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The future of digital asset liquidity: centralized or decentralized?



Last month, bitcoin (B T c) $60,000. Reached over, highlighting the current frenzy surrounding digital currencies. After BTC, the value of altcoins was also seen to increase significantly. All of this is music to the ears of long-term and short-term bull investors, who are also looking for increased profits with Bitcoin’s current pullback and support. $ 40,000. Hovering around.

However, despite all the hype around the current bull market, the lack of digital asset liquidity remains a significant challenge for exchanges, merchants, token issuers, and market makers. The reality of today’s market is that professional crypto traders cannot reach global liquidity efficiently or find the best global value to increase profits.

For token issuers, the current environment has forced them to list their coins on multiple exchanges to reach their target customer base. This increases business development costs and forces issuers into niche markets. In order for the digital currency market to move forward, these categories must be understood.

Fragmentation and market force

One of the main reasons for liquidity lies in market fragmentation. The idea behind crypto is much more than a sexy stock investment. Crypto is a completely new way of handling money. But with all the different coins – even successful ones – and the lack of businesses accepting crypto payments, users are not using crypto the way it was initially done. was.

related: Professional traders need a global crypto sea, not hundreds of lakes

Of course, this was the inevitable consequence of the disintegration of the Fiat world. This type of fragmentation is the only possible route for consumers to transition to the crypto world. And because exchanges are usually localized, they only serve one or a few fiat currencies. Again, consumers are left with a fragmented market and a slow adoption curve.

This situation is not bad, as users have independent choices, but there are consequences.

Two of those consequences are lack of liquidity and highly volatile prices. Consider how much the price of bitcoin has changed in the last two years. It has been a roller coaster ride, to say the least. This instability makes it difficult for a consumer to get into a $ 500 shopping spree using a mobile digital wallet in a progressive and technologically efficient department store. In short, liquidation and price movements become a problem.

What’s more, market fragmentation has left newcomers in space with a massive learning curve. Understanding the market and determining the exact pricing for various coins requires a deep awareness of multiple exchange accounts and the field. For this reason, many new digital investors simply buy and hold, anticipating market changes, but expect relatively rapid returns on coins – even without clear use cases.

related: Bitcoin Price Forecasting Using Quantitative Models, Part 1

Centralize the demons?

The complexities of a fragmented market have forced many different solutions. Some suggest a centralized approach to liquidity. By centralizing coins and standardizing markets, investors no longer face a fragmented and complex cycle of coins and prices. Without such negative fragmentation issues, investors would be willing to trade faster rather than a wider bid-ask margin.

Although this seems consistent at first glance, such a solution is unstable. First, centralization goes against the same ethos on which cryptocurrency was developed. Centralization is not the answer to fixing a market that grows behind the conscious rejection of centralized currencies. By doing this, a considerable part of the market will itself be separated.

Second, if the market adopts a centralized policy, the same problems that trouble banks (slower processing times, lack of transparency and security, higher fees) will eventually hit the digital currency market. The progress once hoped for would only be a replica of the failures of the current financial system.

Finally, even in an explicitly decentralized system where all market liquidity is indeed centralized in some decentralized exchanges, investors will still be limited in how they can participate. With a small but large pool of liquidity, the inevitable result is a return to a Fiat-style financial system.

related: Decentralization vs. Centralization: Where is the future? Expert answers

distributed solutions

Because centralized solutions run contrary to the nature of digital currencies, a more robust decentralized solution is needed to address the problems caused by market fragmentation. Decentralization, while a long-term solution to the problem, can provide institutions with continued adoption of the market. This trajectory ultimately aligns with the vision of cryptocurrency, creating stability.

However, simple decentralization is not a strong enough answer. For crypto, the key to liquidity is “distributed, yet connected.” This slogan takes the best of both worlds and marries them together. Decentralization – that is, distribution – is what makes crypto so revolutionary. But the 21st century is more connected globally than ever before, a link that will be stronger.

However, this increase in connectivity must be maintained through biological methods. Trying to force some hardcore structure on the cryptocurrency space is, of course, centralizing it. Therefore, investors and traders must face a storm of fragmentation to make cryptocurrency so deeply disruptive. This route provides connectivity, and as connectivity increases, the digital currency market becomes more liquid. Also, the more the market is distributed, the more digital currencies retain their original intent. The market should move in this direction in the next three to five years.

Development towards defy

As the cryptocurrency market moves this way, activity will only continue to grow, allowing decentralized finance (DIFI) solutions to take over from there. Defy solutions provide the best of both worlds: truly distributed engagement, which will protect the digital currency space and reduce market fragmentation.

Most cryptocurrency trading companies operate just like banks or stock exchanges, where buyers and sellers will have to pay a fee for usage. Such a practice can quickly turn into a situation of David and Goliath, where traders are taken advantage of by Goliath with greater wealth and higher risk limits. However, in the Daffy trading pool, profits (and costs) are spread equally between all parties. For contributions to the pool, liquidity providers are rewarded with pool tokens. Buyers always have a seller, and sellers always have a buyer.

In addition, all liquidity providers receive a share of trading fees based on the size of their stake. In fact, it is a decentralized system: not only can one offer crypto in a DeFi pool, but they can also make fiat contributions, giving traditional, conservative investors an opportunity to play a role. If an investment group sees a profit, trust them to be there for the reward.

Among the major catalysts leading the market in this direction, the most prominent central banks are Digital Currencies (CBDC). As governments begin issuing CBDCs, they provide a more simplified entry point into DeFi. Investors and consumers alike will already be prepared for digital transactions, and the barrier to the fund’s transition from fiat to crypto will be significantly reduced.

Additionally, CBDCs would allow for a more substantial international movement of funds. Providing an ancillary catalyst for a fully decentralized liquidity pool would make individual exchanges obsolete only in local fiat. Forces like CBDC and increased DIFI participation will bring change, and investors will be better for it.

This article does not contain investment advice or recommendations. Every investment and business move involves risk, and readers should do their own research when making decisions.

The views, opinions and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointegraf.

Haohan Zhu Is CEO of Epiphini, a global liquidity and financial value transfer network. Prior to Epiphany, Haohan was an active investor in the equity markets and a trader in the digital asset markets. Haohan holds a Bachelor of Science degree in Operations Research with a minor in Computer Science from Columbia University.