If you've been in the crypto market for a while, you’ve probably heard the term Market Maker (MM), especially when token prices suddenly pump or dump. Often, MMs are the second-most mentioned entity after project developers when a token experiences a steep dump followed by a rapid rise.
Like many, I used to think Market Makers were just liquidity providers, but the reality is far more intricate. Let’s dive deeper into the world of Market Makers and their role in the crypto space.
What Are Market Makers?
In essence, there are two main types of Market Makers in crypto:
- Exchange Market Makers: These entities ensure stable markets and liquidity on specific exchanges.
- Token Market Makers: These are groups or entities responsible for providing liquidity for specific tokens, especially important after Token Generation Events (TGE) or during times of low trading volume.
Most crypto investors tend to group these two types together, but for the purposes of this article, we will focus on Token Market Makers.
How Market Makers Create Liquidity for Buyers and Sellers
Much like two sides of a coin, the job of a token Market Maker is to ensure there are enough assets available to match buy and sell orders. This helps improve the liquidity of the asset.
Market Makers do this by placing buy and sell orders at various price levels. The spread—the difference between the buy and sell price—indicates liquidity. A narrow spread means the token has high liquidity, while a wider spread suggests lower liquidity and higher trading fees.
Market Makers provide these insights to project teams to help them improve marketing strategies and drive liquidity growth. With over a thousand new tokens created every second, new tokens after TGE need Market Makers to stand out and gain recognition in a crowded market.
Two Market Maker Service Models
According to Cointelegraph, projects typically have two options for hiring Market Maker services:
- Fixed-Service Model: The MM is paid a set fee to provide liquidity for a token.
- Loan Option Model: The MM borrows a fixed amount of tokens from the project at an agreed price. The MM then provides liquidity with the borrowed tokens, profiting from the price spread.
Example of the Loan Option Model:
The MM borrows 10,000 tokens at $1.00 each from the project. At the end of the loan term, the MM must return 10,000 tokens, regardless of how much the price has fluctuated.
Are Market Makers Manipulating Prices?
Here’s where things get tricky. In the Loan Option Model, MMs may be tempted to manipulate token prices to maximize their profits. While MMs fulfill their liquidity duties, they could also focus on gaining the most profit.
For example, by artificially lowering the token price, some Market Makers prolong their contracts with the project. Once the contract is extended, they might drive the token price back up. Additionally, some MMs may offer unethical services like wash trading or creating fake announcements to boost token prices or volume.
A major concern is that dishonest MM practices can cause long-term instability for token holders and damage the reputation of legitimate Market Makers. Investors get caught in volatile price swings, and the integrity of the project is compromised.
Conclusion
Market Makers play an essential role in creating liquidity for tokens, especially post-TGE. However, the lines between liquidity provision and market manipulation can blur, especially with shady practices like price manipulation or wash trading. While some projects may expect MMs to artificially inflate token prices, these actions can lead to significant volatility and undermine trust in both the token and the Market Maker.
Understanding the dual nature of Market Makers can help investors recognize the risks and opportunities involved in working with them. Whether they are providing essential liquidity or manipulating markets, the activities of MMs will continue to be a hot topic in crypto.
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