Reflections on liquidity

Introduction

Defining Liquidity

In cryptocurrency and DeFi, liquidity often denotes the capacity of a market to facilitate substantial buy/sell transactions without impacting price. The higher the liquidity of a market, the easier it is for investors to trade the market’s assets with minimal price effect.

In DeFi, liquidity possesses a unique definition, pertaining to “Liquidity Providers” (LPs). LPs are those who deposit their cryptocurrencies into a smart contract (like a liquidity pool), thereby supporting trading on DEX platforms like Uniswap or SushiSwap. The LPs’ assets in these pools are utilized to provide a market for trading pairs, enabling other users to trade these assets. In return, LPs derive income from transaction fees.For instance, suppose you possess equal amounts of ETH and USDT on Uniswap and decide to become an LP. You deposit these ETH and USDT into the ETH/USDT liquidity pool. Now, when other users trade between ETH and USDT, they are essentially trading with your assets. Uniswap collects a small fee for each transaction, distributed proportionally to all LPs in the ETH/USDT pool, including you.

Importance of Liquidity in Crypto

For CEX:

1. Transaction Speed: Trades in highly liquid markets are quickly completed as buyers and sellers are always ready to trade. In illiquid markets, waiting times may be longer for a buyer or seller to appear for a transaction.
2. Price Stability: Sufficient liquidity in an exchange can buffer price impact from individual trades. This aids in maintaining price stability, preventing extreme price fluctuations and market manipulation.
3. User Attraction: Liquidity is a crucial factor in attracting new users to an exchange. Users generally prefer exchanges with higher liquidity as they can more easily buy and sell assets at a relatively lower trading cost.
4. Market Depth: Liquidity offers deeper markets, crucial for large-scale traders or institutional investors. They require sufficient liquidity to conduct large transactions without affecting market prices.
5. Reduced Slippage: In liquid exchanges, users can obtain better execution prices when trading, as orders can be executed closer to the market price, minimizing slippage.

For DEX:

1. Earnings Source: LPs who provide liquidity to DeFi protocols can earn income from transaction fees.
2. User Attraction: For DEX, high liquidity signifies improved trading experiences for users. In combination with Oracle services, this can realize zero slippage and superior price stability, reducing transaction costs and attracting users.
3. Market Creation: DEX relies on LPs to create new trading pairs. While CEX decides which trading pairs to list, in DEX, any user willing to provide liquidity can create new trading pairs.

How the earliest mobility came about

The earliest cryptocurrency market liquidity primarily originated from the establishment of early exchanges.

In 2010, the first cryptocurrency exchange BitcoinMarket.com was established, initiating the acceptance of Bitcoin for USD trades. This marked Bitcoin as having market value. People began trading on the exchange, buying and selling Bitcoin, thus generating the earliest liquidity. At this stage, Bitcoin market liquidity primarily relies on buyers and sellers trading within the exchange.

Subsequently, more cryptocurrency exchanges such as Mt. Gox, Kraken, OKX, and others were established. These exchanges provided a trading platform for more users, enabling users to buy and sell Bitcoin and other cryptocurrencies, further enhancing market liquidity. Within these exchanges, liquidity primarily came from the activities of market makers and the buy-sell transactions between users.

DeFi’s Transformation of Liquidity

Here are some key stages and transformations:

Innovative Liquidity Applications

In essence, DeFi has profoundly revolutionized liquidity utilization. Leveraging innovative technology and mechanisms, DeFi enhances market liquidity while opening up novel yield opportunities for users.

Liquidity Analysis of MYX

Introduction to MYX

MYX is a decentralized derivatives exchange operating under a P2Pool2P model, bolstered by intelligent rate and exposure hedging mechanisms to ensure protocol stability and deliver consistently high returns. MYX spearheads the next generation of decentralized trading protocols with its unique growth products and supremely efficient fund utilization.

