Bitcoin liquidity fragmentation is a critical issue for achieving scalability – Neon EVM executive

By Crypto Gloom On Sep 4, 2024

Key Points

Bitcoin’s L2 project aims to enable smart contracts and improve scalability, but also introduces liquidity decentralization.
A talent shortage in blockchain development is hampering the growth of the Bitcoin smart contract ecosystem.

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

While it certainly adds more utility to a $1.1 trillion market cap asset, it also creates another problem: liquidity dispersion.

Yuri Yurchenko, CPO of Neon EVM, explained to Crypto Briefing that decentralized liquidity means decentralized finance (DeFi) is split into multiple liquidity pools rather than one unified, easily accessible marketplace.

“Over the past few years, liquidity fragmentation has led to a massive collapse in available liquidity and trading volume across DeFi platforms, blockchains, and networks,” he added.

However, Yurchenko emphasized that fragmentation is a byproduct of scalability, making it a necessary issue as the blockchain industry works to solve the “most important problem”: how to scale networks.

Bitcoin’s baseline throughput is an average of 7 transactions per second, which Neon EVM’s CPO says makes the blockchain commercially unviable and redundant.

Neon EVM has partnered with Yona Network to build a parallelized L2 infrastructure compatible with the Bitcoin-based Ethereum Virtual Machine.

“So yes, creating scalability solutions is critical to scaling the Bitcoin blockchain today. This can be better managed by creating robust DeFi solutions and projects that balance good tradeoffs and consider the fragmentation vs. scaling continuum.”

scarce resources

The idea of introducing smart contract functionality to Bitcoin raises another question regarding the talent available in the industry. Since the number of blockchain developers is limited, focusing resources on the Bitcoin ecosystem could hinder the development of networks that are already focused and in advanced stages of smart contract implementation, such as Ethereum and Solana.

Yurchenko acknowledged this by taking issue with the variety of programming languages within the blockchain industry, such as Solidity, Rust, and Vyper.

sapphire

However, Neom EVM’s CPO pointed out that some teams are focusing on building strong talent to address these issues.

“We’ve seen this scarcity in the Ethereum and Solana ecosystems, and the Neon EVM is well positioned because it has a strong developer team with capabilities on both sides (EVM and SVM). That means it’s in a privileged position in terms of technology development in that sense.”

He added that there is a push for projects to focus resources on Web3, whether or not they pursue development of Bitcoin infrastructure.

“I would say this is a general Web3 problem, and a better prediction would include an influx of new talent into the field,” Yurchenko said.

One way to address this issue is for cryptocurrency companies to continue hiring across a variety of disciplines while also developing talent in-house.