Crypto Market Making Explained: The Secret Keystone To A Token Project's Success

Even highly liquid markets experience high volatility. Crypto market making is, therefore, an essential element for crypto token projects. This article will walk you through what things to keep an eye on when figuring out the optimal crypto market-making setup developed by us at . Autowhale We’ve been a strong partner for clients in the crypto space. Some projects they have supported are token projects, including Presearch, Locktrip, or Blackhat. Why market making is a crucial element for token projects The list below describes the most important points when applying market-making strategies on token markets: By providing liquidity on a crypto exchange, market makers can help to maintain a tight bid-ask spread (i.E. the difference between the price at which an asset can be bought and sold) which makes it easier for market participants to buy and sell an asset. Increased liquidity can also help to reduce the volatility of the token price. Increased liquidity: Market makers can also manage the for a token by using algorithms to automatically buy and sell the token at predetermined prices based on predetermined criteria such as trading volume and price. This can help to smooth out the price movements of the token and reduce volatility. Market-making algorithms can manage order flows by supplying liquidity to key price levels. It is essential to distinguish between placing limit orders (liquidity) at important price levels and paying for order flow or having some backdoor to an exchange to frontrun certain orders. Managing order flow: flow of orders Of course, the latter is highly unethical, if not illegal, and should be avoided by token projects. Market makers can offset the risk of their positions by using various , such as futures contracts or options, to mitigate the impact of price movements on their positions. More on that later in the article. Offsetting risk: hedging techniques Market making can also help to improve the accuracy of price discovery or the process of determining the fair value of an asset. By applying market-making strategies, crypto market makers can provide information about the supply and demand for the asset, which can help to inform the market about the asset's value. Enhanced price discovery: Offsetting Risks and the Alameda/FTX debacle Offsetting risks is a key part of crypto market making. Token projects need to be aware of how to manage the inventory of their tokens and be responsibly exposed to the volatility of their asset(s). Some crypto market makers, such as Alameda, allegedly were set up in a way that token projects provided them with tokens that did not have lockups. In such a setup, token projects are, on the one hand, at the mercy of the market maker to not dump their markets (therefore decreasing the overall inventory of the token project if risks are not offset correctly), and on the other hand, the incentives are not aligned. Token projects should hire a market maker that operates in their (selfish) interest. Crypto market makers like us work instead on a fixed price set up than taking a cut of the token supply. Crypto market-making strategies for token projects There are various strategies token projects can apply for crypto market making, depending on their goals and the characteristics of their token. Here are a few examples of crypto market-making strategies that token projects may use: Simple market making involves continuously buying and selling the token at a fixed spread, or the difference between the buying and selling prices. This strategy can help to provide liquidity to the market and reduce the bid-ask spread, but it may be less effective in volatile markets. Simple market making: Adaptive market making involves using algorithms to automatically adjust the market maker's buying and selling prices based on market conditions, such as volume and price movements. This can help to maximize liquidity and reduce risk in changing market conditions. Adaptive market making: Dynamic market making involves using algorithms - may they are based on statistical/quantitative models or machine learning based - to continuously optimize the market maker's position based on various factors, such as market conditions, order flow, and risk. This can help to maximize liquidity and reduce risk in changing market conditions. Dynamic market making: involves buying and selling the token so that the market maker's overall delta, or the sensitivity of the market maker's position to price movements, is zero. This can help to reduce the impact of price movements on the market maker's position and minimize risk. Regarding delta-neutral market-making for token projects, it is vital to consider the availability of derivatives of the respective token. If there are no derivatives, a crypto market-making firm may consider finding a basket of other derivatives – with a strong correlation to the tokens price - that may be used as a hedge for the token’s market. Delta neutral market making: Delta neutral market making Often a combination of various algorithms is needed to support token projects to achieve their market-making goals ideally. Other strategies, such as arbitrage trading strategies, may need to be considered - especially when looking to make markets across multiple venues, including decentralized exchanges. Ultimately the choice is to be determined on a case-by-case basis depending on the specific requirements of their business and the characteristics of their token. How We Do Market-Making for Token Projects We’ve tailored our solution to meet clients’ needs at scale – whether a token project is only getting started (by having their first secondary market listing) or is already established across multiple venues. Projects don’t even need specialized expertise or infrastructure. Clients, from token projects to exchanges or funds working with Autowhale, start the onboarding by providing the required documents and contracts. After figuring out the right setup (see “Offsetting Risks and the Alameda/FTX debacle”), the clients provide us with the required API keys for connecting to their exchange accounts. : We use the ( ) when it comes to API Keys. . For security and OPSec’s sake Principle of Least Privilege PoLP That means only what is needed is enabled by the client when configuring an API key Together with secure, encrypted storage of the API keys, we help keep confidential data as secure as possible. Clients use our crypto market-making software to benefit from increased liquidity, enhanced price discovery, and more stable and liquid markets for their tokens. Be careful while sharing API keys!! Avoid granting withdrawal rights whenever possible. Trusted crypto market-making firms would never ask for such rights unless needed. In light of the 3commas hack, API keys need to be treated responsibly and at no time be stored in plain text. Contact details If you are a token project interested in our market-making services can reach us at or via the . info@autowhale.net Autowhale website None of the content above is financial advice and is for educational purposes only. Find more content on algorithmic trading software, crypto market making, and market microstructure on our . blog