Exchange Liquidity: How to Solve the Hardest Problem in Crypto

The Silent Killer of Crypto Exchanges

Let me tell you about something that happens roughly every week in our inbox. A founder writes in, excited about their new exchange. They’ve got a great brand, a slick UI, solid security, maybe even a license in a decent jurisdiction. They launch. And then… nothing. The order books sit there, empty. A few traders trickle in, see the barren BTC/USDT book with a 3% spread and maybe $800 of depth on each side, and they leave. They don’t come back.

Within three months, the exchange is a ghost town. Within six, it’s shut down.

This isn’t some edge case. Empty order books have killed more crypto exchanges than hacks, regulatory shutdowns, and bad technology combined. We’ve been in this business long enough to have watched it happen hundreds of times, and the pattern is always the same. Great technology, zero liquidity, dead exchange.

Here’s the frustrating part: most of these exchanges could have survived. Liquidity isn’t some unsolvable mystery. It’s a problem with well-known solutions — solutions that work if you actually plan for them and allocate budget toward them. But too many founders treat liquidity as something that will “just happen” once they launch. It won’t. It never does.

So let’s talk about what actually works.

The Chicken-and-Egg Problem Is Real (And It’s Worse Than You Think)

You’ve probably heard this framed as a chicken-and-egg problem. Traders won’t come to your exchange unless there’s liquidity. Liquidity won’t exist unless there are traders. Both statements are true, and together they create a death spiral that’s killed exchanges with better technology and bigger budgets than yours.

But let me make this more concrete with numbers, because the abstract version doesn’t capture how brutal this actually is.

Say you launch with BTC/USDT as your flagship pair. On Binance right now, the spread on BTC/USDT is usually between 0.01% and 0.02%. The order book has tens of millions of dollars in depth within 1% of the mid-price. A trader can market-buy $500,000 worth of BTC and move the price by maybe 0.03%.

Now look at your fresh exchange. If you haven’t done any liquidity work, your BTC/USDT book might have $2,000 of total depth. The spread could be 0.5% to 2%. A $5,000 market order would blow through multiple price levels and cause noticeable slippage. Any trader who knows what they’re doing — and those are the traders you need to attract first — will take one look at those numbers and go back to Binance.

This isn’t a minor inconvenience. It’s a structural problem that makes your exchange literally unusable for any serious trading activity. And it feeds on itself: low liquidity means bad execution, bad execution means fewer traders, fewer traders means even less liquidity. Round and round it goes.

The exchanges that break out of this cycle are the ones that treat liquidity as a day-one priority, not a nice-to-have they’ll get around to eventually.

Market Making 101: What Market Makers Actually Do

Before we get into solutions, you need to understand what market making is. Not the theoretical version from a finance textbook — the practical version that matters for your exchange.

A market maker is someone (or something — often it’s a bot) that continuously places both buy and sell limit orders on your order book. They’re offering to buy BTC at, say, $42,350 and simultaneously offering to sell BTC at $42,370. That $20 gap is the spread, and it’s how market makers make money. Every time someone market-buys and hits their ask, then someone else market-sells and hits their bid, the market maker captures that $20 difference.

For your exchange, market makers provide three critical things:

Tight spreads. The spread is the most visible indicator of liquidity quality. When a trader pulls up your BTC/USDT pair and sees a 0.05% spread, they think “this exchange has decent liquidity.” When they see a 2% spread, they think “this is a dead exchange” and they leave.

Order book depth. Depth is how much volume sits at various price levels in the book. Good depth means traders can execute larger orders without excessive slippage. If your book only has $500 at the best bid, any market sell over $500 is going to blow through to the next price level. That’s a terrible experience.

Continuous availability. Markets need to function 24/7 in crypto. Market makers keep orders on the book during quiet hours, during weekends, during volatility spikes — times when natural organic liquidity dries up.

Here’s the honest truth: on a new exchange, virtually all of your initial liquidity will be artificial. It will come from market making bots, liquidity aggregation, or professional market making firms. Organic liquidity — real traders placing real limit orders because they genuinely want to trade on your platform — takes months to develop. You need to bridge the gap.

Liquidity Aggregation: Borrowing Depth From the Big Guys

The fastest way to go from empty order books to functional ones is liquidity aggregation. The concept is straightforward: you connect your exchange to major venues like Binance, OKX, Kraken, or Bybit via their APIs, and you mirror their order book depth onto your own platform. When a trader on your exchange places a market order, it gets executed against that aggregated liquidity.

