Have you ever wondered how the prices of cryptocurrencies are determined? 

How can you buy or sell your favorite coins anytime with minimal delay and slippage? 

Who are the mysterious actors that provide liquidity and stability to the crypto markets?

The answer to these questions lies in the role of market makers. 

If you’ve ever bought or sold a cryptocurrency, you’ve interacted with market makers, whether you knew it or not. These financial architects are the bedrock of liquidity, yet their strategies are covered in mystery. 

In this article, you will learn what is market making, their role, and strategies to keep the crypto market liquid, which enables users to buy and sell crypto 24/7.

Driving Liquidity and Efficiency: The Essential Role of Crypto Market Makers.

What Is a Market Maker in Crypto?

Market makers are individuals or entities that play a critical role in facilitating trading activities within the cryptocurrency markets. They act as intermediaries, providing liquidity by continuously offering to buy and sell a particular cryptocurrency at publicly quoted prices. 

Think of them as the backbone of the crypto market, ensuring that there’s always someone willing to trade, whether you’re buying or selling. 

Subsequently, I will use MM, representing Market Maker or MMs Market Makers. 

How Does Crypto Market Making Work?

Continuous Presence: They stand ready to execute trades anytime, ensuring that someone is always available to buy or sell a cryptocurrency. Their trading systems operate 24/7.

Order Book Management: MMs maintain an order book with both buy and sell orders for a specific cryptocurrency. These orders are displayed on cryptocurrency exchanges and updated in real time. 

Monitoring Market Conditions: MMs continuously monitor market conditions, adjust their bids, and ask prices accordingly. They consider trading volume, price movements, and news events that may impact the cryptocurrency’s value.

Risk Management: MMs manage their inventory of cryptocurrencies to mitigate risks. They aim to balance their positions to avoid exposure to significant price fluctuations. This involves monitoring their holdings and making adjustments as needed.

Providing Liquidity: The presence of MMs ensures liquidity in the market, making it easier for traders to enter and exit positions. Traders can buy or sell cryptocurrencies promptly, even in markets with low trading volumes.

Competition: The crypto market-making space is highly competitive, with various MMs vying for market share. This competition benefits traders by driving innovation and improving market quality.

Income Stream Options

Every business aims to make money. MMs are not running a charity organization. 

The fact that they are helping crypto projects and the Web3 space to provide liquidity goes without saying that the potential profit benefit is the motivation to continue providing such services. 

MMs earn income through the spread, which is the difference between the price at which they are willing to buy an asset (the bid price) and the price at which they are eager to sell it (the asking price). 

This spread represents their profit margin. When traders or investors execute orders, they typically buy at the ask price and sell at the bid price. The market maker captures this price difference as a profit.

Furthermore, MMs often trade in high volumes, aiming to profit from the spread of many trades. They also employ algorithmic trading strategies to optimize their income. These algorithms automatically execute trades based on predefined criteria and market conditions, enabling MMs to capture arbitrage opportunities and short-term price fluctuations. 

Why is the Spread Important?

You must have heard traders avoid exchanges with higher spreads. This is because spread reduces the trading volume of traders or investors. 

Spread reflects the risk and cost of market making. A wider spread means less liquidity, more volatility, or more competition in the market. 

This can make it harder for the market maker to execute trades at favorable prices or to maintain a balanced inventory of securities. 

A wider spread can discourage other traders and investors from entering the market, reducing the overall demand and supply. Therefore, the MM has to balance the trade-off between maximizing profit and minimizing risk when setting the spread.

The spread can also affect the efficiency and stability of the market. A narrower spread means the transactions are executed at fair prices with minimal costs and delays. 

This can improve the price discovery process and reduce the information asymmetry between market participants. 

A narrower spread can also increase the trading volume and interest in the security, enhancing the liquidity and depth of the market. Therefore, the spread can have a significant impact on the functioning and performance of the market.

Strategies Crypto Market Makers Use to Make Profit Profit. 

MMs employ various strategies to remain profitable while providing liquidity to cryptocurrency markets. 

Here are some examples of strategies market makers use in the crypto space:

Continuous Two-Sided Quoting: MMs continuously quote bids and ask prices for a specific cryptocurrency pair, such as ETH/UNI, ARB/BNB, BTC/ETH, etc. 

They aim to offer competitive prices close to the current market price. This strategy ensures that they are always ready to facilitate trades.

