Original Article Title: "The Relationship Between Market Makers and Shitcoin Plummet on the Night of 1011 Catastrophe"

Original Article Author: Aussie Master, Crypto KOL

Today, I saw many KOLs' tweets still being questioned about why many shitcoins were able to almost hit rock bottom on the night of the crash. I used to have similar doubts until I later understood how MM operates within CEX.

This post by @yq_acc specifically discusses the behavior and logic of market makers on the night of the crash, which is very worthwhile for patient individuals who want to understand the operational mechanism.

Today, I will briefly explain the common misunderstandings and questions about MM based on the situation on the day of 1011. If there are any errors in my explanation, market maker friends are welcome to provide feedback. The article is long and dry, totaling 4000 characters, taking 5 minutes to read, the creative process is not easy, thank you for liking, saving, and sharing.

Who Usually Provides Liquidity on CEX?

A centralized exchange CEX actually just provides a platform (casino). In addition to the project team (various gaming tables), traders, and users (gamblers) who are active on the platform year-round, there are various market makers (MMs) that provide liquidity.

Of course, it is not only MM that provides liquidity in practice; sometimes, the project team itself will provide initial liquidity on CEX, especially when listing a new coin. Retail investors who place their own limit orders also contribute to the "market depth," but compared to professional market makers, retail investor liquidity is more "fragile."

Why Does This Role Exist?

The existence of MMs is to ensure that every gaming table can place orders at any time, so that gamblers do not find themselves without counterparties when they want to gamble. In simpler terms, it's like a lubricant; without them, the market would be very "dry."
Without market makers, buyers and sellers would need to match directly, causing significant price spreads, and even small trades could lead to large fluctuations.

If you try to place orders on both large coins and very low-volume small coins in a CEX, you will notice that large coins experience hardly any fluctuations when large funds enter and exit, while small coins may see a 20% pitfall with just a few thousand dollars.

Why Doesn't CEX Do MM Themselves?

The simplest reason is that it requires deploying massive amounts of capital, and secondly, it is due to compliance.

As the number of tokens increases, each token requires liquidity, and this accumulates into a significant figure. From the perspective of a CEX, the most cost-effective approach is to run the casino platform well, allowing various actors to perform, rather than doing everything themselves.

So in heavily regulated regions (such as the United States), exchanges like Coinbase and Kraken must strictly differentiate between matching and market-making business. Coinbase even established a separate market-making subsidiary (Coinbase Prime/MM).

If a CEX engages in market-making, it can easily become both a player and a referee: holding user data (order book, stop-loss points, position direction) while also trading on its own account, leading to conflicts of interest.
This is also one of the reasons why some competitors have sparked controversy by engaging in market manipulation against users.

How Do Market Makers Make Money?

Market makers are mainly divided into two categories: passive market makers and active market makers, each with different ways of making money. Well-known passive market makers include Wintermute, GSR, Amber, and Jump, while active market makers are mostly low-key but numerous, with many meme coins originating from their actions.

The revenue channel for passive market makers mainly comes from incentives provided by the project team (maintaining a 24-hour order book depth). The common structure is a fixed fee plus a variable incentive, such as "monthly fee of $50K + 0.05% of trading volume bonus." Additionally, there is also exchange arbitrage, as they are often active on multiple CEXs and DEXs and exploit price discrepancies for immediate arbitrage opportunities.

Active market makers operate differently. They are often deeply tied to the project team, assisting them in controlling the majority of the circulating chips, and then making money through leveraging to attract upward market momentum, dump during price hikes, or engage in more flexible market behaviors such as short selling. Many previous nightmares of retail investors, such as $TRB, $MYX, and recently $COAI, are all the handiwork of active market makers.

How Many Market Makers Does Each Project Sign?

Many projects may initially sign with around 3 market makers, then after a period of evaluation, comparison, and elimination, they end up with one or two as the main market makers to maintain long-term liquidity support.

