New Study Reveals 72% of ETH Liquidity Concentrated on Just 5 Exchanges

By 0xK2 05/30/23 3:15 AM

In a recent report by Kaiko research, concerning news has emerged for the cryptocurrency market. The study reveals that a staggering 72% of Ethereum (ETH) liquidity is now concentrated on just five exchanges. This consolidation of liquidity on a handful of platforms is a significant development that could have far-reaching implications for the entire cryptocurrency ecosystem.

The collapse of FTX last year dealt a severe blow to crypto asset liquidity. The subsequent shutdown of the Signet and SEN fiat settlement networks in the United States further compounded the challenges faced by market makers, hampering their operational efficiency.

As a result, the market depth for ETH dropped by 2% in March and has struggled to recover to pre-FTX levels. However, the .1% depth, which measures liquidity immediately around the mid-price, has surpassed pre-FTX levels as market makers regain confidence and begin offering liquidity again within a narrower range.

The Kaiko report highlights a troubling trend of liquidity becoming increasingly concentrated on only a few exchanges since the collapse of FTX. Specifically, Binance, Bitfinex, OKX, Coinbase, and Kraken account for a significant 72% of the total market depth for ETH. In contrast, the remaining 41 exchanges represent a mere 28% of the market depth. Prior to the collapse of FTX, the exchange and its U.S. counterpart accounted for nearly 40% of market depth.

Notably, the report also sheds light on liquidity shifting away from U.S.-based exchanges over the past year. The share of market depth on U.S.-accessible exchanges currently stands at approximately 40%, down from a peak of 54% reached just before the Terra collapse in May last year. This decline in U.S. market share can be attributed to a regulatory crackdown, which has resulted in global exchanges becoming more attractive to market makers seeking to avoid the uncertainties associated with the U.S. market.

Looking ahead, it is likely that liquidity consolidation will continue to occur, not only for ETH but for all assets, as the cryptocurrency exchange space grapples with the challenges of attracting market makers in an ongoing bear market. The struggle to maintain liquidity levels necessitates a closer examination of the factors driving this trend and raises questions about the overall health and stability of the cryptocurrency market.

The concentration of liquidity on a select few exchanges may pose risks, such as increased vulnerability to market manipulation, reduced trading opportunities, and limited access for smaller players. It remains to be seen how regulators and industry participants will respond to this emerging trend and whether measures will be taken to address the potential implications for market dynamics.

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