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How to choose the best liquidity providers and what is it for?

What is liquidity?

Liquidity is one of the most important properties of digital assets that must be considered when buying them. This is what will help you understand how quickly you can sell your digital assets at the market price. The term liquidity comes from the world of conventional finance. This is the property of an asset to be quickly sold at a price close to the market.

When we talk about the liquidity of the markets, then the higher this indicator, the more funds and ongoing transactions inside the market. At the same time, in a liquid market, each individual transaction will not have a significant impact on asset quotes. For example, if you can quickly buy or sell a large amount of cryptocurrency, then it can be called liquid.

In absolute terms, the USDT stablecoin from Tether is the most liquid cryptocurrency today. At the same time, little-known low-cap altcoins are not liquid. They do not have enough trading volume to satisfy possible interest, as well as also react to large transactions with changes in quotes. And the complete lack of liquidity in the trading pair will prevent you from quickly making a deal.

Who can be a liquidity provider?

Liquidity is generated by counter-offers for market orders in the order book. This creates a balance of supply and demand in the market. To avoid significant distortions at low trading volumes, exchanges attract so-called market makers and large companies. Their task is to constantly have orders in the order book at a price that does not differ from the current one by a given percentage. For this, they receive a reward or a reduced commission, while they are not required to make transactions.

A market maker participating in trading on exchanges takes on the risk of acquiring and storing assets in order to organize their sales and maintain a balance. They are the same traders, but with additional responsibilities. To ensure liquidity, a market maker keeps quotes within a certain price range and also minimizes price gaps, that is, the spread.

There is another way to increase turnover on the exchange - this is a cooperation between sites. For example, when one platform runs out of coins, it buys from the one with which they have the right amount. This does not create a shortage and, accordingly, does not give a sharp upward price jump.

Why liquidity is important for broker business

High liquidity means that there is a demand for this asset from both the buyer and the seller. Among cryptocurrencies, Bitcoin is the most popular, which makes it easy to exchange it for other altcoins or fiat money. This can also be attributed to the rating coins included in the TOP-100 by capitalization.

When deciding whether to invest or trade, a participant takes into account the liquidity parameter. In the case of long-term investments in a crypto asset, this allows you to determine its reliability. A large number of coins, especially new ones, are used as a means of enriching developers in a short time and they are low in terms of liquidity.

What are liquidity pools?

To increase the popularity of digital assets, liquidity pools are used, where project participants unite and supply digital assets to the market. Banks operate on a similar principle, where large amounts of money are concentrated. The funds have been distributed among various loans, project financing. Thus, economic growth is created, and the bank distributes the profit received among depositors according to their share.

A liquidity pool is special storage where a supply of tokens is located. They are locked in smart contracts, in the so-called LP tokens. To participate, you need to deposit a certain amount into the pool. As a reward, interest is paid for financial transactions that other users make. 

Profit is accrued depending on the amount of crypto deposited in the pool. As a liquidity provider, you can either add the amount received back to the pool to increase your profits or withdraw funds at any time. 

The exchange taking place in the liquidity pool changes the number of coins thanks to a special algorithm. When the number of tokens in the pool decreases, its price automatically increases, and the other asset becomes cheaper. This process generates a fair market price.

How to choose a liquidity provider

The lack of supply in the first place harms liquidity. At the same time, an oversupply of cryptocurrencies in the market can kill liquidity. For example, let’s say large companies start to massively buy bitcoins from the market, then the lack of free coins can also negatively affect liquidity since it will simply be impossible to purchase a large amount of cryptocurrency.

Another important factor that affects the liquidity of the market is its infrastructure. Until the big players have the necessary tools to get rid of their assets, the market cannot be liquid. Therefore, it is necessary to create regulated platforms that can meet the needs of institutional investors.

When choosing a liquidity provider for cryptocurrencies, you need to pay attention to several indicators that can tell you about the reliability of the platform. For example, the number of exchanges, the more platforms that provide trading in the selected asset, the higher its popularity and the ability to buy or sell at a bargain price.

