The recent development of Decentralized Finance (DeFi) has demonstrated the potential of Ethereum as the infrastructure foundation of advanced P2P financial systems . In the past few months, how has this affected the liquidity of the asset? Most recent concerns have focused on the role of ETH in decentralized exchanges such as Uniswap, but by studying the liquidity of centralized exchanges, we can better understand how professional market makers absorb the price of the past month changing.
The definition of liquidity refers to the extent to which an asset is quickly bought or sold at a stable price in the market, and this price ultimately reflects the inherent value of the asset. The stronger the liquidity of the asset, the easier the natural process of price discovery will occur, ultimately making the market more efficient.
The market depth has fallen. Market depth refers to the sum of buying and selling in the order book, which is directly related to the liquidity of the trading pair. Generally speaking, the greater the market depth, the stronger the liquidity of the asset, because it is easier to exchange at a stable price with the least slippage .
We can observe that as the ETH price began to rise at the end of July, the market depth dropped sharply. This is an expected behavior during price fluctuations, because market makers adjust their positions in order to increase risks. However, the sharp drop in market depth cannot be fully explained by price fluctuations. It may be related to the growth of the ETH liquidity pools of decentralized exchanges, which may draw funds from centralized exchanges. At the same time, we have also seen a sharp increase in ETH transaction fees .
It is difficult to fully understand why the ETH market depth has fallen so sharply since July, because there may be multiple factors at play, which may include higher volatility, growth in decentralized liquidity pools, higher transaction fees, and The overall increase in market risk caused by continued economic uncertainty.
The spread widens as volatility rises. The spread is the difference between the highest price that the buyer is willing to pay for an asset and the lowest price that the seller is willing to accept. Generally speaking, the narrower the spread, the more liquid the market .
During most of the summer, as the price volatility of all cryptocurrency markets declines, the ETH spread also narrows. However, as ETH experienced a small bull market, this caused the spread to widen at the end of July. Market makers widen the spread to account for more risks during fluctuations. We can observe that since July, the spread has remained volatile, which corresponds to the continuous price changes caused by events in the DeFi field.
Slippage is still very low. Price decline is closely related to market depth, which measures the difference between the expected transaction price and the price level reached after the transaction is executed . High price slippage usually indicates poor liquidity in the market. After the market crash in March, the price slip rate of most ETH trading pairs was above average in May. However, since mid-June, the slippage has been kept at a relatively low level, only rising slightly in the price fluctuations at the end of the summer.
to sum up
Given the development of DeFi and Automated Market Makers (AMM), liquidity is currently a particularly interesting topic. It enables a new and simpler way to provide liquidity for trading pairs. However, AMM is not easy to facilitate the process of price discovery, because arbitrageurs must rely on a centralized market place to know when the price of an asset has changed . Although there are several more efficient price discovery, risk management, and capital efficiency solutions on DEXs, the centralized order book is still the most efficient when determining the natural price of assets through the interaction of buyers and sellers.
