Author: Will Awang, investment and financing lawyer
The myth of getting rich in the crypto market exists every day, and most players do not come here to make money. times, but to turn over. In this dark forest, crypto market makers, as the top predators closest to money, are increasingly mysterious.
Price manipulation, pump-and-dump, and profiteering are synonymous with crypto market makers. However, before labeling crypto market makers these "derogatory" labels, we need to face up to their role in the crypto market. plays an important role, especially for early currency listing projects.
In this context, this article will explain from the perspective of the Web3 project side what a market maker is, why we need market makers, DWF events, the main operating modes of crypto market makers, and existing risks and regulatory issues.
I hope this article will be helpful to the development of the project, and discussions and exchanges are also welcome.
CitadelSecurities, the world's leading hedge fund, defines it this way: Market makers play a vital role in maintaining continued liquidity in the market. They achieve this by simultaneously providing buy and sell quotes, thereby creating a liquid environment. nature, market depth, and a market environment that allows investors to trade at any time, which injects confidence into the market.
Market makers are crucial in traditional financial markets. On Nasdaq, there are an average of about 14 market makers per stock, for a total of about 260 market makers on the market. Additionally, in markets that are less liquid than stocks, such as bond, commodity, and foreign exchange markets, most trading occurs through market makers.
Crypto market makers refer to institutions or individuals that help projects provide liquidity and buy and sell quotes in crypto exchange order books and decentralized trading pools. Their main responsibility is to operate in one or more crypto markets. Provide liquidity and market depth for trading, and earn profits by leveraging market fluctuations and supply and demand differences through algorithms and strategies.
Crypto market makers can not only reduce transaction costs and improve transaction efficiency, but also promote the development and promotion of new projects.
The main goal of market making is to ensure that the market has sufficient liquidity, market depth, and stable prices, so as to inject confidence into the market and promote the completion of transactions. This will not only lower the entry barrier for investors, but also incentivize them to trade in real time, which in turn brings more liquidity, forming a virtuous cycle and promoting an environment where investors can trade with confidence.
Crypto market makers are particularly important for early stage coin listing projects (IEO) because these projects need to have sufficient liquidity/trading volume/market, whether to maintain market popularity/awareness or to facilitate price discovery depth.
Liquidity refers to the degree to which assets can be quickly liquidated without wear and tear. It describes the ability of buyers and sellers in the market to move with relative ease and ease. The extent to which buying and selling can occur quickly and at low cost. Highly liquid markets reduce the costs of any particular transaction, facilitating the formation of transactions without causing significant price fluctuations.
Essentially, market makers facilitate investors to buy and sell tokens faster, in larger quantities, and more easily at any given time by providing high liquidity without interruption due to huge price fluctuations. affect operations.
For example, an investor needs to buy 40 tokens immediately. He can buy them immediately in the highly liquid market (Order Book A) at a unit price of $100. 40 tokens. However, in the low-liquidity market (Order Book B), they have two options: 1) Buy 10 tokens at $101.2, 5 tokens at $102.6, 10 tokens at $103.1, and Buy 15 coins for $105.2 at an average price of $103.35; or 2) wait a longer period for the coins to reach the desired price.
Liquidity is crucial for early currency listing projects. Operations in low-liquidity markets will have an impact on investors' trading confidence and trading strategies, and may also indirectly cause the "death" of the project.
In the crypto market, most assets have very low liquidity and do not have market depth, even for small Volume trades can also trigger significant price changes.
In the above scenario, after the investor has just purchased 40 tokens, the next available price in order book B is $105.2, indicating that one trade caused a price move of approximately 5%. This is especially true during periods of market volatility, where fewer participants can cause prices to fluctuate significantly.
The large amount of liquidity provided by market makers forms a narrow bid-ask spread (Spread) for the order book. A narrow bid-ask spread is usually accompanied by solid market depth. Helps stabilize currency prices and alleviate price fluctuations.
Market depth refers to the number of buy and sell orders available at different price levels in the order book at a given moment. Market depth also measures an asset's ability to absorb large orders without major price movements.
Market makers play a key role in the market by bridging this supply and demand gap by providing liquidity. Just think about which of the following markets would you like to trade?
The roles of crypto market makers: 1) provide a large amount of liquidity; 2) provide market depth to stabilize currency prices, which ultimately helps to enhance investors’ confidence in the project Confidence, after all, every investor wants to be able to buy and sell their holdings in real time with the lowest transaction costs.
