Increase in Liquidity Fragmentation Due to Differences in Permissionless Blockchain Consensus Structures

The Bank for International Settlements (BIS) has stated that the differences in consensus structures of permissionless blockchains are contributing to the fragmentation of networks and liquidity. According to the report, the difficulty in simultaneously achieving decentralization, security, and scalability leads to the coexistence of various Layer 1 (L1) and Layer 2 (L2) solutions. Following Bitcoin (BTC) and Ethereum (ETH), activities based on distributed ledger technology have expanded into payments, decentralized finance, and the digital asset market, but have not been integrated into a single scalable infrastructure. The report presents examples of Proof of Work (PoW) and Proof of Stake (PoS), explaining that while increased validator participation enhances decentralization and security, it limits throughput and latency. Additionally, it points out that when the same asset is used, liquidity pools are divided by chain, requiring users to navigate through bridges, exchanges, and interoperability protocols. The proliferation of L2 also creates similar issues, warning that if each L2 has separate transaction orders and pricing systems, 'vertical fragmentation' will occur. The BIS emphasizes that this fragmentation leaves policy challenges for financial market infrastructure.

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