Market makers have a reputation that is entirely disproportionate to what they do. Despite what half of crypto Twitter would have you believe, when used correctly, market makers are a neutral force. But should tokenized projects routinely deploy these tools on exchanges, and what are the long-term ramifications of manufacturing buy and sell orders?
From Drip-Fed to Full Faucet: Running the Liquidity Spectrum
Liquidity is relative. While bitcoin's liquidity trumps the rest of the crypto market combined, order book depth varies greatly between exchanges. A 5 BTC sell order can be absorbed effortlessly on Binance, but attempting the same on an exchange like Trade Satoshi (24-hour volume: $15K) would result in severe slippage. Ensuring sufficient liquidity across multiple listings is a tough ask for crypto projects, who increasingly face pressure to solve this problem unilaterally.
To address this, many projects have turned to market makers. Omisego, for example, recently partnered with Algoz, a liquidity provider that previously served Cardano for its ADA token. Algoz promises to minimize trading spreads, increase order book depth, reduce market manipulation, and attract greater volumes. In theory, deeper liquidity draws in traders and arbitrageurs, leading to wider adoption.
The Case for Market Makers
Imagine a business wants to acquire a large amount of OMG tokens for its P2P financial network. Despite OMG's average daily trading volume of $30 million, most of the 185 exchanges where it is listed cannot fulfill an order of more than a few thousand dollars without moving the entire order book by 10% or more. Market makers cannot inject liquidity into highly illiquid markets, but they can top up the top 20 or so exchanges where they are integrated, providing a convenient way for users to enter and exit positions with minimal slippage.
Crypto projects seek market making services at every stage of their lifecycle, but are particularly keen upon receiving their first exchange listing, when strict liquidity requirements must be met. In an ideal world, there would be no need for market makers: people would buy and sell tokens directly, creating an efficient market. In practice, markets are never that efficient, hence the need for market makers.
Order Book Replication and Other Services
Liquidity provision takes several forms. Besides traditional market making, some companies offer order book replication, which aggregates order books from multiple exchanges to deepen liquidity and tighten spreads. This can direct liquidity toward a particular exchange or ensure uniform depth across venues. The key difference from market making is that no new bids are placed; existing liquidity is simply utilized to its full potential. Other services include optimal trade execution, where the market maker moves large amounts of crypto while minimizing market disruption.
If you have ever placed a bid and been beaten by an order a few cents higher, you were likely outrun by a bot — and odds are that bot was deployed by the project whose token you were trying to buy. Traders also deploy bots to capture the spread in liquid markets like BTC. Market makers do the same job, but with no obligation to profit — break-even is good enough.
The Invisible Hand That Guides the Crypto Market
The "invisible hand," coined by Adam Smith in 1759, describes the unobservable market force that shapes supply and demand. Replace goods with digital assets and markets with exchanges, and you have a fitting description of market makers. They exist on the order book of every major exchange, absorbing the maker-taker differential by fulfilling orders on both sides.
When a market maker works well, the average trader should barely notice it — only a flurry of small bids and asks gives a clue. Contrary to Telegram group hype, market makers will not pump your bags or send IEO tokens to the moon. But they will provide liquidity, allowing you to enter and exit positions with minimal slippage. In bitcoin's early days, the notion of artificially matching demand seemed absurd. Today, like so many other exchange services, market makers are woven into the fabric of crypto.