Partnered With:

Is there market manipulation by cryptocurrency market makers?

Read this article in 15 Minutes

As the top of the food chain in the cryptocurrency industry, market makers do not guarantee profitability and also face market and liquidity risks.

The content you provided is:

Source: Plain Language Blockchain

In the encryption industry, the violent fluctuations of some tokens are often attributed to the shadow of market makers. As the "market makers" hidden behind the scenes, they are often accused of "market manipulation" by the encryption community. Recently, the popular Worldcoin was revealed to have 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".

01 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. Conversely, if an asset can only be sold at a discount or requires a lot of time to sell, it lacks liquidity. It describes the degree to which buyers and sellers in the market can trade relatively easily, quickly, and at low cost.

Just like pools in DEX, the amount of tokens purchased in UNI and CRV will differ with the same amount of funds, or the amount of funds received will differ with the same amount of tokens sold. This is liquidity. We should understand that the liquidity of a project can directly determine its life or death. Without liquidity, the project is essentially dead. The reason why project parties rush to list on certain top platforms (listing on certain platforms means good news) is because listing on these platforms means increased liquidity and potential users.

Today we will talk about market makers, whose primary role 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 in the cryptocurrency market. Market makers play multiple important roles in the cryptocurrency market and play a crucial role in the development and operation of the market.

以下是加密做市商的主要作用：

The following is the main role of cryptocurrency market makers:

Provide Liquidity

Market makers provide a high liquidity environment for market participants by continuously providing bid and ask prices, promoting fast transactions, reducing costs, and increasing participation.

Maintaining Market Stability

During market fluctuations, balance the supply and demand relationship by continuously adjusting pricing strategies and buying and selling execution to prevent drastic price fluctuations, maintain market stability, and provide a more reliable environment.

Promoting Market Development and Maturity

Providing liquidity for start-up projects increases market attractiveness and tradability, attracting more investors to participate in the market and promoting market development and maturity.

Provide Consultation

As an important participant in the market, market makers have accumulated rich market data and information. These data and information have important reference value for customers and can help them make more informed investment decisions.

The main types of clients for market makers are:

Trading Platform: The trading platform needs to provide a highly liquid market environment to attract more investors and funds to enter the platform.

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

High-frequency trading companies: Market makers provide high-frequency participants with a fast and low-latency environment that meets their need for high-speed trading.

Individual investors: Although individual investors trade on a smaller scale in the market, they can also benefit from the services of cryptocurrency market makers.

02 Market Maker Development

The development of encryption market makers can be divided into the following stages:

Initial Stage

When the encryption market first emerged, a lack of liquidity was a major issue. The platform's order book was often very sparse, with large bid-ask spreads and high costs. At this stage, some individuals or small teams began to provide market-making services, improving market conditions by providing quotes and liquidity. Early arbitrage also falls into this category;

Professionalization Stage

With the development and maturity of the encryption market, more and more specialized 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, which can provide higher quality liquidity and tighter bid-ask spreads.

Participation Stage of Institutions

Innovation and Intensified Competition Stage

Like traditional market makers, crypto market makers also profit from buying and selling spreads. However, due to the lack of regulation in the crypto market, the cost of wrongdoing is extremely low, and information flow and initiative are mainly controlled by the top players in the industry. Market makers in the crypto industry are easily associated with "market manipulation", and individual investors are easily targeted for their profits.

1) The profit model of market makers mainly comes from the following aspects (can be mentioned on the table):

Spread: Market makers make profits by providing both buy and sell quotes in the market, using the spread between the buy and sell prices. They set the buy price lower and the sell price higher, and profit from the difference in price. This difference is usually referred to as "Spread" and is one of the main sources of profit for market makers.

Transaction fees: Market makers provide liquidity and also charge transaction fees according to the platform's regulations. These fees are the costs paid by participants to the platform, and market makers can earn a portion of them as profits.

Arbitrage Trading: Market makers typically use price differences or market fluctuations between different platforms to engage in arbitrage and generate profits. This type of arbitrage operation usually requires fast execution speed and highly automated trading systems.

Liquidity Incentives: Some platforms or protocols provide rewards to liquidity providers, such as token rewards, through liquidity incentive mechanisms.

It can be seen that the main sources of income for market makers are two-fold:

A. Serving Project Parties

B. Serving trading platforms

The relationship between the project party and the market maker is mainly established through the provision of liquidity services, especially when new projects are launched and market makers are needed for price management. The role of market makers is mainly threefold.

A. Provide Liquidity

B. Stable prices to prevent project failure due to excessively high or low prices

C. Market Value Management, Enhancing Project Visibility

3) The relationship between market makers and trading platforms

It should be noted that different platforms may have different requirements and cooperation models for market makers. Some platforms may specify specific market maker partnerships, and new projects must cooperate with the designated market makers in order to go public after launch.

As the top of the food chain in the cryptocurrency industry, market makers do not guarantee profitability and also face market and liquidity risks. The previous Luna crash caused a chain reaction that led to the complete collapse of market makers and the drying up of market liquidity. However, this is also related to various problems such as inadequate industry regulation and transparency, as well as the misuse of user funds and arbitrary leverage. Alameda Research is a typical representative of this.

04 Mainstream Market Makers

There are many market makers in the cryptocurrency industry, but due to the significant differences between the cryptocurrency market and traditional finance, it is easy for market makers to form monopolies when working with trading platforms. As a result, market liquidity is dominated by a few large market makers. Here, we introduce several well-known market makers (although many projects' market makers are not publicly disclosed, so only a few are listed):

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

Wintermute Trading: A digital asset algorithmic trading company founded in 2017. Market-making projects include OP, BIUR, ARB, and more.

DWF Labs: Established a global Web3 venture capital and market maker, suddenly entered the public's view after 23 years. Market-making projects include CFX, MASK, ACH, FET, YGG, and recently accused of market manipulation due to the significant fluctuations in projects such as YGG and DODO.

Sigma Chain: A cryptocurrency trading company registered in Switzerland. The SEC referred to CZ as its actual owner in a lawsuit against a certain security company.

Galaxy Digital: A cryptocurrency and blockchain asset management company founded in 2018;

B2C2: A cryptocurrency financial services company founded in 2015, conducting trading and market making of cryptocurrency assets globally.

GSR: A cryptocurrency financial services company founded in 2013, headquartered in Hong Kong;

Amber Group: A global cryptocurrency and financial technology company headquartered in Hong Kong, founded in 2017.

Many project's market-making services and specific details are in a non-public state, and many comments are leaked through interviews with some market makers, mostly in a "keep quiet and make big money" state. After all, if ordinary investors know who "cut" them, their reputation is not guaranteed, and it is better to remain hidden. Just like the previous WLD market-making related information and various details, they were still dug out by netizens from various details on the push platform.

05 Summary

Above is the relevant content about market makers. As a key participant in the cryptocurrency 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 be helpful in participating in the market.