Introduction
Cryptocurrency markets are often subject to massive price volatility since they operate as individual liquidity pools. It means that the price of a given cryptocurrency can vary widely from one trading desk to another. This change in price is a great opportunity for investors to make profits.
However, it also presents issues for investors who are not aware of these fluctuations. This article is about liquidity aggregators and how cryptocurrency investors can use them to reduce their losses and maximize their profits.
What is a Crypto Liquidity Aggregator?
Liquidity is the ease of converting an asset class into cash and back. Cryptocurrency investors aim to invest in projects that have a higher liquidity meaning that they can be sold and bought without any issues.
A liquidity aggregator is a trading tool that allows investors to gather all sale and purchase orders from a number of exchanges or liquidity providers. It is used to make sure that the investors are able to find the nearest sell or purchase price to the market average when making a trade.
Liquidity aggregators reduce the slippage or difference in the bid/ask spread for the cryptocurrency investors making their trades more profitable.
Why Should You Use Crypto Liquidity Aggregators?
Cryptocurrencies are considered less manipulative assets since they are minted in a decentralized fashion. However, crypto whales or big-volume investors may be able to manipulate the crypto market using various techniques.
Crypto Liquidity Aggregators act as a shield for investors to protect them from these market manipulation techniques. Here are a number of issues that Crypto Liquidity Aggregators can solve:
Spoofing
Spoofing is a technique where whale investors can place a big buy or sell order using with a big market price difference. The impressionable retail investors can take reference from this order and start selling or buying their crypto reserves at an inflated price.
However, when the markets fall or rise enough, the whale revokes the order and trades the cryptocurrency at their intended price point. Liquidity aggregators can solve this issue by classifying trade orders into different sections such as white label, retail, exchangers, institutional investors, etc.
Rinse and Repeat
Whales can artificially drop or inflate the price of a given cryptocurrency by selling it a little lower or buying it a little higher than the market average. This event can trigger massive sell-off or FOMO among the cryptocurrency investors that allow whales to purchase or sell the cryptocurrencies at inflated or deflated prices.
Floating Interest Rates
Constantly changing interest rates are said to be one of the biggest issues that DeFi investors face. This problem persists on account of the changing prices of a given cryptocurrency and their composition in a given liquidity pool.
However, if the investors have access to liquidity aggregators they can place the best bets and have a better view of the overall market.
OTC Trading
Over-the-counter or OTC markets are secondary markets that are largely unregulated and investors are attracted to them on account of finding better deals. However, big players can find the best deals on the OTC platforms and come back to the primary markets such as exchanges to make fat profits.
However, if the liquidity aggregator accounts for the trading data generated on the DEXs they can tackle the possibility of suffering from massive losses.
Loan-Overcollateralization
Another issue in DeFi that stems from isolated liquidity in each crypto trading platform is over-collateralization. Depending on the supply of a given cryptocurrency in the liquidity pool the price can become very inflated or deflated which will affect the lenders by changing the value of their collateral. This issue is also mitigated by liquidity aggregators.
Risk Mitigation
Cryptocurrencies are often classified as high-risk investments since their prices tend to fluctuate rapidly on account of segregated liquidity pools. Therefore, liquidity pools are becoming more popular among commercial and retail investors to reduce their trading risks.
Least Slippage
Liquidity aggregators can also be a big help for whale investors. The HFT investors who are looking to make big swaps may not be able to conduct the required volume of trade based on one DeFi liquidity pool alone.
In that case, the whales may render the services of the liquidity aggregators to find the optimal trading course while keeping their slippage rate as low as possible. At the same time, DEXs and DEX aggregators also allow whales to hide their identity while conducting big trades.
Conclusion
The cryptocurrency market is constantly evolving and going through various changes. Liquidity aggregators have been around for a while but most investors are not aware of their benefits. Therefore, cryptocurrency investors should take their time to learn more about them and try to incorporate them into their trading strategies.
