Liquidity is a big problem in the cryptocurrency market today and decentralized finance (DeFi) has not been immune to this. One of the most interesting developments in the Defi space has been the emergence of decentralized derivatives exchanges. These exchanges are more efficient than centralized exchanges, making them attractive to investors despite the regulatory risks. However, they are currently struggling with liquidity, which is a cause for worry, a report in Coindesk said.
dYdX, the first perpetual futures decentralized derivatives exchange, has been successful, but it is not completely decentralized as it combines a centralized order book with decentralized custody. Its competitors are running out of liquidity, creating a shortage of market depth. This is causing price slippage and extreme price fluctuations, making it difficult for traders to operate.
The DeFi liquidity crisis is not just affecting decentralized derivatives exchanges but also the broader cryptocurrency market. Kaiko’s research team has flagged a lack of fiat payment rails as a reason for Bitcoin’s liquidity to drop to a 10-month low. While caution among crypto traders may contribute to the liquidity shortage, Joe DiPasquale, CEO of BitBull Capital, remains optimistic. He believes the market will remain bullish if Bitcoin stays above $25K.
Despite the challenges, there is hope for the DeFi market. On-chain transparency can help prevent dishonesty, and the recent collapse of FTX has sparked interest in decentralized derivatives exchanges. However, the industry must address the liquidity hurdle to move forward.
In other news, the recent DeFi crisis involving protocol Euler Finance appears to be coming to a close. The hacker responsible for stealing $200 million from the protocol has returned most of the funds, causing ether traders to sigh relief and push up the price. Layer 1 blockchains like Solana and Eos have responded favorably to the news, beginning the Asia business day in the green.