Liquidity Strategy of MYX

MYX, an innovative decentralized derivatives exchange, leverages a P2Pool2P model along with an array of unique features and mechanisms to optimize fund utilization and provide robust liquidity. On the MYX platform, Liquidity Providers (LPs) can serve as counterparties to unbalanced long and short positions, stimulating market maker participation and encouraging balanced trading within the platform through a dual mechanism of funding rates and Maker/Taker Fees. Each trading pair on MYX has its independent market consisting of an index token pool and a USDT pool. This arrangement enables LPs to flexibly deposit index tokens, USDT, or both, generating corresponding LP tokens to enhance market liquidity.

When market imbalances lead to rate disparities, MYX’s intelligent rate adjustment mechanism attracts additional market makers and users to earn funding rates, further improving liquidity. In case of liquidity pool imbalance, MYX’s contracts deposit the deficient tokens according to LP’s expectations until equilibrium is achieved, maintaining market liquidity stability. Moreover, MYX’s copy trading system and rebate mechanism have attracted a broad user base, further boosting liquidity. By implementing these innovative features and mechanisms, MYX has emerged as one of the most efficient decentralized derivatives exchanges in terms of fund utilization.

Why and How MYX Achieves Superior Liquidity

In decentralized finance, the importance of liquidity is paramount. Sufficient liquidity is crucial for smooth transactions and minimizing slippage. MYX addresses this key issue through its unique liquidity mechanisms and dual oracle model.

On the MYX platform, Liquidity Providers (LPs) can act as counterparts to unbalanced long and short positions. This system, in tandem with intelligent rate adjustment and automatic liquidity pool balancing, ensures abundant liquidity even during substantial market fluctuations, preventing liquidity depletion. The dual oracle model effectively reduces trading slippage, further optimizing the user trading experience.

Regarding impermanent loss, MYX provides hedging and arbitrage opportunities to mitigate this risk. In traditional liquidity provision models, significant price swings of asset pairs can cause LPs to suffer impermanent loss, i.e., potential losses compared to simply holding the asset. However, within MYX, users can eliminate or reduce impermanent loss through market arbitrage or hedging strategies, further enhancing liquidity stability.

Additionally, MYX’s copy trading system and rebate mechanism have attracted a large user base. This not only improves MYX’s liquidity but also offers earning opportunities for users. With ample liquidity, MYX can draw more users to trade. The increase in trading volume generates substantial transaction fees, which can be given back to LPs, creating a virtuous cycle.

Such a liquidity mechanism ensures not only ample liquidity but also high fund utilization rates. This is because funds on the MYX platform are utilized more efficiently, providing liquidity and creating returns. Simultaneously, rich liquidity paves the way for DeFi scalability, making the construction of more complex financial products and services possible.

Comparison of Liquidity with Other Projects

Comparison of Liquidity between CEX and DEX

How Users Should Choose

Conclusion

Since the inception of cryptocurrency, the concept and practice of liquidity have continually evolved. CEX were early primary liquidity providers, offering users efficient trading experiences through conventional order book models and market maker roles. The liquidity advantage of CEXs lies in their high liquidity, superior price discovery mechanisms, and swift transaction speeds. However, CEXs come with inherent drawbacks such as the need to trust centralized entities, the risk of censorship, and potential security vulnerabilities.

On the other hand, DEX has revolutionized liquidity provisioning by introducing new liquidity models, like Automated Market Makers (AMM) and liquidity mining. This transformation allows anyone to become a liquidity provider. The strengths of DEXs are their trustless transactions, open access to all, and broader asset diversity. Nonetheless, DEXs also face challenges like potentially lower trading depth, a steeper learning curve for users, and the phenomenon of impermanent loss.

The role of liquidity in the cryptocurrency market is indispensable. Whether it’s CEX or DEX, both cater to the market’s liquidity needs in their unique ways. They empower traders to execute trades at will, thereby enhancing market vibrancy and efficiency.