You want to avoid black-box market-making services, with no insights into how the liquidity is managed by your partner. We set up automated, adaptive strategies, but you always have an influence on how things are done. All metrics are stored in a data warehouse, and you get access to your data via analytics dashboards.
Who is a crypto liquidity provider?
In the crypto space, when token issuers or exchanges use the terms crypto liquidity provider and market maker, they often mean the same. They mean an individual or a company, that buys and sells digital assets at a publicly quoted price to provide liquidity to the crypto asset markets. However, these terms are not quite the same. Not every market maker is a liquidity provider, and not every liquidity provider is a market maker :)
So what is the difference then?
Liquidity providers on centralized exchanges (CEX)
On centralized exchanges, liquidity providers are obliged to submit limit orders continuously to the markets. They are required to quote (binding) bid and ask prices at all times (almost – in practice, a liquidity provider usually commits to 90%+ uptime). In the liquidity provision contracts, token projects or exchanges define the expected liquidity depth per market to be maintained by the cryptocurrency liquidity provider. Usually, a liquidity provider utilizes market making strategies as the heart of their operations.
However, liquidity provision can take a number of forms. Aside from conventional market making, some companies will provide order book replication services, in which the order books from multiple exchanges are aggregated to deepen the liquidity and tighten the spreads. It is a common service for completely new exchanges with no liquidity at all, or exchanges using white-label solutions licensed from big crypto trading platforms. Such an approach directs liquidity towards a particular exchange. The key difference, compared to market making, is that there are no additional bids being placed: all that is happening is the existing liquidity is being utilized to its full potential.
So what about a market maker? It is not a primary objective of all market makers to provide liquidity to the markets. There are profit-driven market makers, usually operating with their own capital. Executing thousands of small transactions, they make money on the spread between the quoted bid and ask orders. These guys do not really care whether they create deep order books (in the case of centralized trading platforms) for an exchange or token. In fact, their orders can be really small, but the number of transactions they execute can add up to a nice profit. Profit-driven market makering companies will not bother themselves with uptime, either. They have no obligation to continuously quote, so for example in a time of high volatility, they might draw back and wait.
However, some market makers do what liquidity providers do. They are called designated market makers (DMMs) – a special kind of a market maker, whose contractual obligation is to maintain binding quotes for a specific asset. As known from traditional markets, a designated market maker is one that has been selected by the exchange as the primary market maker for a given security. Some good token projects engage 3 to 4 DMMs to take care of their liquidity. Many less liquid exchanges also hire multiple DMMs to do the job for the markets they consider crucial for the growth of their platforms.
So the DMMs are the core liquidity providers for the token projects or exchanges. When crypto token issuers or exchanges refer to their market makers, they usually mean their liquidity providers or DMMs.
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Liquidity providers on decentralized exchanges (DEX)
Liquidity pools are at the heart of an automated market maker-based decentralized exchange. A liquidity provider is a user (individual or institution) who funds a liquidity pool with crypto assets she owns to facilitate trading on the platform and earn passive income on her deposit. There are also other reasons like providing liquidity for your own project’s token. The more assets in a pool and the more liquidity the pool has, the easier trading becomes on decentralized exchanges for the market participants.
How much liquidity providers are paid by the DEX is based on the percentage of the crypto liquidity pool that they provide.
Liquidity pool tokens (LP tokens)
Many DeFi platforms have introduced liquidity pool tokens (LP tokens), sometimes also called liquidity provider tokens (as they are only for liquidity providers), as an incentive for funding the liquidity pools. They represent a receipt, allowing you to claim your original stake and interest earned.
It is important to note, that if you lose your LP tokens, then you lose your share of the crypto liquidity pool and any interest gained (as you do not have a receipt needed to withdraw the deposit).
What can a liquidity provider do with the LP tokens? There are some great use cases, like using them as a collateral in a loan (some trading platforms will allow you to do so), or compounding their yield (you put the LP tokens to a yield farm, smart contracts lend your funds to others, and you earn more crypto in return).
EMPIRICA’S LIQUIDITY ENGINE & ANALYTICS
Fully automated market making strategies provide liquidity to your markets 24/7. Your investors have counterparty to trade your assets whenever they want to buy or sell crypto tokens.
You would like to increase demand not only for most liquid markets. The solutions will help you assure healthy books and fair prices with tight spreads on markets that are key for your exchange or token. Improving the liquidity depth and trading conditions for investors helps build the so-called organic liquidity.
