Smart accounts solve UX by abstracting gas and enabling social recovery, but they do not solve interoperability. Each chain's native account abstraction (AA) standard, like EIP-4337 on Ethereum or alternative L1 implementations, creates a walled garden for its bundled transactions.
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Why Smart Accounts Will Fragment Liquidity
Smart accounts (ERC-4337) promise UX nirvana but introduce a critical flaw: protocol-specific whitelists and bundled transactions will balkanize capital, reversing a decade of DeFi's composable liquidity. This is an architectural regression.
introduction
THE FRAGMENTATION THESIS
Introduction: The UX Mirage and the Liquidity Trap
Smart accounts solve UX but will inevitably fragment liquidity across chains, creating a new infrastructure battle.
Liquidity follows the user, but users are now abstracted. A wallet like Safe or Biconomy must manage separate smart account states on Arbitrum, Optimism, and Base. This fragments user identity and assets across rollups, defeating the purpose of a unified L2 ecosystem.
The counter-intuitive insight is that better UX increases fragmentation. Easy onboarding via ERC-4337 Paymasters traps users on a single chain because moving a smart account's state cross-chain is a complex, unsolved data synchronization problem.
Evidence: The current bridging market (Across, LayerZero) moves assets, not smart contract state. Migrating a Safe wallet from Polygon to Arbitrum requires manual redeployment and asset bridging, a UX regression that AA was meant to solve.
key-trends
LIQUIDITY FRAGMENTATION
The Fragmentation Engine: Three Inevitable Trends
Smart accounts will not unify liquidity; they will shatter it across new, non-interoperable execution layers.
01
The Problem: Contract-Enforced User Sovereignty
Smart accounts move logic from the protocol layer to the user's contract. This creates non-standard, non-composable execution environments.
- Wallet-specific logic (e.g., session keys, batched ops) is opaque to DEX aggregators.
- Intent-based flows (like UniswapX or CowSwap) lock liquidity into private solver networks.
- Cross-chain user ops via ERC-4337 bundlers create isolated liquidity pools per chain.
1000+
Custom Logic Paths
-90%
Aggregator Visibility
02
The Solution: Intent-Centric Infrastructure
Fragmentation is a feature, not a bug. New infra (Across, Socket, LayerZero) monetizes by routing between these isolated pools.
- Specialized solvers compete on filling user intents, creating a market for fragmented liquidity.
- Cross-chain messaging becomes the liquidity bridge, with protocols like Chainlink CCIP as the settlement layer.
- MEV capture shifts from public mempools to private order flow auctions between solvers.
$5B+
Solver TVL
~200ms
Auction Latency
03
The Consequence: The End of Universal Liquidity
The myth of a single liquidity pool dies. Liquidity becomes a service provisioned by competing networks.
- Application-specific rollups (dYdX, Aevo) will custody native liquidity, breaking composability.
- Wallet-as-a-Service providers (Privy, Dynamic) will operate their own intent settlement layers.
- The new moat is not TVL, but exclusive routing agreements between solvers and smart account SDKs.
50+
Isolated Pools
10x
Routing Complexity
SMART ACCOUNT FRAGMENTATION
Liquidity Silos: A Comparative Analysis
How different smart account implementations create isolated liquidity pools, comparing native, aggregated, and intent-based architectures.
| Feature / Metric | Native Smart Account (e.g., Safe, Argent) | Aggregated Liquidity Layer (e.g., Biconomy, ZeroDev) | Intent-Based Abstraction (e.g., UniswapX, Across) |
|---|---|---|---|
Liquidity Pool Type | Isolated to account's native chain | Federated across supported EVM chains | Global, sourced from all solvers |
Cross-Chain Swap Gas Cost | User pays destination chain gas | User pays sponsor fee + relay cost | User pays success fee; solver covers gas |
Typical Swap Slippage |
| 1.0% - 1.8% (aggregator spread) | <0.5% (competition among solvers) |
Settlement Finality | Instant on L2, ~12 sec on L1 | ~3-5 min (relay + inclusion) | ~15-60 sec (off-chain auction) |
Requires Native Gas Token | |||
Liquidity Provider | Individual user / DAO treasury | Protocol's staking pool | Competing solver networks (e.g., CowSwap) |
Max Extractable Value (MEV) Risk | High (public mempool exposure) | Medium (relayer discretion) | Low (private order flow auction) |
Protocol Examples | Safe, Argent, Braavos | Biconomy, ZeroDev, Etherspot | UniswapX, Across, Anoma |
deep-dive
THE LIQUIDITY FRAGMENTATION
Deep Dive: From Composable Money Legos to Proprietary Ecosystems
Smart accounts will shatter the universal liquidity pool of EOAs by creating protocol-specific user silos.
