Liquidity fragmentation on Bitcoin is a necessary issue to reach scalability – Neon EVM exec

Key Takeaways

• Bitcoin's L2 projects aim to enable smart contracts and improve scalability, but introduce liquidity fragmentation.
• Talent scarcity in blockchain development poses challenges for Bitcoin's smart contract ecosystem growth.

According to Signal21 Analytics data , 21 layer-2 (L2) projects are being built on Bitcoin’s (BTC) ecosystem. The idea behind these projects is to enable smart contract functionality for Bitcoin while raising the mainnet scalability without changing its fundamentals.

Although it certainly adds more utility to a $1.1 trillion market cap asset, it creates another issue, which is liquidity fragmentation. 

Yuriy Yurchenko, CPO at Neon EVM, explained to Crypto Briefing that liquidity fragmentation consists of decentralized finance (DeFi) being divided into different pools of liquidity, rather than becoming a consolidated, easily accessible market.

“Liquidity fragmentation has, in the last couple of years, created a massive breakdown of the available liquidity and trading volume across DeFi platforms, blockchains, and networks,” he added.

Nonetheless, Yurchenko highlighted that fragmentation comes as a by-product of scalability. Thus, it becomes a necessary issue as the blockchain industry solves its “number one problem:” how to scale a network.

The base throughput of Bitcoin averages seven transactions per second, which Neon EVM’s CPO stated renders the blockchain with no commercial usability, turning it redundant. 

Neon EVM partnered with Yona Network to create a parallelized L2 infrastructure that is compatible with the Ethereum Virtual Machine on top of Bitcoin.

“So yes, today, to scale the Bitcoin blockchain, it is important to create scalability solutions. This can be better managed by creating a good trade-off balance and factoring in the fragmentation vs scaling continuum while creating robust DeFi solutions and projects.”

Scarce resources

The idea of bringing smart contract functionality to Bitcoin also raises another question in the industry related to available talent. As the number of blockchain developers is finite, funneling resources into the Bitcoin ecosystem could hinder developments in networks already focused and in advanced stages of smart contract applicability, such as Ethereum and Solana.

Yurchenko acknowledges that, mentioning another issue, which is the variety of programming languages within the blockchain industry, such as Solidity, Rust, Vyper, etc.

However, Neom EVM’s CPO pointed out that some teams are specializing in robust talent building to tackle such issues.

“We have seen this scarcity in both the Ethereum and Solana ecosystems, and we at Neon EVM are in a good position since we have a strong developer team with capabilities on both sides (EVM and SVM). This puts us in a privileged position for tech development in that sense.”

Moreover, he added that funneling resources in Web3 exists whether or not projects are chasing developments in Bitcoin’s infrastructure.

“I would say this phenomenon is an overall Web3 issue, and a better forecast would include having a fresh talent influx in the space,” Yurchenko said.

One way to solve this is for crypto companies to foster talent in-house, while not forgetting to continue hiring across the spectrum.