What Makes a (Good) Crypto Market Maker?

Having participated in the launch of several tokens, I can tell you first-hand that the experience is mildly terrifying. It feels a lot like taking several years of work by dozens of people and betting it on one turn of the roulette wheel. Some projects raise hundreds of millions of dollars - one I worked with made less than $100 during its ICO.

There are few entities a project can turn to in order to better their odds of success – a good marketing agency is one. A deal with a major exchange is promising. Or if you are a project with real promise, you may be lucky enough to work with a market maker.

Market makers provide liquidity which is essential for a healthy market, as it helps to reduce volatility and price swings. Market makers also help to reduce the spread between buy and sell prices, which can make trading more efficient and cost-effective for traders.

By providing liquidity and reducing trading costs, market makers help to encourage participation and build a stronger community around a project or platform, which is essential for long-term success in the Web3 space.

But the role market makers play is often misunderstood or underestimated. Market makers have been criticized for some practices that could hurt the interests of investors and the projects they represent. For example, some market makers have been accused of engaging in dishonest trading practices such as "spoofing" which involves placing orders with no intention of executing them, and “wash trading,” which is one party selling tokens to itself to create the appearance of activity and move the market in a certain direction.

The current crypto bear market aggravates perceptions of market makers – mainly because people generally misunderstand and see them as a symptom or contributor to an inflated market, and therefore a contributor to the decline. However, they are arguably more important during crypto winter because they help address waning demand and reduce the bid-ask spread (the difference between the price a buyer is willing to pay and the price a seller is willing to accept) and they help stabilize projects through launch and beyond.

I spoke to Alex Andryunin, CEO & Founder at Gotbit, a market maker and hedge fund which purports to have launched hundreds of Web3 projects, about the difference between high-value market makers and the lower-value services that have given their industry a bad name.

Author: What constitutes being a market maker?

Alex Andryunin (AA): “The first era of crypto market makers started in 2013 with GSR, the first and the most respected market maker in the industry. GSR and other market makers all of them used the same business model – the market maker makes a contract, or call option, with the project in which the founder of the project sends the market maker some percentage of the supply of tokens and market maker provides liquidity for both sides of the market in Tether (USDT) or Bitcoin (BTC). Once the contract expires, the market maker sends the tokens back or the equivalent value in crypto.”

If a market maker is creating demand and supplying liquidity to projects by helping to connect buyers and sellers, it seems like a role that would be especially important in a down market. So we asked how the role – and reputation – of market makers can go astray.

Author: If market makers’ role is so straightforward and consistent, how has the perception become so mixed?

AA: “In 2018, there arose a new group of companies claiming to be market makers, but they are more like agencies – small groups with a few smart people who do some developing, marketing, and advisory services, and use simple market-making bots for projects. They do order book management and often resort to wash trading to create the appearance of trading activity. These aren’t real market makers. But projects’ investors tell projects to use a market maker and, unfortunately for the projects, they often end up with these fake services. Fake market makers don't understand how to trade, how to manage the prices, arbitrage, and DEX trading. They can’t do account management – but they still call themselves market makers.

But the truth is that that kind of market maker will only hurt their target market because they will not add any value, they will just extract value from the project.”

Author: So is using a market maker only safe with the top tier of market makers?

AA: “If we go below the top 200 projects by market cap and then we see that GSR and other market makers call option models are not very well suited to smaller tokens. If you as a founder of a smaller project give them tokens to trade, they will subcontract with us, and they will just provide liquidity, but you cannot control what they do on your market. Smaller projects don't want to let their market maker to dump in your community. For Solana or Avalanche, it's fine because the community is so huge. But for smaller projects, it's a very big pain, because market makers' strategy and project strategy are not correlated.”

Author: How does Gotbit handle mid-cap projects?

AA: “We started Gotbit to help middle cap projects. Gotbit's internal trading team approach manages markets and treasuries, as well as liquidates investor positions, solving many client pains and helping them build better products. The company hired top consultants from companies like Deloitte and McKinsey to establish a consultative approach, resulting in six trading teams each linked to specific projects. We will not dump into the community. If projects need to increase market cap, we will support it as a market maker. Gotbit's overarching objective is to create a significant story in the crypto industry, not just generate profits.”

Author: How does a project make sure they are working with the ‘right’ kind of market maker that can sincerely help their project?

AA: “The best way to understand who you're talking to is to check their use cases. The crypto world is small, especially the B2B side. Talk with founders who really worked with the market makers. In crypto, reputation is the only thing you should care about.

Also, be mindful of the contracts you make with these entities – contracts that ask for a big investment upfront and have few guarantees should be avoided.

At Gotbit, we operate on a performance-based model with top projects. This approach has worked well for several years with our top clients, as they don't have to spend any upfront money. In the rare instances where we have faced issues such as traders making wrong decisions or tough market conditions, we covered the losses.

Our philosophy is centered around making net profits for our market-making clients, and we are committed to creating sustainable recurring revenue streams for startups in the web 3 space. We recognize that being a founder of a Web3 startup is a challenging job, as they face constant pressure from investors, the market, and regulators. Additionally, most startups do not have any revenue streams, making fundraising a continual struggle. Our market making solution provides a third revenue stream that can sustain startups, making them less reliant on fundraising. Our goal is to create a net profit revenue stream from the market for all of our clients. By doing so, we can help our clients improve their products, hire better developers, sales and marketing teams, and change the world by creating innovative products.”

Author: Is that Gotbit’s ultimate goal – to change the world?

AA: “Exactly right. We only work with projects which have potential to change the world and products that can make a difference.”

Summary The crypto phenomenon is thought to have started in October 2008 with the release of the whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System". Like any teenager, the web3 industry is still awkwardly finding its way – making mistakes that will most likely look silly with the benefit of hindsight.

The biggest mistake projects – and investors - make in their approach to market makers is not understanding them.

Even as we emerge from this bear market, it’s likely new that projects will need stronger communities behind them to be successful through launch. Market makers, incubators, and launch pads – hopefully of the decentralized variety – will become a standard part of launching. This may slow down the number of new projects entering the market – but hopefully it will stop some of the complete failures that drag down the space.