Lately, many token projects are in question of whether it is worth it to go work with a liquidity service provider, or just utilize a simple crypto market making bot instead.
A crypto market-making bot refers to trading software that is used to follow an automated trading strategy with the goal of providing liquidity of the digital assets traded. Traditionally, these trading bots find their use by projects looking to turn their token more liquid on order book based exchanges. A market-making bot achieves this by automatically placing orders on both the buying and selling side, enabling people to come in and trade against them – turning the token liquid. As the name suggests, a bot usually provides a simple script that can be connected with an exchange to fetch limited amounts of data and then execute orders with a pre-defined spread (the difference between bid and ask price). While a bot may seem like an attractive and cost-efficient option for providing liquidity to your token, there are several risks and limitations that should be taken into consideration.
Compared to a simple trading bot, High-Frequency-Trading (HFT) Software provides a much more scalable solution, which does not surrender to increasing amounts of transactional volume or the processing of vast amounts of data. Institutional market-makers utilizing this kind of software have an advantage in the market, because they work with much lower latency and can execute multiple advanced trading strategies and instances in parallel and on a 24/7 basis.
It’s not ‘One-Size Fits All’. Each token projects features different tokenomics, including the amount and distribution of tokens in circulation. Also, market conditions may change over time and require adaptation within the trading models, but sometimes also on an infrastructure level. Additionally, events like whale transactions, investors coming out of vesting periods, or times where lots of token users are onboarded to the project, a lot of buying or selling pressure can be expected. A professional crypto market-maker will coordinate with the team to handle these extraordinary market situations for the benefit of their client. In summary, market-making and liquidity trading strategies may require some custom tailored solution depending on a project’s goals, requirements or external factors.
achieving liquidity is the primary goal of a market-making bot, they may not be sophisticated enough to protect from malicious flow. This means that the funds that are deployed for the purpose of liquidity can slowly be drained by other market participants. Additionally, data protection is of utmost importance to protect users from getting hacked and loosing market-data or assets through breaches. Ideally, a professional trader actively monitors the markets to manage risks. This does not mean the person should be trading manually, but with sophisticated HFT technology, while constantly overseeing how the digital assets market and the trading models behave. When managing risk, this also includes staying up to date on news and keeping in touch with crypto ecosystem stakeholders like exchanges and protocols.
On top of the benefits of utilizing HFT software and infrastructure over simple bots, established crypto market-makers and liquidity providers may have technological capabilities and experience that can be helpful to token issues of any dimension. While we share more detailed information on our website, here is a list of potential service verticals in the crypto market-making space:
For more information feel free to contact the flovtec team here.