A liquidity provider is someone who provides an opportunity to buy or sell a trading asset at the current price in the shortest possible time. Usually, the provider buys an asset from you with its own funds and puts it up for sale later. Basically, the role of liquidity providers is assumed by banks, exchangers, investment and pension funds, stock brokers, etc.
The meaning of the term
Liquid means being „converted into money“. Liquidity in the economy is the property of assets to be quickly sold at a price close to the market. The closest analogue is “solvent demand”.
It is believed that cash has absolute, or 100%, liquidity. In other words, cash will be accepted always and everywhere. However, the payment of large bills in cash may become the basis for an investigation by the tax authorities for tax evasion. Some banks have introduced special fees for accepting cash for crediting them to a checking account, that is, you need to pay for the contribution of your own cash to your account. Therefore, the liquidity of cash can no longer be considered absolute.
Any other movable and immovable property, as well as intangible assets, has its own liquidity. If the product is sold quickly, it is called highly liquid, if it is slow, it is called low liquid. The market of highly liquid goods bears a similar name - the highly liquid market. If the product cannot be sold at all, it is called illiquid or “illiquid”.
Provider is a company that provides any services. Basically, we use the term provider in the context of Internet service providers providing access to the Internet. Quite often, providers are called commercial organizations that provide digital services: service providers, hosting providers, payment providers. Separately, liquidity providers are financial organizations that provide working capital to the markets. In relation to them, the term “liquidity” is used as a synonym for the concept of “working capital“, for example, “the bank has put liquidity on the FOREX market”.
The term “liquidity provider” appeared when money and valuables received digital form. Although before this term there were many people and organizations that immediately gave money for goods, for example pawnshops or antique sellers.
Types of liquidity providers
Classical market liquidity providers are often banks: they buy stocks, currencies, liabilities in their own interests and in the interests of customers. There are few banks represented on the cryptocurrency market so far.
Liquidity providers in crypto market
They provide services for exchanging one cryptocurrency for another cryptocurrency and buy cryptocurrencies offered by customers themselves. On exchanges, liquidity providers are often special brokers who buy and sell assets according to certain algorithms in order to maintain constant supply and demand, they are called “market makers”.
They provide services for exchanging one cryptocurrency for another crypto currency or for fiat money (dollars, euros, pounds, rubles, etc.) and at the same time only ensure the conclusion of transactions between users.
Investment and other funds can regularly provide their valuables (mainly dollars and euros) for a long time. Funds, acting as buyers, provide not only short-term liquidity of coins and other valuables, but also long-term high liquidity and reputation of the asset.
- Payment systems and gateways
Services that provide automated operations for customers of online stores. The buyer pays the gateway cryptocurrency, he instantly converts it into dollars or rubles and settles with the seller.
- Intermediary services
They provide the services of third-party organizations in exchange for a certain coin. Thus, any projects and services that are ready to exchange their liquidity (money, rights, obligations, etc.) in exchange for digital currency (for example, the DEL coin) are liquidity providers. Liquidity providers are NOT projects that sell their own goods and services for cryptocurrency, although they provide the main liquidity of coins. But the term “liquidity providers” is not applied to direct suppliers of goods and services.