Author: Arthur Azizov, Founder of B2 Ventures Source: cointelegraph Translation: Shan Ouba, Jinse Finance
Despite the rapid growth of the cryptocurrency industry and its ideal of decentralization, its liquidity remains fragmented and weak—reflecting the hidden risks of traditional finance and exposing the entire market to sudden shocks during changes in market sentiment.
Although cryptocurrencies have the characteristic of decentralization and promise innovation, they ultimately remain a form of "currency." And all currencies cannot escape the reality of the current market structure.
With the development of the cryptocurrency market, it increasingly resembles the evolutionary process of the lifecycle of traditional financial instruments. "The Illusion of Liquidity" has become one of the most pressing yet least discussed issues, which is an inevitable byproduct of the overall market maturation.
In 2024, the total valuation of the global cryptocurrency market is estimated to be $2.49 trillion, and it is expected to double to $5.73 trillion by 2033, with a compound annual growth rate of 9.7% over the next decade.
However, beneath this strong growth lies significant fragility. Just like the foreign exchange and bond markets, the cryptocurrency market now faces the so-called "phantom liquidity" problem: order books that appear to have ample liquidity during stable market conditions can instantly dry up during severe fluctuations.
Illusion of Liquidity
The foreign exchange market has a daily trading volume of over $7.5 trillion and has always been considered the most liquid market. However, even this market is starting to show signs of vulnerability.
Some financial institutions and traders are starting to be wary of the so-called market depth illusion. Slippage also frequently occurs in the most liquid currency pairs, such as Euro/USD (EUR/USD). After the 2008 financial crisis, no bank or market maker was willing to take on inventory risk (i.e., the risk of holding volatile assets) during market sell-offs.
In 2018, Morgan Stanley pointed out the structural transfer of liquidity risk: higher capital requirements after the financial crisis forced banks to withdraw from the liquidity provision space. The risk did not disappear; it simply transferred to asset managers, ETFs, and algorithmic trading systems.
Once upon a time, index funds and ETFs emerged like bamboo shoots after a spring rain. In 2007, index funds held only 4% of MSCI World Free Float Stocks, but by 2018, this proportion had tripled to 12%, with some underlying assets even reaching 25%. This resulted in a structural mismatch — financial products that seem liquid actually carry assets with very low liquidity.
ETFs and passive funds promise "free entry and exit," but the assets held within them (especially corporate bonds) often struggle to meet expectations during severe market fluctuations. During such volatility, ETFs are often sold off more aggressively than the underlying assets; market makers may widen the bid-ask spread or even completely withdraw from trading, as they are unwilling to take on positions in the chaos.
This phenomenon, which originally occurred only in traditional finance, is now "skillfully" reappearing in the cryptocurrency market. On-chain activity, centralized exchange order books, and trading volume may seem healthy, but when sentiment shifts, market depth often evaporates in an instant.
The "liquidity illusion" in the crypto market is coming to light
This illusion of liquidity in the cryptocurrency market is not a new phenomenon. During the market downturn in 2022, even mainstream tokens experienced significant slippage and widening spreads on top exchanges.
Recently, the sharp decline of Mantra's OM token serves as yet another warning—when market sentiment shifts dramatically, buying pressure can disappear in an instant, and price support evaporates. What once seemed to be a robust market during calm periods can collapse rapidly under pressure.
The root of the problem is that: the market infrastructure for cryptocurrencies is still highly fragmented. Unlike stock or forex markets, the liquidity of crypto assets is distributed across multiple exchanges, each with its own order book and market-making system.
For tokens ranked outside the top 20 by market capitalization, this fragmentation is particularly severe. They are often listed on multiple exchanges but lack a unified pricing mechanism or consistent market maker support, relying more on some task-oriented market participants. They appear to have liquidity, but in reality, they lack true depth and coordination.
Worse still, some project teams and market participants intentionally create false liquidity to attract attention or gain listing opportunities. Actions like wash trading, fake trading volumes, and order baiting are particularly common on small to medium exchanges.
These "fraudsters" immediately withdraw as soon as they encounter fluctuations, leaving retail investors to face the risk of plummeting prices alone. Liquidity is not just "fragile"; at times, it is even "manufactured."
Solution: Unified Liquidity from Protocol Layer
To truly solve the problem of liquidity fragmentation, deep integration must be achieved at the foundational protocol layer. This means: Cross-chain bridging and routing functions should be embedded within the core architecture of the blockchain, rather than being an afterthought.
Currently, some Layer 1 blockchains have begun to adopt this new architectural design, viewing asset circulation as the core mechanism of the blockchain itself. This approach helps to unify liquidity pools, reduce fragmentation, and achieve smoother capital flow across the entire market.
At the same time, the underlying infrastructure has also seen significant improvements: orders that used to take 200 milliseconds to execute now only take 10 to 20 milliseconds. Cloud ecosystems like Amazon and Google have supported full-chain transaction processing through P2P messaging mechanisms between clusters.
This layer of performance is no longer a limitation, but rather an accelerator: enabling market makers and trading bots to operate in real time on a global scale. It is worth noting that currently, up to 70%~90% of stablecoin trading volume in the cryptocurrency market comes from automated trading systems.
However, the high-performance "pipeline" system is just the foundation. What's more important is to combine it with protocol-level smart interoperability and a unified liquidity routing mechanism; otherwise, it's like building a high-speed rail on fractured land—fast, but with no consistent direction.
But now, the infrastructure for all this is already in place, sufficient to support the construction of a larger financial system.
