In this dark forest of market makers, it is difficult to hold the bottom line; pretentious scoundrels are always more attractive than honest people.

Author: Maxxx

A confession from a frontline market maker, a self-help guide for project parties in the dark forest, hoping to be of some help to you :)

Let me introduce myself: I am Max, a post-2000s who feels quite old. I was originally a struggling finance student in Hong Kong, but since 2021, I have been in the crypto space (thanks to the industry's rescue). Although I haven't been in the industry for long, I entered it as a project party at the beginning, and later started my own business to create a developer community and accelerator, so I have always been close to frontline entrepreneurs. Now I am responsible for our market maker business line at @MetalphaPro. Thanks to my boss for the recognition, giving me the title of Head of Ecosystem, but in fact, I am just responsible for BD and sales. In the past year or so, I have worked with @binance, @okx, @Bybit_Official and second-tier exchanges, handling listings and subsequent market making for more than a dozen coins, so I have some shallow experience.

Recently, it has been a tumultuous spring, and the topic of market makers is at the forefront. I have always wanted to systematically discuss the special roles in the market maker industry, and I took this opportunity to organize some thoughts. My business is not refined, so if there are any mistakes, please forgive me. This article only represents my own views and is 100% written by me.

Here’s a photo of my dog to kick things off.

Starting with the "Observation Label" of GPS…

When I heard that GPS was given an "observation label" by @binance, I was chatting with a project founder I had known for over a year, who planned to list in Q2. This gentleman is quite young, handsome, and capable, but I could hear the exhaustion in his tone—his project had raised several million, achieved some good results, and everything seemed to be going smoothly. However, for the founder, the funds raised are actually debts. After more than a year of constantly pivoting narratives, the market is so tough; he is trying to close a new round of financing while negotiating with frontline exchanges, all the while watching tokens recently break their initial prices, worrying about whether the exchange's token price can perform well and how to explain it to investors. The pain, worry, and confusion can only be understood by friends who have worked on projects… Just as we were chatting about various topics, Binance's notice suddenly caught our attention. Although there was no market-making cooperation with the project, we had been in contact with team members over the past two years, and it was a moment of deep reflection.

I won’t analyze or comment too much on this matter; everything still depends on the notifications and announcements from Binance and the project parties. However, over the past two years, I have indeed seen too many project parties and retail investors being severely harmed by market makers. I hope to take this opportunity to write this article to help project parties and industry friends. Alright, enough chit-chat, let’s get to the point.

The business model of market makers: It’s not as mystical as it sounds; it’s just about “placing orders”

Market makers are not a new term in crypto; there are also "market makers" in traditional finance, but this service has a more relaxed name called Greenshoe (because it was first used in 1963 when the Boston-based Green Shoe Company went public). Although the mechanisms are slightly different, the responsibilities are basically the same: to provide both buy and sell quotes during an IPO, maintaining market liquidity and relatively stable prices. However, due to strict compliance regulations, the greenshoe business is a standard trading desk side business with little "profit margin," and no major trading desk would separately PR that they do this. Ironically, such a standard business has become a big scythe in the minds of many in the crypto industry, controlling the market.

However, if market makers really operate liquidity according to industry norms, there is no talk of any "scythe." The so-called provision of liquidity mainly involves placing both buy and sell quotes on the trading book. Of course, the broader category of market makers in the crypto industry includes some other types and businesses, but today we will focus on the narrow category that is most relevant to everyone, which serves the tokens of project parties. This can be roughly divided into several business models:

Proactive Market Makers

In fact, much of the demonization of market makers in the industry largely comes from the existence and operations of proactive market makers in the early days of the industry. There is a saying in Cantonese, "做厨房," which in Mandarin means "doing the market." Proactive market makers fulfill all the fantasies about "market makers." Generally, proactive market makers collaborate with project parties to directly manipulate market prices, pump and dump, and profit from it, harvesting retail investors and sharing profits with the project parties. Their cooperation terms are varied, involving borrowing tokens, accessing APIs, leveraging, profit sharing, and other different models. There are even cases where rogue market makers do not communicate with project parties and directly use their own funds to grab tokens, and after acquiring enough chips, they operate on their own.

What proactive market makers are there in the market? In fact, the market's active PR, event-hosting, and well-known market makers you have heard of are all passive market makers, at least they must claim to be, otherwise, there will be compliance issues, not to mention marketing boldly (but it does not rule out that some market makers did some proactive cases in the early days of the industry or may still be secretly doing so).

Most proactive market makers are very low-key and have no names because they are inherently non-compliant. As the industry gradually standardizes, the previously high-profile ZMQ and Gotbit have been named by the FBI **and have fallen into serious compliance troubles. The remaining proactive market makers have become even more anonymous, with some larger ones having done some so-called "successful cases," thus gaining "status" in the community, and most deals are made through referrals from acquaintances.

