Fragmented liquidity is killing crypto — institutions fix it

While crypto headlines chase memecoins, L2 scaling breakthroughs, and the latest DeFi yield gimmick, a deeper structural flaw continues to undermine the industry’s credibility: fragmented liquidity. Billions in daily trading volume mask a market that remains fractured across exchanges, custodians, and protocols — a setup that’s fundamentally incompatible with institutional standards.

Institutions essentially don’t care about deregulation — they care about execution quality, depth, and risk controls. If crypto can’t deliver, traditional finance will build parallel rails and leave native players behind.

The invisible tax of fragmentation

First of all, familiar to all bulk traders, the headache of liquidity fragmentation isn’t just a technical inconvenience. I perceive it as a form of structural tax on every trade. We all know that crypto’s liquidity is scattered across centralized exchanges, DEXs on multiple chains, and layer-2 networks. Executing a large trade in Solana (SOL), for example, means simultaneously tracking dozens of venues — from Binance and Coinbase to Raydium and Orca — each with inconsistent depth, fees, and infrastructure.

Here’s the reality when fragmentation sets in: spreads widen, slippage gets worse, and operations turn into a headache with information leaking left and right. Order books thin out, price discovery suffers, and the market just loses its edge. So, what do institutions do? Most either steer clear entirely or move their business to bilateral OTC deals. These arrangements might give them more control, but they also make market data even harder to track. It’s a trade-off, and honestly, it doesn’t do much for transparency.

Institutional grip is tightening

Ironically, while crypto markets remain fragmented, asset ownership is consolidating. Just 216 entities now control over 6 million Bitcoin (BTC) — more than 30% of the total supply. These include centralized exchanges, ETFs, public companies like MicroStrategy (607,000 BTC), and even government bodies. Ethereum (ETH) shows similar trends, with staking pools like Lido and ETFs concentrating large volumes of ETH. Stablecoins like Tether (USDT) and USD Coin (USDC) are issued by centralized entities deeply embedded in banking and regulatory frameworks.

The consolidation of influence in the digital asset sector reflects not solely financial motives but also a calculated strategic approach. Major financial institutions such as BlackRock, Fidelity, and State Street are significantly increasing their exposure to digital assets, with plans to raise portfolio allocations from 7% to 16% by 2028. I think this kind of growing involvement grants dedicated institutions considerable sway over regulatory policies, market accessibility, and the broader discourse surrounding cryptocurrency adoption and associated risks.

Originally, decentralization was fundamental to the ethos of cryptocurrency. However, this principle is increasingly challenged as a small number of powerful entities gain the ability to influence both market sentiment and asset prices. The potential (I’m not voicing any explicit statements, though) for market manipulation grows accordingly. Additionally, as these institutions leverage their political connections to advocate for favorable regulatory frameworks, their substantial holdings further amplify their capacity to shape policy outcomes, often to their own advantage.

Non-custodial models: A glimpse of the future

Meanwhile, infrastructure players are beginning to integrate liquidity networks to meet institutional standards without sacrificing decentralization entirely.

Non-custodial frameworks present a compelling middle ground: institutions maintain direct control over their assets, while advanced smart order routing enhances trade execution. Transparency and auditability further reduce operational risk. These models dovetail well with the rise of sophisticated middleware, which effectively conceals underlying market fragmentation from end users. The trajectory forward involves leveraging intelligent order routing across multiple venues, unifying liquidity pools, and managing cross-venue risk. While these solutions do not eradicate fragmentation, they render it functionally invisible.

Even though these tools don’t eliminate fragmentation, they make it less palpable in bulk trades.

What consolidation means for crypto players

I believe that in the coming years, whether we are ready for it or not, the cryptocurrency sector is poised for a truly remarkable transformation. Exchanges that nowadays operate in isolation will struggle to maintain relevance, especially as institutional participants demand greater connectivity and transparency. Brokers will be increasingly forced to transition into roles facilitating integrated liquidity (that would be a profitable business for them, too). Within DeFi protocols, we will need to prioritize interoperability and adopt more sophisticated execution mechanisms. One of the greatest turn-offs — rigid fee structures and siloed liquidity pools — will likely be supplanted by advanced aggregation solutions, offering smoother and more efficient market access. In any case, the emerging overarching trend points toward a more interconnected and adaptive ecosystem.

As Finchtrade’s 2025 analysis shows, innovations like chain abstraction and zk-rollups are already reducing friction. However, unless these tools achieve mass adoption, crypto risks becoming a niche playground, while traditional finance tokenizes assets and builds deterministic markets on its own rails.

Final thoughts

Crypto’s liquidity structure cannot survive the next stage of adoption. Institutions are not waiting for the industry to mature, since there’s no one else out there to shape it. The main question, therefore, is whether native players will adapt or be sidelined.

Fragmentation may have been tolerable in the retail-driven era. But in the age of institutional dominance, it’s a fatal flaw. The winners will be those who build infrastructure delivering unified liquidity without compromising the principles of decentralization. It’s a tricky, yet feasible challenge!