This is how the majority of small and mid-size exchanges actually operate. Many of the exchanges you’ve traded on are doing exactly this — you just didn’t know it. It’s not deceptive. It’s infrastructure.

There are a few approaches to implementation:

Full mirroring means you replicate the external order book on your platform in near real-time. Your users see the same depth and similar spreads as the source exchange. When they execute a trade, your system simultaneously executes the corresponding trade on the source exchange to hedge the position. The execution is typically fast enough that slippage differences are minimal.

Partial aggregation combines external liquidity with whatever organic liquidity your exchange has. Maybe your organic book has $5,000 of depth, and you supplement it with $200,000 from Binance. The result looks natural to traders, and as your organic liquidity grows, you can gradually reduce your reliance on external sources.

Multi-source aggregation pulls from several exchanges simultaneously, finding the best prices across venues and routing orders accordingly. This tends to produce tighter spreads than any single source because you’re cherry-picking the best bids and asks from multiple books.

Codono’s liquidity engine handles all of these approaches. It connects to major exchanges, aggregates their books, and presents unified depth to your users. It’s the single fastest way to go from “empty order book” to “exchange that actually works,” and in our experience, most operators who implement it properly see their trading volume increase by 5-15x within the first month.

One important caveat: aggregation requires capital. When you mirror a trade from Binance, you need funds sitting on Binance to execute the hedging trade. How much capital you need depends on your expected volume, but most operators start with $20,000 to $50,000 allocated across their source exchanges. This is working capital, not a sunk cost — but you do need it available.

Seeding Liquidity: What Actually Works (And What Doesn’t)

Beyond technical solutions like aggregation, you need strategies to attract real traders and incentivize genuine liquidity. Here’s what we’ve seen work — and what’s a waste of money.

What Works

Zero maker fees (or even maker rebates). This is the single most effective tactic for bootstrapping organic liquidity. Maker fees are what you charge traders who place limit orders that add to the book. By making this zero — or even negative, meaning you pay people to place limit orders — you directly incentivize the behavior you need most. Many successful exchanges run negative maker fees of -0.01% to -0.02% for their first 6-12 months. Yes, it costs you money. Think of it as your customer acquisition cost for liquidity. A busy exchange with negative maker fees makes money on taker fees and eventually converts those makers into long-term users.

Trading competitions with real prizes. Run a competition where the top 50 traders by volume over a two-week period win prizes. Not trivial prizes — real money. $10,000 total prize pool distributed across the top 50. This costs you $10K and generates significantly more than that in trading volume and new user registrations. We’ve seen exchanges generate $2M-$5M in competition-period volume from a $10K prize pool. The key is making the tiers accessible enough that someone doesn’t need to trade $1M to win anything. Give smaller prizes for the 20th-50th spots so mid-level traders feel like they have a shot.

VIP programs for high-volume traders. Create a tiered fee structure where traders who hit volume milestones get progressively better rates. Start the first tier at a achievable level — maybe $50,000 in 30-day volume — and go up from there. This isn’t just about fees. Give your VIP traders dedicated account managers, priority support, early access to new coin listings, and API rate limit increases. These traders become your exchange’s backbone.

Targeted maker incentive programs. Identify traders who consistently place limit orders and give them enhanced rebates, personal outreach, and perks. Even 50-100 active makers can transform your order book quality. Some exchanges formalize this with a “designated market maker” program that offers dedicated API connections, fee discounts, and co-location options.

What Doesn’t Work

Fake volume and wash trading. I shouldn’t have to say this, but: don’t do it. It’s immediately visible to anyone using CoinGecko’s trust scores or checking your reported volume against order book depth. Analytics firms like Kaiko and CryptoCompare will flag you. Real traders will avoid you. And increasingly, regulators are cracking down on it. Fake volume is a reputation death sentence.

Airdrop campaigns. Airdrops attract bots and mercenaries who claim the tokens and never return. We’ve seen exchanges spend $50K on airdrops and gain zero long-term traders. The people who show up for free money are definitionally not the people who will pay trading fees.

Listing hundreds of illiquid tokens. Some exchanges think that listing 500 tokens will attract traders. Instead, you end up with 500 trading pairs that each have $30 of daily volume. Focus on 20-30 pairs you can actually make liquid, and add more only when you can support them with real depth.

Measuring Liquidity Health: The Numbers That Matter

You can’t improve what you don’t measure. Here are the specific metrics you should be tracking across every trading pair, ideally in real-time on a dashboard your operations team checks daily.

