What is a Crypto Liquidity Provider and What is a Market Maker?

In the dynamic world of cryptocurrency trading, liquidity stands as a cornerstone for fostering an efficient trading platform.

The term “liquidity” refers to the ease with which assets can be bought or sold without causing significant price swings. Understanding the importance of liquidity is crucial for both traders and exchanges.

When it comes to an institutional cryptocurrency platform, liquidity takes center stage as a linchpin for smooth and effective trading. Institutional crypto trading platforms thrive on a liquid market, where active buyers and sellers ensure assets change hands seamlessly.

Liquidity providing Forms

Who takes the role of a crypto liquidity provider (LP) on trading exchanges? For that purpose, platforms attract liquidity providers or market-makers, who deliver large amounts of funds to the platform and raise liquidity, ensuring smooth transactions for other participants.

Market-makers (MM) receive benefits and make a profit from their activity on crypto platforms. Depending on what crypto market maker program they choose and the asset volume they deliver, MMs receive different rebates, lower fees, and tools to support their trades. Let’s talk about LPs and MMs in more detail.

Cryptocurrency Liquidity Provider or Market Maker?

LPS and MMs play distinct roles, each contributing to the efficiency and functionality of trading platforms.

A crypto exchange liquidity provider is an entity or service that contributes liquidity to the market. LPs typically facilitate trading processes by placing orders on the order book, ensuring that there are ample assets available for traders to transact.

Key points:

• The purpose is to enhance overall liquidity on the exchange
• The role is placing orders on the order book to ensure there are buyers and sellers for various assets.
• Benefits: LPs improve trading experience by reducing slippage and allowing for smoother transactions.

Crypto market makers are often financial institutions or specialized firms, that actively provide liquidity to a market by continuously quoting buy and sell prices for an asset. Market makers play a proactive role in facilitating trades, acting as intermediaries, and profiting from the bid-ask spread – the difference between the buying (bid) and selling (ask) prices.

Key points:

• The purpose is to actively facilitate trading by quoting bid and ask prices.
• The role is to constantly offer buy and sell prices for assets, aiming to profit from the spread.
• Benefits: MMs increase liquidity by ensuring there are readily available prices for traders.

What’s the Difference?

While both crypto liquidity providers and market makers contribute to market liquidity, the primary distinction lies in their approach. LPs focus on ensuring there are enough buyers and sellers in the market by placing orders on the order book. Market makers take a more proactive role by continuously quoting prices, and participating in the bid and ask process.

Wrap-Up

A liquidity provider is a broader term encompassing entities that enhance overall liquidity, whereas a market maker is a specific type of liquidity provider that actively participates in the market by quoting prices to facilitate trades. Both roles are crucial for the smooth functioning of crypto exchanges, ensuring that traders can execute transactions efficiently and at competitive prices.