Statistical Arbitrage: Market makers use statistical models, crypto narratives, and historical data to identify price discrepancies or patterns between cryptocurrency exchanges. They then execute trades to profit from these disparities as prices converge.

Time-Weighted Average Price (TWAP): This strategy involves executing trades over a specified time period to avoid impacting the market with large orders. 

If an MM wants to liquidate $10 billion worth of Arbitrum, he will not liquidate it once in the market. 

He will take a few days or weeks to gradually dump these tokens in the market so it doesn’t affect the price of Arbitrum. 

If $10 billion Arbitrum is liquidated at once in the market, it will dump the price of Arbitrum, and investors and traders will panic sell, which would cause MMs to sell lower than they expected. 

Market-On-Close (MOC): MMs use MOC orders to execute a large volume of trades at the closing price of a trading session. This strategy aims to capture the closing price spread while minimizing market impact.

Delta Hedging: MMs often hedge their risk exposure by maintaining positions in the underlying cryptocurrency. They adjust their holdings to remain delta-neutral(explained below), meaning they are not exposed to directional price movements.

Pairs Trading: This strategy involves trading a long position in one cryptocurrency and a short position in another related cryptocurrency. MMs identify historically correlated pairs and execute trades based on deviations from their correlation.

Arbitrage: MMs engage in arbitrage opportunities by simultaneously buying and selling the same cryptocurrency or related assets on different exchanges to profit from price differences.

News-Based Trading: MMs monitor news and events that can impact cryptocurrency prices. They may adjust their spreads and risk exposure in response to significant news developments. 

Cross-Exchange Liquidity Mirroring

Cross-exchange liquidity Mirroring is how MMs make money by buying and selling the same crypto on different exchanges. 

For example, MMs can buy ETH on one exchange and sell it on another for a higher price. They do this because the prices of ETH are not always the same on different exchanges. 

Sometimes, one exchange has more buyers or sellers than another, which makes the price go up or down.

To do this, 

MMs set up accounts on two exchanges with the same trading pair, such as ETH/USDT.

Add some money on both exchanges to buy and sell ETH.

Set some rules, such as how much ETH they want to buy or sell, how much profit they want to make, and how often they wish to update their orders.

You then use software like Hummingbot that helps you find the best prices on both exchanges and place your orders accordingly. 

This software will also help you hedge your trades, meaning you will always buy or sell the same amount of ETH on both exchanges simultaneously. This way, you will not lose money if the price of ETH changes suddenly.

For example, you want to buy 1 ETH on exchange A and sell it on exchange B for a 1% profit.

 The software will check the prices on both exchanges and find that exchange A has a price of 3000 USDT and exchange B has a price of 3030 USDT. 

The software will then place a buy order for 1 ETH at 3000 USDT on exchange A and a sell order for 1 ETH at 3030 USDT on exchange B.

 If someone fills your orders, you will profit 30 USD (minus the fees).

However, if the price of ETH changes before someone fills your orders, you might lose money. 

For example, if the price of ETH drops to 2900 USDT on both exchanges, your buy order on exchange A will be filled, but your sell order on exchange B will not. You will then have 1 ETH that is worth less than what you paid for it. 

To avoid this, the software will also hedge your trades by placing a corresponding order on the other exchange as soon as one of your orders is filled. 

For example, if your buy order on exchange A is filled, the software will immediately place a sell order for 1 ETH at 2900 USDT on exchange B. 

This way, you will not lose money even if the price of ETH changes.

Cross-Exchange Liquidity Mirroring is different from arbitrage because you are not just looking for existing price differences between two markets, but you are also creating them by placing your orders. 

You act as a market maker on one exchange and a market taker on another.

Market Makers engage in Cross-Exchange Liquidity Mirroring for the following reasons. 

• Arbitrage opportunities 
• Risk diversification 
• Improved market-making
• Efficient use of capital

Arbitrage Opportunities: By mirroring liquidity across multiple exchanges, market makers identify and capitalize on price differences (arbitrage opportunities) between those exchanges. This allows them to profit from price disparities in real time.

Risk Diversification: Spreading liquidity across multiple exchanges helps market makers diversify their risk. They are less exposed to price fluctuations on a single exchange, reducing the potential impact of adverse market movements.

