Are crypto market makers the “behind-the-scenes dealers”?

In the crypto industry, the shadow of market makers is often behind the violent fluctuations of some tokens. As the "market makers" hidden behind the scenes, they are often accused of "manipulating the market" by the crypto community. When Worldcion, which was popular some time ago, went online, it was revealed that it had signed an agreement with market makers to lend tokens to five market makers to provide liquidity for WLD.

Today, let’s take a brief look at the mysterious “market maker”.

What is a market maker?

To understand market makers, you need to first understand the concept of liquidity. If an asset can be sold quickly and in full, we can say that it has good liquidity. On the contrary, if an asset can only be sold at a discount or takes a long time to sell, it is illiquid. It describes the degree to which buyers and sellers in the market can buy and sell relatively easily, quickly, and at a low cost.

Just like the pool in DEX, if we buy the same amount of funds in different dex, the amount purchased in UNI and CRV will be different, or the amount of funds obtained by selling the same amount will be different, this is liquidity. We should understand that the quality of project liquidity can directly determine the life and death of the project. If there is no liquidity, the project is equivalent to direct death. Project parties are rushing to go on certain top platforms (going on certain platforms means good news) because going on these platforms means increased liquidity and more potential users.

One of the main functions of the market makers mentioned today is to provide liquidity to the market. Many market manipulations are also based on liquidity.

The concept of market makers originated from the securities market, but it is also applicable to the crypto market . Market makers play multiple important roles in the crypto market and play a key role in the development and operation of the market.

Here are the main roles of crypto market makers:

• Providing liquidity: Market makers provide a high-liquidity environment for market participants by continuously providing quotes for both buyers and sellers, promoting fast transactions, reducing costs, and increasing participation;

• Maintain market stability: When the market fluctuates, we constantly adjust quotation strategies and buy and sell execution to balance supply and demand, prevent drastic price fluctuations, maintain market stability, and provide a more reliable environment;

• Promoting market development and maturity: Providing liquidity for start-up projects, increasing the market's attractiveness and tradability, attracting more investors to participate in the market, and promoting market development and maturity;

• Providing consultation: As important market participants, market makers have accumulated a wealth of market data and information, which are of great reference value to clients and can help them make more informed investment decisions.

The clients of market makers mainly fall into the following categories:

• Trading platform: The trading platform needs to provide a highly liquid market environment to attract more investors and funds into the platform;

• Investment institutions: Investment institutions usually need to conduct large transactions in the market, so they need sufficient liquidity support. Market makers help investment institutions to efficiently execute trading strategies and reduce costs.

• High-frequency trading companies: Market makers provide high-frequency participants with a fast transaction and low-latency environment to meet their needs for high-speed trading;

• Individual investors: Although individual investors buy and sell smaller amounts in the market, they can also benefit from the services of crypto market makers.

Market Maker Development

The development of crypto market makers has gone through the following stages:

Initial stage

• When the crypto market was just emerging, lack of liquidity was a major problem. The platform's order book was often very sparse, with wide bid-ask spreads and high costs. At this stage, some individuals or small teams began to provide market making services to improve market conditions by providing quotes and liquidity. Early arbitrage also belonged to this category;

Professionalization stage

• As the crypto market develops and matures, more and more professional market makers are emerging. These market makers are usually composed of professional teams or companies with richer funds, technology and market experience. They use more advanced algorithms and trading systems to provide higher quality liquidity and tighter bid-ask spreads;

Institutional participation stage

• As institutional investors become more interested in the crypto market, more and more traditional financial institutions and institutional investors are beginning to participate in the crypto market-making business. These institutions usually have larger capital scale and more complete risk management capabilities, which enables them to provide larger-scale liquidity support and bring more participants and trading volume to the market.

Innovation and intensified competition

• As competition in the crypto market becomes increasingly fierce, market makers are also constantly innovating and improving. Some market makers have begun to try new trading models and strategies, such as high-frequency buying and selling, arbitrage, etc., to improve efficiency and profits. At the same time, the continuous advancement of technology has also provided market makers with more tools and means, such as machine learning, big data, etc., to optimize trading decisions and risk management.

Liquidity Incentives

• By the way, Uniswap’s innovative AMM is also a type of market maker. It allows anyone to participate in market making and get paid. As a result, DeFI has been able to develop rapidly and continue to innovate.

Compliance and regulatory enhancement phase

• As the crypto market develops, regulators are also strengthening their supervision of crypto transactions.

Overall, crypto market makers have played an important role throughout the crypto market as they continue to grow and evolve to meet market demands and provide a more efficient buying and selling environment.

How market makers make money

Like traditional market makers, crypto market makers also make profits through the spread between buying and selling. However, due to the lack of regulation in the crypto market, the cost of doing evil is extremely low, and the information flow and initiative are mainly in the hands of the top players in these industries. The image of market makers in the crypto industry is easily linked to "bankers", and retail investors are easily targeted by them.