Smart accounts fragment liquidity. Externally Owned Accounts (EOAs) are the universal solvent of DeFi, a single keypair that interacts with every protocol. Smart accounts, like Safe or Biconomy, are unique contract addresses per user, creating protocol-specific user silos that break composability.
Composability requires shared state. The DeFi 'money lego' model relies on protocols reading and writing to a common state object: the EOA. A Uniswap swap can feed directly into an Aave deposit in one atomic transaction. Smart accounts are isolated states, requiring bespoke integrations that most protocols will not build.
Protocols will build walled gardens. Major players like dYdX or Aave will launch their own proprietary smart account standards to capture user deposits and transaction flow. This mirrors the shift from open web2 APIs to closed app ecosystems, sacrificing interoperability for control.
Evidence: The L2 precedent. This fragmentation already occurred at the chain layer. Universal composability died with the proliferation of L2s and app-chains, necessitating complex bridging via LayerZero or Axelar. Smart accounts will replicate this at the application layer, turning every major dApp into its own liquidity island.
counter-argument
THE FRAGMENTATION REALITY
Counter-Argument: Won't Competition and Standards Prevent This?
Standardization efforts are insufficient to prevent the inherent liquidity fragmentation caused by smart account competition.
Standards are not implementations. ERC-4337 and RIP-7560 define interfaces, not a single global system. Each wallet provider like Safe, Biconomy, or ZeroDev builds unique bundler networks and paymaster strategies. This creates distinct fee markets and execution environments that are not natively interoperable.
Liquidity follows economic incentives. Bundlers compete for UserOperation orderflow, creating siloed mempools. A transaction signed for a Safe{Core} bundler stack cannot be efficiently routed to a Stackup or Alchemy bundler without re-signing, fragmenting the available block space for account abstraction.
Paymasters fragment token liquidity. Each AA wallet promotes its own gas sponsorship tokens and fee logic. Users with Biconomy's BICO gas credits cannot use them on a Candide or Etherspot wallet, locking value into specific ecosystems and reducing overall capital efficiency.
Evidence: The current DeFi bridge landscape proves this. Despite standards like CCIP and LayerZero, liquidity remains fragmented across Across, Stargate, and Wormhole. Smart accounts will replicate this, as each implementation optimizes for its own network effects over universal composability.
risk-analysis
LIQUIDITY FRAGMENTATION
The Bear Case: Specific Risks for Builders and Investors
Smart accounts introduce new architectural layers that can splinter liquidity, creating hidden costs and operational friction.
01
The Paymaster Dependency Problem
Gas sponsorship via paymasters (like Stackup, Biconomy) creates walled gardens. Liquidity for fee abstraction is siloed within each service's treasury or staking pool, forcing dApps to integrate multiple providers or lose users.
- User Lock-in: Apps must pre-fund specific paymaster contracts, tying up capital.
- Settlement Risk: Reliance on a single paymaster's solvency for transaction processing.
- Fragmented UX: Users face failed transactions if their chosen dApp's paymaster lacks funds.
5-10+
Paymaster Integrations Needed
$M+
Capital Silos
02
Signature Aggregator Wars
Each smart account wallet (e.g., Safe, ZeroDev, Biconomy SDK) may promote its own signature aggregation standard to reduce gas costs. This leads to protocol-level fragmentation.
- Standard Proliferation: Competing implementations (EIP-1271, ERC-4337 signatures) force dApps to support multiple validation modules.
- Increased Integration Surface: Security audits and maintenance multiply per standard.
- Liquidity for Verification: Staking/insurance pools for aggregator security become fragmented, reducing overall economic security.
3-5x
Integration Overhead
~30%
Gas Variance
03
Bundler-Exclusive Order Flow
Bundlers (like Pimlico, Alchemy, EigenLayer) that order and submit UserOperations to the blockchain can extract MEV and prioritize transactions. This creates a new, fragmented market for block space access.