Improved Market Making: Mirroring liquidity enhances a market maker’s ability to provide competitive bid-ask spreads and deeper order books on multiple platforms. This attracts more traders and improves the overall quality of their market-making services.

Efficient Use of Capital: Market makers can allocate their capital more efficiently by directing it to exchanges with higher trading volumes or more significant trading opportunities. This ensures that they maximize their profit potential.

Market Making Without Hedge

Market making without hedging, often called “unhedged market making,” involves providing liquidity to a market by buying and selling assets without actively hedging or offsetting those positions. While this approach can be profitable, it also exposes market makers to higher levels of risk.

To illustrate how market-making without hedging works, let’s use a simple example with the following assumptions:

• You are a market maker for ETH/USDT on a cryptocurrency exchange.
• You have 10 ETH and 10,000 USDT in your account.
• You use Hummingbot to run your market-making strategy with the following parameters:
• Order amount: 0.5 ETH
• Minimum profitability: 0.5%
• Order refresh mode: fixed
• Order refresh time: 10 seconds
• Inventory skew enabled: false
• Inventory target base percent: 50%

Here is what you do:

– You monitor the prices on the exchange, calculate the optimal bid, and ask prices for your orders based on your parameters. For example, if the market price is 1000 USDT per ETH, you set your bid price at 995 USDT and your ask price at 1005 USDT, which gives you a spread of 1% and a minimum profitability of 0.5%.

– You place your orders on the exchange and wait for them to be filled by other traders.

– If one of your orders is filled, you update your inventory and place a new order with the same amount and price on the same side. For example, if someone sells you 0.5 ETH at 995 USDT, you now have 10.5 ETH and 9950 USDT in your account. You then place another buy order for 0.5 ETH at 995 USDT.

– If the market price changes significantly, you cancel your orders and place new ones with updated prices based on your parameters. For example, if the market price drops to 900 USDT per ETH, you cancel your buy order at 995 USDT and your sell order at 1005 USDT. You then place a new buy order for 0.5 ETH at 895 USDT and a new sell order for 0.5 ETH at 905 USDT.

– You repeat this process until you reach your desired profit profit or stop loss.

Market making without hedging can be a profitable strategy if you can accurately predict the supply and demand of the asset and adjust your prices accordingly. However, it also involves a lot of risks, such as:

– Price risk: The market maker can lose money if the asset price moves against their net position. 

– Liquidity risk: The market maker can face difficulty closing their positions if there is not enough trading volume or interest in the asset.

– Execution risk: The market maker can incur losses due to delays, errors, or failure to place or fill orders.

– Regulatory risk: The market maker can face legal or regulatory consequences for engaging in market making without hedging. 

Delta Neutral Market Making

Delta neutral market making is a sophisticated trading strategy that market makers and traders employ to minimize directional risk in their portfolios while providing liquidity to financial markets. 

In this context, the term “delta” refers to the sensitivity of the option or derivative position to changes in the underlying asset’s price. 

Let’s break it down a bit. 

Delta in Options and Derivatives: In options and derivatives trading, “delta” is a measure that quantifies how much the price of the option or derivative is expected to change in response to a one-point movement in the underlying asset’s price. Delta values range from -1 to 1, where:

A delta of 1 means the option or derivative moves in perfect correlation with the underlying asset (e.g., a call option with a delta of 1 will increase in value by $1 for every $1 increase in the underlying asset’s price).

A delta of -1 means the option or derivative moves inversely to the underlying asset (e.g., a put option with a delta of -1 will decrease in value by $1 for every $1 increase in the underlying asset’s price).

A delta of 0.5 means the option or derivative is expected to move half as much as the underlying asset.

Grid Trading 

Grid trading is often used in market making and trading financial assets, including cryptocurrencies.

It involves creating a grid or network of buy and sell orders at predefined price levels, intending to profit from price fluctuations within that grid.

Here’s a breakdown of what grid trading means in the context of market making:

Price Levels: Grid trading starts by selecting specific price levels or points on the price chart. These levels are typically evenly spaced and can be above and below the current market price. For example, if the current market price of a cryptocurrency is $100, a grid trader might place orders at $95, $97, $99, $101, $103, and so on.

Buy and Sell Orders: A grid trader places a buy (bid) order and a sell (ask) order at each selected price level. This means that for each price point, there are two orders: one to buy if the price reaches that level and one to sell if the price rises to that level.