Passive Market Makers

Passive market makers, including ourselves and many other competitors, belong to this category. What we mainly do is place maker orders on the order book of centralized exchanges to provide market liquidity. The business model is mainly divided into two types:

• Token Loan (borrowing tokens)

• Retainer (monthly fee)

Token Loan (Borrowing Tokens)

This is currently the mainstream and most widely adopted cooperation model. In simple terms, it involves lending tokens to market makers for a certain period, during which the market makers provide market-making services.

A typical token loan deal consists of several aspects:

Amount of tokens borrowed x%: Generally a percentage of the total supply of the token.

Loan period x months: The duration of the loan, after which the service ends, and delivery will be made according to the agreed option.

Option structure: The delivery price for the market maker at the end of the service.

Liquidity KPI: The market maker will place orders at a certain depth on the order book, which may involve different exchanges and different price ranges.

How does the market maker make money in this model?

Market makers earn money in two parts: one is the price difference between buy and sell orders during the order placement process, which is generally a small part; the other is the options given to market makers by the project party, which is generally the larger portion.

If friends familiar with finance may know, every option (option) has value from the first day of signing, and this value is a percentage of the value of the borrowed tokens. For example, if I borrowed a total of 1 million U tokens, and the value of this option on the first day is 3%, it means that if I strictly place orders neutrally according to the algorithm (delta hedge), I can realize a relatively certain profit of 30,000 USD. In general cases (excluding extreme situations like token prices skyrocketing or plummeting, which cannot be effectively delta hedged), the profit from signing this cooperation for the trading desk is 30,000 USD plus some money earned from the price difference during order placement.

Does it feel like market makers earn less than expected? But in fact, the profit margin I mentioned is not completely detached from reality; market makers are currently very competitive, and the option prices are increasingly devoid of excess.

Retainer (Monthly Fee Model)

This is currently the second relatively mainstream model, which means that the project party does not lend tokens to the market maker but keeps them in their own trading account, and the market maker provides market-making services through API access. The advantage of this model is that the tokens remain in the project party's hands, and all operations in the trading account are open and transparent to the project party. In theory, the project party can withdraw funds from the account at any time, so there is no need to worry about the risk of market makers doing harm. However, in this model, the project party needs to prepare tokens and USDT in the account for placing both buy and sell orders, and generally needs to pay a monthly service fee to the market maker.

In this case, the market maker places orders according to the client's liquidity KPI, earning the monthly service fee. The funds in the account are unrelated to the market maker, and in cases of poor liquidity or extreme situations, placing orders may incur losses, which the project party will bear.

I believe both Token Loan and Retainer have their pros and cons. Some trading desks will only focus on one of them, while others, like us, can do both. Project parties should choose based on their needs and project circumstances.

Common Misconceptions

• Market makers are responsible for "pumping," "drawing lines," and "building mouse warehouses."

Qualified passive market makers are neutral and do not actively participate in pumping, market cap management, or harvesting.

• Market makers providing liquidity means "brushing volume."

The order book of exchanges has two types of orders: maker orders and taker orders. Passive market makers mainly place maker orders, and the proportion of taker orders is very small. A skilled cook cannot make a meal without rice; no matter how deep the maker orders are placed, if there are no counterpart takers to execute them, they do not directly increase trading volume. However, if one hand guides the other to execute their own maker orders, i.e., "self-dealing," there will be compliance risks. Major exchanges will strictly investigate such behavior; if the self-dealing ratio is too high, both the market maker's account and tokens may face warnings and actions from the exchange.

• So it sounds like passive market makers are not very useful?

Not directly responsible for token prices, not directly responsible for trading volume—sounds like it’s not very useful. But good liquidity is the cornerstone of everything. Small amounts of money care about price trends, while large amounts of money first look at trading volume and depth. A token that is active in trading and has a healthy price is closely related to the product strength and marketing ability of the project party, and indeed requires close cooperation with market makers. To take a step back, top-tier exchanges rarely allow you to list tokens without a professional market maker; otherwise, the opening will likely be a mess. Market makers need to register in advance, so at this stage, cooperating with passive market makers is still a necessary step for every project party looking to list on top-tier CEXs.

• Does it sound like market makers just place orders, and the threshold is not high? Can project parties do it themselves?

Yes and no. If you indeed have a proprietary trading team and the project is relatively large, some second-tier exchanges may allow you to do it yourself. But if not, or if you need to build a new team, I recommend leaving professional matters to professionals. On one hand, the cost and risk of building a team may not be worth it compared to finding a reliable market maker; on the other hand, if you are not familiar with market making, you could lose a lot of money when facing various extreme market conditions.

