What is Crypto Market Making?

Crypto market making is a service that is offered by cryptocurrency exchange platforms to help traders get the best price for buying and selling crypto assets. It also ensures liquidity on the exchange and makes trading faster, more efficient, and more secure.

A market maker sets the bid and ask price of a digital asset, which is usually based on the price of the crypto asset on another exchange. They make a small profit per trade via the spread. This helps to compensate for the risk they assume by acting as a buyer or seller of a crypto asset at all times, which means that they are always available and ready to take orders.

Liquidity

There is a difference between the liquidity and supply of crypto assets, so crypto market makers play an important role in ensuring that there is enough liquidity for everyone to buy and sell digital currencies. This is a crucial component of the functioning of any market.

Liquidity is the amount of active buy and sell orders on a particular market. It is measured by the bid-ask spread, which is the difference between the highest bid price and the lowest sell price on a market.

Markets with high liquidity have low bid-ask spreads and low volume, while markets with lower liquidity have wide bid-ask spreads and high volume. This is because more people are willing to buy and sell a liquid token than a less liquid one.

It is a risky business to be a market maker, but it can be profitable if you manage your risks and keep an eye on the market. For example, a market maker might place limit orders on an exchange with low liquidity and send them to an exchange with higher liquidity once those orders are filled.

Unlike traditional finance, which involves proprietary trading firms operating off their balance sheets, crypto market making requires much more technological expertise. It’s a different approach that has the potential to bring new investors to the market, and help it recover from a crash like the one seen in late 2017.

The market-making process is automated by software called “bots” which are connected to major exchanges through hotlinks or centralized API endpoints. The bots can be programmed to trade on a variety of exchanges and protocols, with the goal of optimizing their spread, maintaining liquidity, and reducing risk.

Automated Market Makers (AMMs)

AMMs are an autonomous protocol that replaces order matching systems and order books in decentralized exchanges, like Coinbase. They use smart contracts – self-executing computer programs – to define the price of digital assets and provide liquidity. AMMs often pool liquidity into crowdsourced pools of crypto assets, which are then traded with users who are looking to buy or sell those assets.

They are a key part of the growing cryptocurrency ecosystem and play a crucial role in securing the future of this emerging market. AMMs are designed to increase liquidity by automatically moving the prices of their underlying assets in response to market changes, which helps to reduce the impact of impairment loss for liquidity providers.