Grid Spacing: The spacing between each buy and sell order is known as the grid spacing. This spacing can vary based on the trader’s risk tolerance and market volatility. In some cases, traders may use a fixed grid spacing, while others may use dynamic spacing based on market conditions.

Profit from Price Range: Grid trading aims to profit from price fluctuations within the established grid. When the market price moves up or down, it triggers buy or sell orders at the predefined levels. As a result, the trader buys low and sells high within the range, generating profits from the price movements.

Continuous Adjustment: Grid traders monitor market conditions and adjust their grid as needed. If the price moves outside the established grid, they may create a new grid at the updated price levels. This allows them to adapt to changing market dynamics.

Range-Bound Markets: Grid trading is particularly effective in range-bound or sideways markets where prices tend to move within a defined price range. The strategy can capitalize on the price oscillations between support and resistance levels in such markets. 

Market Making Program for Token Projects and Exchanges

A market-making program for token projects is a service that helps new or existing token projects increase the liquidity, accessibility, and visibility of their tokens in the crypto market. 

Market-making programs usually involve providing continuous buy and sell orders for the token on various platforms, such as centralized or decentralized exchanges, to facilitate transactions and reduce the bid-ask spread. 

It may also offer other benefits, such as exchange listing for projects, incentive alignment, risk management, and customized liquidity solutions. 

Market-making programs are important for token projects because they can help them attract more traders and investors, enhance their reputation and credibility, and improve their token price discovery and stability. 

Programs like this can also help token projects overcome challenges and risks associated with the crypto market, such as low liquidity, high volatility, market manipulation, and regulatory uncertainty. 

Many professional market makers offer market-making programs for token projects, each with their features, strategies, and fees. 

Some of the examples of market makers are 

Wintermute, Sixtant, GotBit and many more. More on this below. 

What is the Crypto Market Making Bots?

Crypto market-making bots are automated trading software programs designed to provide liquidity and optimize trading activities on cryptocurrency exchanges. 

Market-making services offered by these bots are essential for maintaining orderly and liquid markets for various crypto assets. 

The following are crypto market-making bots and their services:

1. Liquidity Provision: Market-making bots excel at providing continuous buy and sell orders on cryptocurrency exchanges 24/7. They create depth in the order book, ensuring traders can execute their orders efficiently.

2. Bid-Ask Spread Management: Market-making bots actively manage bid and ask spreads to provide competitive and narrow spreads. Narrow spreads attract traders and reduce their trading costs.

3. Order Book Management: These bots monitor the order book and adjust their orders in response to market movements. They may place limit orders at various price levels, ensuring the order book remains balanced.

4. Price Discovery: Market-making bots contribute to price discovery by providing reference prices in the order book. Traders often use these prices to gauge the fair market value of an asset.

5. Risk Management: Effective risk management is crucial for market-making bots. To minimize potential losses, they typically employ risk-limiting measures, such as position sizing, stop-loss orders, and dynamic order adjustments.

6. High-Frequency Trading: Some market-making bots engage in high-frequency trading, rapidly executing many orders in milliseconds. This strategy is well-suited for liquid markets with low latency.

7. Algorithmic Trading Strategies: Market-making bots may use various algorithmic strategies to optimize their trading, including statistical arbitrage, pairs trading, and mean reversion.

8. Exchange Connectivity: They connect to multiple cryptocurrency exchanges simultaneously, allowing them to provide liquidity on various trading pairs and markets.

10. Scalability: These bots can be scaled to handle increased trading volumes and adapt to changes in market conditions. 

What is a broker? Are brokers and Market Makers the Same? 

A broker is a person or firm that acts as an intermediary between an investor and a securities exchange. A broker can help investors buy and sell stocks, bonds, mutual funds, and other assets for a commission or a fee. A broker can also provide their clients with advice, research, and other services.

A market maker is a person or firm that creates liquidity in the market by placing buy and sell orders for an asset at different prices. A market maker can profit from the difference between the prices they offer to buy and sell, also known as the spread. A market maker also helps to reduce the volatility and improve the efficiency of the market.

Differences between a broker and a market maker

A broker;

• acts as an agent for their clients, while a market maker acts as a principal for their account.
• executes orders on behalf of their clients, while a market maker executes orders on behalf of themselves.
• charges commissions or fees for their services, while a market maker earns spreads or rebates for their trades.
• does not directly impact the asset’s price, while a market maker influences the asset’s price by adjusting their orders.
• A broker does not take any risk from holding an inventory of assets, while a market maker takes risk from holding an inventory of assets.

