If the Cryptocurrency Exchange can’t complete the trader’s buy or sell order, then the exchange is considered to have low liquidity, thus it does not have enough orders in it. The Crypto Exchange with good Liquidity lets traders proceeds with their trading instantly and easily. They also provide rewards to their traders to encourage their trade activities. On the other hand, Crypto exchanges with low liquidity are struggling to complete a single trade. There is a lot of difference between trading in the high Liquidity exchange and low liquidity exchange.
Bring Liquidity is very much important for any cryptocurrency exchange, let’s discuss,
Third-Party Market Makers
Before getting into this, one needs to clearly understand the difference between a market maker and a market taker
Market Taker: Market Taker does not mind putting more money than the existing market price, they value holding the asset
Market Maker: One who buys or sells an asset for the profit
It is the kind of agreement of replication of liquidity solutions. Here the Crypto Exchange which needs liquidity signed an agreement with some other popular cryptocurrency Exchanges or market makers to use their liquidity. Then, the traders of the new cryptocurrency exchange can proceed with trading by using the liquidity of a popular cryptocurrency Exchange.
When it comes to market takers, Crypto Exchanges will add additional incentives in their agreement like compensation for incomplete lowest trade price ordered in their exchange, And they frequently check out the compensation of market takers' price on a daily or weekly basis.
Cross Exchange Market Making
Rather than the third party, Traders act as the market maker. For instance, consider two exchanges, Maker Exchange and Taker Exchange. Both are connected programmatically to execute orders.
The Crypto Exchange which needs liquidity will buy an asset that is listed in the maker exchange and sell an asset instantly in the taker exchange and make a profit from it. In this method, they would not lose their capital and earn little profit from it. Likewise, they can sell an asset in the maker exchange for the best offer and then sell in the taker exchange. Thus by this simultaneous process, the cryptocurrency exchange can make revenue.
Liquidity Mining
Liquidity mining is the process of gaining liquidity through various methods. This also includes Crypto Stacking, where the cryptos remain in the wallet for a particular period and they gain rewards for holding their assets in the crypto exchange. The open-source software is distributed to all the participants. Miners can set parameters to the software and the reward pools generate automatically by algorithm and are distributed among miners.
Risks and Possible Benefits Associated with Low Liquidity
Initially, lower liquidity leads to instability. Price manipulation, Slippage is the risks associated with the lower liquidity environment. This uncertainty would bring serious harm to the traders. On the other side, This instability sometimes brings good fortune to traders as at times, there would be a price hike due to instability.
If you want to know more details about crypto liquidity, Explore this blog>> The Importance Of Liquidity In Cryptocurrency Exchange Platform Development, or you can contact any cryptocurrency exchange development company like Bitdeal. They provide A to Z details about liquidity in the crypto exchange platform, and they help to launch the crypto exchange platform by providing Cryptocurrency Exchange Script.
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