Batcher - Liquidity & Composability

By Jason Ridgway-Taylor

How does one go from Tez to a stablecoin? If you are considering moving a major amount of Tez to a stablecoin, you might assume it is effortless. However, this task can be complex if you are trying not to move the price. In this article, we will look at one particular instance of transferring a sizable volume of XTZ to USDT and look into the concepts of liquidity and composability, their implications, and how Batcher can help to provide deep liquidity within the Tezos ecosystem.

A Token Trade

The example we will use is one of moving a relatively large amount ($100k) of XTZ into USDT. Having the ability to move in to and out of stablecoins is a prerequisite for a healthy DeFi ecosystem on any chain, and this is undoubtedly also true of Tezos. The key to this post is not whether it is possible; but whether it is possible with a minimal impact on the price of the assets.

Liquidity in the Tezos Ecosystem

One of the most significant considerations when exchanging one token for another in the Tezos ecosystem is liquidity. Liquidity is the term used to describe how quickly an instrument can be sold without negatively impacting its price. The more liquid an instrument is, the quicker it can be sold and the easier it is to sell it for a fair price. If an instrument is illiquid, it is more likely to trade at a premium.

An ecosystem home to highly liquid assets allows investors to quickly move into and out of projects built in that ecosystem. This makes the ecosystem attractive to a broad range of investors, including institutional and large-ticket investors.

Deep liquidity is a related concept such that when a blockchain has deep liquidity, it means that there is a large pool of buyers and sellers available at any given time, which makes it possible to execute large trades without significantly impacting the market. Deep liquidity is crucial for facilitating substantial trades on Tezos, or any other chain.

When a blockchain lacks deep liquidity, it may be challenging to find buyers or sellers for large trades, leading to significant price fluctuations and delays in the execution of the trade. In contrast, when a blockchain has deep liquidity, traders can execute large trades quickly and with minimal price impact, making it a more attractive option for high-volume traders, institutional investors and market makers.

When looking for (deep) liquidity, there are a few options avilable: centralized exchanges, decentralized exchanges and Sirius DEX (previously known as Liquidity Baking).

Centralized Exchanges

In general centralized exchanges have more liquidity than their decentralized alternatives, but this isn’t always the case.

Exchange Pair Price +2% Depth -2% Depth 24h Volume
Kraken XTZ/USD $1.16 $200,767 $320,600 $435,439
Coinbase Exchange XTZ/USD $1.16 $188,789 $332,954 $2,338,751
Binance XTZ/USDT $1.16 $220,415 $193,548 $7,045,142
Bitfinex XTZ/USD $1.16 $133,317 $111,343 $355,823 Exchange XTZ/USDT $1.16 $64,650 $70,874 $88,962
KuCoin XTZ/USDT $1.16 $47,704 $56,288 $816,121
Huobi XTZ/USDT $1.16 $13,483 $31,682 $409,491
Bitfinex XTZ/USDT $1.16 $27,918 $28,997 $20,641

The table above is an excerpt (as of 30th Jan 2023) from CoinGekko showing some popular exchanges along with the +/-2% depth metric[^1] for each. This metric illustrates the volume required to shift the asset’s orderbook by 2% in either trade direction. As seen from this, a trade of $100k would be enough to change the orderbook by a non-trivial amount and in some cases a very large percentage.

If you want to read more about this tutorial, please read our blog post on Marigold website :point_right: Batcher - Liquidity & Composability