List of the Best Crypto Market Makers.

• GSR Markets
• Kairon Labs
• Bluesky Capital
• Wintermute
• Jump Trading
• Algoz
• Acheron Trading
• Alameda Research
• Jane Street
• Gotbit
• Pulsar Trading Capital
• Sixtant

GSR Markets

GSR Markets is a market maker in the crypto industry that provides liquidity solutions for token projects, institutional investors, miners, and leading cryptocurrency exchanges. 

According to its website, its mission statement is:

“Powering Crypto Innovation. GSR has ten years of deep crypto market expertise as a market maker, investment advisor, and active, multi-stage investor. We build long-term relationships by offering exceptional service, expertise, and trading capabilities tailored to the specific needs of our clients.”

GSR Markets has helped many crypto projects in the past to provide its services, such as:

• Invested $10.4 million in LimeWire
• Invested in South African crypto exchange VALR
• Invested in Soma.finance
• Partnered with BloXroute

Kairon Labs

Kairon Labs is a crypto market-making and advisory firm that provides liquidity solutions for digital asset issuers, cryptocurrencies, and tokens. 

They use algorithmic trading software to offer various services, such as:

• Market making
• Liquidity provision
• Advisory

Kairon Labs has helped over 300 clients in the past four years, focusing on digital assets, partnerships, and exchange listing. 

They envision enabling easy access to financial markets through transparent and professional services centered around digital asset or token liquidity. 

Bluesky Capital

Bluesky Capital is a market maker in the crypto industry that provides liquidity solutions for token projects and exchanges.

They offer other services, such as crypto asset and quantitative investment management. 

It is based in New York, USA, and has offices in London, UK, and Singapore. The company was founded in 2014 and has been in the crypto market-making business since 2017. 

Wintermute

Wintermute is based in London, England, and has offices in Singapore and Toronto, Canada. The company was founded in 2017 and has been in the crypto market-making business since then. 

Wintermute has helped over 300 clients in the past four years, focusing on digital assets, partnerships, and exchange listing. They envision enabling easy access to financial markets through transparent and professional services centered around digital asset or token liquidity. 

Jump Trading

Jump Trading is a proprietary firm that uses high-frequency trading (HFT) and algorithmic trading across various financial markets, including equities, futures, options, cryptocurrencies, and more. 

They don’t just deploy capital but partner with projects to improve from their wealth of experience. 

It was founded in 1999 by Paul Gurinas and Bill DiSomma. Since its inception, it has grown to become a prominent player in the world of electronic trading.

Algoz

Algoz is a company that provides crypto asset management and technology development services, including market-making solutions for digital assets and trading platforms.

Zerodha, a brokerage firm in India, offers a product that allows its clients to create and run customized market-making and arbitrage bots for crypto assets.

Algoz is based in Raanana, Israel, and has been in business since 2018. It has helped many crypto projects and exchanges with its services, such as Cardano, Binance, Kraken, Bitfinex, Crypto.com, and more.

Acheron Trading

Acheron Trading is a designated market maker(DMM) that provides liquidity and trading solutions for various digital assets. It was founded in 2018 by Wesley, the CEO, with more than a decade of experience in digital asset transactions.

It has helped many crypto projects and exchanges with its services, such as AscendEX, FIO, CasperLabs, Akash Network, and more. 

Acheron Trading operates on centralized and decentralized exchanges worldwide and has over $250 million in assets under management.

It also manages and operates several public infrastructure nodes for blockchains. Acheron Trading aims to reduce market inefficiency and friction among nascent cryptocurrency projects, users, and public markets. 

Alameda Research

Alameda Research is based in Hong Kong and has been in business since 2017. Sam Bankman-Fried and Tara Mac Aulay co-founded it and are also the founders of the crypto exchange FTX. 

It has helped many crypto projects and exchanges with its services, such as Solana, Uniswap, Aave, Serum, Immutable, Render, and More. 

However, Alameda Research is facing a major crisis, as it filed for Chapter 11 bankruptcy in November 2022, along with FTX and 134 other corporate entities.

The bankruptcy was triggered by a solvency crisis at FTX, which had lent more than half of its customer funds to Alameda Research, violating its terms of service. 

