A wave of decentralized exchange projects is in the trend. Each single week a new project has appeared having an aim to offer decentralization with crypto coin trading. Ethereum ecosystem is itself an undertaking powered by a necessity for decentralized, trustless and open modes of operation. Decentralized exchanges, with on-chain settlement through smart contracts, have expanded via a requirement to fight against serious weaknesses in centralized exchange. Let’s take a look at the challenges.

Crypto Exchange Challenges

• Lack of liquidity
• Need for a third party service to hold user funds
• Security and privacy
• Centralized servers to hack
• Restrictions by laws

Challenges are solved by decentralized exchanges

At the exchange level, low liquidity causes slippage and subsiding of prices. It empowers the traders to stay away from expensive more liquidity platforms. One of the simplest approach to crack the liquidity issue is by sharing it. Sharing liquidity secures traders’ money, attract them to your platform as well as decrease price slippage.

Plenty of decentralized exchange is hosted on decentralized servers. So it is very difficult for hackers to hack the whole system. It secures fund and provides more privacy.

Not being located in one place, it is very hard to regulate. So the people who are living in a country where crypto coins are illegal, decentralized exchanges are quite helpful to them.

The liquidity deficit

The most highly liquid asset for these days is financial funds. The buying or selling of even large quantities of any financial currency doesn’t have a major impact on its amount. A related action, execute in the cryptocurrency, will considerably change its value. This is because of the lack of liquidity of the crypto market. The needed amount for a transaction may not be inside a particular exchange platform, which will generate a deficit and upsurge the cost of the operation by 1–10 per cent.

Why liquidity is important?

Liquidity is a significant component for any of the market existing globally. Lack of fund generates an imbalanced situation, and it is not under the control to manage the things. This doesn’t mean, the value of an asset should not change. The fluctuations are helpful if you want to go far and want better ROI. Else, there is not any purpose for the presence of different tradable assets. The fact is, we should have suitable buyers and sellers who keep the market going.

Drawback of decentralized exchange

It is quite difficult for the liquidity providers to provide liquidity given the existing technical offering. Discovery of price and updates of order is very slow. It causes a danger that the market maker will face “run over” if they can’t stop in time. This points to poor, highly protective liquidity providing by market makers, leads to a lack of liquidity.

Loss of traders with lack of liquidity

Liquidity has been a big issue in crypto trading these days. The growth of digital coins trading has opened a way for multiple exchanges. Nowadays, every exchange has a different value for different trading pairs supported and therefore have different trading volume. It is not every time a fault of the exchange. Some coins do not attract investors and therefore cannot produce appropriate liquidity. According to the news published a couple of months ago, Bittrex declared to eliminate 82 tokens because of poor liquidity.

Survey of Encrybit shown that 36% of the participants stated that lacking liquidity is a significant concern for current cryptocurrency exchanges. Some experts anticipate that the growth of decentralized exchanges can solve the liquidity issue. But still, decentralized exchanges are so far to rule the crypto world. Only the time will let us know whether it can overcome the liquidity issue or not.

How to enhance liquidity in decentralized exchanges?

Cultivating the liquidity in decentralized exchanges is one way to inspire majority adoption. Obviously, plenty of factors support to the asset liquidity. But, if the ways how customers make financial transactions with the use of digital coins could be streamlined, it’s not that much challenging to predict that the demand for such assets would upsurge.

There’s a slight uncertainty that trading crypto coins will carry on to take place on multiple trading platforms without a single, more stable asset evolving to keep their value in check. Means solving market fragmentation as well as liquidity issues need an exceptional solution.

One tactic to overcome the challenges is to decrease the price of the switch for coin traders. If an on-chain exchange can hit into different assets, and lower the hurdles to switching from one to another by functioning with different wallet providers. Then users can log-in to their wallets and perform a token conversion without leaving the wallets. This enables receipts to access payments from different token supported by a decentralized platform.

Token-to-token conversion is not the only method to overcome the liquidity. There are plenty other unique concepts on how to assist users to execute cross-network transactions easily and at sensible charges. Decentralized exchange solutions are introducing new ways for the public to take part in the crypto ecosystem.

Moreover, liquidity is not the only thing in the implementation of the technology, but it is a critical element in how the market develops. Endorsing liquidity in the crypto ecosystem, and especially in decentralized trading platforms, will be significant to enhance the general public’s awareness of digital coins as a valued tactic to trade coins securely.

Pooling liquidity for a better market

You will need to attract more users to your platform. Investors need safe, liquid markets where they can trade at reasonable prices as well as leave swiftly. If your platform’s trading volume is low,

• Traders will become competitors with better charges
• Lose the profits regarding your USP
• Use of centralized exchange that keeps the funds at risk

Second, sharing liquidity means you can focus on the development of your exchange in the way your customers want. A customer experience, from the development of a user-friendly UI to 24/7 technical support. You might also need to support additional tokens, or build new dApps. If you think you have suitable users to make things work, you can focus to build what is missing in the market.

If we share liquidity, trading volume as well as frequency will upsurge. It makes digital assets more liquid and results in a more attractive investment.