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I sometimes encounter statements like "XLM is the most liquid asset on the stellar network" or "XLM has trading pairs with all other assets on the network", etc.

Is there something in the protocol that necessitates this? e.g. do all anchors have to create an order book to trade their assets with XLM? even so, if no one chooses to use the order book then there may be other assets on the network with higher liquidity, no?

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I believe it's argued that XLM is the most liquid asset because it is ubiquitous. (At least, that's why I think it will always be).

The ability for an account to hold an asset requires a trust line to be established in all cases except for XLM. Therefore, an account can work with XLM at all times, but requires effort and XLM to extend its reach to other assets.

  • When an account trusts no assets, it can be used to convert to and from real world things & XLM via an anchor.
  • When it trusts one asset, it can also offer to buy or sell that asset for XLM on the network (but only with other parties who also trust that asset).
  • When it trusts n assets, it can directly trade those assets, but if there is no depth in the order book for a specific pair it can trade via any other asset or, more likely, XLM.

It is possible that one day a secondary asset will become so popular that it is traded with greater frequency than XLM. So it may not always be the case that XLM is the most liquid. It's also perhaps likely that the network's participants are evolving now to become forever reliant on XLM. I'm just guessing though.

do all anchors have to create an order book to trade their assets with XLM?

Anchors are not responsible for creating order books. The DEX takes care of that when offers are made. The responsibility of an anchor is to be a deposit-taker - exchanging off-network assets for the on-network token and vice versa. After a token is issued other entities such as backend-applications, wallets and even users on a site like the laboratory can interact with the order books.

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    However anchors are expected to provide liquidity by filling the XLM order book on both sides. I mean, they don't have to but then nobody would use it.
    – Mister Ticot
    Aug 12, 2018 at 21:36
  • Thank you @MisterTicot, that helps make clear the chicken & egg question I've had in the back of my mind for a while about the anchor business model.
    – Synesso
    Aug 13, 2018 at 0:55
  • "When it trusts n assets, it can directly trade those assets, but if there is no depth in the order book for a specific pair it can trade via any other trusted asset or, more likely, XLM." Is this accurate? IIUC you only need trust to hold an asset but you don't have to trust all assets on the payment path, only the final one.
    – hillel
    Aug 13, 2018 at 5:47
  • That's my understanding too @hillel - the word "trusted" was not intended there. Thanks.
    – Synesso
    Aug 13, 2018 at 7:43
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    Thanks @Synesso. Recapping the answer and comments, IIUC, at the protocol level the main differentiator for XLM is that there's no need to explicitly trust the asset in order to put offers to trade from/to it. Still, it seems the liquidity of XLM does depend on network participants actually putting these offers, which is not strictly guaranteed. Based on your answer and on MisterTicot's comment, it seems that there's a network effect at work here: the more popular XLM becomes, the higher the incentive for asset issuers to make sure their assets trade with it, etc. Does that make sense?
    – hillel
    Aug 13, 2018 at 8:14

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