Understanding the Challenges of Currently Existing Crypto Liquidity Aggregators
Despite being relatively young compared to the traditional finance sector, the cryptocurrency market has experienced remarkable growth over the last decade. While traditional finance in its digital form has been evolving since the 1970s, the crypto space has scaled at an unprecedented pace. One of the most tangible examples of this growth is the rise of Decentralized Finance, which has demonstrated how projects that once required a vast corporate structure can now be done by a small team of developers. DeFi’s accessible nature has transformed blockchain into a dynamic and intriguing technological ecosystem. However, this accessibility comes with its challenges. Not all products in the DeFi space meet high-quality standards, and the underlying blockchain technology still faces several limitations.
As a professionals, in our journey, we have been actively observing the space even before joining our efforts in FluidAI. We remember the times of the first clunky decentralized exchanges like IDEX or HADAX, which were not even using the liquidity pool mechanism. We also remember the times when AMM-based DEXes were introduced, and how it impacted the whole crypto ecosystem. Liquidity aggregators, as well went through an evolution. In the current crypto liquidity aggregation space there are different approaches on how to solve liquidity fragmentation issue. Each of the solutions that are currently available on the market has its pros and cons. FluidAI team has extensively analyzed the existing products to makes sure we have the best solution. We’ve identified the main problems with current liquidity aggregators, and we’re keen to share our findings with you.
Infrastructure
Some older crypto liquidity aggregators require their own chain to operate fully. Running a full node can be very expensive, leading to a concentration of infrastructure security in the hands of the team and a few entities that can afford to deploy a node. Additionally, native token staking is often needed for operation, plus there must be sufficient assets staked on both sides of a traded pair. In effect, the high collateralization levels not only drive up operational costs but also pose challenges in handling high-volume trades.
Relying solely on liquidity sourced from centralized exchanges can be risky since exchange can put on hold liquidity supply. Centralized exchanges frequently undergo maintenance or trading suspensions and are prone to hacks. Moreover, they retain the authority to suspend trading functionality with any integrated venue without explanation, leaving liquidity aggregators dependent on their mercy.
Execution Problems
Trade cancellations are a common issue as routing takes time, during which market conditions may change, or users may opt to cancel the trade. In such cases, orders can become stuck between matching and execution, resulting in delays.
Some aggregators employ external partners, or brokers, to execute trades on centralized exchanges on their behalf. However, these brokers may lack the liquidity needed to handle high trading volumes effectively.
Costs
The prices offered by crypto liquidity aggregators can often exceed those on the original decentralized exchanges, particularly for small trades involving less popular trading pairs. Moreover, some aggregators prioritize routing trades to preferred liquidity sources to earn higher commissions rather than ensuring the best execution. By adding a referral code to transactions, aggregators receive kickbacks from every trade executed by the preferred DEX. Consequently, there is no optimal execution for small trades due to routing costs, limiting aggregators’ ability to implement advanced trading strategies like high-frequency trading.
Security
In the current landscape, liquidity aggregators adopt diverse approaches to security. Some prioritize security rigorously, while others may not take it as seriously. Unfortunately, there are instances where highly vulnerable aggregator components lack proper audits, raising concerns about the overall security posture.
Much of the current cross-chain aggregation relies on bridges, which inherently introduce risk and are susceptible to infrastructure hacks. The lack of thorough audits is particularly alarming, especially when all deposit smart contracts are designed to be immutable. This oversight serves as a significant red flag, underscoring the importance of comprehensive security measures in the liquidity aggregation space.
FluidAI approach to the challenges of crypto liquidity aggregation
Although existing crypto liquidity aggregators have encountered numerous challenges, they still manage to aggregate liquidity and offer users competitive rates to some extent. This space is continually evolving, with existing aggregators improving and new ones emerging annually. The FluidAI team acknowledges this dynamic environment and aims to address the challenges faced by competitors while developing a complementary liquidity solution.
Our project undergoes a thorough audit process to ensure its integrity, and we’ve designed it to reduce dependencies on third-party actors that could potentially impact FluidAI aggregator performance. We’re committed to constructing a fast and reliable liquidity solution suitable for both retail and professional traders. By leveraging AI technology, we strive to deliver the most advanced liquidity aggregator on the market.
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