The Ecological Position of Market Makers: Opening Liquidity is the Most Precious Resource

After explaining the business model, let’s talk about the current situation, which may help you understand better.

What will the crypto space look like in 2024-2025? From a liquidity perspective, here’s how I see it:

1. BTC has an independent market, rising steadily, with ample top-tier liquidity. Recently there has been a pullback, but it does not shake the foundation. Miners are happy with mining costs starting with 5s and 6s, and traditional institutions rushing in are also pleased.

2. The tail end of PVP is fierce, and liquidity was once relatively ample. @pumpdotfun, @gmgnai, @solana, @base, and @BNBCHAIN have seen small players losing money to the point of addiction (I contributed a bit too, unfortunately), while outliers and insiders are making money happily.

3. The mid-tier liquidity is exhausted, with the recent wave of Trump and Libra peaking, almost sucking dry the mid-tier liquidity and buying power, and structurally irreversibly drawing it from within the circle to outside. Tokens with market caps from hundreds of millions to tens of billions are awkwardly positioned, and newly listed tokens on first and second-tier exchanges have no buyers. Trading volume sharply decreases within two months of listing, with most trading volume and depth occurring at the opening, quickly falling below the primary price set by VCs. When VCs unlock, they are likely to lose money, and when team tokens unlock, they are likely to go to zero.

In this cycle, these mid-tier tokens seem to be having the hardest time. But another harsh reality is that over 90% of the so-called "web3 native" professionals in our industry are truly those who receive salaries, attend conferences, and conduct business daily, including VCs, project parties, accelerators, BD, marketing, development, etc. Everyone is engaged in the business of mid-tier tokens. When you look at investment and financing, product development, marketing, and listing on exchanges, this series of actions is actually centered around these mid-tier project parties listed on centralized exchanges. Therefore, in this cycle, many professionals have not made money, and life has been tough for them.

Only market makers, I believe, hold the most scarce resource of mid-tier tokens: "opening liquidity." Yes, just having liquidity is not enough; liquidity must come early, and it must be available at the opening. Otherwise, when the project goes to zero, having more tokens is useless. For a project with a circulating supply of, say, 15% at the opening, there will always be 1 to 2 points, or even more, allocated to market makers. This liquidity that unlocks at the opening is an extremely valuable resource in the current market. Therefore, not only are market makers becoming increasingly competitive, but many VCs and project parties are also stepping in to temporarily build teams to start market making. Some teams even lack basic trading capabilities and just grab the tokens first, as they will eventually go to zero anyway, so they are not afraid of not being able to cash out.

The Dark Forest Where Bad Money Drives Out Good: Honest Contributors Cannot Compete with "Scoundrels"

In such an evolving market, a very unique ecology of market makers has formed: on one hand, there are more and more market makers, with quotes becoming absurdly competitive; on the other hand, the quality of service and professional capabilities vary greatly, often leading to various after-sales issues. The most common issue is withdrawing liquidity and defaulting on contracts. First, let’s clarify that market makers are not prohibited from selling tokens. In fact, if the token price skyrockets, placing orders according to the algorithm will naturally lean towards selling, because what I borrowed is the token, and what I settle with the project party is USDT (if you don’t understand, you can review the token loan option section). However, a qualified passive market maker should place orders according to the algorithm normally, rather than aggressively selling as a taker, as such actions can cause significant harm to the project.

Why do market makers do this? Returning to the options part we just discussed, if a market maker has obtained a token loan limit and places orders according to the algorithm normally, if the market remains lukewarm, they should successfully realize the value of the option and earn 3%. However, if they believe the project will go to zero by the settlement date, they can achieve a 100% return by crashing the price at the opening, which is 33 times the normal market making profit. Of course, this is a very straightforward and extreme example; most real operations are much more complex, but the underlying logic is that they short the token, taking advantage of high prices and good liquidity to sell early, then buy back at settlement.

Of course, this approach is not only unethical and non-compliant but also carries additional risks. On one hand, market makers cannot fulfill the KPI of providing liquidity within the contract period because they do not have a healthy inventory; on the other hand, if they bet wrong on the token's direction, they could lose a lot of money and be unable to cash out.

Why is such behavior common?

1. The industry’s compliance is still in its early stages. In terms of the token loan model, although market makers report service conditions to project parties through daily reports, weekly reports, dashboards, etc., and there are third-party supervisory institutions and tools in the market, what happens to the tokens in the market maker's account is ultimately a black box, and the market lacks effective regulatory measures. After all, the only entity with concrete evidence that can see every trade made by market makers is the centralized exchange itself. However, many market makers are clients of centralized exchanges’ V8 and V9, bringing in hundreds of millions in fees and capital to the exchanges each year. Exchanges also have an obligation to protect their clients' privacy, so how could they possibly disclose their trading details to help project parties defend their rights? At this point, I must admire @heyibinance and @cz_binance for their decisive actions. I recall this is the first time detailed trading information of market makers has been fully disclosed, including minute-level timing, operational details, and cash amounts. Whether such actions should be taken is worth pondering, but the original intention must be good.

