What Is a Crypto Liquidity Provider? Here’s What To Know

Lucrative markets rely on the constant interplay of buyers and sellers. This mutual exchange creates a continuum of liquidity that tracks with overall market health. Generally speaking, when markets are moving at a fast pace, domestic and international economies are better off.

However, there are times when market activity stalls due to low liquidity. When this happens, market volatility takes shape and causes price slippage. Eventually, both buyers and sellers become reluctant to enter the market. 

In the crypto world, crypto liquidity providers help ensure that markets run smoothly, which is essential for both run-of-the-mill traders and large-scale institutional players.

In this comprehensive guide, we’ll explain everything there is to know about crypto liquidity providers and why they’re valuable in worldwide crypto markets

Understanding Liquidity in Cryptocurrency

In finance, liquidity refers to the ease with which an asset converts to cash. In simple terms, liquidity is the level at which you can “cash out” an investment. 

When it comes to both traditional (stocks, bonds, securities) and untraditional (cryptocurrencies and NFTs) assets, liquidity is the lifeblood of a market. A liquid market leads to tighter spreads and more stable prices.

When buyers and sellers can quickly complete their orders, they achieve liquidity in that respective market. All markets need liquidity, but crypto markets require more unique liquidity providers, due to the new nature of the products.

Many buyers and sellers enter the crypto market on high alert and expect to quickly liquidate their assets. For example, if a brokerage enters the crypto market on behalf of their customers, they’re likely going to execute large orders. 

So they need buyers to complete their orders and net a profit for themselves and their clients. Liquidity in the market ensures this happens quickly without affecting prices. 

This is why cryptocurrency exchanges rely on liquidity partners (LPs) and related technology providers like AlphaPoint to streamline market activity and engage buyers and sellers as market makers.

What Are Crypto Liquidity Providers?

A crypto liquidity provider is a financial institution that provides buy and sell orders to a trading platform to increase its liquidity. In short, they deposit purchased crypto assets into a liquidity pool so traders can perform trades on an exchange. 

In this sense, crypto liquidity providers allow buyers and sellers to trade their assets with each other. Thus, crypto liquidity providers are the backbone of a crypto exchange.

If you plan to start a crypto exchange, partnering with an LP can be a challenge without the blockchain technology to implement their services. This is where AlphaPoint comes in. 

AlphaPoint is a technology firm offering infrastructure to launch and manage digital asset platforms. It’s not a liquidity provider itself, but it helps exchanges integrate with liquidity providers. If you want to learn more, check out our liquidity solutions

Primary Roles

Crypto LPs are responsible for the following market activities:

  • Encouraging the stability of market prices
  • Reducing market volatility
  • Decreasing spreads
  • Making crypto trading more cost-effective


Trading firms, banks, and other financial institutions can all serve as LPs in the crypto market and benefit crypto exchanges

Types of Crypto Liquidity Providers

There are three common types of crypto liquidity providers in a market. These are:

  • Banks: Banks that have large balance sheets can fund substantial market transactions, making them highly useful in the crypto market. In fact, the world’s largest banks serve as LPs on forex markets. 
  • Financial institutions: Securities firms and other financial companies can serve as designated market makers (DMMs) in the crypto space. This means they can act as a buyer or seller when there is an imbalance within a market. 
  • Trading firms: Large trading firms can also become DMMs in the crypto market, filling orders with their own inventory and profiting from the eventual bid-ask spread. 


All of these parties can step in and provide liquidity for crypto markets. The exact LP will depend on the exchange’s business structure. Whichever LP you choose, AlphaPoint provides an integration to help your markets move smoothly. 

Top Reasons to Connect With Crypto Liquidity Providers

Choosing a liquidity provider for your trading platform isn’t optional. You’ll need the help of a crypto LP to reduce the effects of market volatility. Here are some reasons why you should select a reputable LP with a sense of urgency.

Access to Fragmented Markets

Crypto exchanges tend to operate regionally. This makes it difficult for big investors to navigate diverse crypto markets with different market opportunities. However, crypto exchanges that rely on LPs can deepen their order books to attract investors and avoid one-dimensional markets with only retail investors. 

