Crypto had a terrible 2022. Over the year, its market capitalization fell by almost 60% from $2.2 trillion to $797 billion.BTC and ETH, the top two coins by market cap, fell 64% and 67%, respectively.Terra (LUNA) crashed May. The Fed raised US interest rates. The crypto market slumped due to these and other factors.
Finally, in November, the third-largest crypto exchange, FTX, collapsed amid allegations of misappropriating user funds. According to Coinbase, FTX’s collapse will have “second-order effects” that could extend the crypto-winter until 2023. “Poor liquidity conditions” may persist since many institutional investors have their funds in FTX.
For single-chain liquidity, these claims are valid. Crypto markets need several macroeconomic changes, but tapping cross-chain liquidity is essential. It can also stabilize prices and increase volume. Cross-chain liquidity aggregation can attract retail and institutional investors with easier access.
FTX, Terra, and other big players’ collapses caused the crypto industry’s liquidity crisis.
To be fair, the issue is deeper than how individual companies operate. Stakeholders must avoid the blame game to set realistic goals. Thus, while FTX and Terra are important, crypto projects’ fragmented architecture makes them vulnerable to liquidity crises.
Blockchains, staking pools, and applications don’t or can’t share liquidity. This greatly underutilizes crypto-based protocol value. Fragmented liquidity hinders institutional participation by causing inefficient price discovery and slippage for larger trades. Fragmented liquidity worsens during market downturns due to low capital influx. Routing liquidity across protocols can help, but it’s difficult.
Protocols fall into a cycle of lower liquidity and higher slippage, losing investors. Innovation solves technical problems. However, macroeconomic factors also cause the liquidity crisis. Terminal rates will reach 5.4% by June 2023 due to the Fed’s interest rate hike. US recession is also likely. To make matters worse, global crypto regulations, including in the US, UK, and EU, are unclear.
Crypto is borderless. Its biggest advantage over other asset classes and currencies is that. Crypto assets must flow freely across chains and protocols. This will maximize these assets’ value and potential, creating new opportunities. Crypto liquidity shouldn’t be siloed for another moral reason. The traditional internet divides value into exclusive, non-cooperating systems. Giants maximize profits by restricting consumer access to isolated resources.
Crypto is meant to disrupt unfair business models that hurt consumers and end-users. This requires competitive collaboration. Financial exclusion to inclusion must be reflected in protocol and communities. To provide a seamless experience for retail and institutional users, platforms must use smart liquidity routing.
Smart cross-chain aggregators can route liquidity from multiple sources to improve transactions and trades during the crisis. Cross-chain token swaps, where price stability and volume are difficult to assess, benefit from this. Blockchain-agnostic aggregation solutions support DEXs, DeFi protocols, NFT marketplaces, wallets, arbitrage bots, and money markets. These tools enable boundless cryptography. Industry stakeholders must use them to overcome market conditions.
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