Two-sided Liquidity Marketplace Is The Key To Globalizing Crypto Trading

Despite all the hype around the current Bitcoin bull run and crypto in general, the market reality is this:  the global crypto trading market is in its infancy. The reality is professional crypto traders cannot efficiently access global price discovery, global best bid and offer, or global liquidity. 

The problem is relatively simple:  market fragmentation. There is no single exchange that provides a unified global trading market with access to all of the aforementioned benefits. And each exchange is its own trading “lake” with no “canal” connecting them. 

The solution to this problem is not easy. Otherwise, someone would have solved it and the crypto trading landscape would not be in its infancy today.  I believe developing a two-sided liquidity marketplace is a key step to solving professional crypto traders’ ails -- and in creating a unified global trading market. Actually Apifiny, a digital asset trading network, is reportedly working on developing such a two-sided marketplace, according to its CEO, Haohan Xu.

But first, it’s helpful to contextualize two-sided marketplaces at-large. 

Two-sided marketplaces are not new. They are proven ways to bring together buyers and sellers who would otherwise be unable to connect, creating new revenue streams for sellers and new capabilities for buyers.

Google’s advertising service, AdSense, is a great example of how a two-sided marketplace created a new source of value for small advertisers (buyers) and website publishers (sellers) and helped accelerate the growth of a new business category. Google AdSense collected $146.92 billion in 2020 in ad revenue, helping drive new demand for ad inventory by making ad space available to legions of small advertisers (over 38.3 million websites so far in 2021).  AdSense made it possible for websites of all sizes to monetize their audiences by easily selling ad space. Without a 2-sided marketplace, this phenomenal business would cease to exist.

The dearth of global liquidity supply is limiting the growth of digital asset trading despite the growing demand for global liquidity from exchanges, asset issuers, and quant traders.  It bears repeating that today’s digital asset trading markets are highly fragmented with no single, global market. Institutional traders can only trade in local markets and, therefore, do not have access to deep, global liquidity and the best asset prices. Why? 

Today’s exchanges are disconnected, operating in isolation from each other. As a result, to achieve sufficient liquidity, traders must connect with multiple exchanges using different APIs, whose reliability varies widely and requires high development and maintenance costs. Moreover, without enough distributed IDCs to connect exchanges across the world, trading speed is too slow for professional traders. 

Traders also need to deposit large positions, and transferring those positions between exchanges is also slow and expensive. Finally, high withdrawal and transfer fees also force many traders to store their funds on centralized exchanges, which poses a huge security risk.  

The end result is today’s international trading systems lack enough liquidity and are too complicated, slow, and expensive. 

But a two-sided, liquidity marketplace that connects the world’s exchanges to new, untapped liquidity sources, can solve these challenges. Just as advertisers can easily buy ad space, a 2-sided liquidity marketplace would enable exchanges and token issuers to easily purchase liquidity from scores of new market makers who can automatically sell liquidity. (A market maker is a financial institution that buys and sells assets on exchanges and other trading platforms and makes profits by optimizing its “bid-ask” spread, which is the difference between a buy (ask) and sell (bid) order). 

A two-sided marketplace would, in theory, enable legions of mid-sized market makers across the world to provide enough liquidity to catalyze the next big wave of trading growth. It would also set the stage for the globalization of crypto trading that seamlessly connects exchanges, market makers, professional traders and OTC desks into a unified, global marketplace.  

A two-sided liquidity platform would democratize access and benefit all players. Smaller market makers could participate without facing upfront capital or trading volume requirements. Fee rates would also be much lower with no accumulation, meaning the lowest fee rate would be in place at any one time. 

Exchanges would benefit from all the fresh liquidity that tens of thousands of new market makers provide across a much larger number of assets. This, in turn, benefits professional traders with superior price discovery, tighter spreads, higher fill rates and capital utilization, and faster trade execution. Faster execution will also help exchanges attract more professional traders, creating a virtuous cycle of market growth. 

“But wait, there’s more!” Sorry, I just love to poke fun at the disingenuous nature of that common infomercial refrain.  

In all seriousness, this kind of two-sided liquidity marketplace could also allow more professional traders to become market makers by automatically connecting them to exchanges and/or asset pairs that need liquidity. Expanding the scope of market making to new parties would fuel trading market growth even more. 

Such a marketplace could also empower exchanges and asset issuers to list their market making opportunities and their corresponding maker rewards. Professional traders could place funds into a market making account, allocate it to a participating digital asset exchange, and select their preferred trading pairs (such as BTC/USD). 

It may seem far-fetched to turn traders into market makers. But no less far-fetched than retail bank savings accounts fueling commercial loans. A well-designed two-sided marketplace with the right technology and enough connected exchanges would make it very doable. Global liquidity and the entire crypto trading ecosystem would take a big evolutionary step forward as a result.