Mitigation of Volatility

The presence of market liquidity can also dampen extreme price swings. This creates a stable trading environment for all parties. 

When cryptocurrencies and assets are difficult to move, prices can swing out of control. Cautious investors are then reluctant to deal with a market with rapid price fluctuations. Consistent liquidity sources can ease this tension. 

Adaptability to Market Evolution

The crypto ecosystem is constantly evolving. Successful crypto exchanges can keep up by keeping their markets liquid and attracting all kinds of investors across the world. This is the key to building a viable business model as crypto market changes occur in the future. 

This is also why you’ll need scalable crypto solutions like AlphaPoint that can grow with your exchange. 

Reduced Slippage

Price slippage is simply the difference between an asset’s expected price and the price the asset is actually executed at. Many investors don’t like surprises and want to buy assets at prices they know will stay constant. 

The problem is that market volatility (due to low liquidity) can cause slippage in the crypto realm. While LPs can help combat market volatility, they can also keep slippage at a minimum as well.

Cross-Platform Trading

Many crypto exchanges allow their users to trade across other platforms to take advantage of competitive prices. With LPs spread across these exchanges, fulfilling market orders is a convenient process.

To make these transactions happen, there also needs to be an integration tool like AlphaPoint to connect multiple exchanges and facilitate cross-platform trading. 

Risk Management

Having consistent liquidity sources gives the crypto market the financial backing it needs to fight against volatility, regulatory changes, and market manipulation.

Running a successful crypto exchange means you will likely encounter many of these issues. Having a crypto liquidity partner reduces the negative impacts of these challenges on your exchange. 

Configuration of Liquidity

The configuration of liquidity refers to the sourcing and management of liquidity on an exchange. Once an exchange secures an LP, it can manage the use of liquidity to improve the trading experience

For example, by partnering with an LP, a crypto exchange can enable cross-platform trading to give its users access to additional markets. Overall, this procedure impacts market stability, price discovery, and the ability to execute large orders without significant slippage.

Challenges in the Crypto Liquidity Space

Crypto liquidity is the answer to market volatility, but it’s not a perfect solution. Here are all the challenges associated with partnering with an LP. 

Potential for Fragmented Liquidity

Fragmented liquidity can be a problem as investors might see various prices for specific tokens across different exchanges. As such, investors would have to access each exchange to initiate an order of their choice. 

AlphaPoint helps exchanges integrate with multiple liquidity sources to avoid fragmented liquidity and make trading easier. 

Risks of “Fake” Liquidity or Wash Trading

Wash trading happens when an entity buys and sells the same (or similar) cryptocurrency to mislead the entire market. This form of market manipulation is also known as “fake” liquidity because it creates a false pretense that a market is highly active. 

The good news is that you can fight against wash trading by partnering with a reputable and transparent liquidity provider in your niche. 

Impact of Market Volatility on Liquidity Provision

Market volatility will happen whether you have an LP or not. For example, sudden market movements due to new innovations and developments can stifle a crypto market temporarily. 

Partnering with a crypto liquidity partner helps your exchange bear these negative effects since they have the capital to back up their activities. 

Capital Requirements

Crypto markets can become volatile for extended periods of time. As such, crypto businesses need access to substantial capital to manage risk and maintain positions.

During times of market stress, not having enough capital can cause liquidity issues to form. With an LP, your exchange can weather the storm and even thrive. 

Post-trade settlements also play a critical role in lowering capital requirements. Efficient settlements ensure trades happen quickly and accurately, reducing the time between trade execution and final settlement. This minimizes how long funds are set aside, which lowers capital requirements.

The Range and Diversity of Products

Liquidity partners fully participate in crypto markets. As such, they can offer a wide range of diverse crypto assets

For example, crypto LPs can help form trading pairs (like BTC/USD, ETH/EUR) to improve market depth and liquidity. On the other hand, limited trading options will likely restrict a market’s efficiency. 

How to Choose the Best Crypto Liquidity Provider for Your Needs

By now, you should have a good idea of the importance of crypto liquidity profiles. With that in mind, here is how you can choose the right crypto LP for your business needs.

