The digital asset industry has been shaken up by countless crises in the last year, including the de-peg of Terra’s USD stable coin UST or bankruptcies like Celsius or FTX for example. The fallout of these events often result in major industry players being removed from the industry. Because of that, it makes sense to take a step back every so often to reassess the landscape. In this case, we will take a concise look the liquidity providers in crypto.
Generally, a crypto liquidity provider (LP) can be anyone who deploys capital to enable efficient trading of digital assets through a protocol or an exchange. Since there are often complexities and risks associated with crypto liquidity provision, the top liquidity providers tend to be institutional investors that utilize technology and quantitative, algorithmic models to enable liquid markets. These liquidity providing companies are often labeled market-makers, since they create a market by constantly streaming buy and sell orders to an exchange with their high-frequency trading strategies.
As a result they help any market participant in filling their orders, solving liquidity problems of trading venues. When it comes to on-chain liquidity, for example via decentralized exchanges or cross-chain bridges, the market-makers expertise with risk management, analytics and modelling, but also their automated trading background, can be greatly beneficial.
As soon as your business launches its cryptocurrency or token you should be interested in creating a market for it as well. Without people being able to buy or sell the asset at attractive conditions, in other words without liquidity, there is no value in holding it.
Partnering up with a top liquidity provider who professionally manages the market turns your crypto into an interesting asset to trade or invest in. This as a baseline, alongside good utility of your token, favourable tokenomics and potentially some marketing activities, should drive interest and accelerate growth of your crypto business. It becomes a win-win situation where traders experience cost efficient and smooth trading with minimal slippage, while they assist with healthy price discovery and potentially enable your project to sell some of your treasury to fund business costs.
On centralized exchanges (CEX) without an automated market-maker (AMM), the trading venue will require your token project to partner with a liquidity provider to meet the exchanges liquidity requirements in terms of spread, order book depth or uptime.
It’s not possible to define best crypto liquidity providers objectively. Any partnership largely depends on a project’s needs and preferences. Any crypto project should take time to perform due diligence on the various types of market-makers and liquidity providers before making a decision. After all, the business involves managing large amounts of capital and therefore requires a solid foundation of trust. While there are established liquidity providers like flovtec, who have a year long track record of providing liquidity to tokens and exchanges, there are just as many unprofessional ones who engage in shady market-making activities due to lack of regulation.
Some of the largest and most established crypto liquidity providers in the industry include:
These types of crypto liquidity providers work via loaned assets from crypto projects and often bring their own capital to form a trading pair. They are compensated with a call option on the loaned digital asset. Which is great, as projects can pay in their own cryptocurrency or token, but aligns incentives towards the option’s profitability instead of liquidity (large selling pressure). Also, these kinds of market-makers tend to focus on the large cap crypto projects.
Examples include: GSR, Wintermute, Jump Trading
This type of crypto market maker focuses on providing liquidity by managing a token project's capital in an optimal way. Because these companies act as a service provider who’s compensated by other means than an option (e.g. a monthly fee), the incentives are better aligned on optimal liquidity. Additionally, this business model also works well for mid, to even small cap crypto projects. It should be noted that these service providers may also opt for a loan and option compensation on a case by case basis.
Examples include: Keyrock, flovtec, flowdesk
These can come in various shapes or forms. Some offer free, open source software for high-frequency trading with one or multiple market making strategies. Others operate as service providers too, who offer their intellectual property to projects, so they can manage the liquidity themselves. It serves more as a niche product, as most crypto teams themselves do not have the required capacity or competences to perform efficient liquidity management themselves.
Examples include: Hummingbot, Cryptohopper
We purposely keep this list short and note that the topic needs to be revisited on a continuous basis because of the fast moving nature of the industry. To give an example, some months ago Alameda Research probably would have made it onto the list. However, with it’s ties to FTX, the trading firm has recently filed for bankruptcy and closed its liquidity provision and investment activities.
Additionally, it should be noted that the largest liquidity providers who may source large amounts of capital or offer venture investments for your project, may not be the best fit even though those offers seem tempting at first glance. Intransparent pricing, e.g. of Call Option contracts, can result in projects paying much more than they were initially expecting. Incentives should be properly aligned between a token issuer and their liquidity provider. Communication should be clear and direct, as opposed to standardized reporting. Market-making service providers who act more like a boutique for your liquidity management may offer a more exclusive business relationship which is based on an equal footing and a genuine interest to find solutions that best meet your needs.
For 5 years, flovtec has been in the industry and there is a reason why our customers remain with us for an extended period. If you would like to learn more about our approach to market making and our comprehensive understanding of crypto liquidity provision on and off chain, be sure to contact the team for an introduction and hopefully another fruitful partnership.