Illiquidity is a condition where an asset is difficult to sell because of its expense, lack of interested buyers, or some other reason. Examples of illiquid assets include real estate, stocks with low trading volume, or collectibles.
It usually relative to the ease of which asset can be converted to cash or other asset. The more difficult, the more illiquid the asset is.
Binance, one of the fast growing cryptocurrency exchanges with more than $100 million daily trading volume, just held the 2nd online public voting to decide which next cryptocurrency will be listed on Binance. Each registered user can cast multiple votes (maximum one vote per candidate coin) and needs to pay 0.1 BNB per vote. Binance will award the highest voted cryptocurrency with free listing on Binance. But as exciting as it may sound, the future of the “losing” cryptocurrencies still uncertain.
The current exchange model for cryptocurrency currencies/assets has a critical barrier, requiring a certain volume of trading activity to achieve market-liquidity. This inherent barrier makes it nearly impossible for small scale currencies to be convertible for other popular currencies using a market-determined exchange rate.
Lower liquidity tends to result in a more volatile market (especially when large orders are placed), and it causes prices to change more drastically; whereas higher liquidity creates a less volatile market, and prices do not fluctuate as significantly.
Liquidity in cryptocurrencies and blockchain tokens generally are the relative ease with which they can be bought or sold.
Solving the Liquidity Challenge
Bancor intoduces Smart Tokens , a solution for liquidity problem in cryptocurrency trading. Smart tokens are standard Ethereum ERC20 smart contract-based tokens, which implement the Bancor Protocol. Smart Tokens hold a balance of least one Connector, which can be a different Smart Token or any ERC20 standard token. Each Smart Token can be bought or sold for any Connector that it holds, directly through the Smart Token contract. Through the formula at the heart of the Bancor Protocol (the “Bancor Formula”), the Smart Token adjusts the price at which the Smart Token can be converted to or from its Connector) in response to each purchase/sale conversion. When a user sends a balance of a Connector to the Smart Token contract, the sent amount of the Connector is added to the balance held by the Smart Token contract, and the contract adds the appropriate quantity of the Smart Token to the balance associated with the user’s Ethereum address according to the Bancor Formula autonomous calculation. Conversely, when a user sends a balance of the Smart Token to the Smart Token contract, the contract deducts the amount from the user’s balance and sends the user the appropriate quantity of the Connector, as calculated by the Bancor Formula. In both cases, the conversion happens autonomously through the Smart Token contract, with no need for a counterparty, at the then-current price set by the Bancor Formula. Furthermore, when used in connection with transactions with Smart Token contracts, the price at which a Smart Token is liquid is the price autonomously set by the Bancor Formula, rather than at the perceived value of the buyer or seller. The platforms offer an alternative, and perhaps even more valuable service, by promising greater security and transparency. They do not rely on third-party services to hold customer funds. Instead, transactions are possible through an automated process.
The benefit of using Bancor Platform is that there is no need to put any trust in the exchange platform itself, as the funds are held by the user in a personal wallet, rather than with a third party. It s also provides more privacy, while reducing the risk of liquidity.