In 2022 and 2023, the landscape of crypto market makers has evolved significantly. During the ongoing bear market, crypto liquidity has dried up and retail trading volume across exchanges decreased. The market environment underlines the importance of liquidity providers to manage capital efficiently, stabilizing volatile markets and rebuilding trust in cryptocurrencies.
Let’s dive into the intricate world of crypto market making to create an up-to-date overview.
A Crypto Market Maker plays a critical role within the digital asset ecosystem, ensuring robust market liquidity and facilitating seamless trading. Unlike traditional financial markets, cryptocurrencies trade continuously (24/7) on both centralized and decentralized exchanges, prompting the need for market makers to ensure efficient flow of value.
Crypto market makers are mostly entities or sometimes individuals who consistently provide buy and sell orders for specific cryptocurrencies, creating a liquid market that bridges the gap between buyers and sellers. They enable traders to execute transactions promptly at competitive prices, even during times of high volatility. By utilizing high frequency trading algorithms and strategies, crypto market makers can profit from the bid ask spread, representing the difference between buying and selling prices.
Narrow spreads signify higher liquidity and more efficient markets, making them integral to cryptocurrency trading. Beyond enhancing liquidity, market makers contribute to price stability by curbing sudden price swings and market fluctuations. This fosters trust and confidence of retail traders and professional investors alike, attracting more participants to the crypto market.
As the cryptocurrency markets are moving at a fast pace and with a high rate of innovation, two- to three-year-old information can easily be outdated. For that reason, we aim to provide an extensive overview of the crypto market making industry in 2023, and dive into a range of topics – including a list of crypto market makers.
Some crypto market makers operate first and foremost as proprietary trading firms, who trade with their own capital and have no interest in publicity. Others are more specialized in specific regions, exchanges, type of assets (utility vs security tokens) or derivatives, request-for-quote (RFQ), over the counter (OTC), DeFi asset management, or open-source trading bots (Crypto Market Making Bot). Therefore, it is challenging to create an all-encompassing list of crypto market makers, and this is by no means an attempt to do so.
The following list is in no particular order and shall merely offer quick overview of the landscape of crypto market makers in 2023:
Major players left the space or reduced their presence in recent months due to regulatory uncertainty (e.g. Jane Street), or in the case of Alameda Research because of a massive fraud scheme. For this reason, we urge anyone who plans to engage with a market maker to perform their due diligence. We strongly recommend working with crypto market makers who have a year-long track record of liquidity provisioning for digital assets and who are working in a fully compliant and transparent manner. Predatory contracts involving certain “profit shares”, or aggressively priced option-based compensation may not align incentives in a way that benefits token issuers or other market participants.
The journey of crypto market makers has been an interesting one to follow, as it is often reflecting the rapid growth and maturation of the broader crypto market. In the early days of cryptocurrencies, trading was limited, and liquidity was scarce (even more than today). However, as the digital asset space gained momentum, numerous teams and individuals recognized the need for crypto liquidity providers to ensure efficient markets for Bitcoin and a spree of emerging altcoins.
During the early 2010s, some of the first market makers, such as GSR, played a crucial role in jumpstarting liquidity on nascent cryptocurrency exchanges. Some early adopters, who were equipped with basic algorithms and manual strategies, embraced the challenge of providing continuous buy and sell orders for various cryptocurrencies. As the crypto market expanded, market making strategies evolved in sophistication. The introduction of high-frequency trading (HFT) techniques and advanced algorithms propelled market makers to the forefront of the digital asset trading landscape. Specialized market making firms dedicated solely to automated cryptocurrency trading emerged during this phase. The teams behind these firms often had backgrounds in quantitative trading in traditional markets or building exchange infrastructure. In the case of flovtec, founding members were previously pioneering quantitative trading at a hedge fund in Zurich and spearheaded post-doctoral quant research at the local university. At the time, these endeavors led to the founding of Switzerland's first digital asset exchange, Lykke.
The mid-2010s witnessed increased institutional interest in cryptocurrencies, prompting traditional financial institutions to explore market making opportunities in the crypto space. Established trading firms, such as Jump Trading, began integrating crypto market making desks into their operations. Towards the late-2010s, during and after the 2017 Bitcoin bull-run, the number of crypto market makers exploded. Major players such as Wintermute, Kairon Labs, Kronos Research, Amber Group, or Alameda Research were founded; further bolstering liquidity, and advancing the acceptance of cryptocurrencies as a legitimate asset class. Due to the need for highly specialized talent, cutting edge technology infrastructure, and progressive regulatory environments, most crypto market makers chose traditional financial hubs like New York, London, Singapore or Switzerland as their domiciles.
With the arrival of decentralized finance (DeFi) around 2019 and into the early 2020s, a new chapter unfolded in the evolution of crypto market makers. DeFi protocols presented unique challenges and opportunities, demanding market makers to adapt their strategies to a rapidly changing environment. A novel concept, liquidity pools based on automated market makers (AMMs), revolutionized liquidity provision in DeFi by replacing order books with algorithmically determined token prices enabled by smart contracts. Not all crypto market makers embraced the innovations of DeFi and instead stuck with their core business on centralized crypto exchanges.
