How market makers are injecting liquidity into the cryptoeconomy – Bitcoin Exchanges News
Market makers have a totally disproportionate reputation for what they do. Despite what half of crypto Twitter would have you believe, MMs, as they are colloquially known, are a neutral force when used correctly. But should tokenized projects routinely deploy these tools on crypto exchanges, and what are the long-term ramifications of crafting buy and sell orders?
Also Read: Tether ERC20 Transactions Overthrow Their Omni Equivalent
From Drip to Full Tap: Managing the Liquidity Spectrum
Liquidity is all relative. While bitcoin’s liquidity trumps the rest of the combined crypto market, the depth of the order book still varies widely across exchanges. A 5 BTC sell order can be absorbed without blinking on Binance, but try the same on Trade Satoshi (24 hours volume: $15,000) and you will be reimbursed per slip. Ensuring sufficient liquidity on multiple exchanges where their token is listed is a difficult task for crypto projects, which are increasingly expected to solve this problem unilaterally.
To meet this challenge, many projects have now turned to market makers. Omisego, for example, joined the ranks of market projects when it partnered with Algoz earlier this month. The liquidity provider, which previously performed market making on behalf of Cardano for its ADA token, promises its customers the following results:
- Minimize trading spreads
- Increase order book depth
- Reduce market manipulation
- Attract larger volumes
This last provision should arise naturally as a consequence of the first objectives: traders are naturally attracted to markets with deeper liquidity, which allow for arbitrage opportunities, and to exit profitable positions through limit orders executed at a price close to the spot price.
More liquidity equals greater awareness, which leads to greater adoption. At least that’s the theory. The jury is still out on whether market makers encourage genuine use of crypto assets for the role described in their respective white papers many moons ago. In theory, however, it should be, with the increased liquidity making the token attractive to a wider range of buyers.
The case of market makers
Imagine that a company wants to acquire a load of OMG tokens to be deployed on the P2P financial network. Despite an average daily trading volume of $30 million, the majority of the 185 exchanges where OMG is listed could not fulfill an order larger than a few thousand dollars at a time. Beyond that, the entire order book would move by 10% or more. Market makers generally cannot inject liquidity into highly illiquid markets, but they can supplement the approximately 20 major exchanges they are integrated into, providing users with a convenient way to enter and exit positions with minimal movement .
Crypto projects seek market-making services at every stage of their lifecycle, but are particularly keen to receive their first listing on an exchange, when there may be pressure to meet stringent liquidity requirements. In an ideal world, there would be no need for market makers: people would buy and sell tokens as needed to other people, creating a highly efficient market with enough counterparties to absorb all orders and ensure a spread greenhouse. In practice, markets are never so efficient, hence the need for market makers to get things done efficiently.
Replication of the order book and other services
The provision of liquidity can take several forms. In addition to conventional market making, some firms will provide order book replication, in which the order books of multiple exchanges are aggregated to deepen liquidity and tighten spreads. This can be used to direct liquidity to a particular exchange or to ensure that liquidity is uniform across multiple exchanges. The main difference, compared to market making, is that no additional bids are placed: all that happens is that the existing liquidity is used to its full potential. Other services include punctual execution and optimal trade execution, in which the market making provider will strive to move a significant amount of crypto assets while minimizing market disruption.
If you’ve ever gone to place a bid on an exchange and another user placed a tiny order a few cents more, chances are you’ve been beaten by a bot. Also, chances are the bot was placed there by the project whose token you were trying to buy. That said, traders have also been known to deploy robots to play the difference between bids and asks in liquid markets such as BTC. It’s a very competitive game, and so profit margins are low, but with enough volume, catching the difference between bids and asks can start to add up. Market makers do the same job, the only difference being that they have no profit obligation: the break-even point is sufficient.
The invisible hand guiding the crypto market
The “invisible hand”, coined by Adam Smith in 1759, describes the unobservable market force that shapes the supply and demand for goods in a free market. Think of these goods as digital assets and the market as the exchanges that dominate the cryptosphere, and you have a pretty good description of market makers. Although they are virtually imperceptible, they exist in the order book of all major exchanges, absorbing the differential between maker and taker by executing orders on both sides.
When a market maker is performing well, the average trader should hardly notice. Only the wave of small offers and requests should give a clue as to its existence. Despite what Telegram trading groups may have you believe, market makers won’t pump your bags or send your IEO tokens to the moon – but they will provide liquidity, allowing you to enter and exit positions. with minimal slip. In the early days of bitcoin, the notion of market makers to artificially meet demand would have seemed absurd. Today, like so many other crypto exchange services, market makers are woven into its tapestry.
What do you think of market makers? Let us know in the comments section below.
Images courtesy of Shutterstock.
Did you know that you can check any unconfirmed bitcoin transaction with our Bitcoin Block Explorer tool? Just fill out a Bitcoin Address Lookup to see it on the blockchain. Also, visit our Bitcoin Charts to see what is happening in the industry.
Comments are closed.