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Can anybody give some idea about the issue of providing liquidity to the users for creating a cryptocurrency exchange ? Thanks!

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To summarize the 'liquidity problem' as I understand it: A cryptocurrency exchange needs users in order to function, but it also needs liquidity in order to serve users, and users are the ones who provide liquidity!

So where does the liquidity come from in the first place? Why would 'user 1' join, if there is nobody else to trade with? This is a sort of chicken-and-egg problem, but the answer could come in various forms.

  • Maybe the exchange operator is very rich, and can act as a market-maker, until the point in time that a critical mass of users has been reached and the market can be self-sustaining.

  • The exchange operator could work with other wealthy individuals, and provide them incentives to act as market makers

  • The exchange operator could work with a mining pool, using them as a market maker (allowing the pool to exchange BTC for $, in order to pay their overhead costs).

Eventually, an exchange with a good base of users will have both market makers, and market takers present. To ensure there are enough market makers, the exchange may incentivize certain types of orders (eg market makers pay no fees, market takers pay a small fee).

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The liquidity would be dependant on the amount of available exchangeable cryptocurrencies or fiat currencies. And to answer your question all crypto currencies, ICOs, tokens, and etc. hold some value and they can be exchanged, and that's what solves the liquidity issue.

For example coinbase accepts xyz $ and allows u to change it into xyz crypto currency like ripple or something, the more available currencies higher the liquidity and the ease of transaction increases the liquidity of assets.

This question is to some extent unnecessary. But, hey all of us get confused at times!

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