Opinion by: Arthur Azizov, Founder and Investor at B2 Ventures

Despite its decentralized nature and big promises, cryptocurrency is still a currency. Like all currencies, it cannot escape the realities of today’s market dynamics.

As the crypto market develops, it starts mirroring the life cycle of traditional financial tools. The illusion of liquidity is one of the most pressing and, surprisingly, less addressed issues that stem from the market’s evolution.

The global cryptocurrency market was valued at $2.49 trillion in 2024 and is expected to more than double to $5.73 trillion by 2033, growing at a compound annual growth rate of 9.7% over the next decade.

Beneath this growth, however, lies a fragility. Like the FX and bond markets, crypto is now challenging phantom liquidity: Order books that look robust during calm periods quickly thin out during the storm.

The illusion of liquidity

With over $7.5 trillion in daily trading volume, the foreign exchange market has historically been perceived as the most liquid. Yet, even this market now shows signs of fragility.

Some financial institutions and traders fear the market’s depth illusion, and regular slippages on even the most liquid FX pairs, like EUR/USD, are becoming more tangible. Not a single bank or market maker is ready to face the risk of holding volatile assets during a sell-off — the so-called warehouse risk post-2008.

In 2018, Morgan Stanley noted a profound shift in where liquidity risks reside. After the financial crisis, capital requirements pushed banks out of liquidity provision. Risks didn’t disappear. They just went to asset managers, ETFs and algorithmic systems. There was a boom of passive funds and exchange-traded vehicles back in the day.

In 2007, index-style funds held just 4% of the MSCI World free float. By 2018, that figure had tripled to 12%, with concentrations up to 25% in specific names. This situation shows a structural mismatch — liquid wrappers containing illiquid assets.

ETFs and passive funds promised easy entry and exit, but the assets they held, corporate bonds in particular, could not always meet expectations when markets turned volatile. During drastic price fluctuations, ETFs are often sold more intensively than underlying assets. Market makers demanded wider spreads or refused to enter, unwilling to hold assets through turmoil.

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This phenomenon, first observed in traditional finance, is now playing out with familiarity in crypto. Liquidity may seem robust only on paper. Onchain activity, token volumes and order books on centralized exchanges all indicate a healthy market. But when sentiment sours, the depth disappears.

Crypto's liquidity illusion is finally coming to light

The illusion of liquidity in crypto isn’t a novel phenomenon. During the 2022 crypto downturn, major tokens experienced substantial slippage and widening spreads, even on top exchanges.

The recent crash of Mantra's OM token is another reminder — when sentiment changes, bids vanish, and price support evaporates. What at first looks like a deep market in calm conditions can instantly collapse under pressure.

This happens mainly because crypto’s infrastructure remains highly fractured. Unlike equities or FX markets, crypto liquidity is scattered across many exchanges, each with its own order book and market makers.

This fragmentation is even more tangible for Tier 2 tokens — those outside the top 20 by market cap. These assets are listed across exchanges without unified pricing or liquidity support, relying on market makers with different mandates. So, liquidity exists but without meaningful depth or cohesion.

The problem worsens with opportunistic actors, market makers and token projects, who create an illusion of activity without contributing to real liquidity. Spoofing, wash trading and inflated volumes are common, especially on small exchanges.

Some projects even stimulate an artificial market depth to attract listings or to seem more legitimate. When volatility hits, however, these players pull back instantly, leaving retail traders toe-to-toe with a price collapse. Liquidity isn't just fragile, it's simply fake.

The solution to the liquidity problem

Integration at the base protocol level is required to deal with liquidity fragmentation in crypto. This means embedding crosschain bridging and routing functions directly into the blockchain’s core infrastructure.

This approach, now actively embraced by select layer-1 protocols, treats asset movement not as an afterthought but as a foundational design principle. This mechanism helps to unify liquidity pools, reduce market fragmentation and ensure smooth capital flow across the market.

Besides, the underlying infrastructure has already come a long way. Execution speeds that once took 200 milliseconds are now down to 10 or 20. Amazon and Google's cloud ecosystems, having P2P messaging between clusters, enable trades to be processed entirely in the network.

This performance layer is no longer a bottleneck — it's a launchpad. It empowers market makers and trading bots to operate seamlessly, especially since 70% to 90% of stablecoin transaction volumes, which is a major segment of the crypto market, now comes from automated trading.

Better plumbing alone, however, isn't enough. These results should be paired with smart interoperability at the protocol level and unified liquidity routing. Otherwise, we'll continue building high-speed systems on the fragmented ground. Still, the foundation is already there and finally strong enough to support something bigger.