2. Liquidity: It’s Not Always Easy to Exit

The ability to convert DPTs into fiat or other assets depends on something called liquidity. In simple terms, it’s about how easily you can sell what you own. While popular tokens are generally liquid under normal conditions, the situation can change quickly.

During periods of high volatility, market stress, or technical issues, liquidity can dry up. You may find fewer buyers, or the prices available might be far less favourable than expected.

Events like blockchain network slowdowns, exchange outages, or extreme price movements can disrupt the usual flow of trades. What seemed like a quick trade might become stuck or filled at a much lower value.

At Coinut, we actively display liquidity information on our platform to help users make better decisions. Still, it’s important to remember that market conditions are beyond any single platform’s control, especially in global crypto markets.

Liquidity can be a concern when dealing with DPTs because it directly affects how easily and efficiently assets can be bought or sold without causing significant price changes. Here are the main reasons why liquidity is especially critical—and sometimes problematic—in DPT markets:

Price Stability and Volatility: Low liquidity means that even relatively small trades can cause large swings in price, making the market more volatile and less predictable. In contrast, high liquidity supports stable prices and reduces the risk of sudden, sharp moves. 

Market Fragmentation: Unlike traditional markets where liquidity is often concentrated on a few major exchanges, crypto liquidity is fragmented across many platforms. This fragmentation can lead to inconsistent pricing and makes global price discovery challenging, as the same asset may trade at different prices on different exchanges.

Risk of Liquidity Crises: A liquidity crisis—when there isn’t enough cash or readily convertible assets to meet withdrawal or trading demands—can result in users being unable to access or withdraw their funds. In severe cases, this can lead to exchange insolvency or bankruptcy, as seen in past crypto exchange failures. (Insert a line here where you can say that Coinuts’ assets are kept separately, distinct and is bankruptcy remote)

Impact on Trading: For traders and investors, low liquidity increases the risk of price slippage, where the final execution price is less favorable than expected. This is particularly problematic for large trades or during periods of market stress when liquidity can dry up quickly.  (Can choose to add: For larger trades, we may suggest circumventing this issue using OTC trades, which are only available for Accredited/Institutional Investors.)

Operational and Technological Constraints: Crypto markets can face technological bottlenecks (e.g., slow blockchain transaction speeds or high fees during congestion), which can further reduce effective liquidity and discourage market participation.

Centralization Risks: Many crypto trades are concentrated on a few large exchanges. If one of these exchanges faces operational issues or suspends trading, it can trigger a market-wide liquidity crunch and amplify systemic risk.

Stablecoin-Specific Risks: Stablecoins, which are often used as a liquidity bridge in crypto markets, may face liquidity mismatches if their reserves are not fully liquid or if there is a sudden surge in redemption requests. This can lead to runs and destabilize the broader market.

In summary, liquidity is a fundamental concern in crypto because it underpins market stability, trading efficiency, and investor confidence. Low or fragmented liquidity can lead to erratic price movements, higher trading risks, and even systemic crises if market participants cannot access their funds or execute trades as needed