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The Impact of Liquidity for a Successful Exchange

Sep 29, 2020
Exchange_Liquidity_Representation

Overview

Useful and comprehensive information is paramount before setting out to navigate any financial objective. Whether you are a retail trader, an established institution, or simply a non-professional investor, there are certain concepts to grasp and research to carry out. From finding or setting up an exchange or broker to defining asset classes, there is an abundant set of decisions to be made. We will further explore the impact of liquidity for a successful exchange and the relevant processes it affects. 

 

Exchange Characteristics and Blockchain: A brief introduction 

Embedded deep into every transaction we partake in, trust is the fundamental currency of commerce. Whether it’s on counterparty risk, a clearing procedure or other interactions, trust is the foundation of our economic system. We manufacture trust by creating intermediaries and adding layers upon layers of verification. Fortunately, newly incorporated Blockchain technology [1] provides us with a method to directly eliminate synthetic trust and improve each and every aspect discussed below.

Some concepts have proved to be fundamental for making informed decisions and obtaining effective results in building an exchange:

 

  • Operational features such as speed, security, connectivity, surveillance, and scalability are definitely a necessary condition but by no means sufficient to obtain the best performance. 

 

  • Other factors, such as (deposit and withdrawal) fees, exchange trading commissions, licenses, time in business, and liquidity provide a sound complement and the basis for a successful exchange. 

 

Liquidity, liquidity, liquidity

One particular aspect we believe to be key in the outcome of a successful undertaking is liquidity. It bears revising what liquidity means and its different classifications. Asset liquidity (as opposed to market liquidity) can be defined as whether an asset can be readily sold and converted into a base asset without causing a material impact on the asset price. To assess the liquidity of a digital asset, a base currency or asset must be selected against which to measure relative liquidity (BTC/USD for example). Market liquidity, on the other hand, is characterized by every other component in the system,  ranging from actors involved, size of transactions and so on.

There are usually a number of quantitative and qualitative ways to measure asset and market liquidity [2]:

Asset 

  • Slippage points for different size orders
  • Bid/ask spread

Market

  • Order book depth
  • 24 hr trading volume
  • Average number of trades
  • Number of participants
  • Heterogeneity of participants

 

Essentially, the bigger, deeper, and more secure exchanges are, the more lucrative results will be, all else equal.

There is a note to be made between liquidity and volume. Although sometimes mistaken for one to be a proxy of the other, they are different concepts. While one measures the liquidity of markets, the other tracks the amount of assets that change hands. They are, however, correlated to a certain degree. A highly liquid market can imply a high volume market as traders usually prefer to trade in exchanges that have a high amount of counterparties as that reduces the slippage on their trades.

Even though the global market for trading digital assets today is highly fragmented and has experienced notable pricing differences across global exchanges, an every-day closing gap between the liquidity provided by Centralized Exchanges and Decentralized Exchanges serves as strong evidence of the greater utilization of Blockchain technology (and its benefits), proposing a scenario where every company in the world today is at risk of having competition from a blockchain version of themselves.

 

What About SCALABLE?

The pool our clients connect to is among the deepest and most liquid in the industry. With an unparalleled heterogeneity of participants and a harmonious blend of experience between traditional and digital assets markets, every user can trade with minimal impact prices, regarding its order size. Find out more about Scalable Liquidity.

 

Conclusion

As discussed above, liquidity undoubtedly plays a crucial role in the success of an exchange. SCALABLE excels in every main metric used to measure exchanges’ liquidity, attracting order flow, and sorting the entrance barriers for newcomers. This practice can be extended to all of our future customers.

 

References

[1] Casey, Michael et al. The Impact of Blockchain Technology on Finance: a Catalyst for Change. ICMB International Center for Monetary and Banking Studies, 2018.

[2] Quinn, Steven. “If Blockchain Is the Door to the Future of Finance, Liquidity Is the Key.” Cointelegraph, Cointelegraph, 13 May 2020, cointelegraph.com/news/if-blockchain-is-the-door-to-the-future-of-finance-liquidity-is-the-key.

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