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John Kiff

DeFi liquidations: Volatility and liquidity - 0 views

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    The OECD published a report that analyzes the connection between decentralized finance (DeFi) protocol liquidations and price volatility in decentralized exchanges (DEXs). The analysis employs transactional data of three of the largest DeFi lending protocols and suggests a positive relation between liquidations and post-liquidations price volatility across the main DEX pools. It also shows a positive correlation among borrowing rates and across different assets, which indicates that the liquidity in DeFi lending pools is connected, and that at extreme events, when investors pursue the same strategy at large numbers, liquidity of a particular asset may dry up in each of the pools across protocols. This implies that the liquidations mechanism might be limited in its ability to restore liquidity, as liquidators themselves rely on the liquidity available in the pools to repay underwater loans.
John Kiff

Liquidity bridges across central banks for cross-border payments - 0 views

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    The Committee on Payments and Market Infrastructures (CPMI) published a report  on central bank liquidity bridges -  short-term intraday liquidity arrangement set up between two or more central banks. In a liquidity bridge, collateral held by a payment service provider (PSP) with one central bank can be used by a PSP's related entity in another jurisdiction to get intraday liquidity from that other central bank. Liquidity bridges may help reduce credit and settlement risks to PSPs arising from FX transactions and reduce intraday settlement risk across borders.
John Kiff

Crypto Bank Silvergate Announces 'Voluntary Liquidation' - 0 views

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    Silvergate Bank will "voluntarily liquidate" its assets and wind down operations. The bank was under fire after announcing it would have to delay filing its annual 10-K report due to questions from its independent auditors and accounting firm over its figures. "In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward. The Bank's wind down and liquidation plan includes full repayment of all deposits." https://ir.silvergate.com/news/news-details/2023/Silvergate-Capital-Corporation-Announces-Intent-to-Wind-Down-Operations-and-Voluntarily-Liquidate-Silvergate-Bank/default.aspx
John Kiff

Improving the Efficiency of Payments Systems Using Quantum Computing - 0 views

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    "High-value payment systems (HVPS) are typically liquidity-intensive as the payment requests are indivisible and settled on a gross basis. Finding the right order in which payments should be processed to maximize the liquidity efficiency of these systems is an NP-hard combinatorial optimization problem, which quantum algorithms may be able to tackle at meaningful scales. We developed an algorithm and ran it on a hybrid quantum annealing solver to find an ordering of payments that reduced the amount of system liquidity necessary without substantially increasing payment delays. Despite the limitations in size and speed of today's quantum computers, our algorithm provided quantifiable efficiency improvements when applied to the Canadian HVPS using a 30-day sample of transaction data. By reordering each batch of 70 payments as they entered the queue, we achieved an average of C$240 million in daily liquidity savings, with a settlement delay of approximately 90 seconds. For a few days in the sample, the liquidity savings exceeded C$1 billion. This algorithm could be incorporated as a centralized preprocessor into existing HVPS without entailing a fundamental change to their risk management models."
John Kiff

Evidence of concentrated DeFi liquidity from DEXs and AMMs - 0 views

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    The OECD published a paper that provides evidence of increased concentration of decentralized finance (DeFi) liquidity provision in decentralized exchanges (DEXs) and automated market makers (AMMs). A low trade count is observed in liquidity pools where DeFi liquidity provision is concentrated, with 20% of the pools of some of the DEXs examined accounting for more than 90% of the trading volume of these DEXs. Also, a small number of liquidity providers participating in the examined pools represent a significant part of the trading activity. This could exacerbate DeFi vulnerabilities, with possible impact on market functioning, price discovery, and competitive dynamics.
John Kiff

Stablecoins' impact on banks' balance sheets and prudential ratios - 0 views

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    The European Central Bank (ECB) published a paper that explores the relationship between banks, and stablecoins and their issuers, focusing on the mechanical effects on banks' capital and liquidity ratios when issuing stablecoins or collecting deposits from stablecoin issuers. The analysis reveals that converting retail deposits into stablecoin issuers' deposits weakens a bank's liquidity coverage ratio (LCR), turning a retail deposit into a wholesale deposit, even when these funds are reinvested in high-quality liquid assets (HQLA). If a credit institution issues its own stablecoins, the impact on its LCR depends on whether it can identify the stablecoin holders; unknown holders weaken the LCR which could incentivize banks to issue stablecoins where they can continually identify the holders to benefit from more favorable liquidity treatment. The study also finds that when retail customers of bank A buy a stablecoin issued by a non-bank that keeps reserves at bank B, both banks could see an unexpected decline in their liquidity ratios, as bank A loses stable retail deposits and bank B gains volatile wholesale deposits.
John Kiff

Liquidity Usage and Payment Delay Estimates of the New Canadian High Value Payments System - 0 views

