Market makers in crypto have a reputation that precedes themselves. Despite what many would have you believe, MMs are actually a neutral force when they’re used correctly. So does that mean tokenized projects should deploy such tools as a matter of course?
Fact is, new crypto projects especially need liquidity. But when you’re a new project, you generally won’t get it. Liquidity is relative and it varies from exchange to exchange. Take Bitcoin, where a 10 BTC sell order on Binance would be absorbed without anyone blinking. But try the same thing on Trade Satoshi, an exchange whose 24-hour volume averages just $15,000, and that sell order will be “rekt” by slippage. For new projects though, ensuring sufficient liquidity across multiple exchanges can be a tough task, especially as they’re forced to solve the problem unilaterally.
To overcome these challenges, new crypto projects increasingly turn to market makers to ensure they have sufficient liquidity to get off the ground. Clearpool Finance, for instance, joined the ranks of market made projects by partnering with Auros earlier this year.
Crypto projects need liquidity at every stage of their lifecycle, of course, but it’s really all the more important for those that have just received their first exchange listing, where they may be under intense pressure to meet strict liquidity requirements. Such projects generally lack the community of believers to achieve that critical volume and get any momentum going. And that can spell disaster for any newly-listed token.
In an ideal world there wouldn’t be any need for market makers, of course. People would buy and sell the tokens, creating an efficient market with enough counterparties to absorb the demand for orders and ensure a tight spread. But in reality, crypto markets are rarely that efficient, meaning there’s an urgent need for market makers who can keep things moving along.
Let us imagine that a business wants to acquire a load of RADIX tokens (XRD) to deploy on its alternative DeFi network. Though XRD has an average daily trading volume of $400,000, the dozen exchanges where it’s listed on wouldn’t be able to fulfill an order of more than a few thousands dollars worth at any one time. If someone put in a sell order for anything greater, the entire order book could shift by 10% or more.
Market makers therefore play a key role in providing sufficient liquidity in highly illiquid markets, minimizing trading spreads, increasing order book depth, reducing market manipulation and attracting greater volumes.
Sufficient liquidity ensures greater awareness, which leads to more widespread adoption. That’s the theory anyway, and it makes sense that increased liquidity would make a token more attractive to a broader spectrum of buyers. In this way, market makers are able to incentivize genuine usage of their assets as per the role outlined within a project’s whitepaper.
This explains why new crypto projects increasingly choose to partner with market makers. A strategic market making service can provide the cornerstone liquidity to new token issuers to drive adoption and growth. Such as Auros’s platform is able to accommodate traders of all sizes and enable them to enter and exit positions amid the daily market volatility.
Auros does this by combining sophisticated pricing models with advanced execution capabilities, building sophisticated models that support market making utilizing derivative instruments to improve the liquidity of its partner project’s tokens.
Coined by the Scottish economist Adam Smith in 1759, the phrase “invisible hand” refers to the unobservable market forces that determine the demand and supply of goods within a free market. Those goods can be thought of as digital assets, with the market akin to the exchanges that dominate the world of crypto. In this scenario, the “invisible hand” is akin to market makers. Though this force is almost imperceptible, it’s one that exists on the orderbooks of every major crypto exchange, helping to balance liquidity by fulfilling orders on both sides.
If a market maker is working well, the average trader will not even be aware of it. Market makers play a key role, and all the more so for new crypto projects, providing the liquidity that’s required for new traders to enter and exit a position with minimal slippage.