  • The spread. It is estimated as the difference between the purchase and offer of an asset on different platforms. A low spread indicates high liquidity.
  • Trading volume. In most cases, this figure is taken for 24 hours. It indicates how popular the coin is in the market.
  • Number of coin holders and community. Regardless of the technical component of the cryptocurrency, a strong community that supports the digital asset, providing good supply and demand, and thereby increasing liquidity. Dogecoin the meme-coin can serve as an example. Issued as a joke coin, thanks to its supporters, it is actively used, mostly by participants within the system.
  • The position of the government concerning a certain crypto asset. In this case, it allows cryptocurrency to fully function in a particular country, without fear of sanctions from regulatory authorities.
  • Cryptocurrency payment points. If a coin has many points where it can be used to pay for goods and services, then it is popular as a means of payment. The network of crypto ATMs and its development provides ease of use and growth in popularity.
  • The news background is very important for financial markets. It is on the news that the market is often manipulated. In the event of a flow of negative messages, cryptocurrencies may collapse.

The factors that positively affect the liquidity of a crypto exchange are a high trading volume, the availability of various deposit and withdrawal methods, low commissions, and the activity of traders. To evaluate exchanges, a liquidity ratio is used, which compares the current assets of the platform with the current payment obligations.

You also need to pay attention to what software and protocols are used on the crypto exchange to understand how safe it is and has protection from hacks and other illegal actions of cybercriminals.

About Protocols

Regardless of the type of protocol, all exchanges are interested in attracting liquidity from some users to use this liquidity by others. This is directly related to the protocol monetization model, which is based on receiving commissions from user transactions. Accordingly, the higher the level of liquidity, the greater the number of transactions, the more money the protocol earns.

Because of this monetization model, the protocols incentivize users to provide liquidity by promising them not only a bit of the protocol earnings but also using additional motivation in the form of protocol tokens, which form the main base for such high returns.

Protocol tokens are traded on exchanges, allowing owners to exchange them for the desired currency at any time. Their market value is expressed in US dollars and is formed based on the interest of the crypto community in the protocol itself and the demand for protocol tokens in the market. 

Many protocols use governance tokens as a reward for participating in liquidity pools. Their essential difference from the usual ones is that they allow making certain decisions related to the development of the protocol.

Get offers from crypto exchanges and compare all the parameters of them. Choose the exchange with the best conditions for you by adjusting the fees and terms of cooperation. The most obvious way would be to create a table with the characteristics of different exchanges, which will facilitate and speed up the choice of a crypto exchange.

Liquidity consolidation and why it's good

Investment companies and brokers, in particular, make money by matching sellers and buyers of highly liquid assets, including cryptocurrencies. At the same time, the amounts of orders for the purchase and sale of each asset are fundamentally different. To fulfill the orders of all clients, brokers turn to liquidity providers.

The turnover of brokers today reaches tens of trillions of US dollars. Last but not least, therefore, the more liquidity providers a broker has, the better. After all, modern financial technologies allow you to choose the best offers for buying and selling. Thus, the more liquidity providers, the lower the broker's commission from transactions can be.

The most common scheme for obtaining liquidity from several different providers is the electronic system for executing transactions for the purchase and sale of exchange commodities. Moreover, the network can unite liquidity providers, as well as the brokers themselves.


Liquidity is an extremely important indicator that largely determines the possibility of earning on a particular asset. Even if an altcoin shows hundreds of percent growth in a short period, in the absence of liquidity, it will not be possible to sell it at the desired rate and lock in profits.

However, liquidity can also play a cruel joke, as is the case with cryptocurrencies, the emission of which is limited. The liquidity trap could lead to an avalanche-like drop in prices if the demand for digital assets drops sharply.

It is necessary to monitor liquidity and take it into account when making transactions. This indicator will help to avoid unnecessary losses.