The crypto market has increased in size considerably thanks to the NFT boom of 2021, with more than 1 in 100 people owning a digital wallet. The cryptocurrency landscape is larger than anyone imagined back in 2009 when blockchain and crypto first emerged. With rising demand, decentralized exchanges struggled with liquidity and investors found themselves paying over market value when the pool ran dry. To solve the liquidity crisis, interoperability between multiple blockchains was needed - find out more below.
What Is Liquidity?
Liquidity refers to the ease with which digital assets can be traded or converted without impacting the market price. To manage crypto sales there are exchanges - centralized or decentralized. In the centralized sector, there are fewer liquidity issues because the central sole benefactor has cash flow. Whereas, decentralized exchanges (DEX) rely on community value to determine the market price, which leads to more reasonable trade prices.
DEX platforms work on liquidity pools, which are assets gathered together from the community used to fulfill trade requests. All liquidity pool investors gain revenue from trades within the pool. This setup worked for a while, but if the pool runs low the trade price rockets above market value, which lowers liquidity and defeats the purpose.
What Are The Existing Issues?
Achieving liquidity in crypto means relying on others wanting to sell when you want to buy - and vice versa. However, much of the world is currently facing inflation, meaning investors aren’t willing to sell and the crypto market cap has crashed to below $1 trillion from $3 trillion.
Now, focusing on the decentralized exchanges again, take the trades that are still taking place and split them between the different blockchains. What you have is numerous liquidity pots unable to communicate with each other, meaning the crypto price varies drastically from blockchain to blockchain. Unfortunately, this increases friction for investors and pushes decentralized crypto trades into an unhealthy state.
How Are the Issues Being Addressed?
To solve the problem posed by interoperability, hybrid DEX platforms enter the playing field. At the forefront is Alium Finance, which has currently brought together ten blockchains into a single platform by using blockchain bridges. In simple terms, this means that if you wish to sell crypto through Alium and the liquidity pool is running low, it can use artificial intelligence (AI) algorithm to scope the best deal across the linked blockchains. By doing this, the traders are always receiving the best possible deal on their crypto assets.
As well as improving crypto liquidity, decentralized access to multiple blockchains makes the market more accessible because new investors don’t have to pay Ethereum chain prices, which have rocketed since the NFT boom.
Conclusion
The trading world relies on liquidity to thrive, but the crypto space has run into constant issues with it because of how blockchain works. Fortunately, thanks to innovation from DEX platforms, trades can be made cross-chain from the comfort of one single interface. As more blockchains become integrated into hybrid DEX platforms, the more liquidity there will be and the more stable the market will feel.