What is liquidity aggregation and how it benefits the market?
Understanding the intricacies of the cryptocurrency market is no easy task. There are plenty of sources available, but it’s difficult to find plain and comprehensive articles that explain the work of cryptocurrency exchanges, trading process, subtle factors influencing the cryptocurrency rates, etc. Understanding all of this is crucial to successful cryptocurrency trading.
One important process in the cryptocurrency market is the liquidity aggregation. Some exchanges sell liquidity, others buy it, but what does it all mean for traders?
Most pieces devoted to liquidity aggregation are targeted either at finance professionals and are written in a complex industry vernacular; or at potential buyers of liquidity and are focused on selling rather than informing.
We set off to repair this injustice and lay down in plain terms what the liquidity aggregation is and why the entire market will benefit from using it.
What is liquidity aggregation
Liquidity aggregation is a process of gathering buy and sell orders from different sources and directing them to the executing party. The purpose of aggregation is to provide traders with an opportunity to buy an asset at prices close to market average.
Since the cryptocurrency market is extremely volatile, various platforms may offer different prices for the same asset. Imagine three exchanges: A. B and C which offer BTC at prices ranging from $10,000 to $10,300. A trader wants to buy BTC, but there are only orders with prices higher than $10,200 at the moment. The trader has two options: raise their buying price or go to a different exchange (which seems logical). However, there is no guarantee that they will find the desired price on any of the exchanges. The solution is liquidity aggregation. If the exchange C employs liquidity aggregation, it will be able to gather sell orders at favorable prices from the exchanges A and B and provide them to the trader. In this case the trader will see on the exchange C not only orders at $10,200+, but also aggregated orders from the exchanges A and B at prices starting from $10,000. As a result, the trader can close the order at the best available price as quickly as possible.
This is a simplified explanation that nevertheless captures the essence of the process and its benefit for individual traders. But the liquidity aggregation in a global sense has a much deeper meaning: it opposes market manipulators.
Market manipulation and how liquidity aggregation counters it
It is believed that the cryptocurrency market is less susceptible to manipulation compared to the fiat market. It’s true in a certain sense, since issuing of cryptocurrency is a predetermined procedure. Neither its creator, nor the token holders can print cryptobanknotes or limit their issue by the sheer force of will. In this respect, the cryptocurrency market is free from manipulative influences.
However, it is wrong to assume that the cryptocurrency market is completely invulnerable. Although cryptocurrency assets are not subject to adjustments by central banks, they are very much dependent on the behavior of the so-called whales — owners of large amounts of cryptocurrency.
According to a study by Delphi Digital, 588 wallets hold $10,000,000 worth of bitcoins each. Most of the happy owners of these wallets are cryptocurrency funds and other institutional investors, but still there are individuals among them: Barry Silbert (about $200 million), Tim Draper ($150 million), Tyler and Cameron Winklevoss ($400 million) and, as the rumor has it, Satoshi Nakamoto himself (900,000 BTC, which equals $4 billion). Having hundreds of millions of dollars at their disposal, whales have great leverage over the market. Cryptonet describes some of the most well-known:
Rinse and repeat
In order to buy cryptocurrency at a profit, a whale first starts selling it at a price slightly lower than the market average, which triggers a huge sell-off by short-sighted market participants. Thus the whale creates a perfect opportunity to buy high volumes of cryptocurrency at a much lower price.
Spoofing
An even more interesting method aims to simulate a market collapse. A whale places a large order to buy or sell cryptocurrency. Having put up a high price order to buy cryptocurrency, the whale waits for traders to start buying the overpriced asset anticipating a price surge. When the price peaks, the whale cancels the order and sells cryptocurrency at an extremely inflated price. The same technique works with selling, in this case the price is set significantly below the market average: traders see a large order at a low price and anticipating a plunge start selling off their assets.
OTC trading
While honest traders have to work under the keen eye of regulators, while the biggest trades are made in the black market. These are so-called OTC trades (over the counter). For example, such brokers as Circle and Cumberland give access to the market only to traders with orders starting at $250,000.
OTC trading is, of course, attractive due to cryptoasset prices which can be significantly lower than those on exchanges. What is truly unfortunate here, is that OTC players often return to the exchanges where they implement other manipulation strategies, reaping even higher profits.
It seems like the market is very vulnerable to reversals initiated by the whales. However, there’s a tool capable of considerably neutralizing the influence of manipulators: liquidity aggregation. Even if a whale wants to cause a global market meltdown by selling a large part of their assets at a low price, an exchange with liquidity aggregation will immediately gather orders from other exchanges, which will allow trading to continue at regular market prices. Thus, liquidity aggregation acts as a tool for interexchange arbitration that shields market participants from the psychological factor of price swings.
Liquidity aggregation on Serenity.Exchange
Liquidity aggregation is a closed process. Serenity.Exchange receives liquidity from major exchanges, while gathering it into a large pool with its own orders, thus multiplying the turnover. At the same time, clients who are connected to the Serenity aggregator act as both consumers and providers of liquidity.
Serenity.Exchange forms liquidity through several sources:
Retail clients
The exchange receives orders from traders, which form Serenity’s internal liquidity.
Top exchanges
Serenity connects to other exchanges and aggregates their orders for its own depth of market, which are executed in case Serenity’s internal orders can’t be closed at near-market prices.
White Label
Serenity acts as a liquidity provider for those clients who bought a White Label license. When White Label orders are closed on the Serenity platform, White Label acts as a liquidity provider for Serenity.
Institutional clients
Companies trading on Serenity on behalf of a large number of traders are considered institutional clients. Among them are exchanges, cryptocurrency funds, trust management systems, and other financial organizations participating in the cryptocurrency market. Institutional clients are the recipients and providers of liquidity at the same time.
Exchangers
Serenity creates software modules and provides them to cryptocurrency exchangers, receiving liquidity in return. Exchangers synced with Serenity.Exchange never experience any balance issues: any trade may be executed thanks to the orders aggregated from various exchanges.
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Liquidity aggregation functions not only as a tool that facilitates efficient trading on one particular platform, but also as a working method for stabilization of the whole market.
The more exchanges use liquidity aggregation, the more stable and predictable the cryptocurrency market will become. Only then a true decentralization and independent trading processes will become possible. Furthermore, liquidity aggregation means extra protection from abuse by dishonest exchanges, since any price doctoring attempts will be offset by orders from other trading platforms.
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