Market makers have a reputation that is entirely disproportionate to what they do. Despite what half of crypto Twitter would have you believe, MMs, as they are colloquially known, are a neutral force when used correctly. But should tokenized projects be routinely deploying these tools on crypto exchanges, and what are the long-term ramifications of manufacturing buy and sell orders?
Also read: ERC20 Tether Transactions Flip Their Omni Equivalent
From Drip-Fed to Full Faucet: Running the Liquidity Spectrum
Liquidity is all relative. While bitcoin’s liquidity trumps the rest of the crypto market combined, the depth of the order book still varies greatly from exchange to exchange. A 5 BTC sell order can be absorbed without blinking on Binance, but attempt the same on Trade Satoshi (24-hour volume: $15K) and you’ll be rekt by slippage. Ensuring sufficient liquidity across multiple exchanges where their token is listed is a tough ask for crypto projects, who are increasingly being expected to solve this problem unilaterally.
To address this challenge, many projects have now turned to market makers. Omisego, for instance, joined the ranks of market made projects when it partnered with Algoz earlier this month. The liquidity provider, which has previously supplied market making on behalf of Cardano for its ADA token, promises its clients the following outcomes:
- Minimize trading spreads
- Increase order book depth
- Reduce market manipulation
- Attract greater volumes
The latter provision ought to arrive naturally as a consequence of the former objectives: traders are naturally drawn to markets with deeper liquidity, which allow for arbitrage opportunities, and for exiting profitable positions through limit orders executed at close to spot price.
More liquidity equals greater awareness, which leads to greater adoption.