The market maker business can also be said to be one of the businesses at the top of the food chain, because they control the lifeblood of the project token after it goes online. Market makers usually cooperate with exchanges, which can easily form a monopoly, with market liquidity dominated by a few large market makers.
<img src="https://img.php.cn/upload/article/000/000/000/171789936179372.jpg" alt="站在 Web3 项目方视角，看待“亦敌亦友”的加密做市商">（Crypto Market Makers [2024 Updated]）
In July 2023, Worldcoin, an encryption project co-created by OpenAI Sam Altman, reached an agreement with market makers when it was officially launched, lending a total of 100 million $WLD to 5 market makers. In order to provide liquidity, the loaned tokens must be returned after 3 months, or the tokens must be purchased at a price of 2 to 3.12 US dollars.
These 5 market makers include:
A. Wintermute, a company registered in the UK, investment masterpieces: $WLD, $OP, $PYTH, $DYDX, $EN A, $CFG, etc., have invested in more than 100 projects since 2020.
B. Amber Group, established in 2017, is a Hong Kong company whose board of directors includes institutions familiar to Chinese people such as Fenbushi Capital. The team members are basically all Chinese. Participating projects: $ZKM, $MERL, $IO, etc.
C. FlowTraders, established in the Netherlands in 2004, is a global digital liquidity provider focusing on exchange-traded products ETP. It is one of the largest ETF trading companies in the EU and is based on Bitcoin and Ethereum. Obtain exchange trading certificates and carry out cryptocurrency ETN trading business.
D. Auros Global, implicated by FTX, filed for bankruptcy protection in the Virgin Islands in 2023. US$20 million of assets were stranded on FTX, and news broke that the restructuring was successful.
E. GSR Markets, founded in the UK in 2013, is a global crypto market maker specializing in providing liquidity, risk management strategies, programmatic execution and structured products to mature global investors in the digital asset industry .
DWF Labs is the most popular “Internet celebrity” market maker in the market recently. DWF was founded in Singapore in 2022 by its Russian partner Andrei Grachev. According to reports, the company now claims to have invested in 470 projects in total and has worked with projects that account for approximately 35% of the top 1,000 coins by market capitalization in its short 16-month history.
<img src="https://img.php.cn/upload/article/000/000/000/171789936535151.jpg" alt="站在 Web3 项目方视角，看待“亦敌亦友”的加密做市商">（Binance Pledged to Thwart Suspicious Trading—Until It Involved a Lamborghini-Loving High Roller）
Let’s review this incident:
The Wall Street Journal broke the news on May 9 that a self-proclaimed former Binance Anonymous sources from the insider said that Binance investigators discovered $300 million worth of fake transactions by DWF Labs during 2023. A person familiar with Binance’s operations also said that Binance has not previously required market makers to sign any specific agreement to manage their transactions (including any specific agreement to regulate their trading behaviors such as prohibiting market manipulation).
This means that, for the most part, Binance allows market makers to trade as they wish.
According to a proposal document sent to potential customers in 2022, DWF Labs did not adopt a price-neutral rule, but proposed It uses its active trading positions to drive up token prices and create so-called "artificial trading volume" on exchanges, including Binance, to attract other traders.
In a report prepared for a token project client that year, DWF Labs even directly wrote that the institution had successfully generated a manual trading volume equivalent to two-thirds of the token, and was working hard to create A “Believable Trading Pattern” that, if partnered with DWF Labs, can bring “Bullish Sentiment” to the project token.
A Binance spokesperson stated that all users on the platform must abide by the general terms of use prohibiting market manipulation.
A week after filing the DWF report, Binance fired the head of its surveillance team and laid off several investigators over the next few months, a Binance executive said. Attributable to cost-saving measures.
He Yi, co-founder of Binance, said: Binance has been monitoring the market of market makers and is very strict; there is competition among market makers, the methods are very dark, and they will attack each other through PR.
On the Binance platform, DWF is the highest "VIP 9" level, which means that DWF contributes at least $4 billion to Binance every month Transaction volume. Market makers and exchanges have a symbiotic relationship, and Binance has no reason to offend one of its largest customers for the sake of an internal investigator.
Like traditional market makers, crypto market makers also make profits through the price difference between buying and selling. They set a low buying price and a high selling price, and obtain profit from the spread. This spread is often called "Spread" and is the main basis of profit for market makers.