Others, such as flovtec, were amongst the first to integrate various AMM protocols for liquidity provision and arbitrage strategies, as well as concentrated liquidity strategies on the leading decentralized exchange Uniswap V3 in 2021. With a pure focus on the latter, new approaches to market making arose: For example, Arrakis offers trustless market making infrastructure and strategies for projects to manage their DeFi liquidity. At their peak in the summer of 2022, their total value locked (TVL) amounted to over $1.8 billion, before falling down to about $180 million one year later. Much of this may be attributed to the aftermath of a major market crash fueled by the collapse of Terra Luna, Celsius, FTX, as well as Sam Bankman-Fried’s (SBF) and Caroline Allison’s crypto market maker Alameda Research.
Many market makers and quant hedge funds, such as the well-respected Gallois Capital, got burned in the liquidity crunch and subsequent chapter 11 bankruptcy of crypto exchange FTX. With some of the industry’s best infrastructure and most liquid derivatives markets, it had established itself as one of the preferred trading platforms for professional traders.
However, there is room for optimism. In 2023, the DeFi landscape still witnessed a plethora of innovations, despite the relatively low retail trading volume and negative macro sentiment. Emerging order book decentralized exchanges (DEXs), such as Helix on Injective, Proton, or Orderly Network on Near, aspire to blend the advantages of a central limit order book with decentralized and trustless settlement mechanisms. Additionally, novel approaches to AMMs, exemplified by Uniswap V4 and Maverick Protocol's dynamic liquidity concentration, are compelling crypto market makers to remain vigilant and adaptable.
Crypto market makers bring several benefits to individual markets and user experience, as well as the broader digital asset market and advancements in technology. Some of these benefits include:
By consistently acting as a counterparty to buy from or sell against, crypto market makers ensure that traders can enter and exit their position in a digital asset at attractive conditions, even during times of high volatility. Algorithmic buy and sell orders across many price levels deepen liquidity and allow for transactions to be executed promptly without significantly impacting asset prices. This increase in liquidity attracts more market participants, including institutional investors, fostering an efficient market.
Crypto market makers aid in the discovery of fair and accurate prices for cryptocurrencies. By offering buy and sell orders at specific price points, they contribute to price transparency and reduce the risk of market manipulation. This benefits all market participants by providing access to reliable and up-to-date price information.
Market makers play a vital role in reducing price volatility within the crypto market. Through their provision of competitive bid and ask prices, they prevent sudden price swings, market fluctuations, and malicious flow like pump and dumps. A higher degree of stability instills confidence and makes the market more appealing for long-term investment and adoption.
Crypto market makers facilitate smooth trading experiences for market participants. Their continuous presence ensures that traders can execute trades at fair prices, free from slippage or delays. This efficiency encourages heightened trading activity and contributes to the overall growth of the crypto market.
The presence of market makers in the crypto market signifies its growing maturity and acceptance as a legitimate asset class in traditional finance. As more sophisticated market-making firms and institutional players enter the space, it signals increased confidence in the market's long-term sustainability.
Within the DeFi space, market makers are essential for providing liquidity to decentralized exchanges and other platforms, such as cross-chain bridges or aggregation protocols. These rely on capital deployment in any market condition, as retail liquidity providers often behave opportunistically (e.g., to farm yield on incentivized liquidity pools) and are driven by emotional decisions. Professional liquidity providers, such as crypto market makers or DeFi asset managers, may utilize more advanced strategies that involve arbitrage strategies and hedging their exposure.
Crypto market makers drive ongoing innovation and competition in the crypto market. Firms vie to offer better liquidity, tighter spreads, and improved trading experiences, propelling continual advancements in trading infrastructure, technology and automation, as well as machine learning and artificial intelligence. As a result, new avenues for startup financing through token issuing, or organizational governance in the form of decentralized autonomous organizations (DAOs) become available through efficient digital asset markets. The overall blockchain industry, including decentralized physical infrastructure (dePIN), real-world-asset (RWA) tokenization, or even art in the form of non-fungible tokens (NFT) benefits from liquid and efficient exchange of value.
Now, one might ask if it makes sense to employ multiple crypto market makers as a token issuer or crypto exchange. The simple answer is: Yes.
Working with two or more cryptocurrency market makers on a trading platform or on the same trading pairs can boost liquidity and improve price stability. Having multiple market makers also means they compete against each other. This competition can lead to narrower spreads, meaning the difference between the buying and selling price becomes smaller, leading to better prices for traders and ultimately, making the token more attractive to potential investors. Naturally, the trading volume also increases with several professional trading firms operating in the same market.
While the engagement of multiple market makers can prove advantageous, it also necessitates careful management to avert potential conflicts and promote synergistic collaboration among them. Thus, establishing transparent agreements that clearly define the operational boundaries and responsibilities becomes indispensable when engaging with multiple market makers. For example, all parties should be aware of how each one is incentivized. If one market maker is compensated with a call option, for example, the selling pressure upon exercising the option should be managed in a joint effort and in the best interest of the token issuer who employed both crypto market makers. This is especially relevant in comparatively illiquid altcoin markets, where the market share of both market makers may be significant.
For the most liquid spot trading pairs, such as BTC/USDT, the number of sophisticated traders and firms is much larger, hence the automated trading strategies should reflect the high degree of competition.
At flovtec, we embrace competition from our industry peers and invite any token issuer and exchange to contact our team if you are looking for a crypto market maker that acts more like an equal partner than a contracted counterparty. With our market making services, we serve a wide range of tokens, from initial exchange listings to some of the largest cryptocurrencies by market cap.