There are several methods to generate liquidity in the crypto market, but one of the most effective is crypto market making. Market makers act as intermediaries between buyers and sellers, creating order trading and balancing out the risk. They often trade in high volumes and incur a short-term risk. They compensate for this risk through scores of trades in both directions. Market makers are naturally present in high volume products, but less liquid tokens may need market makers to generate liquidity.
The success of cryptocurrency market making depends on speed and intelligent adaptation. Instead of manually placing orders into order books, most market makers use fully automated trading algorithms. Advanced concepts from AI and machine learning are used to train these algorithms, enabling them to execute thousands of orders daily with minimal human involvement. Such automated trading algorithms are essential in the crypto market, where markets are open 24 hours a day. But there are some limitations. Initially, most exchanges were set up with a focus on retail users.
There are very few market makers in crypto, compared to the proliferation of digital assets. Because of this, liquidity is extremely concentrated. Hence, quantitative trading firms and hedge funds are in high demand. These firms earn commissions by making trades in different crypto currencies. They are paid by exchanges or token issuers. In an effort to increase liquidity, Blockstack hired GSR, a quantitative trading firm, to lend the exchange $1 million worth of bitcoin and ether at zero interest.
As the demand for cryptocurrencies continues to increase, so does the role of the market maker. Market makers are the people who submit bid limit orders on a crypto exchange and collect the bid-ask spread from multiple trades. In crypto markets, market makers play an important role in ensuring that the liquidity of the assets is stable and the overall efficiency of the markets and token ecosystems is increased. These professionals can help increase liquidity by reducing volatility and slippage.
While crypto market makers are essential to create liquidity in the market, they are also the ones who make it possible for buyers and sellers to execute orders. A market maker’s primary goal is to fill the gap between buyers and sellers, which is known as the spread. If the market is illiquid, the spreads are larger, which makes it more difficult to buy and sell, and the spread is much higher. By lowering the spread and making trading easier, market makers can generate higher profits.
Another method is automated maker protocol, which is used in decentralised exchanges with an autonomous trading mechanism. These protocols remove the need for centralised authorities. It allows two users to transact assets directly, eliminating the need for intermediaries. This way, AMMs can generate liquidity that would otherwise be unavailable. But it is important to note that the prices of the crypto-assets are not the same. In fact, there is significant price slippage among different crypto-assets.