After understanding this basic, let’s look at the two main business models of market makers for project parties.
In this model, the project party provides tokens and corresponding stable coins to market makers. Market makers use these assets to provide liquidity to CEX order books and DEX pools. The project party sets KPIs for market makers based on their own needs, such as how much price spread is acceptable, how much market liquidity and depth (Depth) need to be guaranteed, etc.
A. The project party may first give the market maker a fixed Setup Fees as the start of the market making project.
B. Afterwards, the project party needs to pay a fixed monthly/quarterly subscription service fee to the market maker. The most basic subscription service fee usually starts at $2,000 per month, depending on the scope of services, and there is no cap. For example, GSR Markets charges a setup fee of US$100,000 (Setup Fee), a subscription fee of US$20,000/month, plus a US$1 million BTC and ETH loan.
C. Of course, in order to encourage market makers to maximize profits, some project parties will also pay KPI-based transaction commission fees (the incentives obtained by market makers for successfully completing KPI targets in the market).
These KPI indicators may include: trading volume (which may involve illegal Wash Trading), token price, bid-ask spread (Spread), market depth, etc.
Under this model, the market making ideas are clearer and more transparent, and it is easier for project parties to control. It is more suitable for mature project parties that have built liquidity pools in various markets and have clear goals.
The most widely used market maker model in the market is: Token Loan ) + call option (Call Option). This model is especially suitable for early currency listing projects.
Due to the limited funds on hand of the project team in the early stage of coin listing, it was difficult to pay market making fees, and there were few circulating tokens in the market during the initial stage of coin listing, so the early tokens were lent to market makers, and market makers Risks will also be borne accordingly.
In this case, it is more suitable for the market maker to set KPI by itself according to the project situation, and in order to compensate the market maker, the project party usually embeds a call option (Call Option) in the market making contract to give Market makers hedge token price risks.
In this model, the market maker will borrow tokens (Token Loan) from the project party to put them into the market to ensure liquidity and stabilize the currency price. Generally, it is agreed that 1-2 years market making period.
The call option stipulates that before the expiration date of the contract, the market maker can choose to purchase the previously borrowed tokens from the project party at a predetermined price (Strike Price). It should be noted that this option is a right of choice given to the market maker, not an obligation (OPTION not Obligation).
The value of this call option is directly related to the price of the token, giving market makers the motivation to increase the value of the token. Let’s simulate a scenario:
We assume that the Mfer s project has found a market maker, signed a Call Option, and agreed to lend 100,000 tokens with an exercise price of $1 and a term of 1 year. Then during this period, the market maker has two choices: 1) repay 100,000 Mfer tokens at maturity; or 2) pay $100,000 at maturity (based on the exercise price of $1).
If the token price rises 100x to $100 (yes, Mfers to the Moon), the market maker can choose to exercise the option, that is, buy $10,000,000 worth of tokens at a price of $100,000, and obtain 100 times the Profit; if the token price falls by 50% to $0.5, the market maker can choose not to exercise the option ($100,000), but directly purchase 100,000 tokens in the market at a price of $0.5 to repay the loan (the value is half the exercise value of $50,000).
Because of the existence of call options, market makers will have the motivation to crazy pull orders and increase shipments to make profits; at the same time, there will also be crazy selling prices and low prices. The motivation for purchasing goods and returning currency at a high price.
