BIS bulletin: blockchain consensus mechanisms and fragmentation

Public permissionless blockchains reduce reliance on centralised intermediaries by using decentralised, open infrastructure. Since the emergence of Bitcoin and Ethereum, activity built on distributed ledger technology (DLT) has expanded rapidly, spanning payments, decentralised finance and broader digital asset markets. Yet rather than converging on a single scalable infrastructure, a multitude of networks have arisen, fragmenting liquidity and diluting network effects. This Bulletin describes consensus mechanisms, asks why fragmentation occurs and explores what it means for market structure and resilience.

The authors of this Bulletin examine how consensus mechanisms in permissionless blockchains balance decentralisation, security and scalability. These choices shape validator participation, costs and coordination and generate distinct equilibria across different layer 1 (L1) blockchains. They have also driven the growth of layer 2 (L2) solutions that execute off-chain.

„L1s are the base networks that validate, process and finalise transactions directly in the shared ledger (on-chain). L2s, in turn, run on top of an L1 to enhance efficiency and scalability. We assess how this architecture fragments activity across and within chains, and how mitigation tools reduce frictions while introducing new trust, governance and operational dependencies. We conclude with implications for the potential role of permissionless blockchains as financial market infrastructures and for policy.” – said the authors.

Daniel Eidan, one of the authors, commented: „Public permissionless blockchains face real trade-offs between decentralisation, security and scalability. These trade-offs shape validator incentives and network design — driving the rise of multiple layer 1s and the growth of layer 2s, and with that, a fragmentation of infrastructure, liquidity and assets.

We look at how tools like bridges, native multi-chain issuance, shared layers and interoperability protocols try to reconnect this landscape — and the new dependencies on trust, governance and operational resilience they bring with them. We also touch on the policy implications: operational and cyber resilience, oversight and standard-setting across jurisdictions.”

Key takeaways

. While all permissionless blockchains use token-based incentives to sustain honest validation, differences in how validator rewards, coordination and participation are structured lead to distinct equilibria and trade-offs between decentralisation, security and scalability.

. These trade-offs underpin the emergence of multiple layer 1 networks and the expansion of layer 2 solutions, resulting in fragmentation of infrastructure, liquidity and assets across and within chains.

. Tools to mitigate fragmentation – eg bridges and native multi-chain issuance – can reduce frictions, but they reintroduce new dependencies on trust, governance and operational resilience.