An Introduction to Market Makers and their Importance

Market markers are important to traders, crypto project founders, and exchanges in the crypto space. Market makers help to provide liquidity for exchanges, making it easier to trade different tokens without having a massive impact on the price. In this post, we'll explore market markers and their importance in crypto.

What are market makers?

Market makers, also known as liquidity providers, ensure that exchanges operate efficiently by providing liquidity and helping to control the price of the assets being traded. They do this by submitting limit orders (at "buy" and "ask" prices), facilitating transactions that are both transparent and orderly amongst participants in the market. In addition, market makers contribute to improving the market's overall efficiency by quoting prices on various trading platforms and eliminating inter-market dislocations via arbitrage.

How market makers work

To maintain the fluidity of the financial markets, many market makers provide liquidity to exchanges and financial protocols in the blockchain space. For example, every market maker will show buy and sell quotes for a predetermined minimum amount of tokens. In addition, the market maker will promptly liquidate their position in tokens from their inventory after a buyer has given them an order. 

Because of this, they can finish the order. In a nutshell, market making improves the fluidity of financial markets by simplifying the buying and selling processes for investors and traders. In the absence of market making, there is a possibility that there will not be enough transactions and less investment activity.

For example, DWF Labs is a Web3 venture capital firm and market maker that provides liquidity for crypto projects. The organization currently works with over 800 trading pairs daily across 40 different exchanges. Crypto projects are able to get liquidity without paying any onboarding fees, monthly fees, trading fees, market-making crosses fees, or any additional fees. Some of the main benefits of using a market maker are easier access to popular exchanges and protection from pump and dump schemes. 

Low liquidity makes it easier for malicious actors to manipulate the price of a cryptocurrency since it won't take a large amount of capital to move the price. Market makers like DWF mitigate this by providing a high level of liquidity, making it possible for users to trade the token while making it very difficult for malicious actors to manipulate the price.

Market Marking in Crypto

The general public's capacity to engage in market making in traditional financial markets is hindered by a high barrier to entry. On the other hand, these hurdles are removed in the blockchain industry, so the general public can participate more easily. To be more precise, independent traders have the same access as institutional traders to the protocols used by digital asset exchanges. This gives them the ability to submit price quotes and execute transactions programmatically. There are also certain markets for digital assets that provide users access to market data sources completely free of charge.

Takers, also known as the traders who fill market price quotations, are often responsible for paying higher fees on exchanges. In contrast, maker fees are typically reduced or even nonexistent in most cases (traders who provide price quotes). 

Thanks to market makers, there are several advantages to exchanges. First and foremost, market makers facilitate fluid trade, reducing transaction costs and allowing buyers and sellers easy access to the asset at fair pricing. This means market makers strive for narrow bid/ask spreads since this indicates a robust order book. Stable token prices and low levels of volatility are the results of robust order books.

Due to the high volatility in the cryptocurrency market, traders risk losing money due to slippage while placing orders on a DEX. In addition, a lack of liquidity may make a market more susceptible to a flash crash, which happens when a huge sell order cancels out the best purchase offers in the order book, precipitating a sharp price drop.

Cryptocurrency tokens need easy access to a regulated trading market. Token issuers that want to get the public to utilize their native token may lose support if their token is very volatile and illiquid.