Jane Street

Jane Street is based in New York and has been in business since 2000. 

It also has offices in London, Hong Kong, Amsterdam, and Singapore. The firm trades various asset classes on over 200 venues in 45 countries. 

The company is one of the largest market-makers, trading more than $17 trillion worth of securities in 2020. It was considered to have helped keep bond exchange-traded funds (ETFs) liquid during the market turmoil in 2020. 

However, Jane Street is facing some challenges in the crypto space, as it reportedly retreats from crypto trading in the US due to a regulatory crackdown on the industry. 

Jane Street has helped many crypto projects and exchanges with its services. It was among the contributors to Pyth Network. 

Gotbit

Gotbit is based in Elk Grove Village, Illinois, and has been in business since 2017. 

It was co-founded by Alex Andryunin and Iuliia Milianovich, the company’s CEO and CTO, respectively. Gotbit has offices in Portugal, UAE, Turkey, Vietnam, the UK, and Armenia. 

Gotbit has helped many crypto projects and exchanges with its services, such as Syscoin, PowerPool, AptosLaunch, and Prom. 

It has also invested in 26 projects in the seed stage through its venture capital arm. Gotbit has developed 52 products for clients and internal use, including launchpads, vesting mechanisms, and NFT platforms. 

Pulsar Trading Capital

Pulsar Trading Capital is a leading algorithmic trading firm specializing in cryptocurrency trading and market making. 

They are located in Hong Kong but have offices in London and Tokyo. They were founded in 2014 and have been part of the cryptocurrency evolution. 

They have a strong presence and relationship with more than 60 exchanges across more than 600 trading pairs. 

Sixtant

Sixtant is a proprietary trading and market-making firm that takes a scientific, high-frequency approach to crypto trading. 

They provide liquidity to various crypto markets and instruments, such as perpetual swaps and emerging market currencies. 

Sixtant started operation in 2020, according to their website. They are a registered company in Singapore, with a team of engineers, traders, and researchers from different backgrounds and locations.

It has helped several web3 projects by making markets for their tokens and improving their trading conditions. Some of the projects they have supported include:

• Polkadot
• Acala
• Moonbeam
• Kusama
• Phala Network 
• Darwinia Network

AMM vs Market Makers: How are they related? 

What Is an Automated Market Maker? 

An automated market maker (AMM) is a decentralized exchange (DEX) protocol that uses a mathematical formula to price assets. 

Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm. This formula can vary with each DeFi protocol.

AMMs use liquidity pools, where users can deposit cryptocurrencies to provide liquidity. These pools then use algorithms to set token prices based on the ratio of assets in the pool. 

When users want to trade, they swap one token for another directly through the AMM, with prices determined by the pool’s algorithm.

Advantages of an AMM. 

– Liquidity: AMMs provide continuous liquidity for a wide range of assets, making it easier to trade less popular cryptocurrencies.

– Accessibility: Anyone can provide liquidity to AMMs and participate in trading, often with lower fees than traditional exchanges.

– Decentralization: AMMs often operate without centralized intermediaries, offering greater autonomy and control to users.

Disadvantages of AMMs

– Impermanent loss(IL): Liquidity providers who have deposited funds in affected pools automatically incur an impermanent loss. The larger the shift in the price ratio, the larger the loss. (more details on this below) 

– Slippage: This is the difference between the expected price of a trade and the actual price at which it is executed. Slippage occurs when there is not enough liquidity in a pool to support a large trade, resulting in a significant change in the price ratio.

– Front-running: This is a type of market manipulation where someone exploits the public nature of blockchain transactions to execute their trade before another user’s trade. 

Front-running can result in higher slippage and lower profits for the original trader.

Some examples of DeFi protocols using AMMs

• Uniswap
• SushiSwap
• PancakeSwap

AMM: How is it Related to Market Making

The similarities between automated market makers and market makers are both;

• provide liquidity for a tradable asset on an exchange, making it easier for traders to buy and sell.
• use algorithms to determine the prices of assets based on supply and demand.
• aim to profit from their trading activity’s fees or the spread.

The differences between automated market makers and market makers are AMMs

• are decentralized and operate on smart contracts, while market makers are centralized and operate on traditional platforms.
• do not rely on order books or counterparties, while market makers do.
• use liquidity pools where users can deposit their assets and earn rewards, while market makers use their accounts or funds.

