Crypto Liquidity Providers
for token projects and exchanges
If you represent crypto exchange, please see this page
Author: Michal Rozanski, updated on 12 January 2023
If you represent crypto exchange, please see this page
Author: Michal Rozanski, updated on 12 January 2023
When we talk with token projects we often hear they usually face a few challenges. First of all token projects must overcome the challenge of attracting users and building a community. With the growing number of users, token projects need to provide a friendly environment for trading a token on cryptocurrency exchanges. Depending on the maturity of the token, the challenges are different. Here are some of the most common challenges token issuers may face:
We encountered many token projects that faced similar problems, which blocked their development potential. In order to attract investors to the project and build a community around it, the token must overcome these problems. Here’s how we help tokens address the above challenges.
For over 50 tokens on several exchanges Empirica makes 40-60% of the turnover, quoting them 99% of the time. On exchanges for which we are the designated market maker, we are responsible for the execution of 20-30% of the exchange’s daily volume. Hundreds of millions of usd monthly volume we generate for our partners. With Empirica you can expect the increased demand for your token in your community, healthy order books and a fair price quoted with low spread regardless of market conditions.
We specialize in building liquidity for small and medium token projects, often neglected by other market making companies. During the last years, we have crafted and optimized our algorithms solely for that purpose
Unlike many other market makers, we do not demand 1-5% of your token supply for our activities. We are flexible in choosing a business model that will work for you (retainer, call option, hybrid)
The liquidity provision firm managed by the founders of Empirica is an exceptional partner, their top-notch solutions have become critical for our liquidity ambitions.
Algorithms by Empirica provide liquidity to our order books 24/7 and are resilient to market volatility. We know we can count on them when it comes to liquidity support.
We’ve been honestly impressed by the level of knowledge on markets and technology at the same time by the employees of Empirica. I can recommend these specialists to any exchange, trading- or token project that needs support in their markets. (May 2022)
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.
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.
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.
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.
In the crypto space, when token issuers or exchanges use the terms crypto liquidity provider and market maker, they often mean the same. It’s an individual or a company that buys and sells digital assets at a publicly quoted price to provide liquidity to the crypto asset markets. Decentralized exchanges extended the meaning of this term to investors staking their assets in liquidity pools to support the trading and price formation of a token.
Liquidity measures how easily you can convert an asset into cash or another asset. Token liquidity may also be 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. Here we present more data on crypto liquidity.
A crypto liquidity pool is a smart contract where tokens are locked to provide liquidity. Liquidity pools are at the heart of an automated market maker-based decentralized exchange.
A liquidity provider in crypto is an investor (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 by the project team for its token. The more assets in a pool, the more liquidity the pool has, and the easier trading becomes on decentralized exchange for other market participants.
How much the DEX pays the crypto exchange liquidity provider is based on the percentage of the crypto liquidity pool she puts, the volume, and the transaction fee offered by the exchange to LPs.
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.
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. Learn more on liquidity mining here.
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.
Well, we know that some liquidity providers in crypto 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.
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.
Liquidity provision can take several 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 no additional bids are being placed: all that is happening is utilizing the existing liquidity from some other venue.
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 a buyer and seller market, a liquidity pool is a counterparty for the trades.
Many DeFi platforms have introduced liquidity pool tokens (LP tokens), sometimes 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.
What can a liquidity provider do with the LP tokens? There are some significant use cases, like using them as 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). Please read more on LP Tokens here.
Many established firms focusing 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.
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).
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.
Smart contracts are computer programs hosted and executed on a blockchain network. They run on blockchain and allow multiple parties to achieve a shared result in an accurate, timely, and tamper-proof manner.
A liquidity provider makes money in two ways:
And last but not least, because of lower transactional fees, other trading algorithms they use may be even more profitable.
Here you will learn more about the topic of market making strategy
On centralized exchanges, liquidity providers must 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 at the heart of their operations.
So what about a market maker? It is not a primary objective of all market makers to provide market liquidity. 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 making companies will not bother themselves with uptime, either. They have no obligation to quote continuously, 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 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 manage 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.
Impermanent loss is inherent to providing liquidity with AMMs due to their internal mechanics. The liquidity provider by putting assets in the pool, agrees to receive back not the exact number of assets that were put in but the proportional stake in the pool. If the price of the assets changes meanwhile, it may bring a loss. A loss is calculated as the difference between the value of the assets in the pool to the value of the assets if they were hodled instead.
Impermanent loss conveys a significant risk, especially for smaller tokens, where big price swings might never reverse. Thus, becoming a liquidity provider on potentially volatile assets requires additional steps, like incorporating optimal hedging tactics, which is not that obvious. Otherwise, this is a very risky game.