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Blog|Defi|Guide on Crypto Liquidity Provider 2022
Published April 26, 2022|7 min read

Guide on Crypto Liquidity Provider 2022

It is necessary to have certain mechanisms that provide liquidity in order to trade assets on exchanges. The level of liquidity describes the simplicity of trading tokens in the context of cryptocurrencies. This guide is going to uncover the role of a liquidity provider in decentralized markets.

What Is a Liquidity Provider?

Users who give their crypto assets to a platform to facilitate trading on it and get rewards in return are called liquidity providers. While liquidity on fiat currency exchanges can be achieved by purchasing large amounts of currency and selling it to the clients in smaller batches, the process is a little different for digital currencies. Providing liquidity for crypto is possible thanks to liquidity market makers.

Benefits of Liquidity Providers

So, what are the advantages of liquidity providers in the DeFi ecosystem?

  • Avoiding hectic price changes. Liquidity providers assist with setting a price for assets. Of course, the demand influences all prices, but market makers guarantee that the prices fluctuate smoothly and do not change drastically. This makes the assets less volatile and reduces slippage.
  • Consistent trading. Liquidity providers ensure that everyone can trade when they want. Otherwise, traders would have to wait for someone to trade with, fill orders, negotiate average prices, etc.
  • Keeping prices low. All providers are in competition much like any other vendors in various markets, which is why they try to deliver the best prices. Ensuring that more people trade with them is important to guarantee high liquidity of assets.
  • As you can see, liquidity providers simply deliver better trading conditions for all parties involved.

    Types of Providers

    There are two kinds of liquidity providers in fiat currency trading:

  • Tier one liquidity provider. These are primarily banks and other large financial organizations that buy assets directly from the issuers, which are institutions that print money.
  • Tier two liquidity provider. The term covers market brokers and smaller institutions trading with clients directly.
  • In addition, there are supplemental providers. They trade in high volumes using certain algorithms to create liquidity.

    Best Crypto Liquidity Providers

    When choosing a crypto liquidity provider, it is necessary to pay attention to its pricing, transaction speed, and quality of client support. Here are some of the top market makers for crypto trading:

  • B2Broker
  • Leverate
  • X Open Hub
  • GBE Prime
  • Brokeree
  • Sometimes the speed of trading differs in milliseconds, which is why all the options above are top tier. It all comes down to the personal convenience and requirements of each trader.

    What to Consider in Selecting Provider

    For crypto traders, it is important to choose a reliable and convenient liquidity provider based on specific requirements. Here are some of the factors to consider when selecting a provider.

    What's On Offer

    The main objective of market makers is to deliver a range of assets and high liquidity. A wide selection of cryptos is preferable, together with liquidity created for multiple assets.

    Market Depth

    This indicator shows the depth and liquidity of each asset available. The level of market depth is calculated based on the number of trades with each price level. Thanks to deep markets, it becomes possible to execute large orders safely and efficiently.

    Fast Executions

    Swift trades must be available for clients, especially at times of impactful news on the market. High-quality client care should be also ensured to help with solving any issues at all times. Look for a liquidity provider that offers a professional manager 24/7.

    Data Feeds

    Dependable and stable data feeds must be available for clients. Current prices for all assets need to be displayed. There might be gaps in trading if the prices are not updated immediately.

    Authenticity

    All market makers need to be regulated to deliver the best liquidity. A broker should back all liquidity providers. A reliable regulatory status is required to rely on a provider. A trustworthy provider should be a public company that openly provides all requested information about its legitimacy.

    Reporting Requirements

    An automatic reporting system should be in place to follow all regulative requirements. This includes trading reports, swaps, etc.

    Software

    Various APIs and bridges should be implemented by liquidity providers for smooth operation. It should be quick and simple to check any of your trades via an application or specialized software. Fix API is a common protocol used for placing orders and sending cancel requests. This is one of the most convenient ways of communication between crypto markets and liquidity providers.