How do Automatic Market Makers (AMMs) work?

Here is a simplified example of how an AMM works:

– Tony wants to trade 10 ETH for DAI on an AMM. He connects his wallet to the AMM and selects the ETH/DAI pool.

– The AMM uses a formula, such as x * y = k, where x is the amount of ETH, y is the amount of DAI, and k is a constant value, to calculate the price of ETH in terms of DAI. For example, if the pool has 100 ETH and 10,000 DAI, then k = 100 * 10,000 = 1,000,000. The price of 1 ETH is then 10,000 / 100 = 100 DAI.

According to the formula, Tony swaps his 10 ETH for 909.09 DAI. The AMM deducts a small fee, such as 0.3%, from his trade and adds it to the pool. The new pool balance is 110 ETH and 9,090.91 DAI, and k remains the same at 1,000,000.

– Binta wants to provide liquidity to the ETH/DAI pool. She deposits 10 ETH and 1,000 DAI to the pool in proportion to the current pool ratio. The new pool balance is 120 ETH and 10,090.91 DAI, and k increases to 1,210,909.09.

– Binta receives liquidity provider (LP) tokens representing her pool share. She can use these tokens to redeem his liquidity at any time or stake them to earn additional rewards from the AMM or the project behind it.

– Anah wants to trade 100 DAI for ETH on the same AMM. According to the formula, she selects the ETH/DAI pool and swaps her 100 DAI for 0.98 ETH. The AMM deducts a fee from her trade and adds it to the pool. The new pool balance is 119.02 ETH and 10,190.91 DAI, and k remains the same at 1,210,909.09.

This is just a basic illustration of how an AMM works. AMMs use formulas, features, and incentives to facilitate trading and liquidity provision. Some of the popular AMMs include Balancer, Curve, and Bancor. 

The Role of Liquidity Providers in AMMs

The role of liquidity providers in AMMs is to supply assets to the liquidity pools, which are the core components of AMMs.

Liquidity pools are tokens locked in a smart contract to facilitate trading by providing liquidity. Liquidity providers deposit an equal value of two tokens into a pool and receive a new token representing their share of the pool. 

This token is called a liquidity provider (LP) token, and it can be used to withdraw the deposited assets or to earn rewards from trading fees. Liquidity providers are essential for the functioning of AMMs, as they enable traders to swap tokens without relying on order books or intermediaries. 

By providing liquidity, they also help reduce market price slippage and volatility. Liquidity providers are incentivized to participate in AMMs by earning a portion of the fees generated by each trade in the pool. 

The fees are proportional to the liquidity provider’s share of the pool and are usually paid in the same tokens as the pool. Liquidity providers can earn additional rewards by staking their LP tokens on other DeFi protocols, such as yield farming platforms.

Yield Farming Opportunities on AMMs

Yield farming is a way of earning passive income by providing liquidity to AMMs

Opportunities for AMMs vary depending on the market conditions, the demand and supply of tokens, and the incentives offered by the AMMs or the projects.

Here are some yield farming opportunities:

– Uniswap: This is one of the most widely used AMMs on Ethereum. Uniswap allows anyone to create a pool or join an existing one. Its governance token, UNI, also gives holders voting rights on protocol decisions.

– SushiSwap: This is a fork of Uniswap that adds additional features such as rewards for liquidity providers, integration with other DeFi protocols, and community governance. 

– PancakeSwap: This is an AMM on Binance Smart Chain (BSC), a blockchain that offers faster and cheaper transactions than Ethereum. PancakeSwap uses a similar constant product formula as Uniswap and SushiSwap but supports BSC-based tokens. 

– Curve Finance: This AMM specializes in stablecoins and low-slippage trades. It uses a different formula than Uniswap and SushiSwap, which allows it to offer better exchange rates for stablecoins.

– Balancer: Allows users to create custom pools with up to eight tokens, each with its weight. Balancer pools can also have dynamic fees that adjust according to market conditions.

– Aave: This lending and borrowing protocol allows users to earn interest on their deposits and borrow assets using their deposits as collateral.

 Aave also has uncollateralized flash loans that can be taken and repaid within one transaction.

– Compound: This lending and borrowing protocol allows users to earn interest on their deposits and borrow assets using their deposits as collateral.