因此，在代币借款 + 看涨期权（ Loan / Options Model ）模式下，项目方可能需要将做市商当做交易对手来看待，需要特别注意：
A . 做市商拿到多少的行权价，以及多少的代币借款数量，这决定了做市商的盈利空间和做市的预期；
B . 还要注意这个看涨期权的期限（ Loan Period ），这决定了在这个时间维度的做市空间；
C . 做市合同的终止条款，万一出现紧急情况下的风险控制处理方式。尤其是项目方将代币借款给做市商后，对于代币的去处是无法把控的。
<img src="https://img.php.cn/upload/article/000/000/000/171789937637755.jpg" alt="站在 Web3 项目方视角，看待“亦敌亦友”的加密做市商">（Paperclip Partners, Founder’s Field Guide to Token MarketMaking）
我们也可以看到众多做市商都有一级投资部门，能够通过投资与孵化更好地服务被投项目，为项目提供资金筹集、项目宣发、上币 listing 等服务，而且拥有被投项目的份额也有助于做市商触达潜在客户（投贷联动？）。
OTC 场外交易同理，从项目方/基金会手中低价购买代币，并通过一系列做市运作使代币价值升值。这里存在更多的灰色空间。
在了解了加密做市商的运作模式之后，我们就知道，抛开做市商在加密市场中的积极意义之外，它们不仅割的是韭菜，项目方也是它们“对韭当割”的对象。因此，项目方尤其需要把握与加密做市商合作的风险以及监管可能造成的障碍。
过去对于做市商的监管集中在“证券”做市商，而且目前对于加密资产的定义尚未明晰，那么就造成了针对加密做市商以及做市行为的相对监管空白。
因此对于加密做市商而言，目前的市场环境是一个天高任鸟飞的局面，作恶成本极低，这也是我们将价格操纵，拉高抛售，对韭当割作为加密做市商代名词的原因。
我们看到监管在不断规范，如美国 SEC 正在通过监管式执法的方式在明晰 Broker & Dealer 的定义，欧盟 MiCA 法案的推出也将做市商业务纳入监管；同时也有合规加密做市商积极申请监管牌照，如 GSR Markets 向新加坡金融管理局申请主要支付机构牌照（允许在新加坡的监管框架内开展 OTC 和做市服务），年初完成 5000 万美元融资的 Flowdesk 也获得法国监管的牌照申请。
但是，主要司法辖区的监管并不妨碍一些加密做市商的离岸运营，因为它们本质上是各个交易所里面的大资金账户，且大部分不存在任何在岸业务。
所幸由于 FTX 事件，以及监管对 Binance ， Coinbase 等各大交易所的不断规范，共生于交易所的加密做市商也会受到交易所内控合规规则的限制，使得行业更加规范。
我们确实需要监管去规范这些不道德/不法行为，但是在行业爆发之前，我们可能更需要行业去拥抱泡沫。
由于缺乏监管，加密做市商就会有动机进行不道德的交易和操纵市场以获得最大的利润，而不是有动机创造一个健康的市场或交易环境。这也是它们臭名昭著的原因，同时也会带来诸多风险。
A . 做市商的市场风险
做市商也会面临市场风险和流动性风险，尤其是在极端行情下。此前 Terra Luna 的崩盘，以及 FTX 的崩溃带来的连锁反应导致做市商全面溃败，杠杆崩塌以及市场流动性枯竭，其中 Alameda Research 便是典型代表。
B . 项目方缺乏对出借代币的控制
在代币借款的模式中，项目方缺乏对出借代币的控制，并不知道做市商会拿项目方的代币去做什么事情，这里可能是任何事情。
因此在出借代币时，项目方需要将做市商想象成交易对手，而非合作伙伴，去构思因价格影响而可能出现的情况。做市商能够通过对价格的调整来达到众多目的，例如可能通过故意压价，来为新的合同定一个较低的价格；也有可能通过匿名投票，通过对其有利的提案等等。
C . 做市商的不道德行为
不道德的做市商会操纵代币价格、通过洗售交易夸大交易量，并进行拉高和抛售。
许多加密货币项目聘请做市商使用洗售交易等策略来提高绩效指标，洗售交易是指实体反复来回交易同一资产以制造交易量的假象。在传统市场中，这是非法的市场操纵，误导投资者对特定资产的需求。
Bitwise 在 2019 年发表了一篇著名的报告，称不受监管的交易所 95% 的交易量都是假的。美国国家经济研究局 ( NBER ) 2022 年 12 月的一项最新研究发现，这一数字已降至 70% 左右。
D . 背锅的项目方
Since the project party lacks control over the loaned tokens, and it is difficult to restrain the unethical behavior of market makers, or there is no way to know about these unethical behaviors, once these behaviors fall into the scope of supervision, the project party that actually operates the project will Hard to blame. Therefore, the project party needs to work hard on contract terms or emergency measures.
Through this article, it can help the project party to understand that by providing liquidity, crypto market makers ensure efficient transaction execution, enhance investor confidence, and make market operations more efficient. It has made great contributions to smooth, stable currency prices and reduced transaction costs.
But at the same time, by revealing the business model of crypto market makers, it reminds project parties of the many risks arising from cooperation with crypto market makers, and they need to pay special attention when negotiating terms with market makers and implementing cooperation.
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