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
The liquidity issues in TradFi are potential structural risks in the crypto market.
Author: Arthur Azizov, Founder of B2 Ventures Source: cointelegraph Translation: Shan Ouba, Jinse Finance
Despite the rapid growth of the cryptocurrency industry and its ideal of decentralization, its liquidity remains fragmented and weak—reflecting the hidden risks of traditional finance and exposing the entire market to sudden shocks during changes in market sentiment.
Although cryptocurrencies have the characteristic of decentralization and promise innovation, they ultimately remain a form of "currency." And all currencies cannot escape the reality of the current market structure.
With the development of the cryptocurrency market, it increasingly resembles the evolutionary process of the lifecycle of traditional financial instruments. "The Illusion of Liquidity" has become one of the most pressing yet least discussed issues, which is an inevitable byproduct of the overall market maturation.
In 2024, the total valuation of the global cryptocurrency market is estimated to be $2.49 trillion, and it is expected to double to $5.73 trillion by 2033, with a compound annual growth rate of 9.7% over the next decade.
However, beneath this strong growth lies significant fragility. Just like the foreign exchange and bond markets, the cryptocurrency market now faces the so-called "phantom liquidity" problem: order books that appear to have ample liquidity during stable market conditions can instantly dry up during severe fluctuations.
Illusion of Liquidity
The foreign exchange market has a daily trading volume of over $7.5 trillion and has always been considered the most liquid market. However, even this market is starting to show signs of vulnerability.
Some financial institutions and traders are starting to be wary of the so-called market depth illusion. Slippage also frequently occurs in the most liquid currency pairs, such as Euro/USD (EUR/USD). After the 2008 financial crisis, no bank or market maker was willing to take on inventory risk (i.e., the risk of holding volatile assets) during market sell-offs.
In 2018, Morgan Stanley pointed out the structural transfer of liquidity risk: higher capital requirements after the financial crisis forced banks to withdraw from the liquidity provision space. The risk did not disappear; it simply transferred to asset managers, ETFs, and algorithmic trading systems.
Once upon a time, index funds and ETFs emerged like bamboo shoots after a spring rain. In 2007, index funds held only 4% of MSCI World Free Float Stocks, but by 2018, this proportion had tripled to 12%, with some underlying assets even reaching 25%. This resulted in a structural mismatch — financial products that seem liquid actually carry assets with very low liquidity.
ETFs and passive funds promise "free entry and exit," but the assets held within them (especially corporate bonds) often struggle to meet expectations during severe market fluctuations. During such volatility, ETFs are often sold off more aggressively than the underlying assets; market makers may widen the bid-ask spread or even completely withdraw from trading, as they are unwilling to take on positions in the chaos.
This phenomenon, which originally occurred only in traditional finance, is now "skillfully" reappearing in the cryptocurrency market. On-chain activity, centralized exchange order books, and trading volume may seem healthy, but when sentiment shifts, market depth often evaporates in an instant.
The "liquidity illusion" in the crypto market is coming to light
This illusion of liquidity in the cryptocurrency market is not a new phenomenon. During the market downturn in 2022, even mainstream tokens experienced significant slippage and widening spreads on top exchanges.
Recently, the sharp decline of Mantra's OM token serves as yet another warning—when market sentiment shifts dramatically, buying pressure can disappear in an instant, and price support evaporates. What once seemed to be a robust market during calm periods can collapse rapidly under pressure.
The root of the problem is that: the market infrastructure for cryptocurrencies is still highly fragmented. Unlike stock or forex markets, the liquidity of crypto assets is distributed across multiple exchanges, each with its own order book and market-making system.
For tokens ranked outside the top 20 by market capitalization, this fragmentation is particularly severe. They are often listed on multiple exchanges but lack a unified pricing mechanism or consistent market maker support, relying more on some task-oriented market participants. They appear to have liquidity, but in reality, they lack true depth and coordination.
Worse still, some project teams and market participants intentionally create false liquidity to attract attention or gain listing opportunities. Actions like wash trading, fake trading volumes, and order baiting are particularly common on small to medium exchanges.
These "fraudsters" immediately withdraw as soon as they encounter fluctuations, leaving retail investors to face the risk of plummeting prices alone. Liquidity is not just "fragile"; at times, it is even "manufactured."
Solution: Unified Liquidity from Protocol Layer
To truly solve the problem of liquidity fragmentation, deep integration must be achieved at the foundational protocol layer. This means: Cross-chain bridging and routing functions should be embedded within the core architecture of the blockchain, rather than being an afterthought.
Currently, some Layer 1 blockchains have begun to adopt this new architectural design, viewing asset circulation as the core mechanism of the blockchain itself. This approach helps to unify liquidity pools, reduce fragmentation, and achieve smoother capital flow across the entire market.
At the same time, the underlying infrastructure has also seen significant improvements: orders that used to take 200 milliseconds to execute now only take 10 to 20 milliseconds. Cloud ecosystems like Amazon and Google have supported full-chain transaction processing through P2P messaging mechanisms between clusters.
This layer of performance is no longer a limitation, but rather an accelerator: enabling market makers and trading bots to operate in real time on a global scale. It is worth noting that currently, up to 70%~90% of stablecoin trading volume in the cryptocurrency market comes from automated trading systems.
However, the high-performance "pipeline" system is just the foundation. What's more important is to combine it with protocol-level smart interoperability and a unified liquidity routing mechanism; otherwise, it's like building a high-speed rail on fractured land—fast, but with no consistent direction.
But now, the infrastructure for all this is already in place, sufficient to support the construction of a larger financial system.