Most DeFi projects suffer from the lack of liquidity, which leads to highly volatile market prices for assets trading pairs. This weakness plays a crucial role in why most crypto projects try to get listed on centralized exchanges but even this works against them, historically speaking.
Like any business, centralized exchanges are out to make money for themselves and this most times will be at the expense of projects and even their own users.
When crypto projects approach centralized exchanges for listing, it typically involves offering up a percentage of the project's token supply which can be weaponized to manipulate said token markets at initial launch and over a continued period.
In addition to partnerships with centralized exchanges, crypto projects are often found dealing with market makers in the business of charging a fee to provide liquidity to any token.
Just like centralized exchanges, market makers are out to maximize profits and as often openly observed, these firms leverage the power they've been granted by project teams to manipulate token markets for personal profits.
This is why more than half the tokens that gets listed in a year reverses gains by as much as -90% after a few months of listing and sometimes less.
This reality proves that neither partnerships with central exchanges or market makers are the way to go, so what would be the better alternative?
Understanding liquidity and why it matters
Before we get down to what strategies would be better for DeFi projects to build great liquidity for their assets, it's crucial to understand what liquidity is and why it matters.
Generally, liquidity refers to how quickly and easily an asset can be converted to cash without significant price effects. That said, considering that sometimes, settlements are not in cash, an asset with great liquidity is an asset that can be conveniently traded to other assets or currencies without much price swings.
When an asset lacks adequate liquidity, it usually leads to traders or investors losing money when making conversions. That said, low liquidity also affects the purchase of an asset, making it a case not unique to one side of a trade.
This means that if liquidity is low, buying an asset may prove expensive, so an asset ought to have adequate orders on both sides to to ensure stability. Deep liquidity matters to facilitate the buying and selling of any asset at varying volumes without huge volatility.
Solving DeFi’s liquidity problem requires decentralized funding
A major problem with DeFi projects is VC or centralized funding of any form. This creates a layer of influence that detects how the projects evolve.
DeFi projects have to majorly raise capital through decentralized funding platforms. These funds raised from network participants ought to have a percentage allocated for initial asset liquidity on decentralized markets.
That said, even this will mean nothing if DeFi projects lack products and/or services that people actually want to use.
The problem with most crypto projects is that they launch without any worthwhile product, hence market participants only trade their tokens for speculative reasons and sooner dump them to move on to the next.
Deep liquidity for DeFi projects sustainability will demand that these teams build projects that attracts liquidity organically. If a DeFi project solves a need, then liquidity will flow to it naturally, without any added incentives.
Offering yield for liquidity provision can only do so much, real volume that creates a sustainable asset market comes from people using a product for the needs it serves.
A DeFi app that facilitates convenient buying and selling of digital courses? In order to make purchases, liquidity injection has to occur and even if users don't pay in native assets that are bought off the markets first, each purchase generally would incur fees that can go towards slowing building up these token markets liquidity.
Decentralized funding enables DeFi project to raise capital for initial liquidity but what will sustain and aid it grow is the products and services offered to attract users with the capital to use these products and services.