- Centralization Pressure: High-performance bundlers with exclusive order flow become de facto gatekeepers.
- Slippage & MEV: Liquidity for intent settlement (e.g., via UniswapX, CowSwap) is influenced by which bundler a user's wallet uses.
- Fragmented Fee Markets: Gas pricing and reliability become inconsistent across different bundler networks.
1-3s
Latency Variance
Basis Points
MEV Leakage
04
Cross-Chain Smart Account Incompatibility
A user's smart account on Ethereum is a different contract address on Polygon, Arbitrum, or Solana. This fractures identity and asset holdings across chains, defeating a core promise of a unified account.
- Asset Duplication: Liquidity must be bridged and deposited into separate account contracts on each chain.
- Broken Social Recovery: Guardians must be set up and funded per chain, increasing cost and failure points.
- Protocol Overhead: dApps must deploy and maintain their logic on every chain a user's account might exist on.
N Chains
N Deployments
2-5x
Capital Efficiency Loss
future-outlook
THE LIQUIDITY FRAGMENTATION
Future Outlook: The Interoperability Arms Race
Smart accounts will fragment user liquidity across chains, forcing a new wave of interoperability solutions.
Smart accounts fragment liquidity. Each new chain deployment creates a separate, non-custodial wallet instance. A user's assets on Base are siloed from their assets on Arbitrum, even within the same account abstraction (AA) standard like ERC-4337.
This creates a new bridging problem. Traditional bridges like Across and Stargate move assets between EOAs. Smart accounts require intent-based solutions like UniswapX or Across' new architecture to move value between a user's own fragmented account instances.
The race is for the aggregation layer. Protocols that aggregate liquidity and settlement across a user's fragmented smart accounts will win. This is a more complex problem than current DEX aggregation on a single chain.
Evidence: The 1.8 million ERC-4337 smart accounts created in 2023 represent the initial wave of this fragmentation. Each is a potential liquidity silo.
takeaways
LIQUIDITY FRAGMENTATION
TL;DR: Key Takeaways for Protocol Architects
Smart accounts (ERC-4337) shift the atomic unit of execution from the wallet to the account, creating new attack vectors for MEV and fracturing the liquidity landscape.
01
The Problem: Paymaster-Dependent Liquidity Pools
Gas sponsorship via paymasters ties user transactions to specific token pools. A Uniswap pool sponsored by USDC becomes inaccessible to a user whose paymaster only holds DAI. This creates siloed liquidity based on sponsorship currency, not protocol quality.
10-100x
Pool Silos
$B+
Stuck Capital
02
The Solution: Intent-Based Order Flow Auctions
Decouple execution from sponsorship. Let users express desired outcomes (intents). Systems like UniswapX and CowSwap allow solvers to compete to fulfill these intents, aggregating liquidity across all paymaster pools and capturing efficiency gains.
-50%
Price Impact
~90%
MEV Extracted
03
The Problem: Cross-Chain State Fragmentation
Smart account state (nonces, session keys) is chain-specific. Bridging assets for a user requires re-authentication on the destination chain, breaking composability. This defeats the purpose of omnichain protocols like LayerZero or Axelar.
5-30s
UX Delay
2-10x
Tx Cost
04
The Solution: Native Account Abstraction & Shared Sequencers
L2s with native AA (e.g., zkSync, Starknet) and shared sequencer sets (e.g., Espresso, Astria) can maintain unified state across rollups. This enables atomic cross-rollup transactions without re-verification, preserving liquidity aggregation.
<1s
Finality
~0
Re-auth Cost
05
The Problem: Bundler-Censored Transaction Flow
ERC-4337 bundlers act as centralized gatekeepers. A bundler can exclude transactions from specific paymasters or smart accounts, creating a new vector for censorship and fragmenting transaction flow based on bundler policy, not network rules.
1-5
Dominant Bundlers
>50%
Censorship Risk
06
The Solution: SUAVE-Like Decentralized Block Building
Adopt a decentralized block-building layer for the mempool. Inspired by Flashbots' SUAVE, this creates a competitive marketplace for bundle inclusion, neutralizing bundler power and ensuring transaction flow is governed by fee markets, not whitelists.
100+
Competing Builders
-90%
Censorship Surface
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