1) Market makers make profits mainly from the following aspects (which can be put on the table):

• Spread: Market makers make profits by providing bid and ask quotes in the market at the same time, using the bid-ask spread. They will set the buy price lower and the ask price higher to make a profit from the spread. This spread is usually called "Spread" and is one of the main sources of profit for market makers.

• Transaction fees: While providing liquidity, market makers will also charge fees according to the platform's regulations. These fees are paid by participants to the platform, and market makers, as the role of providing liquidity, can obtain a portion of them as profit;

• Arbitrage trading: Market makers often use price differences or market fluctuations between different platforms to conduct arbitrage to make profits. This arbitrage operation usually requires fast execution speed and a highly automated buying and selling system;

• Liquidity rewards: Some platforms or protocols provide rewards to market makers who provide liquidity through liquidity incentive mechanisms, such as token rewards.

It can be seen that the market maker's income comes mainly from two sources:

A. Serving the project party

B. Serving the trading platform

2) The relationship between market makers and project owners

The relationship between the project party and the market maker is mainly established by providing liquidity services. Especially when a new project is just launched, market makers are needed to manage prices. Market makers play three main roles:

A. Providing liquidity

B. Stabilize prices to prevent projects from failing due to excessively high or low prices

C. Market value management, improve project visibility

In addition to providing liquidity, market makers will also help project parties formulate token price strategies and help the team cash out. The cooperation terms and contracts between market makers and project parties will stipulate the rights and obligations of both parties, including reserve requirements, cooperation period, profit sharing and other issues. In general, the cooperation methods and terms between project parties and market makers will vary according to the specific circumstances of both parties. They need to cooperate on the basis of consensus and comply with relevant legal frameworks. Market makers will choose well-known projects to cooperate to increase brand exposure, and project parties will also choose well-known market makers to increase the success rate of the project. It should be noted that many market makers are not only market makers, but also investment institutions, so that they can better support investment projects.

3) The relationship between market makers and trading platforms

Liquidity is the most fundamental infrastructure of a trading platform, so the platform will give market makers many benefits, such as fee discounts, leverage funds, deposit and withdrawal limits, API internal channels, and institutional client accounts/accounting systems. These benefits are aimed at attracting and supporting market makers to provide liquidity support for the trading platform.

It should be noted that different platforms may have different requirements and cooperation models for market makers. Some platforms may designate specific market makers for cooperation. After a new project is launched, the project must cooperate with the designated market maker before it can be listed.

Market makers are at the top of the food chain in the crypto industry, but they are not guaranteed to be profitable and will also face market risks and liquidity risks. The chain reaction caused by the previous Luna collapse led to the complete collapse of market makers and the depletion of market liquidity. However, this is also related to the imperfect supervision of the industry, the lack of transparency in the industry, various misappropriation of user funds, and arbitrary leverage. Alameda Research is a typical representative.

Mainstream Market Makers

There are many market makers in the crypto industry, but since there is still a big gap between the crypto market and traditional finance, market makers can easily form a monopoly by cooperating with trading platforms. The liquidity of the market is dominated by several large market makers. Here we introduce several well-known ones (the market makers of many projects are not public, so only some are listed):

• Jump Trading: A high-frequency trading giant founded in 1999. Market making projects: Solana ecosystem, various dex, LUNA, MASK, LDO, etc.

• WintermuteTrading: A digital asset algorithmic trading company established in 2017. Market making projects: OP, BIUR, ARB, etc.

• DWF Labs: established a global Web3 venture capital and market maker, and suddenly entered the public eye in 23 years. Market making projects: CFX, MASK, ACH, FET, YGG. Recently, it has been accused of manipulating the market due to the sharp fluctuations of YGG, DODO and other projects;

• Sigma Chain: A crypto asset trading company registered in Switzerland. The SEC stated in the lawsuit against a certain An that CZ is its actual owner.

• Galaxy Digital: Crypto and blockchain asset management company founded in 2018;

• B2C2: A crypto financial services company founded in 2015 that trades and markets crypto assets worldwide;

• GSR: A crypto financial services company founded in 2013 and headquartered in Hong Kong;

• Amber Group: A global crypto fintech company headquartered in Hong Kong, founded in 2017.

The market making services and specific details of many projects are not public. Many comments are only fragments of information revealed through interviews with market makers, and most of them are in a state of "making a fortune in silence". After all, if ordinary investors know who "cut" him, his reputation will be ruined, so it is better to be in anonymity. Just like the previous WLD market making related information and various details, it was still picked out by netizens on Twitter from various details.

summary

The above is the relevant content about market makers. As key participants in the crypto market, market makers play an important role in maintaining market liquidity, improving market efficiency and reducing costs. For investors, understanding the relevant knowledge of market makers will help them participate in the market.