You are searching for a solid & experienced partner to help you manage your liquidity. 12 years of experience in the traditional markets and crypto space, helping professional liquidity providers, stock & digital asset exchanges worldwide.
We specialize in less-liquid markets, often neglected by other market making companies. Always happy to discuss your KPIs.
Access to real-time liquidity analytics for your crypto exchange or token. We set up dashboards to monitor the liquidity of your markets. Market data and trading activities are continuously recorded into a data warehouse, calculating liquidity metrics for the dashboards. You get insights into your market liquidity and the liquidity of your competition.
Empirica helps its clients and partners build deep liquidity on centralized and decentralized platforms. We are helping startup token projects, as well as mature tokens to improve liquidity in their markets. We also specialize in helping mid-size cryptocurrency exchanges to build deep order books and efficient markets.
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What is liquidity?
Liquidity is the measure of how easily you can convert an asset into cash or another asset. Token liquidity may be also considered from a cost perspective – the less liquid the token is, the more investor needs to pay when buying and selling a token, as he is crossing wide spread between these two prices.
What is a liquidity pool?
A crypto liquidity pool is a smart contract where tokens are locked for the purpose of providing liquidity.
What is the difference between an order book and a liquidity pool?
In order book markets (on centralized exchanges), bid and ask limit orders are submitted and updated by market makers and organized in the order book, while in AMM markets (on decentralized exchanges) liquidity is posted to a liquidity pool by market participants, and transaction prices are determined by a mathematical framework.
What is liquidity mining?
Liquidity mining is a strategy in which participants within a DeFi protocol contribute their crypto assets to make it easy for others to trade within a platform. In return, the participants are rewarded with a share of the platform’s transaction fees or newly issued tokens.
Does a liquidity provider generate volumes on exchange?
A liquidity provider will generate volume if there is a counterparty to trade with. A liquidity provider will add liquidity to order books or liquidity pools. When other investors consume the liquidity provided, organic volume is generated.
Should an exchange or token expect generating volume as a KPI in the agreement
Well, we know that some liquidity providers commit to generating specific amounts of volumes for exchanges and tokens. However, what they should commit to are two things: building liquidity depth and making the markets efficient by quoting fair prices. The volumes will be the outcome of the two, in case there is a good community that trades in the markets.
What are order books?
Order books are automated lists that organize buy and sell orders for a specific asset based on its current price level. The purpose of order books is to show the standing orders in different markets in real time.
What is order book replication?
An order book replication algorithm usually copies all pending buy and sell orders from a source exchange to the destination exchange, while adding a configurable spread.
Who is Automated Market Maker (AMM)
Automated market makers (AMMs) are tools used in decentralized exchanges, that utilize so-called liquidity pools, which store coins or tokens that are locked in a smart contract. Liquidity pools are used to facilitate trades between those assets. Instead of a traditional model of buyer and seller market, a liquidity pool is a counterparty for the trades.
Biggest crypto liquidity providers
Many established firms with a focus on liquidity provision have recently entered the cryptocurrency space. Companies like Jane Street, Virtu Financial, Jump Trading, and even Citadel Securities are among them. These are all enormous businesses with over a thousand employees each, and they all have roots on Wall Street in the 1990s.
What is yield farming?
Yield farming refers to lending or staking cryptocurrency in exchange for interest and other rewards. Yield farmers measure their returns in terms of annual percentage yields (APY).
What is staking?
With crypto staking, investors earn funds by holding coins or tokens in their wallets. On Proof of Stake blockchains, rewards based on minting new coins are distributed to those who stake funds according to the size of their holdings.
What is a smart contract?
Smart contracts are computer programs that are hosted and executed on a blockchain network. They run on blockchain and allow multiple parties to come to a shared result in an accurate, timely, and tamper-proof manner.
How do liquidity providers make money?
A liquidity provider makes money in two ways:
- On the spread between the quoted bid and ask orders. Executing thousands of small transactions, earning on each more or less the spread value adds up when the risk is properly managed.
- Secondly, they are sometimes renumerated by the exchanges (share of the taker fee) or token issuers.
And last but not least, because of lower transactional fees, other trading algorithms they use may be even more profitable.
What does CEX mean?
It is a shortcut for a centralized exchange.
What does DEX mean?
It is a shortcut for a decentralized exchange, an exchange that allows for peer-to-peer transactions, which means that an intermediary is unnecessary. This type of exchange is fully autonomous and is managed by algorithms as well as smart contracts.
What does DeFI mean?
It is a shortcut for decentralized finance.