The decentralized and censorship-resistant nature of blockchain technology has dramatically improved the ways in which value and information can be transferred. However, while tokenized assets are imbued with a wide range of blockchain-enabled benefits, the platforms on which digital assets are bought and traded are still subject to several traditional market dynamics. The most prevalent of these dynamics is market liquidity, which plays a crucial role in facilitating asset transfers and reducing market volatility.
Market liquidity is the ease with which an asset can be converted into another asset without affecting its current market price. More specifically, an asset’s level of market liquidity is a function of two parameters. The first is the volume and ratio of active market participants.
The more buyers and sellers actively placing orders for an asset, the more liquid the asset is in that particular market. Healthy markets require a relatively balanced ratio of buyers and sellers, otherwise the value of the asset may be distorted or subject to manipulation.
Within a traditional market environment, the highest price a prospective buyer is willing to pay for an asset is called the bid price, and the lowest price a prospective seller is willing to sell an asset for is called the ask price. The difference between these two values is called the bid-ask spread. An asset with many active buyers and sellers will typically have a relatively small bid-ask spread.
The second factor in an asset’s liquidity level is the ease with which the asset can be transferred. In order for an asset to be liquid, buyers and sellers not only need to be ready and willing to exchange an asset — they must also be able to easily and quickly transfer the asset in a practical sense. For instance, a physical good like real estate is inherently less liquid than a digital security. The size of an order may also affect liquidity, or in turn be affected by limited liquidity, since larger orders require more liquidity to complete.
Within the traditional financial services sector, fiat currencies are generally the most liquid assets — particularly the U.S. dollar, given its current status as the global reserve currency. In terms of cryptocurrency markets, bitcoin (BTC) and ether (ETH) tend to be the most liquid. This is why many crypto exchanges offer trading pairs with one of these two cryptocurrencies — in addition to fiat currencies.
Liquidity is essential to the proper functioning of any healthy market. Without sufficient liquidity, market transactions are prone to dysfunction or failure to execute. To better understand why this is the case, let’s explore the essential market characteristics that liquidity enables.
Market stability: Markets with liquidity have a high volume of trading activity, which in turn serves to stabilize the prices of the assets being traded. By contrast, markets without significant trading volume are subject to more sudden or severe bouts of volatility and can be easily manipulated by actors with significant asset holdings. A single large buy or sell order could potentially trigger a liquidity crisis, leading to significant price swings that could affect other investors in unpredictable or costly ways.
While most asset prices are constantly shifting, more liquidity helps smooth transactions by decreasing slippage, which is the difference between the expected price of a trade and the price at which the trade is executed. Slippage occurs whenever the bid-ask spread for an asset changes between the time a market order is placed and when that order is executed. While a small amount of slippage is expected in some transactions involving a market order, this issue is particularly pronounced when investors place a market order for an asset without much trading volume or during periods of heightened market volatility. Additionally, larger market orders typically result in more slippage, as more liquidity is required to complete these trades.
Fairer prices: Liquid markets have a well-balanced number of active buyers and sellers, which results in high trading activity on both sides. Each buyer and seller is looking to buy and sell an asset at an optimal price. Buyers and sellers vying against other market participants to execute similar orders leads to more sellers asking for competitive prices and more buyers bidding at these higher prices. Thus, high liquidity leads to more market stability, and inherently results in fairer prices for both buyers and sellers.
Reliable markets: Enhanced liquidity makes it easier for market participants to identify potential market trends because liquid assets experience high transaction volumes, which consequently yields a wealth of information that can be useful for investors who rely on technical analysis to inform their trades.
Quicker transactions: The presence of more active market participants naturally enables faster transactions, as supply and demand are met with relative ease.
These benefits of liquidity enable essential functions that every healthy market needs. Every reputable marketplace — whether it’s the Nasdaq, a centralized cryptocurrency exchange like Gemini, or a blockchain-enabled decentralized exchange (DEX) — has built-in mechanisms specifically designed to maintain enough liquidity to facilitate smooth transactions.
At the start of 2021, most people hadn’t heard of the word non-fungible token (NFT) and fewer still had any idea of what it meant. By the end of the year, Collins Dictionary had declared NFT its word of the year, and the market was worth an estimated $40 billion.
Just as a physical wallet allows you to store your money, a blockchain wallet allows you to manage and use your cryptocurrencies and other blockchain-based digital assets. With the rising adoption of cryptocurrencies as an investment asset class, digital payments option, and digital economy facilitator, people who own cryptos should be familiar with blockchain wallets and their uses.
Over the course of history, the face of gaming has evolved at an unprecedented rate. Aided by advancements in technology, the gaming arenas have gone from the arcade halls, where you could find the likes of Pacman and Space Invaders, to handheld Gameboys, to Sony releasing their first Playstation and Microsoft doing likewise with their Xbox, through to the Nintendo Wii, online casino play and Esports. But it seems that the world is encountering and preparing itself for a new wave of gaming right now, in the form of GameFi.