Now back to the main topic, why did many meme coins experience an unbelievable instant crash in value during the 1011 event? Was it related to the actions of market makers?

My answer is: yes, and to a large extent.

Firstly, to my knowledge, there are approximately 50-70 active market makers on Binance, supporting the liquidity depth of the majority of tokens during stable market conditions. However, with the rapid expansion of meme coins in the market and the weakening of liquidity, many older and smaller meme coins have liquidity concentrated only near the spread (buy 10 sell 10?). It's like an eggshell.

In normal circumstances, market makers can steadily earn the bid-ask spread through continuous buying and selling, aligning their interests with the project teams and operating smoothly.

During the 1011 USDE de-pegging event that triggered a rapid decline in wBETH and BnSOL prices, leading to a cascading sell-off, a major issue arose in the market: MM's interests clashed significantly with maintaining the project's depth. In simpler terms, whoever continued to support the buy-side depth would face severe selling pressure.

What would you do in this situation?

Let's review the timeline:

· 4:40 am: Real-time tracking data shows the start of a disastrous liquidity exodus. The market depth on major assets began to plummet from $1.2M.

· 5:00 am: Key inflection point as conditions rapidly deteriorated, widening bid-ask spreads, and reducing order book depth. This was the moment when many MM shifted from a defensive posture to a full-on withdrawal.

· 5:20 am: Peak of chaos, with almost no MM left in the market to provide services, especially on smaller assets where only one or two MM were contracted. Once the eggshell was crushed, the bottom of the order book became a vacuum, leading to scenarios of 98% price crashes (retail traders had long stopped placing orders at very low levels).

· 5:35 am: Market makers cautiously began to return, gradually reaching 80%-90% of the pre-disaster levels, but the disaster had already unfolded.

This chart illustrates how liquidity swiftly evaporated:

Therefore, it can be inferred that at that moment, virtually all remaining awake MM had already begun to sense the impending storm by 4:40 and wisely withdrew all their orders within the following 20 minutes, vacating the battlefield early.

More MM later engaged in a stampede-like escape over the next 20 minutes, with panic prevailing. Few were willing to adhere to the MM agreements signed with projects - at that point, avoiding losses far outweighed any rewards promised by the project.

At that moment, all rational traders were in self-preservation mode—no longer seeking profits from spreads but merely aiming to survive.

In reality, MM who failed to wake up in time to identify the problem suffered heavy losses in this wave. Some woke up to find losses in the hundreds of millions of dollars. Future 24/7 cross-time zone readiness is likely to become a standard practice for MM teams.

Why was there such a significant price difference between Binance and other CEXs at that time, and why did no one arbitrage it?

Don't forget, the liquidity on mainstream CEXs is actually provided by the same group of market makers. Wintermute, GSR, Amber, Auros, Cumberland all simultaneously provide liquidity on platforms like Binance, OKX, Bybit, Coinbase, and others. When one platform experiences extreme risk (such as a surge in Binance Futures liquidations),

Market Makers will collectively withdraw all exchange orders to avoid being liquidated by association. Therefore, during the most chaotic period in the market when the price difference between centralized exchanges (CEX) is the largest, the entire market enters a Liquidity Shock state. Binance is the main battlefield of cascading liquidations, with no arbitrageurs stabilizing the coin price, hence the lowest price?

Therefore, the conclusion of my lengthy article is:

The current Market Maker system actually has limitations. While it operates like a well-oiled machine in normal market conditions, it only leads to a panic stampede during black swan events, with everyone scrambling to escape first.

Saying that Binance maliciously stopped trading is just showing a lack of understanding of the MM system. Binance is a big target, but Binance is not equal to MM; these are two different things. Of course, the black swan event was triggered by the USDT circular loan, a structural risk for which Binance bears some responsibility in prevention.

However, this sharp drop has indeed exposed many issues, including the MM system that has operated for many years and appeared to be extremely stable. In the future, if CEXs want to progress further, it is crucial to address how to solve the loose collaboration model that resembles a scattered alliance when a crisis hits.

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