Comparing Traditional Centralized Exchanges to Decentralized Platforms 

Traditional centralized exchanges (CEXs) are governed by a central authority; decentralized exchanges (DEXs) don’t have this kind of governance. As such, they require different kinds of LPs. 

Centralized exchanges need more liquidity since they market to a large number of buyers and sellers. These exchanges also offer collateralized debt obligation, asset derivatives trading, and options and futures. Their business model dictates the availability of substantial liquidity to keep their operations functional. 

However, through smart contracts and algorithms, DeFi exchanges rely on automated market makers (AMMs) to facilitate transactions without a central authority. They don’t need as much liquidity and even offer yield farming incentives to raise capital. 

Regardless, both exchanges need cutting-edge technology and integration capabilities to harness liquidity for their users.

Assessing the Depth and Breadth of Liquidity Offered

Depth and breadth are two crucial components of market liquidity. Depth refers to the volume of buy and sell orders in an order book. Breadth refers to the percentage of assets that participate in a market’s growth. 

LPs that provide high depth and breadth can deliver a constant influx of orders to an exchange and reduce volatility. Traders and businesses monitor supply and demand, as well as market trends, to determine the value of liquidity being offered.

Reviewing Technological Infrastructure and Integration Capabilities

Liquidity partners can’t work with an exchange without the presence of state-of-the-art integration technology. They need robust tech infrastructure to provide liquidity in real time.

AlphaPoint makes it possible to seamlessly integrate your chosen LPs into your tech stack to foster smooth operations. 

Understanding Fee Structures and Cost Implications

Liquidity providers charge percentage fees for swapping tokens. This fee can be split by different LPs who contribute to liquidity reserves. 

LPs can also charge protocol fees to make extra profit. It’s important to ensure that a prospective LP’s fee structure falls in line with your business model.

Security and Regulatory Compliance Considerations

There are massive security risks when doing business with liquidity providers. For example, centralized exchanges can have their liquidity pools compromised if a hacker infiltrates their servers. 

As a result, businesses need to prioritize regulatory compliance when choosing a liquidity provider to avoid these risks. 

Reviewing Connectivity or Latency Issues

Liquidity providers boasting high-class technology can fulfill orders at break-neck execution speed and latency. 

Generally speaking, lower latency means quicker and more accurate order fulfillment. As such, businesses should opt for providers with advanced technology and low-latency networks for efficient trading.

The Future of Crypto Liquidity Provision

Liquidity provision is constantly changing as crypto businesses continue to evolve. Here are some new developments in this arena and how you can adapt. 

Technological Advancements

In the past, obtaining crypto liquidity was a massive challenge for new businesses, and integration required substantial time and resources to complete.

However, rapid technological advances are changing the way crypto businesses engage LPs. For example, AlphaPoint provides integrations to help crypto exchanges quickly fulfill market orders.

The Implications of Regulatory Shifts

Liquidity provision could also be affected by the growing regulations in the crypto industry. As crypto becomes a more widely accepted virtual currency, governments may begin to enforce stricter financial regulations for exchanges. 

For example, new regulations could force peer-to-peer crypto exchanges to vet LPs more strictly to fight against market manipulation. 

Institutional Players Entering the Crypto Space

As the popularity of the crypto industry grows, more big players are entering the mix. For example, Chase has begun allowing its customers to pay their mortgages and credit card bills with cryptocurrencies like Bitcoin and Ethereum from their wallets.  

It may not be long before Chase and other prominent financial institutions begin providing liquidity to central exchanges like Binance, Kraken, and Coinbase.

Empower Your Crypto Ventures With AlphaPoint Solutions

Overall, liquidity is the primary driver of a crypto market’s success. With liquidity, crypto markets can move at a fast pace, and exchanges can deliver a world-class trading experience

If you’re new to the crypto industry and need a liquidity partner integration, AlphaPoint can help. With more than ten years in the crypto industry, we’ve built the perfect technological infrastructure to help you bolster your business.

To see our products in action, request a demo today.

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