Bid-ask spread. This is your primary indicator. Track the volume-weighted average spread throughout the day, not just a snapshot. For major pairs like BTC/USDT, target a spread under 0.1%. For mid-cap pairs, under 0.5% is acceptable. Anything over 1% is a red flag that will drive traders away.

Order book depth at 0.5%, 1%, and 2% from mid-price. Depth tells you how much volume a trader can execute without excessive price impact. For your main pairs, aim for at least $50,000 of depth within 1% on each side. Track this over time — if depth is declining, something is wrong with your market making or incentive structure.

Slippage simulation. Run automated checks that calculate the actual execution price for hypothetical market orders of various sizes — $1,000, $5,000, $25,000, $100,000. If a $10,000 market order on your BTC/USDT pair would cause more than 0.1% slippage, your depth needs work.

Volume-to-depth ratio. Divide your 24-hour volume by your average order book depth. An unusually high ratio (high volume relative to thin books) can indicate wash trading. An unusually low ratio (thick books but no volume) means you have market makers but no real traders. Healthy exchanges typically show a ratio where daily volume is 5-20x the average visible depth.

Fill rate for limit orders. What percentage of limit orders placed on your exchange actually get filled? A low fill rate means your traders are placing orders that sit on the book forever without matching. This is a sign that there aren’t enough active takers, and you might need to adjust your taker fee structure or run campaigns targeting active traders.

Time-weighted availability. What percentage of the time does each trading pair have bids and asks within your target spread? If your market makers are going offline during Asian hours or during high-volatility events, you have gaps in your liquidity coverage that need addressing.

Build a dashboard with these metrics. Check it daily. Set alerts for when any metric falls outside acceptable ranges. The exchanges that maintain healthy liquidity are the ones that treat it as an ongoing operational concern, not a set-and-forget configuration.

Professional Market Makers: When to Bring Them In

At some point, you’ll want to evaluate whether hiring a professional market making firm makes sense. These are companies like Wintermute, GSR, Kairon Labs, Keyrock, and Gotbit that specialize in providing liquidity to crypto exchanges.

What they’ll do for you: A professional market maker will deploy capital on your order books, maintaining tight spreads and decent depth across your key trading pairs. Good firms use sophisticated algorithms that adjust quotes based on volatility, inventory risk, and market conditions. They can also support new token listings by providing initial liquidity from day one.

What they cost: This varies enormously, but here’s a realistic range. Most firms charge a monthly retainer of $5,000 to $15,000 per trading pair, plus they’ll want favorable trading terms — usually zero fees or even rebates. Some firms work on a loan model: you lend them tokens (say, 100,000 of your native exchange token), they use those tokens to make markets, and they return the tokens minus a fee at the end of the engagement. Expect to spend $15,000 to $50,000 per month for a professional market maker covering 3-5 trading pairs.

When it makes sense: If you’re past the initial launch phase, have some organic volume but need to level up your liquidity quality to attract institutional traders or get listed on aggregator sites with good trust scores. Also, if you’re launching a native exchange token and need deep, professional liquidity for that pair from day one.

When it doesn’t make sense: If you haven’t solved basic liquidity aggregation first. Professional market makers are a supplement to, not a replacement for, a solid liquidity engine. Also, if your total monthly revenue doesn’t support the retainer costs. A market maker that costs you $20K/month only makes sense if the improved liquidity generates enough additional volume to cover that cost and then some.

Red flags to watch for: Any market maker that guarantees specific volume numbers is likely planning to wash trade. Any firm that asks for unrestricted access to your exchange’s funds is setting you up for disaster. Any firm that can’t explain their risk management approach in plain language is probably winging it. Get references from other exchanges they’ve worked with and actually call those references.

How Codono’s Liquidity Infrastructure Actually Works

I want to get specific here because vague marketing language about “deep liquidity” doesn’t help anyone make real decisions.

Codono’s trading engine is built with liquidity management as a core function, not a bolted-on afterthought. Here’s what that means in practice.

The liquidity engine connects to multiple external exchanges simultaneously — Binance, OKX, Bybit, Kraken, and others — via their APIs and aggregates order book data in real time. It doesn’t just mirror one source; it combines the best prices across all connected venues and constructs a unified order book that typically offers better effective spreads than any single source exchange.

