How aggregators are solving crypto’s liquidity problem
This article was also published in Brave New Coin
With crypto trading available across hundreds of different exchanges on a 24/7 basis, traders can experience liquidity issues. Are liquidity aggregators a solution?
Cryptocurrency trading happens 24/7 across a fragmented ecosystem containing hundreds of different crypto exchanges. The varied nature of these exchanges (futures, derivatives, CeFi and DeFi) makes efficient data capture and price discovery challenging. While leading assets such as Bitcoin (BTC) and Ethereum (ETH) are listed on all crypto exchanges, some tokens, especially those with a smaller market capitalization, may be listed on a handful of exchanges only. This fragmented ecosystem means traders can experience liquidity issues which result in prices being significantly different across separate exchanges.
For example, during the 2017 bull run, South Korean exchanges experienced the Kimchi Premium. This resulted in BTC costing up to 40% more in South Korea than it did on US exchanges. As a result, this created the opportunity for an arbitrage trade. Traders who were able to buy BTC on international exchanges and sell that BTC on South Korean exchanges was able to achieve significant profits by exploiting the price difference.
These liquidity impacts are a unique characteristic of 24/7 trading across hundreds of exchanges.
Compare this 24/7 global crypto trading with stock trading, where trading is limited to Monday to Friday local time office hours. When trading stocks, the trader with access to faster information and trade execution has a significant advantage. In many cases faster can be measured in milliseconds as the rise of high-frequency trading and ultra-low latency direct market attests.
Trading cryptocurrencies have different challenges. Speed is not as important as liquidity. When the fixed or limited supply of BTC and ETH is spread across 400+ exchanges, the liquidity on each can dramatically impact price, as demonstrated by the Kimchi Premium referenced above.
When it comes to price discovery and benchmarking, the positive evolution of the digital asset ecosystem depends in no small part on market participants being able to trust the market data they are being presented with. Without sufficient liquidity, traders are not able to enter and exit positions as they wish.
With thousands of tokens available across hundreds of exchanges with different interfaces, fees, and processes, crypto trading is an intimidating prospect for newcomers. The lack of liquidity can frustrate traders who must deal with high spreads, high slippage, a lack of trading pairs, and a need for multiple accounts on multiple exchanges.
Addressing the crypto liquidity problem
Having identified that the problem that needs to be solved is liquidity, are CEX and DEX aggregators a solution? Let’s use an example of one centralized aggregator, and one decentralized aggregator to find out.
FinxFlo (FXF) is a hybrid liquidity aggregator that enables traders to access the best prices from leading CeFi (Centralized Finance) exchanges and DeFi (Decentralized Finance) protocols. When users trade on the FinxFlo platform they are effectively trading across multiple exchanges and benefiting from the combined liquidity which mitigates any price discrepancies.
In addition to trading on their consolidated global order book users will also be able to trade, lend, borrow, stake, farm, and yield farm, all from one exchange.
From a user experience perspective, this means the user only needs to have one account, with one wallet, and one KYC process on FinxFlo as opposed to setting up and trading with multiple accounts across multiple exchanges. This also means centralized access to data for tracking trades and also reporting.
FinxFlo is a centralized regulated exchange located in Singapore. All cryptocurrency exchanges in Singapore are required to be registered with the Monetary Authority of Singapore (MAS). FinxFlo has applied for this license and whilst this process is underway they have been granted an exemption, which permits Finxflo to continue its operations whilst regulatory approvals are obtained.
Orion Protocol (ORN) Orion Protocol is a decentralized liquidity aggregator protocol that bridges the gap between the centralized and decentralized crypto platforms. Orion Protocol aggregates the liquidity of centralized exchanges, decentralized exchanges, and swap pools into one decentralized platform. The protocol aims to connect traders to the entire crypto market via one interface.
Orion has developed a custom-designed matching engine, which connects to dozens of different exchanges in real-time enabling their users to trade their combined order books from one place without giving up their private keys.
“Orion Protocol is a combination of E*TRADE and the Bloomberg terminal for the blockchain world,“ according to the Orion white paper.
As a decentralized protocol, users have no requirement for KYC and Orion is non-custodial, so users maintain ownership and control of their private keys.
Orion’s platform is in working beta and can be used to buy and sell several major cryptocurrencies.
Orion Protocol’s token, ORN, is available on several exchanges including Uniswap and Binance.
Liquidity begets liquidity
Orion and FinxFlo are just two examples of platforms working to aggregate access to crypto liquidity. There are many more. Ultimately, however, the move towards a seamlessly liquid global crypto market is a journey that will happen over time. It’s likely that Bitcoin will get there first. It is already easily the most liquid crypto asset, and as the saying goes, “liquidity begets liquidity”, so its first-mover crypto advantage is likely to continue. The next step towards increasing this liquidity are instruments such as the long-awaited Bitcoin ETF. And as Bitcoin continues its inexorable path towards full financialization, the resulting liquidity will benefit the entire crypto asset market, attracting more and more market participants who will contribute further liquidity.