Liquidity: What You Need to Know
Have you ever wondered what factors contribute to the price action for exchange traded assets? It all begins with an attribute known as: Liquidity. Liquidity measures how quickly and cost-effectively one asset can be converted into another, like cash based on the order book spread, volume, and depth. Cash is the ultimate liquid asset. Any asset that is easily converted into cash is also considered highly liquid, notably Tether (USDT). Greater liquidity in a market means greater efficiency in that market.
Digital assets like BTC, ETH, and ADA are among the most liquid digital assets on most trading platforms. However, not all digital assets are created equal when it comes to liquidity. Some assets trade more actively than others on exchanges and trading platforms, creating greater market opportunity and more consistent interest from traders and investors. These liquid assets are usually identifiable by their daily trading volume, which can be in the millions, or even hundreds of millions, of units.
Market Liquidity
Market liquidity refers to the extent to which a market, such as a country’s stock market, a digital asset market, or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices.
The most liquid assets tend to be those with great interest from various market participants and a high daily transaction volume. Such assets will also attract a larger number of market makers who maintain a tighter two-sided market. Illiquid assets will have wider bid-ask spreads and less market depth. These assets tend to be lesser-known, have lower trading volume, and often have lower market capitalization. A widely and frequently traded asset will tend to be more liquid than a smaller, alternative asset.
Liquidity on AscendEX
Suppose the user wants to sell or purchase $100 of OMI (an industry-leading NFT digital asset with robust liquidity) on AscendEX. In that case, he will sell his assets almost instantly without any severe impact on price. For crypto assets, being listed on a popular platform allows many users to buy into the assets directly at efficient prices. On the other hand, if someone wants to purchase token XYZ and there are poor liquidity conditions, meaning a wider spread, thinner orderbook and lower trade volume, their purchase or sale price will be negatively affected as their order will attempt to be filled on an order book with a larger spread meaning the final price will be higher or lower than their desired buy or sell price giving them unfavorable pricing.
AscendEX has a variety of market maker and liquidity services available in support of market efficiency. Designated Market Makers (DMMs) and liquidity mining services like Hummingbot contribute to increasing market liquidity through its provision to specific token listings. Designated Market Makers are contracted by the project as a trading institution, providing two-way liquidity for the assigned token in a manner that seeks to build a more mature and efficient marketplace.
Additionally, AscendEX has relationships with liquidity mining services like Hummingbot, a great institutional acquisition tool for organic liquidity providers. Hummingbot significantly contributes to centralized liquidity resilience and conditions. Resilience is the ability for liquidity to return to its original state after a large market order.
Overall, liquidity and market efficiency on AscendEX has grown tremendously from the time of its inception with more trader sign-up and more project listing. This growth and the action of the liquidity services provided has definitely improved the market efficiency and liquidity quality on the trading platform.
