Liquidity Providers In Crypto: Meaning, Examples

Liquidity plays an essential role in the crypto market as it ensures smooth and efficient transactions. It is based on liquidity providers (LPs), which can be investors, market makers, and even crypto exchanges. They ensure sufficient trading volume, thus making a market more stable. Learn more about the importance of LPs, how to choose them, and the best providers on the market from this article.

Why Is Liquidity On Exchanges Important?

Liquidity provides the ability to quickly buy or sell assets without significant price fluctuations. In other words, a high level of liquidity reduces the risk of slippage, where the coins’ value can change right at the moment of trading. It is also significantly important for traders because spreads are smaller with high liquidity, which means transactions are more profitable. Thus, high liquidity on centralized exchanges (CEX) maintains stable market conditions, ensuring a smoother trading experience and the greatest efficiency, which, in turn, form the platform’s competitiveness. This is where liquidity providers come into play.

What Is A Liquidity Provider?

Now let’s look at the concept of a liquidity provider in more detail. So, as we already said, a liquidity provider is a person or entity that supplies liquidity to a market or exchange by placing orders to buy or sell assets. By rendering the order book model when orders are placed and executed, LPs allow other participants to easily buy and sell crypto without significant price swings. For the contribution, liquidity providers receive a part of the commissions for executed deals.

Role Of Liquidity Providers

Liquidity providers guarantee the smooth operation of centralized exchanges and markets in general; in other words, they ensure that there will always be someone on the other side of the transaction. In this way, they bridge the gap between buyers and sellers and smooth out market imbalances. Following are the roles LPs play in more detail:

• Facilitating trades. Liquidity providers create a quantity of buy and sell orders on the exchange and market, allowing traders to execute deals without major price swings and delays.

• Providing access to assets. Due to LPs’ contribution, traders have easy access to the cryptocurrencies they plan to buy or sell. This is possible even during market demand fluctuations.

• Reduction of slippage. High liquidity minimizes slippage during sales; thus, LPs ensure stable asset prices even in large transactions.

• Stability. LPs' participation in increasing market liquidity leads to more consistent pricing, thereby reducing volatility. All of this forms the stability of the market.

Liquidity providers are the “hidden force” that guarantees smooth trading. Without them, crypto exchanges and markets would undergo order shortages and sharp price changes, resulting in the loss of the traders trust.

Example Of Providing Liquidity

Now that you know who the LPs are and what role they play, let's look at an example of how liquidity is provided on centralized exchanges. We can think of this process in terms of three elements: market makers, trade execution, and commissions. Here are the details:

1. Market makers. These are the most frequent liquidity providers on CEXs. Market makers place orders to buy and sell assets at different price levels.

2. Execution of trades. When a trader intends to buy or sell an asset, the exchange matches his orders with the ones of the market makers. Thus, if a trader wants to buy Ethereum, the exchange will match the market makers’ sell orders to the best available price.

3. Commission accrual. Market makers receive a percentage of trading commissions in exchange for providing liquidity. So, if a trader wants to buy Ethereum, whose exchange price is $2,000, once the trade is made, the market maker will receive a portion of the fee from that trade. Some exchanges also offer LPs bonus programs to encourage liquidity.

How To Choose Liquidity Provider?

Before choosing a crypto liquidity provider, you need to know the factors to consider to be sure of its reliability. These are:

• Reputation. The LP should have positive reviews, a broad working base, and a high rating in the market.

• Regulatory compliance. Assess the security measures working on the platform (encryption, AML, 2FA, etc.). Check that the provider is compliant with regulatory requirements in key markets (such as the SEC in the US).

• Depth of liquidity. The provider should have consistent trading volumes, supporting popular trading pairs such as BTC/USDT or ETH/USDT.

• Commissions. It is worth choosing the platform with the most favorable fee structure to make trades efficient. They can vary depending on trading volume as well.

• Asset diversity. The more available assets on the platform, the higher the liquidity. It is also worth checking whether the exchange supports the assets you plan to trade.

• Platform tools. The website provider should be intuitively clear and offer useful trading tools (e.g., real-time data transfer) and technical integration (e.g., APIs).

• User support. The LP should offer 24/7 customer support, as quick resolution of problems is one of the factors for fast trades’ execution.

List Of The Best Crypto Liquidity Providers

In this block, we highlight four of the best liquidity providers in the market that meet our selection criteria. Among them are such CEXs as Cryptomus, Binance, Kraken, and OKX. All of them offer robust security measures, deep liquidity pools, and a great working base.

Cryptomus

Cryptomus is a young centralized exchange, founded in 2022, but already has a large customer base. There is 24/7 support via email or Telegram bot functioning, which makes the work easier. Another advantage is the reliability of the exchange, as here funds are protected with 2FA and encryption technology, and the platform has full compliance with AML and KYC regulations.

Cryptomus supports more than 100 highly liquid pairs, including assets such as BTC, ETH, USDT, and others. There is also the option to add a trading pair on request. As for commissions, it is zero for takers and for makers. In general, Cryptomus exchange provides projects with different degrees of risk and working in niche segments, as well as offers an individual approach to the formation of liquidity. It happens through the API on the platform offering seamless integration.

Binance

It is the largest cryptocurrency exchange in terms of trading volume, which makes it a leader in providing liquidity. The platform is chosen for its deep liquidity pools, large selection of assets, and expanded range of trading tools. For example, Binance allows liquidity providers to work together and offers incentives to attract people who can improve the platform's ecosystem. Margin trading, perpetual contracts, and futures are also among the functionalities there.

Binance is available in 180 countries, which further indicates a large customer base of active users, positively impacting liquidity dynamics. Due to the large functionality, it can be difficult to understand the platform’s interface, so in such cases the support service comes to help.

Kraken

The Kraken exchange is known for its high security standards and offers a robust trading infrastructure for beginners and professionals. There are various trading tools here, including margin trading, futures, and OTC (Over-the-Counter) services. And for large traders, the platform provides institutional support.

In terms of liquidity, the exchange features a robust order book depth for popular trading pairs. A program called “Liquidity Providers” has been developed here; as elsewhere, it involves users increasing the platform's liquidity by depositing the exchange's order books. LPs in return receive discounts on trading costs, which becomes favorable for trading.

OKX

OKX offers a wide range of trading services, including spot, options, futures and open-ended contracts. The exchange is also chosen for its high attention to security and commitment to regulatory requirements. In addition, OKX supports decentralized finance and actively integrates DeFi protocols to expand its offerings.

When it comes to liquidity, the platform takes a multi-faceted approach. Firstly, the exchange supports both centralized and decentralized liquidity sources, so users have access to a large number of assets and trading pairs. Secondly, OKX has integrated the Uniswap Labs API into the DeFi platform, whereupon clients gain access to additional liquidity pools. The exchange also robustly supports APIs for liquidity providers, facilitating connectivity for market-making. Thus, the infrastructure is characterized by depth and efficiency of execution.

As you can see, liquidity providers are key players to ensure efficient and profitable crypto transactions. There are a huge number of them on the market, so you can choose according to your priorities. Probably you have chosen the one from the list we have shared? Leave your thoughts in the comments below.