Introduction
Most crypto pairs lack real depth: a single large order can push the price several percent. When liquidity is thin, trading becomes expensive and stressful. Market makers step in by posting buy-and-sell quotes, absorbing risk and earning the spread. In small markets their job is harder: they must shift price ranges, adjust fees on the fly and fend off front-running. This article explains why liquidity evaporates and which practices actually bring it back.
Why liquidity disappears
The collapse of key players breaks trust
After the high-profile bankruptcies of 2022-23, major funds pulled capital, alt-coin books emptied and spreads exploded. Market makers hesitate to hold inventory when counter-party risk exceeds the potential spread.
Fragmentation makes things worse
One token trades on dozens of venues and across several blockchains; each slice of order book is tiny. Even healthy aggregate volume turns into many micro-markets with double-digit spreads.
Active fixes for AMM pairs
Concentrated ranges
Instead of covering the whole price curve, liquidity hugs the current price—one dollar works harder. Drawback: if the market moves away, the pool stops earning. The answer is a bot that automatically recentres the range.
Dynamic fees
During calm hours the fee stays low to attract flow; when volatility spikes, it rises to compensate risk.
Token incentives
Protocols pay LPs in their own token. It works when rewards are tied to real volume and expire quickly. Paying merely for “idle deposits” drains the treasury with no lasting depth.
On-chain order books for thin assets
A full blockchain order book brings CEX-style flexibility: limit orders, icebergs, tight spreads. Yet the public mempool exposes each action to front-runners. Developers add delays, encryption or special MEV filters, sacrificing some speed for safety. A market maker must choose a venue with the right transparency-versus-protection balance.
The regulatory angle
In Europe, MiCA forces exchanges to disclose how they manage low-liquidity risk. In the US, the CFTC is weighing fines for “deceptive depth” when venues display fake orders. Exchanges and market makers therefore benefit from publishing depth, spread and slippage statistics—users and supervisors both trust transparent books.
Practical insights
Trust beats high APR. Traders move volume toward venues that show proof-of-reserves and honest liquidity stats.
Code outruns passivity. An auto-bot that slides ranges and fees narrows spreads faster than a static LP.
Fragmentation hides alpha. Wider spreads in micro-markets reward makers who can teleport liquidity across chains.
Public quality metrics are a shield. Displaying depth and slippage reassures clients and regulators alike.
Open questions
- How long does “purchased” liquidity last a year after incentives stop? No long-term data yet.
- How to measure MEV damage in on-chain books without insiders’ bot logs?
- Where will regulators draw a red line for minimum depth or maximum spread when listing new pairs?
Conclusion
Liquidity is cultivated, not granted. In thin markets the winner is not the player with the biggest wallet but the one with the most agile strategy—moving ranges, tuning fees and shifting across networks faster than rivals.
