Addressing Crypto-assets’ Liquidity

Since the start of 2017, the growth of the combined value of all crypto-assets has been sensational. At the beginning of the year, the capitalization was US$16 billion, but it has since increased more than six folds in only months, and is now hovering in the US$100–110 billion range. With a strong line-up of new, interesting blockchain project announcements in the coming months, many expect continual increment in the prices of these crypto-assets, which would ultimately lead to a higher capitalization of the sector.

Having said that, the daily traded volume of these crypto-assets is immensely skewed. On June 30, 2017, with a listing of approximately 800 different types of crypto-assets on coinmarketcap.com, the top 10 most active assets by dollar volume account for almost 90% of the entire traded volume in the crypto-space. This also means that there are not as many willing buyers and sellers for most of the listed crypto-assets, making it hard for holders of less commonly traded crypto-asset to locate potential trading partners to sell their assets.

On Liquidity

Why is liquidity important? For one, it dictates the price volatility of an asset: lower liquidity usually results in a more volatile market and causes prices to change more drastically, whereas higher liquidity creates a less volatile market, in which prices do not fluctuate as greatly. Referring to the trading patterns of crypto-assets as seen on coinmarketcap.com, the stark difference in the spread of asset liquidity could suggest that price movements of crypto-assets are very subject to speculations.

Also, improving the liquidity of crypto-assets is one of the ways to encourage mainstream adoption. This is certainly much more difficult than it seems because many factors contribute to the liquidity of an asset. To illustrate the importance of liquidity, here is a case that most of us can relate to: we cannot buy a car with our house, despite the fact that the house has an intrinsic value. Instead, we have to move the value of the house to cash or fiat through a reverse mortgage, and use the cash to buy a car. Looking at the current state of crypto-assets, with the exception of the top few traded currencies and tokens, most other assets are just as illiquid as a house, if not worse. Knowing the potential of blockchain, we can say with absolute certainty that the current state of liquidity of crypto-assets can be more than it is at this stage. If we could enable and simplify ways in which consumers could make monetary transactions using crypto-assets, it is not hard to imagine that the demand for such assets would increase as a result.

KyberNetwork’s Solution

KyberNetwork’s approach to improve the liquidity of crypto-assets stems from the belief that the market deserves a safer and more efficient exchange to facilitate trades between consumers within the network. Presently, a lot of crypto-assets traders have to place their faith and trust in centralized exchanges, that they (1) will not lose trader’s money; (2) do not have internal fraud risk; and (3) can guard money against theft. However, if something goes wrong as it did on multiple occasions in the past, consumers who trade via centralized exchanges will be affected and likely lose their assets.

Aside from centralized exchanges, there are also decentralized exchanges in the market. Not governed by any central individual or entity, decentralized exchanges are supposedly the safer trading platform, yet most people still prefer centralized exchanges over decentralized ones. Resistance to switch from one service provider to another, as well as low liquidity in decentralized exchanges are some of the main reasons for consumers’ preference for centralized exchanges.

Recognizing the challenges existing in decentralized exchanges, KyberNetwork has tailored a solution that centers on improving liquidity of the platform and reducing the cost of switch for crypto-asset traders. KyberNetwork guarantees high liquidity by tapping on multiple reserves, and since the entire exchange is on-chain, trades can be made instantaneously.

Additionally, knowing the high inertia to switch from one exchange to another, we are going to lower the barrier to convert by working with various wallet providers to integrate KyberNetwork’s functions into their wallets. This means that a user can log in to his or her preferred wallet and execute a token conversion over KyberNetwork’s protocol without leaving the wallet. By doing so, we enable smart contracts and recipients to access a wider class of users and receive contributions and payments from any token that the platform supports.

The Bigger Picture

Understandably, KyberNetwork is not the only team that is trying to take on the token-to-token convertibility issue, and in the greater scheme of things, the liquidity challenge that exists in the blockchain space. Each of the teams works on the same issue with different approaches, for example: KyberNetwork is an on-chain exchange that facilitates token exchange by leveraging reserves; 0x adopts a hybrid implementation of off-chain order relay with on-chain settlement that combines the efficiency of state channels with the settlement on-chain; Bancor protocol addresses the same issue with smart token and reserves. This is not to say anyone of us is better than the other. In contrast, the Kyber team believes that each of us in the field plays an extremely important role in this aspect of the blockchain. With our unique approaches, we will inevitably bring in fresh approaches and insights to issues that we might eventually face. Ultimately, our very existence is a self-imposed challenge to keep finding new and better ways to engage and serve customers.

To put things into perspective, it is good to remind ourselves that it takes a lot of effort to address the crypto-asset liquidity situation. Token-to-token convertibility is just one slice of a much bigger pie. On one side of the spectrum, OmiseGo attempts to promote value transfer service across currencies and asset types because the team wants to coordinate payment processors, gateways, and financial institutions. This is so that people can execute cross-network transactions seamlessly at a reasonable rate. On the other side, companies such as TenX and Monaco are addressing the liquidity issue by allowing consumers to pay for goods and services using crypto-assets, and their solutions are opening up a new way to encourage the greater public to participate in the blockchain ecosystem.

With all that said, we are not suggesting that liquidity is the only factor for price movements of crypto-assets, neither will it guarantee increase in the adoption of the technology. Drastic and sudden price changes can also be due to political (if a jurisdiction decides to ban or accept a cryptocurrency as a legal payment option), economical (a country announces capital lock down and prevents in and outflow of domestic currency), social (demonstrations against the use of crypto-assets) events and many other reasons. But in order for a market to grow to a state of maturity, liquidity of crypto-assets is very critical. The blockchain technology is at the dawn of a new beginning, and it has limitless potential to benefit our societies in unthinkable ways.

Final Thoughts

The blockchain technology has already spawned new business models every day. Some of these new businesses will, in time, become established giants; and some of them may dominate their respective sectors. Each of the mentioned companies exists because of business models made possible by the blockchain technology, and each of them has the potential to be both highly profitable and difficult for rivals to dislodge. Impressive though these fiercely entrepreneurial firms may be, we need to be aware of what is coming.

It is a long and arduous road ahead of us. If anything, history has taught us that even with towering market capitalizations, most of us will simply fade from view, unable to capture our desired customers and turn our services into solid profits that build long-term businesses. For now, amidst everything, it is wise to remind ourselves to stick to these few principles: deep understanding of the blockchain technology and how it can serve business strategies, flair in executing the strategies, unlimited ambition, and prayers for lots of good luck.

*Poster photo is courtesy of Shutterstock

About KyberNetwork

KyberNetwork is a decentralized and trustless exchange that facilitates instant conversion of crypto-assets with guaranteed liquidity. Our protocol will be key to promote liquidity of crypto-assets in the blockchain ecosystem, and improve the perception of tokens as a tradable asset class to the greater public.

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