Articles related to Token Projects/Token Issuers/Web3 Projects
Issues realted with liquidity of the token listed both on centralized and decentralized exchanges
With the prospering cryptocurrency market and lots of brilliant Blockchain ideas that have been born in recent times, not all of these projects and their coins survive the market. One indicating factor for this outcome is coins being delisted from exchanges that accepted to list them. Although different exchanges have different delisting policies and reasons for delisting coins from their exchange we have found a set of common patterns amongst them.
At a high level, we can categorize the delisting into two categories and then we break one down. Why one only, because the other one is really a dead project. Meaning, the team behind the project (the coin) has been dismantled and the exchange team has found out that this is no longer the case for investment. How do they know that? well, they research, they try to make contacts with the team behind the listed coin, they face unresponsiveness or not sufficient evidence that makes them believe that this project behind the coin is relevant anymore, these are labelled as failed projects. No one can do anything about this.
On the other hand, there are coins and projects that are genuinely alive, there are teams that are working around the clock to keep those coins and projects alive and they don’t want to be delisted, we plan to break this case down for you as the reasons for delisting vary.
Regulatory requirements and compliance. After all, being listed, being tradable is considered as a financial operation. Regulators are keeping track of coins that are being listed and evaluate their legitimacy. Unlicensed securities and financial products are subject to delisting from exchanges. Regulatory requirements could also evolve and coins need to be reactive to newly updated frameworks otherwise delisting will await them.
Another notable issue that causes delisting is a poor technical implementation which could lead to more fees for the exchange to maintain the coin listed. In most cases, the blockchain or related technology becomes compromised or defective.
Adding to the technical issues, a lot the coins and tokens traded between 2017 and 2018 were created as the ICO’s using existing blockchain’s programmable infrastructure and using specific token standards such as ERC-20. This means that most of ICO’s tokens were quite similar. A lot of these coins were listed on exchanges were simple as all these tokens are supported by the same protocol and wallets, and no improvements were made. This has caused a lot of delisting of coins across exchanges as well.
The security vulnerability could also be categorized as technical issues with coins that are being delisted. This type of delisting is due to technical maintenance costs for the exchange. Some of the technical obstacles with coins reach a point at which the developers of the exchange become aware of security alerts or technical ambiguity in the coin’s network that put the exchange, as a large holder of the coins, in a potential threat of loss in values or holdings.
Another important reason was coins were delisted, was wash trading or insufficient liquidity. Major Exchanges may delist a coin if it attracts a small number of traders, even if they are generating large volumes and trading fees due to wash trading, as they believe building a strong customer base is very important while artificial volume has little to no impact on the long term success of the asset while it hurts the reputation of the exchange. This delisting policy keeps wash traders away from the exchanges.
On the other hand, consistent liquidity is also a key factor for delisting. While most of the crypto traders are focused on top coins, some do trade smaller coins as well. Some due to initial holding of those from the ICOs and some small portion of interest on the project. Either way, exchanges tend to delist those coins that are not drawing enough traders to them since the cost and maintenance of those coins for the exchange are not enough in order to make profits from trading fees that they charge from traders. Many liquidity providers tend to work with these coins in order to provide enough liquidity to keep the coins listed in the exchange and also draw traders to and maintain their value.
Many coins and projects that have tokenized and are listed on exchanges do face this issue. After all, they need liquidity and volume in order to stay on the exchange and do attract new traders to trade and include their coins into their portfolios.
Some would choose the inorganic, fake and fast way of injecting liquidity into their coins. You guessed it right, through wash trading. Even though wash trading arguable could be used as fast or even maybe the cheaper approach to this, it may not be the best long term solution. One, because professional traders do and can spot wash trading activities on order books, two, many exchanges do not tolerate wash trading and do delist those tokens once they detect suspicious activities around those coins. For who would like to stay on track for a foreseeable future the best approach is to provide real liquidity to their coins.
Many Market Makers and liquidity providers focus on providing real liquidity to coins that either newly listed on exchanges or are lacking enough liquidity. There is a variety of off the shelf solutions available in the market. These solutions are known as Market Making Bots. Some of these bots are using as profit-making bots which do so with the typical approach to market making which is placing bids and asks on both sides of the market, be present in the market and compete and at last, make some profits from the difference in the spread and market movements.
Market Making bots are a good solution but perhaps not the best for a more sophisticated approach to market making. This is mainly because of limited parametrization available bots in the market. Another notable disadvantage of market making bots is that they are not built to manage and deal market fluctuations well when they occur, this is especially when the prices in the market are going down.
So what would be the best solution? Perhaps, more sophisticated market making algorithms and software that are configurable to different market situations. This is important especially because of risk management.
So what makes a good market maker when it comes to market that lack liquidity and in the danger of getting delisted, the following points are the most crucial in the liquidity provision journey:
- First and foremost, always-be-present-in-the-market. Constantly quoting in the market is an important criteria for improving efficiency and price discovery in an illiquid market.
- Reasonable quoting strategy. Quotes cannot exceed a specified percentage away from the best bid and offer
- Control the spread. Narrower spreads will induce both informed and uninformed traders to trade which in turn increases price efficiency and quickens price discovery.
- As an additional option, some sophisticated tools may be able to mirror instruments from other exchanges (usually more liquid exchanges) to get a good understanding of the market changes. This can be an issue because of volatility reasons, but some tools have a way around that.
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