August 14, 2023
Web 3 projects encounter daily challenges, from expanding adoption and trading volumes to securing exchange listings and attracting new investors. Despite extensive efforts in optimizing tokenomics and experimenting with marketing strategies, the neglect of one key component – liquidity – could compromise the project's success and longevity.
We believe every project should be familiar with the metrics discussed in this article and be capable of self-assessing their liquidity using these two benchmarks:
1. Do you have more than $1,000 in +2% depth and -$1,000 in -2% depth?
2. Is your spread below 0.75% on all exchanges?
By the conclusion of this article, you will be equipped to evaluate your project's liquidity using CoinGecko, comprehend the significance of these metrics, and recognize their importance in fostering adoption, augmenting trading volume, and attracting investors who are less inclined to invest in illiquid assets.
The spread, defined as the percentage difference between the best buy (bid) and sell (ask)orders on an exchange, plays a pivotal role in trading. Traders buy at the lowest available sell orders (asks) and sell against the highest available buy orders (bids) in the order book. If they were to buy and sell simultaneously, they would experience a price discrepancy, purchasing at a higher rate and selling at a lower one.
Essentially, the spread represents the transaction cost or value loss a trader encounters when executing a buy or sell order, irrespective of the trading size.
A tighter spread, by minimizing immediate value loss, naturally encourages more trading activity. This increased trading activity not only amplifies the 24-hour trading volume, but also promotes the adoption rate of the project, enhancing its overall market presence and attractiveness to potential traders.
Consider the example below, where the difference between the best sell and buy orders amounts to $0.00011 or 0.84% of the price. This indicates that any trader purchasing the token would immediately experience a 0.84% decrease in value. For traders to begin realizing a profit, the price would need to increase by more than 0.84%.
We recommend that small-cap projects aim for a general spread within 0.75%, and mid-cap projects aim for a spread within 0.55%. These targets help ensure that transaction costs don't deter potential traders, thereby fostering a healthier and more appealing trading environment.
Depth acts as an indicator of available liquidity for trades. The +2% depth reveals the dollar volume of traders willing to sell their asset within 2% of the price. If there are no sellers, or if sellers are sparse, the ability of buyers to purchase the asset is restricted. For instance, in the below example, there is$35.32 worth of liquidity available for trades. A buy order of this amount would clear the first three order levels in the order book, resulting in the buyer paying a higher price than the one listed on the exchange. This difference, known as slippage, is an additional cost borne by traders with larger trade volumes.
The mid-price, as demonstrated in the following example, is the rate between the first buy and sell orders in the order book ($0.013085). The +2% depth signifies the dollar volume within the order book between the mid-price and a point 2% above it ($0.0133467). In this scenario, it aggregates to $35.20, as represented by the sum of the first three sell orders. Similarly, the -2% depth is the dollar volume within the order book between the mid-price and a point 2%below it, reflecting the depth of buy (bid) orders.
Greater depth is beneficial for a token project as it reduces the premium traders pay when buying or selling in large quantities. Conversely, a lack of depth discourages or prevents the trading of large volumes. While the spread is the immediate cost of trading, slippage is an added expense for traders with larger volumes in the event of insufficient order book depth.
Projects that lack 2% depth often display charts like this:
For instance, Bitcoin on Binance has a +/-2% depth of $22,830,580. This substantial depth enables you to place a trade of this size as ample sellers are available, although a premium of up to 2% may be incurred for some portions of Bitcoin.The significant 2% depth of Bitcoin is a key factor in its adoption by institutions, as it allows them to trade millions of dollars without paying substantial premiums due to market illiquidity.
Projects that lack sufficient 2% depth often exhibit limitations such as lower organic24-hour trading volume and reduced appeal to traders with large funds or investors requiring liquidity for efficient asset trading.
In essence, attaining a +/- 2% depth requires a substantial amount of buy and sell limit orders within 2% of the listed price in the order book. While these orders could originate from traders genuinely interested in buying or selling, in reality, successful projects often employ a market maker to fulfill this role.
Market makers such as Enflux, through their algorithmic capabilities, strategically position these orders in the order book, thereby fostering a robust market characterized by a tight spread and +/- 2% depth. This mechanism ensures that project users, traders, and investors can conveniently transact in larger volumes, enhancing the overall liquidity of the asset.
To assess liquidity using Coingecko, ensure that your project is listed on their platform. If your project is not yet listed on Coingecko or Coinmarketcap, we recommend reaching out as the listing process is typically straightforward and free of charge.
1. Begin by locating the search bar in the top right corner of the Coingecko website.
2. Enter your token ticker or name to access the relevant information.
3. Proceed to the "Markets"tab, where you can explore the listed exchanges associated with your token.
After selecting the "Markets" tab, you will be able to observe the markets where your token is listed. Pay attention to metrics such as price, spread, +2% depth, and 24-hour trading volume, as they offer insights into liquidity and market activity.
Coingecko offers valuable tools to gain a decent understanding of your project's current liquidity state. However, it is important to note that Coingecko provides only a snapshot and lacks the ability to show liquidity trends over time.
To address this need, Enflux has developed a custom liquidity tracking tool that measures liquidity dynamically and presents it in a user-friendly dashboard. Our tool evaluates liquidity based on eight or more criteria, providing comprehensive insights into your project's liquidity performance. A sample dashboard showcasing the "Spread %" metric is illustrated below:
We firmly believe in transparency, both in liquidity assessment and in assessing the performance of market makers. As a result, we offer real-time insights through our dashboard to our clients. Additionally, even for non-clients, we extend a complimentary liquidity assessment utilizing the data from our dashboard.
If you provide us with your Coingecko link, we will be delighted to share a concise video breakdown of your project's liquidity. Please feel free to reach out to us via direct message (DM) to initiate the process.
1. Assess liquidity based on depth and spread.
2. Receive a comprehensive liquidity assessment video from our experts.
3. Boost adoption and liquidity with Enflux's two-week free trial.
Take action now to increase trading volume, double market cap, and attract new investors. Contact us for more information.
Without commitments or payments upfront
To benchmark our performance to your current market-maker or find out how liquidity can boost project adoption.
We will analyze your markets without any commitments, rate your market's health and assess your market maker's performance.