2. The understanding of market makers by project parties and the entire industry still needs to be strengthened. I am often surprised that many top-tier investors, project founders who have raised tens of millions, and even exchange professionals do not have a good understanding of the market maker profession. This is also a significant reason why I decided to write this content. Most project parties are actually "first-timers," while market makers are seasoned "scoundrels." As a frontline practitioner, I sometimes look at project parties choosing what they believe are "better terms" and ask myself if I am also matching the outrageous terms offered by competitors just to secure the deal. In this dark forest of market makers, it is difficult to hold the bottom line; pretentious scoundrels are always more attractive than honest people. Only when everyone’s understanding of the industry aligns can we avoid the situation where bad money drives out good.

How to Choose Your Market Maker

Here are a few important questions and tips I believe are essential:

• Is it absolutely necessary to avoid proactive market makers?

When project parties ask me this question, I won’t categorically say not to choose them. If we set aside compliance, I think this is a debatable issue. Some projects have indeed brought better results, more trading volume, and more cashing out through close cooperation with proactive market makers, but there are countless examples of things going wrong. I just want to express one viewpoint: you need to realize that those who can help you pull in real money will also cut you without mercy, and the market’s liquidity is limited. At the end of the day, you are in a competitive relationship; the market’s money will either be earned by you or by your proactive market maker.

• Should you choose token loan or retainer for cooperation?

Currently, the token loan model is still more mainstream, but the market share of retainers is gradually increasing. This is a matter of the project party's taste and needs. For example, project parties that want to control their tokens tightly may not want external uncontrollable large-scale liquidity.

• Try not to choose only one passive market maker.

Don’t put all your eggs in one basket. You can choose 2-4 market makers to compare terms. If one goes down, others can fill in. Additionally, market makers often propose various extra value adds to win deals, so choosing several can help you get more assistance. However, to avoid the "three monks have no water to drink" problem, it’s advisable to assign different exchanges to each market maker, as mixing them together will significantly increase monitoring difficulty.

• Don’t choose your market maker solely based on investment.

Accepting investment from market makers and having more runway is always good. But you also need to understand that the investment from market makers and that from VCs are not the same game. Since they control a significant portion of opening liquidity, market makers can easily lock in prices, hedge, and perform other operations on tokens that have not yet been unlocked. Therefore, when market makers take a token loan, having a significant portion of token investment positions may not necessarily be a good thing for the project party.

• Don’t choose your market maker solely based on liquidity KPIs.

Liquidity KPIs are difficult to verify precisely in practice, so don’t choose market makers solely based on liquidity KPIs. No matter how beautifully written the terms are, if they can’t be fulfilled, they are useless. Before borrowing tokens, you are the boss; once the tokens are lent to the market maker, you become the subordinate. They have many ways to fool you.

• Change your mindset: Be a "scoundrel" yourself.

Remember that you are the principal. Before signing with a market maker, compare terms extensively, discuss how to monitor, and how to prevent market maker defaults. Choose a plan that suits your project’s development. You can use one company’s terms to pressure another, comparing back and forth. Ensure that there is no ambiguity in the terms, and if there are unclear points, don’t hesitate to ask for clarification.

A Few Reflections

As a newcomer to the industry, I cherish the opportunity to perceive and touch the industry at this depth. I often feel the dirtiness and chaos of the industry, yet I also constantly sense vitality and energy. I never consider myself among the smartest; many of my peers in the industry are excellent and have quickly found their positions. However, many young people are indeed confused, and without the web3 industry, it would be challenging to find upward mobility.

I also have a boss with a very positive value system and a highly capable trading team supporting us. A stable asset management business allows us not to rely on market-making business to sustain the team but rather to use market-making business to build friendships. I have always followed my own pace, using the logic of making friends with project parties. I have missed some deals but have also engaged in a few that I am proud of. Some projects, although not turned into business, have led to friendships with the project parties.

I have written extensively, and I felt conflicted about publishing this article. On one hand, I worry that my business acumen is lacking or that my expression may mislead project parties and readers. On the other hand, market makers have always been shrouded in mystery in the industry, and I fear that discussing these matters may overstep boundaries and disturb someone’s interests.

However, I truly believe that as the industry develops and compliance gradually becomes mainstream, there will come a day when the role of market makers will no longer be demonized and will return to the light. I hope this article can play a small role in that process.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。