Unveiling the Illusion of Liquidity in the Crypto Market: Unresolved Issues in TradFi and Fragmentation Intensifying Risks

Behind the impressive market capitalization rise and the ideals of Decentralization, the Crypto Assets market is facing an underestimated systemic risk: "Liquidity Mirage." This has long existed in the TradFi markets, and the Crypto Assets have not resolved it. However, today, amidst the fragmented chains and exchanges, this situation has become even more difficult to manage, making it harder for Crypto Assets to become mainstream.

The dream of Decentralization cannot support the shattered Liquidity.

The market capitalization of Crypto Assets has now reached 3.4 trillion USD, and it is estimated to double to 5.73 trillion by 2033. However, Arthur Azizov, founder of B2 Ventures, pointed out that this wave of growth conceals a core issue: "Market depth is actually extremely fragile."

He took the foreign exchange market as an example, emphasizing that even though the global daily trading volume reaches 7.5 trillion USD, major currency pairs like EUR/USD often experience slippage and liquidity gaps.

The crypto market was not spared either; when the market atmosphere turns cold, the once-active order book instantly dries up, and selling pressure can surge like an avalanche.

A lesson from ETFs: Packaging masks instability as "false liquidity"

TradFi has long experienced this lesson. After the 2008 financial crisis, banks were forced to withdraw from market making, and the role of market liquidity supply was taken over by ETFs, passive funds, and algorithmic trading. At that time, only 4% of the circulation in the global MSCI World index was held by index funds; by 2018, this proportion had risen to 12%, with specific stocks even exceeding 25%. What risks does this represent?

Even if ETFs or passive funds themselves claim to have "great liquidity and can be entered and exited at any time", the actual holdings behind them, such as corporate bonds or subprime market bonds, are difficult to offload during market turbulence due to insufficient Liquidity.

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When funds rush out, market makers can only widen the bid-ask spread or simply exit the market, leading to greater market turmoil.

The issue of "low liquidity assets wrapped in liquidity" is quietly spreading in the Crypto Assets market today.

Deep Illusion: The "False Depth" Dilemma of the Crypto Market

During the 2022 crypto bear market, major exchanges also experienced price slippage, and the recent flash crash of Mantra's OM coin further highlights the essence of the issue: "The trading depth that seems active on ordinary days can instantly collapse under pressure."

(Mantra )OM( is collapsing and fermenting! Reef Finance founder involved in manipulation allegations, selling off over a hundred million dollars? (

Azizov pointed out that this phenomenon is particularly prevalent among Tier 2 Tokens outside the top 20 in market capitalization )Tier 2 Tokens):

They are spread across different exchanges, each having inconsistent quotes and market-making strategies, lacking cohesiveness and depth. In addition, many project teams and exchanges often resort to wash trading ( and spoofing ) to fake market activity in order to attract users, further weakening real liquidity.

He is worried that when volatility strikes, these false liquidity providers will exit at the first opportunity, leaving only helpless retail investors and free-falling prices.

Resolving fragmentation from the protocol layer: true integration is the way forward

The fundamental solution to resolving liquidity fragmentation does not lie in launching another faster exchange, but rather in integrating cross-chain bridges and liquidity pathways from the blockchain infrastructure (L1).

Some new generation L1s have incorporated "asset liquidity" into the core design of their protocols, allowing funds to flow freely across chains through smart interoperability and unified liquidity pools, thereby enhancing capital efficiency and trading stability.

With the cloud communication architecture (AWS and Google Cloud) occupying up to 90% of stablecoin trading volume with automated trading, the technical foundation of the crypto market is ready. Once the facilities are perfected, the crypto market may truly possess capital market functions that can compete with TradFi.

Can the crypto market break out of the cycle of traditional finance?

The future of the crypto market is not just about new technologies, but also a redesign of market structures and risk-bearing methods. To avoid repeating the liquidity flaws of TradFi, the crypto industry must see through the illusion of "surface prosperity" and instead build deeper and genuinely connected financial infrastructure.

This article unveils the illusion of liquidity in the crypto market: unresolved issues in TradFi and fragmentation exacerbate risks. Originally appeared on Chain News ABMedia.