Cryptocurrency liquidity refers to the ease with which someone can buy and sell cryptos at the nearest price possible to the market value.
Liquidity in the crypto market depends on liquidity providers, including aggregators, who ensure enough assets are available from the currencies in question. Otherwise, when the cryptocurrency liquidity is low, trade execution can be delayed, and the position may be executed at a different price from the desired one.
Hence, if you want to buy or sell coins at the best price, you need to consider the liquidity aggregator.
How Do Crypto Liquidity Aggregators Work?
Crypto liquidity aggregators provide the best rates for trading assets using a combination of exchanges and market makers. They collect information from the crypto exchange’s order book to offer better trading prices than other exchanges.
The data collection from the order book is usually done using advanced algorithms that scan the books. They aggregate crypto liquidity by finding the best trading rate in the order book and instantly offer it to the end-users. Besides, constantly checking the books to always provide a better rate.
This way of aggregating liquidity has become frequently used recently because it has proven its efficiency in offering improved rates using a simple method. Additionally, this method makes it easier for new brokerage firms to enter the market and compete with existing players.
Advantages Of a Crypto Liquidity Aggregator
Buying cryptocurrencies using liquidity aggregation has many advantages besides getting the best price in the market. These include:
- High liquidity: The process of consolidating the order book from crypto exchanges enables liquidity aggregators to provide improved rates.
- Competitive trading rates: The high liquidity of these platforms allows them to offer trading at the best prices and with the tightest spreads.
- User-friendly platforms: These trading platforms usually have an easy-to-use interface, making it easier for all traders to compete in the financial market.
- Risk management: Liquidity aggregators rely on multiple exchanges. Thus, if one exchange goes down, aggregators can read through other exchanges’ order books.
Challenges Of a Crypto Liquidity Aggregator
Crypto liquidity aggregation may seem like a great deal with many advantages. However, there are a few drawbacks you need to take into account.
- Risk of manipulation: Some malicious software or programs can deceive the algorithms used to scan the order book. Resulting in misleading information and undesired prices, leading to excessive losses.
- Exchanges default risk: The high reliability on exchanges alone can be risky. Liquidity providers are connected to these exchanges, and if an exchange faces downtime, that may cause some trouble for the platform in providing enough liquidity.
- Commission fees: Some crypto liquidity aggregation trading platforms may charge relatively high service prices. Therefore, this can offset any profits you make from trading.
5 Ways Crypto Liquidity Aggregators Improve The Market
Crypto liquidity aggregation is becoming more popular not only because it provides a simple and easy tool for traders. Additionally, it improves the efficiency of the crypto market in several ways:
- Giving access to a more liquidity pool, leading to reduced difference between the bidding and asking prices or tighter spreads. Eventually, it helps market participants find the assets they want and trade at a price near the given market value.
- Increased liquidity makes an asset highly accessible for buying and selling since many traders are willing to execute trades. Therefore, minimising the slippage time, which happens in markets with low liquidity where the trades are executed at slightly different prices from the market value.
- Lower the entry barrier and make it easy for relatively new firms to compete with market whales. These trading platforms help traders get the best prices on their trades, and they rely on multiple exchanges, minimising the impact of major players on the market.
- Lower fraud risk due to relying on multiple exchanges rather than a single one. When a platform depends on a single exchange, any hack or fraudulent scheme may put the platform and its users at high risk. However, using multiple exchanges lowers the impact of malicious activities on one exchange.
- Minimise the impact of speculations. These trading platforms use algorithms and numerical data to drive prices and rates. Therefore, any major event or news speculation doesn’t affect this data consolidation. Moreover, the algorithms will be able to provide better prices amidst market speculation and lower the speculations’ impact.
Liquidity aggregators positively impact the crypto market, especially in light of the high volatility of the market, where this helps offer the best trading conditions.
Crypto liquidity aggregators consolidate multiple exchanges’ order books and use advanced algorithms to offer tight spread, high liquidity, competitive rates, and lower the impact of market whales.
Eventually, these events make it more accessible for new brokers to enter the market and compete with key players, improving the crypto market’s well-being overall.