# Liquidity Strength

Liquidity Strength (LS) measures the ratio between the available liquidity of a token compared to its market capitalization. This is calculated by dividing a project’s total valid extractable liquidity (the sum of the hard assets in all valid liquidity pairs across all pools) by the project’s market capitalization (the circulating supply of the token multiplied by the spot price of the token). This metric is designed to look at if a project is maintaining enough liquidity compared to how large the market for the project’s token is. In other words: is there enough capital backing the token you are holding, or are you holding an empty bag that you cannot actually liquidate because the token is illiquid?

Simply put, LS looks to answer the following question: Does this project have enough liquidity based on its MCAP?

$LS = Z * t1$

*for*$Z <= threshold$

$LS = 1$

*for*$Z > threshold$

****

*where:*

$Z = (\frac{e^{X/s} - e^{-X/s}}{e^{X/s} + e^{-X/s}})^β * Y^α$

$threshold = 1 / t1$

*Boundaries for plots ("sus" region):*

$LB(X) = (0.7/t1)^{1/α}*(\frac{e^{X/s} - e^{-X/s}}{e^{X/s} + e^{-X/s}})^{-β/α}$

$UB(X) = (1/t1)^{1/α}*(\frac{e^{X/s} - e^{-X/s}}{e^{X/s} + e^{-X/s}})^{-β/α}$

*Constants configs.:*

*For MCaps <= $250M:*

$t1=14.4$

$s=1,062,000,000$

$β=0.31$

$α=0.69$

*For MCaps > $250M:*

$t1=18.4$

$s=3,000,000,000$

$β=0.37$

$α=0.63$

*Variables description:*

**

$X$

*: Market cap. in usd*

**

$Y$

*: Extractable liquidity to market cap. ratio*

We look at the relationship between total valid extractable liquidity (from rented + owned) and the sustainability range upper bound.

Anything below the range entirely is considered unsustainable liquidity. Those projects score between 0 and 70. If you are on the lower bound of the sustainability range you would have a score of 70. As you move higher into the range, you can reach a score of 100. Anything above the range is also defined as 100 for now.

In a later version of the LHD credentialing system we will start to look at what is ‘too much’ liquidity that it is capital inefficient. But for now we are focusing on what's the minimum amount of liquidity a project needs as most of the industry is undercapitalized from a liquidity perspective.

Last modified 7mo ago