Cryptocurrency Liquidity Providers – An Essential Component of Popular Exchanges

liquidity service providers

Liquidity is one of the commonly used terms in Crypto related businesses. They have a significant role in the successful running of a Crypto exchange. In fact, when an exchange constantly suffers due to poor liquidity, it directly impacts the revenue generation for owners. Hence, it is crucial that both Cryptocurrency liquidity providers and Exchange owners work in tandem to ensure the end result is in good hands. 

The first known Cryptocurrency, Bitcoin, has the highest liquidity among other Crypto coins. A survey last year in June 2022 noted that more than 19 million bitcoins have already been mined and are in existence. Thus, Bitcoin owners are increasing day by day, and they can easily make money out of it. Most Bitcoin owners approach a popular Exchange either to sell a portion of it or, provide liquidity to the exchange for which they get back profits.

Before discussing deep on the topic, it is essential to understand the basic concept of Cryptocurrency liquidity. In this blog, we at Coinsclone have provided detailed information on Liquidity service providers and their impact on the Exchange owner’s revenue.

What is Crypto Liquidity? Who are Cryptocurrency Liquidity Providers?

Crypto Liquidity can be defined as the amount of Crypto-flow in an exchange and how easily it can be converted into cash. In other words, the more Crypto liquidity, the higher will be the probability of selling Crypto quickly in the exchange without price fluctuations affecting the seller. Since Cryptocurrency is highly volatile, investors usually notice the platform’s liquidity before trading in the exchange. Liquidity providing is a separate feature for users of Defi platforms, which isn’t the case in Centralized platforms.

Cryptocurrency liquidity providers can either be an individual or can be separate groups of investors. For providing liquidity, the exchange owners reward the individual or the investors with profits. Liquidity service providers usually tend to have more fiat or digital assets for helping out the exchanges. They can also be called the market makers, as they are directly responsible for creating the market for a particular Cryptocurrency.

How are Exchanges Getting Profits by Utilizing Liquidity Service Providers?

The exchanges have directly or indirectly profited through the liquidity providers. Here are a few of the ways through which the exchanges make profits. 

Currency Supply

Since liquidity providers have enough digital assets with them, the exchanges will not have any shortage of Cryptocurrency supply. In fact, most of the Cryptos in the exchange is supplied by the liquidity provider to maintain the market.

To Set Market Prices

Besides keeping the market stable, Crypto Liquidity Providers help to set the market prices for the exchange owners. Since the investors have deep knowledge of how the market works, they are likely to reveal the perfect price for any Crypto and help in making profits. 

Faster Trade Execution

Liquidity providers directly impact the trade matching engine and the speed at which a Crypto gets bought or sold between two users. Once the liquidity of the platform increases, users trade more quickly and help generate revenue for the owners through Commission fees, withdrawal fees, etc. 

Moving on, let us look into how liquidity providers’ responsibilities in the exchange.

How do Cryptocurrency Liquidity Providers Play a Major Role in Popular Exchanges?

Apart from directly impacting the trading volume, the liquidity providers assist popular exchanges with some other benefits too. 

Enhancing Market Figures

As we are in the Crypto industry, it is well-known for volatility factors. Therefore, these market makers are responsible for enhancing the trading volume and reducing the fluctuation in the prices. This, in turn, is achieved by increasing the number of tradeable assets in the trading pair. 

The liquidity providers usually ensure the trading volume doesn’t go down and act accordingly to it. This creates a constant flow between the supply and demand factors. Therefore, the popular exchanges seamlessly cooperate with these Cryptocurrency liquidity providers to attract more traders to the platform.

Elimination of Huge Investment Risk

Without liquidity service providers, exchanges might face the risk of popularity going down. This, in turn, affects the business investment and revenue generation for the owners. To regulate the investment factor, liquidity providers play a significant role and keep the trust going for the traders in the exchange. 


Since Cryptocurrency liquidity providers analyze the market constantly, they can provide the latest updates to the Exchange owner. Thus, they also act as a reporting agent for the admin and make the work easier for the owners. Also, they enhance the admin by generating reports on various activities in the exchange, which include

  • Email Notifications on the latest updates
  • Report Generation on the profits gained
  • Report Generation on the history of transactions
  • Report Generation on the open & closed transactions for a selected period

Next up, it’s important to know how a liquidity provider earns from exchanges.

How does a Cryptocurrency Liquidity Provider Earn from Exchanges?

The liquidity provider has numerous ways to earn from exchanges, and this remains the main reason behind a lot of investors aspiring to become liquidity providers. Here are a few of the ways Crypto liquidity providers make money through exchanges.

Passive Income

Since Crypto liquidity providers help the exchanges by generating liquidity for the platform, the exchange has to return it in some way or another. The most convenient way to return back is by providing passive income to the liquidity providers. Thus, the investors will have a passive source of income by providing liquidity instead of waiting for the Crypto market to go up. 

Reduced Price Fluctuations During Trading

Once liquidity is provided into the platform, the exchange becomes a hunting place for the traders. Improving liquidity not only helps the users of the platform but also the liquidity provider himself can save from losses of price fluctuations during trading. 

Liquidity Returned With Profit

Investors visiting an exchange to provide liquidity can also demand interest from the owner. For example, if an investor provides five bitcoins to an exchange to improve its liquidity, then he/she can get back the liquidity with a slight profit percentage after a certain period of time. In this way, both exchange owners and Cryptocurrency liquidity providers can make money.


We have seen information about Cryptocurrency liquidity providers in detail and their collaboration with exchanges. Finally, we would prefer to ask you a question. If you have enough Cryptos to become a liquidity provider, why not try starting an exchange business with the same liquidity?

The reason we have suggested developing an exchange is you already have the most important possession of liquidity, which remains the heart piece of running an exchange. Besides, you have more ways to generate revenue with an exchange rather than being a liquidity service provider alone. Several liquidity service providers are earning millions now, having started an exchange, and you can become one of those. 

We at Coinsclone have the best Cryptocurrency Exchange Development solutions for budding entrepreneurs at affordable prices. Do get in contact with us to get more business strategies. Our blockchain experts will guide you to multiply your revenue and provide the perfect solutions for you.