First let’s understand what pair and liquidity mean.
Pair: Two crypto tokens that can be exchanged, such as BTC and USDT.
Liquidity: If you want to exchange 100 USDT for BTC, it is necessary that there is enough supply of BTC available in the market (i.e. other traders willing to exchange their BTC for USDT). This availability is termed as liquidity of the BTC token.
Fragmented liquidity is the spread of liquidity available for a given pair across multiple Decentralized Exchanges (DEXs) and multiple chains. Some DEX may have a lot of volume for a given coin for buying but not many are willing to buy it, while in another DEX there is a dearth of that coin, but many buyers are there. This results in localized starvation for liquidity, even though sufficient liquidity exists globally. This liquidity fragmentation is one of the reasons why decentralized protocols are failing to capture the market share of Centralized Exchanges (CEX). It is negatively impacting the traders as liquidity is thin on any DEX and needs bridging across chains sometimes to get better price.
Challenges due to fragmented liquidity are
- Inefficient Pricing – Trading pairs liquidity is split across multiple protocols making the system inefficient. Each platform offers different price for a given token based on respective AMM (Automated Market Making) model and supply.
- Slippage – Fragmented liquidity adds to the problem of slippage. As the total supply is widely distributed, trades on a platform with thin liquidity cause stronger price action. This in-turn adds to market imbalances.
- User experience – Having to go through several platforms and DEXs to find right price and right place to trade is a burden to the user. They end up spending more time and gas to find good combination for trading.
Underlying issue is much deeper and needs larger DeFi standardizations to achieve optimal solution.
catBots focuses on user experience and removes barriers to invest due to liquidity challenges.
Image courtesy: cedro finance
Solutions to manage fragmented liquidity
catBots uses trade aggregators and best liquidity providers on-chain to execute the trades. These aggregators are pioneers and use advanced routing mechanisms to bring best possible rate for a given trade. Being able to analyse the gas cost, limiting the slippage and choosing the DEX with best price are some of the levers used by the platform to optimize the trades.
In multi-chain transactions, the catBots platform deduces the best on-chain exchange, bridges funds/native token as gas to perform the trade. This keeps users away from the hassles of cross chain transactions. It is an arduous deal if users themselves have to research and identify the right chain, DEX and pair to buy a token every time they trade a new one.
One important aspect of trading on DEXs is to identify a trading pair which has enough liquidity and/or low slippage. Platform keeps trading capital or reserve in stablecoins to be used across DEXs. This facilitates multiple options to trade. If liquidity available for given pair is not adequate or doesn’t exist, platform takes alternative route, converting stablecoin in real time into more liquid pairs and ensures that trade is executed.
Fragmented liquidity is a larger problem to solve, however catBots remediates most of the bottlenecks through automating the trades through DEX aggregators, smartly bridging and selecting best possible route to execute a trade, providing a cost-effective, hassle-free experience for the users.
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