    Why Care About Liquidity

    Providing liquidity for crypto is crucial as it reduces risks associated with investments. Your holdings can be liquidated easily, thanks to the liquidity of crypto markets. Here is why it is important to care about liquidity:

  • Less vulnerable cryptos. As cryptocurrencies are decentralized, they are not much regulated, and people can try to manipulate the markets in their favor. Luckily, thanks to the high liquidity of the most popular and reliable cryptos, they can resist various market manipulations. The larger is the number of traders who buy or sell on the market, the smoother each transaction will be. Both single market players and their groups will have great difficulties trying to influence the market.
  • Lower volatility and stable price. Liquid markets are considered to be less volatile and more robust. Such markets provide a balance between people wishing to buy and sell assets. Each time you will try to sell some funds, there will also be multiple people who want to buy them. This is why prices are more balanced and less fluctuating. For example, if you want to purchase BTC, which is one of the most liquid cryptos, it will be very easy to find someone to trade with. Thanks to the stable demand and supply, the prices do not change drastically, and they will be immune to fluctuations following big trades.
  • Easier analysis of behaviors. The number of traders in a specific market directly influences its liquidity. The more people are engaged in activities on the market, the more liquid it is. This also allows the collection of more data about the market. With a large number of trades, it becomes possible to predict the behavior of traders.
  • Quicker trading. Providing liquidity for crypto also allows for maximizing profits for traders. There are more people involved in liquid markets, which helps in making a greater number of trades faster. Traders with liquid assets are able to keep trading until there is a beneficial offer from a potential buyer.
  • These are just some features that make both market makers and regular traders care about liquidity. Liquid cryptocurrency markets are highly beneficial for everyone and allow convenient and profitable trading.

    How Are Liquidity Providers Important for Traders?

    If you want to select a new broker, you should look for a company with great liquidity. This can be achieved by collaborating with various tier-two providers. In addition, brokers can actually work as tier two providers and collaborate with a tier-one liquidity provider in their turn. Regardless of the broker you want to open an account with, these are the advantages of high liquidity for traders:

  • Instant trading. The higher the liquidity, the faster are your trades and order processing on the platform.
  • Lower slippage. In case your order is being processed for a long time, the prices might change for these assets. This is what brokers call slippage, and it reduces profits from such trades. With great liquidity, the level of slippage is low, as all orders are processed swiftly.
  • Competitive prices. If your broker works together with different liquidity providers, you can be sure that the prices will remain stable and low. There will be no drastic changes in prices as well.
  • Smaller fees. The fees for each transaction are significantly lower with top brokers that partner with several liquidity pools.
  • Top crypto brokers collaborate only with reliable and stable liquidity providers. It is also important to give access to diverse market information for providers to have good depth. This way, they will be able to trade in larger volumes without making the prices fluctuate too much.

    Conclusion

    Crypto trading is becoming more popular all around the globe. In order to satisfy the growing demand, brokers are constantly searching for reputable liquidity providers. This is why liquidity brings an additional value that all participants of trading markets should take into account when buying, selling, or exchanging crypto. The liquidity of assets influences their volatility and stability, which leads to preserving their value in the long run. The level of liquidity for each currency helps define its volatility, as more liquid cryptos are less volatile and vice versa. Even during certain fluctuations, their value will remain level.

    It is significant to invest in tokens with decent liquidity since it will provide a higher chance of someone purchasing this crypto from you. The possibility to sell quickly is crucial, as you will not be much affected by price fluctuations. Understanding cryptocurrency liquidity is extremely beneficial for all traders and market makers, the more so as cryptocurrencies are the future of trading. With all the tips about picking a great crypto liquidity provider, you should be able to improve your trading game significantly.

    Frequently Asked Questions

    What Is a Crypto Liquidity Provider?

    A crypto liquidity provider is an intermediary that helps customers with purchasing cryptocurrencies. These providers are users who add their crypto tokens to a liquidity pool and allow other people to buy crypto.

    How Do Liquidity Providers for Crypto Work?

    Because cryptocurrencies are decentralized and one provider cannot own a huge amount of crypto, liquidity providers come together to add their assets to a liquidity pool. They provide crypto so that other users could buy it.

    Does Liquidity Provider Make Profits?

    Yes, liquidity providers make profits by funding liquidity pools. They receive trading fees each time someone uses their pool to buy or trade cryptocurrency. This fee is usually fixed.