What Is The Future of Digital Asset Liquidity: Centralized or Decentralized?

Digital asset liquidity continues to be a problem within the crypto market for exchanges, token issuers, traders, and market makers. Any professional trader will admit that there is a real struggle to efficiently access global liquidity or even access the best prices to boost profits. This issue has had differing repercussions for various stakeholders. For example, token issuers have been forced to list their coins on many platforms to reach their target client base. As a result, business development costs have shot up, forcing issuers to focus on niche markets. Many experts believe some of the impending problems have to be resolved if the crypto market is to continue growing.

Market Fragmentation Issue

Market fragmentation is a chief cause of illiquidity since there are so many different coins and fewer businesses accepting payments using digital assets. This means crypto isn’t being used the way it was intended. However, the market is relatively young, and it’s trying to oust a system that has been around for hundreds of years. This will take some time. Fragmentation is part of the process crypto has to go through as consumers transition into cryptocurrencies. The process is slowed down by localized crypto exchanges that tend to support one or a few fiat currencies, and as a result, this leaves consumers with a fragmented market slowing the adoption rate.

Even in such a situation, things aren’t as bad as you may think since users have plenty of choices that have some negative consequences. These include lack of liquidity and high volatility. Other than stablecoins, consider how the price of any crypto asset has changed over the past year or so. It’s this volatility that makes many businesses and even individuals afraid to touch cryptocurrencies. A $1,000 payment today in BTC can turn $800 in a day. People new to the market face a daunting task before they can fully understand how to determine accurate pricing of various coins since you need to compare prices on several exchanges.

Can Centralization Work?

The problem of fragmentation has seen many come up with suggestions on how to solve the issue. Some experts suggest the centralization of the market. This means standardizing markets, thereby ensuring investors don’t have to face a fractured sector and complex maze of coins. By eliminating fragmentation, there is a chance investors would be more willing to trade without having to hold their assets and wait for bigger bid-ask margins.

Even though this seems like an ideal plan, centralizing digital assets would go against the essence they were developed to achieve. This could cause a huge rift within the community, given that most proponents of crypto are against centralized fiat currencies and what they stand for. And even if the market were to adopt such a strategy, then the core issues that have plagued the traditional finance industry would start appearing on this market. This includes a lack of transparency, high fees, and slow processing times.

The Future Lies In DeFi

Since centralization is against the core crypto principles, decentralized solutions seem fit to mend market fragmentation in the long term. Already the DeFi space is shedding light on how the future crypto space will look like since it offers the best of both centralized and decentralized worlds. Benefits and costs in a DeFi liquidity pool are shared evenly, unlike centralized solutions where the situation can shift to favor the mighty ones.

Some experts expect the issuing of central bank digital currencies by governments to make it easier to get into DeFi since there are incentives built around the sector that encourage anyone looking for profit to venture; these include a share of the transaction fees and pool tokens. With CBDCs, the entry barrier posed by converting fiat into crypto will be lessened.

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