When a trader executes against aggregated liquidity on your platform, the system automatically places the hedging trade on the source exchange. This happens in milliseconds. The trader on your exchange gets fast execution at competitive prices. You earn the spread differential plus whatever fees you charge. It’s a genuine value-creation mechanism, not smoke and mirrors.

For spot trading, this means your users see deep order books from the moment your exchange goes live. No cold-start problem. No empty books driving away your first visitors. For futures trading, the same aggregation principles apply to perpetual swap and futures markets, giving your derivatives platform the depth it needs to handle leveraged positions without excessive liquidation risk from thin books.

The system also includes built-in market making tools. You can configure bot parameters for any trading pair — target spread, order sizes, depth levels, refresh intervals, inventory limits. These aren’t crude bots that dump static orders on the book. They respond to market conditions, widen spreads during high volatility, tighten spreads during calm periods, and manage inventory risk automatically.

Everything integrates with the TradingView charting interface your traders are using, so the liquidity depth is visible in the order book widget and reflected in accurate price candles. Nothing breaks the trader’s experience.

And because you get the full source code with every Codono license, you can customize the liquidity logic for your specific needs. Maybe you want to add a DEX aggregation layer that pulls from Uniswap and PancakeSwap for DeFi tokens. Maybe you want custom spread logic for your native token pair. The exchange platform gives you the foundation; you extend it however you need.

Building Your Liquidity Playbook: A Phased Approach

If this all feels overwhelming, let me simplify it into phases. This is roughly the playbook we recommend to every new exchange operator, adjusted based on their specific market and budget.

Phase 1: Pre-Launch (Weeks 1-4)

Before your exchange goes live, set up liquidity aggregation. Connect to at least two major exchanges as liquidity sources. Allocate $20,000-$50,000 in working capital across those venues. Configure your market making bots for your top 10-15 trading pairs. Test everything in your staging environment, making sure hedging trades execute correctly and spreads are within target.

Set your fee structure with liquidity in mind: zero maker fees, competitive taker fees (0.1% is standard). Design your trading competition for launch week. Have your VIP program ready to roll.

Phase 2: Launch Month (Weeks 5-8)

Go live with aggregated liquidity already running. Your order books should look populated from the first minute. Run your launch trading competition. Personally reach out to crypto trading communities, algorithmic trading groups, and individual high-volume traders. Monitor your liquidity metrics daily and adjust bot parameters as needed.

This is also when you’ll discover which trading pairs need more attention. Maybe your BTC/USDT looks great but your SOL/USDT has gaps. Reallocate resources accordingly.

Phase 3: Growth (Months 2-6)

As organic volume picks up, evaluate professional market making for your top 3-5 pairs. Introduce your maker incentive program to convert active takers into limit-order providers. Start measuring the ratio of aggregated vs. organic liquidity — you want to see the organic percentage growing month over month.

Consider adding more trading pairs, but only ones you can support with real depth. A pair with $0 volume is worse than not having the pair at all, because it makes your exchange look dead.

Phase 4: Maturity (Months 6-12+)

By now, you should have a healthy mix of aggregated and organic liquidity. The best exchanges at this stage start reducing their reliance on external aggregation for major pairs while keeping it active for long-tail pairs. You might negotiate better terms with your market maker based on demonstrated volume. Some exchanges at this stage even become liquidity providers to other, smaller exchanges — turning the liquidity problem into a revenue stream.

The Uncomfortable Truth

Let me close with something that needs to be said directly: liquidity costs money. There is no free lunch here. You can’t launch a crypto exchange for $5,000, list 200 tokens, and expect traders to show up because your UI is pretty.

The exchanges that succeed allocate 30-40% of their total launch budget to liquidity operations. That means working capital for aggregation, market making costs, incentive programs, and trading competitions. If your total budget is $100K, you should be spending $30K-$40K on liquidity. If that sounds like a lot, consider the alternative: spending $100K on everything else and having an exchange that nobody uses.

The technology to solve liquidity is mature. Aggregation works. Market making bots work. Incentive programs work. Professional market makers work. None of it is magic — it’s all operational blocking and tackling that any exchange operator can execute with the right tools and adequate capital.

The question isn’t whether you can solve the liquidity problem. The question is whether you’ll take it seriously enough to actually do it.

If you’re planning to launch an exchange and want to talk specifics about liquidity strategy, start here. We’ve helped hundreds of exchanges navigate exactly this problem, and the initial conversation is always straightforward — we’ll tell you what it’ll take for your specific market and budget, with no sugarcoating.

Your exchange’s survival depends on getting this right. Plan accordingly.