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    As part of modernizing its core payments infrastructure, Canada will replace the Large Value Transfer System (LVTS) with a new Real-Time Gross Settlement (RTGS) system called Lynx. An important question for policy-makers is how Lynx should be designed. This paper presents simulation results to aid in the design of Lynx. The main interest of policy-makers is to measure the liquidity demands of the system and the corresponding amount of time it takes to settle the value and volume of transactions typically observed in LVTS. To assess this, we developed a simulation environment of the Lynx system using the description of its vendor. We evaluated a variety of configurations of Lynx under several payment demand scenarios. With an initial liquidity comparable to one pledged in LVTS today, Lynx with a first in, first out (FIFO) bypass configuration would require a higher level of liquidity than LVTS or a plain-vanilla RTGS with pooled liquidity. This suggests Lynx could be made significantly more efficient, warranting further research.
John Kiff

Crypto Traders Stung by Liquidations on Leveraged Exchanges - 0 views

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    On Sunday, BitMex had the most Bitcoin-related liquidations in three months, according to crypto derivatives tracker Skew. More than $190 million has been liquidated on the exchange in the last 24 hours, according to TokenAnalyst.io. BitMex offers as much as 100 times leverage on futures contracts, and when trades go bad, users are at risk of facing margin calls on what's borrowed that can end up leading to the liquidation of their position.
John Kiff

78% of the Bitcoin Supply is Not Liquid - 0 views

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    According to Glassnode analysis, only 4.2 million BTC (22%) are currently in constant circulation and available for buying and selling. As a measure of an entity's liquidity, Glassnode uses the ratio of the cumulative outflows and cumulative inflows over the entity's lifespan, excluding "in-house" transfers. This ratio yields a number L between zero and one, with larger values indicating higher liquidity. Liquidity is therefore the extent to which an entity spends the assets it receives. Illiquid entities are those that hoard coins in anticipation of a long-term BTC price appreciation. The analysis suggests that the present bull market is driven by the staggering illiquidity growth.
John Kiff

Macroprudential Considerations for Tokenized Cash - 0 views

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    "This paper examines the financial stability risks associated with tokenized cash, a subset of stablecoins fully reserved with cash and cash equivalents. Using a combination of on-chain data together with uniquely collected wallet address labels, we construct empirical measures of liquidity ratios and run off rates on the largest cash token and characterize its users and their behavior. The overall circulation of tokenized cash is largely insulated from crypto price movements, though price changes correlate with re-balancing between smart contracts and private wallets. A liquidity ratio calculation, similar in concept to Liquidity Coverage Ratio (LCR), indicates that tokenized cash has at least two times the amount of High-Quality Liquid Assets (HQLA) when compared to the worst observed gross outflow over 30-day ahead periods. We discuss the implications of tokenized cash on safe asset creation, credit supply, and monetary policy transmission. The adoption of tokenized cash can reduce moral hazard risks from public guarantees and expand credit provision through market-based lending enabled by smart contracts."
John Kiff

Binance offers to buy FTX's non-U.S. operations to fix 'liquidity crunch' - 0 views

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    Binance has reached a deal to buy the rival crypto exchange FTX for an undisclosed amount. Binance CEO Changpeng Zhao announced that "there is a significant liquidity crunch" at FTX and that after FTX asked for Binance's help, they "signed a non-binding letter of intent, intending to fully acquire FTX and help cover the liquidity crunch." Zhao added that Binance will be conducting full due diligence in the coming days, and the firm has the discretion to pull out from the deal at any time. Days earlier, Binance had announced that it would sell all of its FTX FTT governance tokens, which set in motion the chaos that resulted in FTX's liquidity woes.
John Kiff

On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges - 0 views

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    "We compare decentralized blockchain-based venues (DEXs) to centralized crypto exchanges (CEXs) by assessing two key aspects of market quality: market liquidity and price efficiency. A comprehensive analysis of transaction costs and deviations from the "triangular" no-arbitrage condition suggests that market liquidity in CEXs and DEXs is similar but DEX prices are less efficient. While the main frictions for DEXs are high exchange fees and the gas cost of transactions stemming from proof-of-work blockchains, the superior price efficiency of CEXs involves significant risks and latency associated with delegated custody. We propose and empirically validate a stylized model of DEX liquidity provision, linking trading volume, exchange fees, and liquidity in equilibrium. Our theory identifies the quantitative conditions for DEXs to overtake CEXs in the future."
John Kiff

