Nobody wants to miss out on the rapid gains to be made during a crypto bull run, and for Web3 projects that means going above and beyond to ensure there’s plenty of liquidity behind their native tokens.
For many projects, that means utilizing the services of a crypto market maker, which works closely with them to ensure their token not only provides value, but is able to maintain it during fluctuating market conditions.
Market makers are playing an increasingly significant role in the crypto industry today, providing the liquidity needed for investors to buy and sell digital assets in a seamless way, without any significant price impact. It’s especially important for newer Web3 projects, whose tokens may not be well established. By working with a market maker, they can ensure there’s always sufficient liquidity for traders to buy and sell at fair prices and build a strong economic foundation for their project.
That said, no two market makers are the same, and there is a dark side to this kind of activity, with many so-called “partners” using manipulative tactics to artificially inflate the value of the tokens they’re supposed to be supporting. But these unethical practices can be the undoing of what is, otherwise, a totally legitimate project.
Projects must identify reputable market makers that prioritize an ethical approach to trading tokens that aligns with their long-term objectives and builds trust in their native assets. But how do they know which market makers are legit?
What to look for in a market maker?
The first step is to understand the needs of your project and how your market maker intends to help you achieve your objectives. That requires a careful assessment of the market maker’s technical infrastructure, its ethics and experience, its track record and it’s ability to adapt to suit the peculiarities of your specific project.
A reliable market maker is meant to deliver the following:
- Rapid transactions: By ensuring sufficient liquidity is available, investors will be able to buy and sell your native token on any platform it’s listed on without an excessive delay.
- Low volatility: Market makers must ensure price stability, and that means making sure there are always buy and sell orders available to fulfil other trader’s requests. In doing this, they can ensure transactions go smoothly without high slippage.
- High confidence: Projects need not only an efficient market environment, but also a transparent one that shows long-term stability and fairness with regards to how orders are fulfilled.
- Seamless user experience: Effective market making means being able to minimize slippage and optimize order books, so that every participant can trade quickly in a way that’s predictable.
- Adaptability: There’s also a need for flexibility to ensure liquidity and price stability, which requires the ability to react rapidly to unexpected changes in market conditions.
- Effective communication: Projects should ensure that their chosen market maker is always available to communicate and willing to cooperate in terms of their changing objectives.
How to tell it does this?
With the collapse of FTX and other exchanges still fresh in many investor’s minds, the importance of a solid track record is all-important. Web3 projects need to identify market makers with a strong reputation that’s based on their long-term performance. That means looking for measurable prior results, including the ability to maintain orderbook depth and tight spreads during volatile markets.
Reputable market makers will ensure that key performance indicators or KPIs aren’t just used in their corporate presentations, but consistently achieved over the duration, in order to demonstrate their ability to maintain liquidity and meet their uptime commitments.
In addition, projects should carefully examine the market maker’s infrastructure. The best, most genuine market makers will have a proprietary trading platform and algorithms that provide them with a competitive advantage over their rivals. Some advantages include high-frequency trading algorithms that continually adjust bids in milliseconds, proximity to the exchange’s servers and specialized hardware and software for trade execution. Alternatively, some market makers specialize in arbitrage models, relying on mathematical strategies to identify mispriced assets.
As for the most important metrics, it’s essentially to keep an eye on factors such as latency, or the market maker’s reaction speed to changing market conditions, its order fulfilment rate, the percentage of completed order requests, the precision of its bid/ask spreads and the depth of liquidity at multiple price points.
Transparency instills confidence
These KPIs are key to identifying a market maker’s ability to maintain sufficient liquidity during volatile periods, helping projects to thrive during dynamic markets. But of course, most crypto project founders are not financial experts, and so they lack the expertise to properly assess these metrics and understand a market maker’s performance.
Fortunately, Kairon Labs Chief Technology Officer Mathias Beke offers some advice. In an interview with DailyCoin, he points out that the key thing to remember is why the project is hiring a market maker in the first place. Their job is to supply a continuous flow of buy and sell orders to exchanges to ensure price stability. By doing this, investors can easily adjust their positions without having any serious impact on the asset price, even if they buy or sell large volumes.
“Our algorithms are meticulously crafted to handle large trades and strategically distribute them over time to minimize their market impact,” Beke explained.
In addition, projects also need to look for a market maker that provides transparent reporting so they can easily check it has been able to maintain consistency as the market evolves over time. By looking for transparency, projects will be able to avoid market makers that use dubious tactics such as wash trading, which is when the market maker buys AND sells an asset repeatedly in order to try and inflate its price artificially.
“Instilling confidence is paramount under any market condition,” Beke added. “Our goal is to foster a secure trading environment where investors can confidently execute their strategies.”
Adaptability is key
As a final tip, projects would do well to remember that no two tokens are the same. Every single asset has unique tokenomics, market dynamics and funding needs. So there’s no one-size-fits-all market making strategy that can be applied to any project.
Indeed, such strategies will almost certainly fail to optimize liquidity over the longer run. Market makers need to customize their trading strategy for each project, such as by adjusting their inventory for the underlying asset, and tailoring their trading bots to suit different platforms, such as centralized exchanges and DEX-based liquidity pools.
Projects can assess a market maker through its willingness to adapt based on its short-term objectives, its long-term roadmap, and the unique challenges it faces. Those that take the time to explain their strategy, how they’re changing things and why those changes are needed reflect thoughtfulness and a genuine commitment to providing sufficient liquidity for the duration.
