8 ways crypto exchanges can help address liquidity concerns

Crypto exchanges must take the initiative in addressing regulators’ and investors’ concerns about liquidity.

Globally, the young crypto industry struggles with image issues. The latest blow came in May 2023, when the U.K.’s Treasury Committee recommended that crypto trading and investment be regulated as gambling rather than as a financial service. 

Setting aside the fairness or accuracy of the opinions of regulatory agencies and crypto-skeptical investors, it’s clear that the industry must take every possible step to earn the trust of outsiders. This includes the need for crypto exchanges to address liquidity concerns — not only to enhance exchanges’ trustworthiness and credibility, but also to provide a stable and seamless trading experience for users. Below, eight members of Cointelegraph Innovation Circle suggest strategies to help crypto exchanges calm investors’ concerns about liquidity.

Introduce liquidity mining

The benefit of liquidity mining — as opposed to working with liquidity providers — is that the process is decentralized and doesn’t rely on third parties. There are risks associated with liquidity mining, so exchanges should be careful in adopting this approach. – Anthony Georgiades, Pastel Network

Build a reserve of vetted fiat-to-crypto and crypto-to-crypto pairs

In an industry predicated on trust, it’s critical to provide access to products and services when users need them most. However, part of that infrastructure is building a reserve of vetted fiat-to-crypto and crypto-to-crypto pairs that ensure greater movement through the space. This helps encourage ample liquidity pools that, like a river powering a mill, keep the engines of an exchange running. – Oleksandr Lutskevych, CEX.IO

Implement market-making programs

One way that crypto exchanges can help address liquidity concerns is by implementing market-making programs. These programs involve incentivizing third-party market makers to provide liquidity by offering them rebates on transaction fees, thereby increasing the overall liquidity of the exchange. – Theo Sastre-Garau, NFTevening

Join the community where you can transform the future. Cointelegraph Innovation Circle brings blockchain technology leaders together to connect, collaborate and publish. Apply today

Incentivize users via staking and mining campaigns

Crypto exchanges can tackle liquidity concerns by collaborating with market makers and incentivizing users via staking and mining campaigns. This strategy ensures deeper order books, tighter spreads and efficient price discovery while reducing slippage, ultimately boosting user participation and liquidity in both the exchange and the broader market. – Tomer Warschauer Nuni, Kryptomon

Allow verification of key info on the blockchain

Allow the community to verify key information directly on the blockchain. Whether you are running a centralized exchange or a decentralized exchange, always ensure that user funds are allocated transparently. Crypto exchanges should proactively show their reserves because even rumors of insolvency can negatively affect their business. – Wolfgang Rückerl, ENT Technologies AG

Allow P2P trading

Allowing peer-to-peer trading would enable an exchange to boost liquidity from outside its platform’s domain. This can significantly help with liquidity, especially with less favored trading pairs, where liquidity can be heavily lacking. It’s vital to know that P2P trading is not a substitute; rather, it’s a complementary service that can add further benefits, such as efficiency and reduced costs. – Ilias Salvatore, Flooz XYZ

Focus on attracting a bigger, more diverse customer base

Crypto exchanges should focus on attracting a bigger and more diverse customer base. By having more investors and traders, exchanges can increase the number of buying and selling orders. But to achieve this, they need to do a few things better, including marketing, providing a good user experience, educating users, and enhancing security and reliability. As the number of users grows, liquidity may improve, reducing the risk of large trades impacting prices. – Bogomil Stoev, Seasonal Tokens

Avoid large amounts of debt and commit to transparency

Liquidity is incredibly important to avoid unstable price movements and instill market health. Liquidity concerns have not only been relevant in crypto, but in the fiat banking system as well. Avoiding large amounts of debt and being transparent about how funds are allocated should be standard first steps for exchanges in the space. – Megan Nyvold, BingX

This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.

Learn more about Cointelegraph Innovation Circle and see if you qualify to join.