Binance and its stablecoins - 0 views

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    "The crypto ecosystem relies on stablecoins as a cheap and plentiful form of dollar liquidity. If all stablecoins were classed as securities, dollar liquidity for onshore crypto exchanges and platforms would dry up as stablecoin issuers either went offshore or out of business. It is very hard to see what would replace it, at least in the short term: U.S. dollars (and other fiat currencies) are not liquid on crypto exchanges, because to move them around requires banks, and non-USD stablecoins have gained little traction thus far. So trading crypto onshore would become much more expensive and considerably riskier. The dollar liquidity drought could also severely impact DeFi, because that relies on stablecoins (or derivatives of stablecoins) as collateral. So the SEC's action could bring down the onshore crypto ecosystem. "
John Kiff

Macroprudential Considerations for Tokenized Cash - 0 views

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    "This paper examines the financial stability risks associated with tokenized cash, a subset of stablecoins fully reserved with cash and cash equivalents. Using a combination of on-chain data together with uniquely collected wallet address labels, we construct empirical measures of liquidity ratios and run off rates on the largest cash token and characterize its users and their behavior. The overall circulation of tokenized cash is largely insulated from crypto price movements, though price changes correlate with re-balancing between smart contracts and private wallets. A liquidity ratio calculation, similar in concept to Liquidity Coverage Ratio (LCR), indicates that tokenized cash has at least two times the amount of High-Quality Liquid Assets (HQLA) when compared to the worst observed gross outflow over 30-day ahead periods. We discuss the implications of tokenized cash on safe asset creation, credit supply, and monetary policy transmission. The adoption of tokenized cash can reduce moral hazard risks from public guarantees and expand credit provision through market-based lending enabled by smart contracts. "
John Kiff

Synthetix Explores Adjusting sUSD Liquidity Incentives with SIP 51 - 0 views

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    Synthetix - the permissionless derivatives protocol - is exploring adjusting its economic incentives for liquidity providers across sETH and sUSD pools. sETH acts as the primary on-ramp for Synthetix users, sUSD also acts as a critical off-ramp. Therefore, there must be high confidence (and liquidity) in the stability of the sUSD peg at $1. The added SNX incentives to Curve will aid in sUSD maintaining its $1 peg and assurance for liquidity providers that the incentives will exist in the long term.
John Kiff

Bitcoin's 'Most Volatile Day' Prompts Exchanges to Make Changes - 0 views

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    For now, the largest crypto exchanges are not changing their leverage policies, but they are making other tweaks. Huobi instituted a flavor of a circuit breaker: Instead of halting trading, the software will halt liquidation orders on positions where the margin ratio is less than or equal to zero when abnormal price deviation between the market price and liquidation price is identified. The exchange has also begun doing partial liquidations.
John Kiff

Bitcoin Volatility Is Up, Liquidity Stagnant - 0 views

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    Perhaps bitcoin itself will achieve stability over time, as its liquidity improves with growing investment in the crypto-asset category. Those who believe it will do so may feel disappointment or impatience reading this article. For in 2019, market and network data have told a different story: volatility has increased and liquidity remains stagnant. "
John Kiff

Decentralized dealers? Examining DEX liquidity provision - 0 views

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    The Bank for International Settlements (BIS) published a paper that explores the role of participants in providing liquidity on decentralized exchanges (DEXs). DEXes allow participants to buy and sell assets without the need for intermediaries, in theory democratizing liquidity provision. However, using data from the largest DEX (Uniswap V3), it shows that liquidity provision, rather than being the purview of a diffused set of market participants, is confined predominantly to a small group of sophisticated ones. These participants submit orders that mimic bids and asks and are able to extract significantly higher profits compared to their unsophisticated counterparts. They also exhibit considerable skill, extracting higher profits during periods of high volatility by capturing a higher share of trading without incurring additional adverse selection.
John Kiff

Digital euro safeguards - protecting banking sector liquidity - 0 views

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    In April 2024 the European Central Bank (ECB) published a paper that shows the usefulness of digital euro safeguards, such as holding limits, that would limit the impact of the introduction of a digital euro on banks' liquidity and on their reliance on central bank funding. To this end, it assesses how banks might respond to the introduction of a digital euro while seeking to maximize profitability and manage their risks for a range of holding limit scenarios. The results of the simulated impact on key liquidity metrics show that, with safeguards in place and on aggregate, the liquidity metrics of euro area banks would decline but remain well above regulatory minimums. In addition, the central bank funding ratios of euro area banks would not increase materially on aggregate and would remain contained overall.
John Kiff

Binance may be in deep trouble with their margin lending platform - 0 views

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    Binance recently announced that Margin Insurance Fund has been bled dry by liquidations, and they are now putting their own "profits" into the fund to try and replenish it. The Insurance Fund is designed to use the collateral from fees on non-bankrupt clients to cover losses when the client accounts go below 0 in value, to limit the occurrences of counterparty liquidation. During the recent flash crash billions was liquidated, probably bleeding the Insurance Fund dry. Binance has also reduced the interest rates on flexible savings on USDT/BUSD from 6.5% to 2%.
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