Introduction to DeFi’s Hidden Flaw
Decentralized finance, or DeFi, has a significant flaw that is not related to its code, but rather to its market structure. The issue lies in the locked liquidity that exists across L1s, L2s, appchains, and bridges, each with its own fee market, user experience, and MEV profile. This fragmentation leads to inefficiencies, including slippage, idle capital, and operational risks, ultimately acting as a hidden tax on DeFi.
Understanding the Problem of Fragmentation
Fragmentation in DeFi results in a scattered liquidity landscape, where capital is not utilized efficiently. This leads to higher costs for users, including slippage and spreads, as well as increased operational overhead and idle time. The lack of a unified liquidity pool forces protocols to store excess collateral, protecting against issues such as oracle desynchronizations, bridge delays, and general cross-domain outages. This, in turn, results in a negative carryover across the entire stack.
Abstraction as the Solution
Abstraction layers, smart accounts, and intent-based routing can unify liquidity, automate execution, and provide a single portfolio view, eliminating the need for manual cross-chain management. By specifying a desired end state, users can rely on an off- or on-chain solver to orchestrate routes across venues and networks under enforceable constraints. This approach optimizes goals, rather than just justifying them, and ensures that liquidity is utilized where trading needs it.
The Importance of Verifiable Execution
Verifiable execution is crucial for institutional adoption, as it enables the creation of an environment where users can limit exposure to MEV and latency arbitrage or pay for protection. By providing cryptographic evidence for decisions made in routing, the system becomes public, replayable, and provable. This level of transparency and accountability is essential for building trust and ensuring compliance with regulatory requirements.
Benefits of Abstraction Layers
Abstraction layers can remove the bridge-roulette and tab-hopping elements of the UX from the process, effectively acting as an equalizer. By demonstrating route selection, price improvement, and billing finality, abstraction layers can eliminate the need for due diligence that cannot be delineated. This, in turn, enables users to focus on their investment strategies, rather than navigating the complexities of DeFi infrastructure.
According to the BIS Annual Economic Report 2025, tokenized platforms can concentrate liquidity, reduce settlement friction, and support new market designs. This highlights the importance of addressing fragmentation in DeFi and the need for abstraction layers to unlock capital efficiency. As the founder of LIKWID, a DeFi protocol that combines DEX and lending on Uniswap V4, Heaven emphasizes the importance of building abstraction layers and intent-based routing to achieve true institutional flow.
Read more about the importance of abstraction layers in DeFi and how they can address the issue of fragmentation in the article Abstraction Layers Are the Upgrade DeFi Needs.
Heaven is the founder of LIKWID, a DeFi protocol that combines DEX and lending on Uniswap V4. An experienced fintech CTO turned crypto-native entrepreneur, Heaven has built the entire blockchain stack since 2018, from OTC trading desks and EOS-based games to DeFi protocols and mining infrastructure. His current focus is on laying the foundation for a new generation of permissionless and oracle-free financial applications.
