Cryptocurrency Liquidity – A Big Problem for Decentralized Trading Platforms

The concept of liquidity is unique and has many angles to it. In layman’s term, an asset is liquid when it holds the potency to be converted into cash on demand. Another angle says that when you are able to buy or sell an asset at a decent price.

Liquidity of an asset implies that it doesn’t have discounts or premiums appended to it during buying and selling and it is really simple to enter and exit the asset. It is a known fact that the product which is traded more (sold and bought) doesn’t have attached premiums or discounts. The frequency of buying and selling decides the worthiness of the item.

And this stands true for something as new as cryptocurrencies. As the sound of cryptocurrency applications on the blockchain network reverberates, its trading has gained a grip in the market. While there have been a lot of exchanges which support trading of the cryptocurrencies, the question of liquidity of these digital currencies is setting many brains quizzical.

Personally, I belong to that “Illuminati group” who don’t believe in liquidity of the cryptocurrencies because I want them to be our primary mode of exchanges. I think that everyone who owns a cryptocurrency will be remembered for their audacious efforts to snatch the power of real money from the government and hand it to the people.

But again, some people are trying to collect short-term gain by treating cryptocurrencies as assets. Mass selling and buying are making them a liquid asset.

The total market capitalisation of cryptocurrencies is close to $250 bn, and it is expected to touch the magical figure of $500 bn by the end of this year. But not everything comes up with perfection.

Although the blockchain technology makes the cryptocurrencies one of the primary applications of recent times, the market is facing the problem of liquidity.

The volatility of the market sways from one end to the another. This bridles the investors and traders from taking any substantive steps towards crypto-market. Its volatility affects the liquidity and world needs immediate solutions to address this issue.

Higher and Lower Liquidity

Lower liquidity leads to a more volatile market (due to massive demand or immediate plummeted demand), and this causes prices to fluctuate like a pendulum. Unlike lower liquidity, higher liquidity hints towards lower volatility and prices don’t change drastically.

We know that cash is the most liquid asset. If an exchange of $1 million is requested, the market will quickly absorb this mighty transaction without affecting the value of dollar drastically.

How much time will the cryptocurrencies like bitcoin take to create a similar environment? I don’t see this happening in the near future. Imagine a transaction of bitcoins worth 1 million $. This will devastate the market and will have a significant effect on the cryptocurrency’s value.

Where is the Main Problem?

The main problem lies in the lack of liquidity in the market. Any trading platform can’t confirm the complete transaction because there are chances that amount of cryptocurrencies can run out. This forces the buyers to execute the operation at a higher percentage (up to 10%) than expected. Requesting the transaction of $1 million might surge the total cost, possibly an extra price of $10,000 to $100,000 could hurt the traders.

Decentralized Platforms Are Creating A Stimulating Environment?

As of now, cryptocurrency market is supported by the centralised exchanges. These exchanges empower everyone to store and transact their cryptocurrencies into fiat currencies and vice-versa. However, the term “centralised” itself kills the purpose for which cryptocurrencies were created. These centralized exchanges are handled by humans and are vulnerable to hacking as much as central institute like banks.

Hence, inadequate security of the third-party apps is inviting the crypto-currency enthusiasts on the platforms like Bitcoin talks, Quora, etc. to work towards hack-proof exchanges in the form of decentralized exchanges. Although the decentralized exchanges have their issues, they at least overcome the security threats which central exchanges pose.

Hackers are well aware of the fact that if the central node or the server is attacked, everything will be under their control. This is the reason why centralized exchanges have not been able to stop the infiltration of the hackers.

Yes, not all centralized systems are equally susceptible to hacking, some do have an advanced form of firewalls, but one can rule out the fact that they are CENTRALIZED and a person with high computing power can hack that system.

Decentralized trading platforms have been able to create a stimulating environment among the traders. Reason? No, there are set of right (S) to consider these exchanges as better alternatives. They offer valuable services by promising uncompromised security firewalls and transparency. A decentralized system is not run by the dictating authority.

Instead, it is run by the people present on the peer-to-peer network. Since it works on a consensus model, validators on the net verify the transactions and maximum votes would either accomplish or discard the transaction.

Now, it is really difficult to hack 51% of the system. Outcome? Security. What portion of the system makes it worth? The portion where users don’t have to trust on an individual or the exchange platform. That’s because funds are not held by the user on the exchange wallet but personal wallet. The decentralised system also promises to provide far more privacy and reduces the threat of server downtime.

Problems with Decentralized Trading Platform

With security and transparency projection, there are sections where the decentralised system has to improve. And they are “ease of usability” and “lack of commodity”. It lags user base because of “user support” which in turn, makes the exchanges less liquid and highly volatile. Jitendra Rajput, co-founder of Encrybit – The Future of Cryptocurrency Exchange quotes, “Decentralized exchanges are still to be tested at its full potential. Because even if the exchange has high security, better support, good range of coins and all other fads, but if it cannot maintain proper liquidity, it is not going to live longer.”

How to Challenge Liquidity Issue?

The cryptocurrency community is working hard to improve the liquidity on decentralised platforms, so that mass adoption becomes a reality. Several factors impact the liquidity of an asset. If the crypto-community works towards simplifying the monetary transaction, then the day is not far when cryptocurrencies would be treated as an asset and more importantly, a required asset.

The decentralised system needs unique solutions to solve the liquidity problem. One astute method to gain political traction is by lowering the cost of switching crypto-exchange accounts.

If the existing platform becomes flexible and reduces the barriers of switching from one exchange account to another by partnering with multiple wallet providers, then a user can easily access their wallets by logging in and generate a token conversion without dumping their portfolios.

The reaction of this action allows the participants to get access to payments from the variety of tokens a decentralized podium supports. In a simpler term, it can be called as token-to-token convertibility. There are other methods to solve the liquidity problem apart from this convertibility.

There are unique and implementable ideas to make the cross-network transaction smooth and at a nominal cost. These solutions are building a unique cryptocurrency ecosystem for the users.

Liquidity is not the only mandatory component but one of the essential elements for embracing technology. There is a strain on promoting the liquidity on the blockchain network because it will play a key role in making the cryptocurrency a valuable resource or asset and would carve a public perception in favour of considering these currencies as an essential medium of trade.

The Final Call

Yes, the cryptocurrency liquidity is possible. We can make this mythological tale a reality. Let’s hope that in thirst of converting digital assets into the liquid money, the asset’s price doesn’t flicker too much services by promising.

Thanks for reading!


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