– Harvest Finance: A yield aggregator automatically moves user funds between different DeFi protocols to maximize returns. Harvest Finance has several products, such as Vaults, Farming Opportunities, Profit Sharing Pools, and AutoFarm. Harvest Finance’s FARM token can be used for governance and earning fees. 

– Bancor uses a bonding curve formula to determine the prices of tokens. Bancor rewards liquidity providers with BNT tokens, which can be used to stake and earn fees from the protocol.

What is Impermanent Loss?

Impermanent loss is the loss of value that occurs when a user provides liquidity to a pool of tokens on a decentralized exchange (DEX) that uses an AMM mechanism.

Users can deposit two tokens into a pool and receive a share of the pool’s fees and a new token representing their stake in the pool.

However, when the price of one of the tokens in the pool changes significantly compared to when the user deposits them, the user may experience impermanent loss. 

This means that the value of their stake in the pool is lower than if they had kept their tokens in their wallet. 

The loss is impermanent because it only becomes permanent if the user withdraws their liquidity from the pool. If the price ratio of the tokens in the pool returns to the original state, the impermanent loss will disappear.

FAQs

Do market makers make money

Yes, market makers make money from the difference between the bid (buy) and ask (sell) price (the spread) of a cryptocurrency. 

Who controls the crypto market prices

The interaction of supply and demand and the sentiment and behavior of the market participants determine the crypto market prices. 

Who are the biggest owners of Binance

The biggest owners of Binance are not publicly disclosed, as the company is privately held and does not reveal its shareholders or their stakes. 

However, here are some of the major stakeholders. 

• Changpeng Zhao: He is the co-founder and CEO of Binance. 
• Yi He: She is the co-founder and chief marketing officer of Binance and one of the most influential women in crypto.  

Who is in charge of Bitcoin?

No single person or entity is in charge of Bitcoin, as the cryptocurrency is decentralized and composed of many different actors who influence the network through their actions. 

Some of the actors who have an impact on Bitcoin are:

• Traders
• Miners
• Developers
• Users

Is a market maker a broker

A market maker is not a broker; they are both involved in the financial markets.

Do brokers use market makers

Yes, some brokers use market makers to execute their clients’ orders. 

Who are the 4 types of market participants

– Hedgers: These traders use the market to reduce or eliminate the risk of price fluctuations in their underlying assets, such as commodities, currencies, or stocks. 

– Speculators: These traders use the market to bet on the future direction of prices and profits from price changes. 

– Market makers: These traders provide liquidity and depth to the market by quoting both a bid price and an asking price for a given asset and standing ready to execute trades at those prices. 

– Institutions: Large entities, such as banks, hedge funds, mutual funds, pension funds, or insurance companies, that trade large volumes of assets on the market.

Is there a market maker in crypto

Yes, there are market makers in crypto. 

Below are some of the popular market makers in crypto. 

• Wintermute 
• DWF labs
• Sixtant
• Bluesky Capital  

Does Binance have market makers

Yes, Binance has market makers. Examples are GSR, DMF_Labs, and Jump Trading

What exchange do market makers use? 

Market makers often use Binance, Coinbase, and Kraken. 

What is the difference between a broker and a market maker

A broker is an intermediary with the authorization and expertise to buy securities on an investor’s behalf. Brokers are regulated and licensed, and they are obligated to act in their clients’ best interests. 

A market maker is typically a large bank or financial institution that helps create a market for investors to buy or sell securities. They ensure enough trading volume so that trades can be done seamlessly. 

Do crypto exchanges manipulate the market?

Cryptocurrency exchanges have been accused of manipulating the market. Some exchanges are suspected of manipulating the spot market to exploit the dynamics of leverage trading. It may not exceed this directly, but a market maker could do it.

Who controls the crypto market? 

Any single entity, government, or centralized authority does not control the cryptocurrency market. They’re managed by peer-to-peer networks of computers running free, open-source software. 

Can anyone predict the crypto market?

The cryptocurrency market is highly volatile and influenced by various factors, making it challenging to predict with certainty. 

While some analysts and traders use technical indicators and chart patterns to forecast price movements, it’s important to note that these predictions are not always accurate.

What is a crypto maker & taker? 

In cryptocurrency trading, a maker is a trader who creates a new order that is added to the order book, while a taker is a trader who fills an existing order from the order book.

Do market makers know your stop loss? 

Market makers know traders’ stop-loss levels and can use this information to manipulate prices.