GuShiio.com Project owners ‘self-help guide in the dark forest.
Written by: Maxxx, head of ecology at Metalpha
Confessions from a front-line market maker and a self-help guide to the dark forest for project parties. I hope it will help you a little: )
Let me introduce myself: I am Max, a post-00s generation who feels very old. I was originally a struggling finance student in Hong Kong, but I have been in the currency circle for 21 years (thanks to the industry for saving me). Although he hasn’t been in the industry for a long time, he first entered the industry as a project party, and later started his own business as a developer community and accelerator. He has always been close to front-line entrepreneurs. Now I am in charge of our market maker business line at @MetalphaPro. Thank you to the boss for giving me the title of Head of Ecosystem, but I am actually responsible for BD and sales. In the past year or so, I have worked on @binance,@okx,@Bybit_Official and second-tier exchanges. In total, I have handled a total of more than a dozen coins listing and subsequent market-making. I have some superficial experience.
Recently, it has been an eventful spring, and the topic of market makers is also at the forefront of the wave. I have always wanted to systematically talk about the special role of market makers in the industry, and I just took this opportunity to do some sorting out. The business is not refined. Please forgive me if there are any mistakes. This article only represents my own opinions, and it is also 100% by me. If you feel that you have gained something after reading it, I hope to help pay attention to it, like it, and help workers rush through the KPI. Thank you.
Start with the GPS “observation tag”…
When I heard that GPS had been labeled as an “observation label” by Binance, I was chatting with a project party founder who had known him for more than a year and also planned to invest in Q2. This guy was very young, handsome, and capable, but I could hear the tone of the conversation was full of fatigue-the project had incorporated a few Mils and achieved some good results. Everything seemed to be going smoothly, but to the founder, the funds he raised were actually debts. He had been pivoting for more than a year, and the market was so difficult. While trying to close a new round of financing, while negotiating hard with the first-tier exchanges, while looking at the recently broken coins, I am worried about whether the exchange’s currency price can perform well and how to explain it to investors. Only friends who have done projects can understand the pain, worry and confusion… Just as we were chatting, Binance’s notice suddenly came into our eyes. Although there was no market-making cooperation with the project, it happened that we had been in contact with team members in the past two years, and we were instantly filled with emotion.
I will not analyze and comment too much on this matter, but I will make a long speech annoying. I will still wait for the notice and announcement of the currency security and the project party. However, in the past two years, I have indeed seen too many project parties and retail investors being cheated by market makers. I just took this opportunity to write this article, hoping to help project parties and friends working in the industry. Okay, enough nonsense, let’s get some dry goods.
The business model of a market maker: not as divine as it is rumored, but a “order-setting”
Market maker is not a new term for crypto. There are also “market makers” in the traditional financial industry, but this service has a more relaxed name called Greenshoe, Green Shoes (because this mechanism was first used during the IPO of Boston Green Shoes in 1963). Although the mechanisms are slightly different, the responsibilities they bear are basically the same, that is, to make bilateral quotations for buying and selling during the IPO to maintain market liquidity and relatively stable prices. However, due to strict compliance supervision, the green shoe business is a very standard trading desk branch business that does not have much “oil and water”. Not even a large trading desk will take out a separate PR to say that we are doing this. But paradoxically, such a standard business has become a scythe that controls the market in the minds of many people in the crypto industry.
However, if market makers really follow industry norms and regulations for liquidity, there is really no such thing as a “sickle”. The so-called provision of liquidity is mainly to make bilateral quotations at the trading market. Of course, there are some other categories and businesses in the broad sense of market makers in the crypto industry. Today, we will only focus on the one that is most closely related to everyone. This narrow category serving the project party’s tokens is roughly divided into these Several business models:
Active market maker
In fact, many demonizations of market makers in the industry largely come from the existence and operation of active market makers in the early days of the industry. There is a saying in Cantonese that “make a kitchen”, and in Mandarin it is called “make a restaurant”. Active market makers satisfy all the market’s illusions about “market makers”. Generally, the proactive market-making chamber cooperates with the project party to directly manipulate market prices, raise and suppress them, and seek benefits from them, harvest retail investors in the market, and share the shares with the project party. The terms of their cooperation are also varied, involving different models such as currency borrowing, API access, capital allocation, and profit sharing. There are even cases where Yezhuang does not communicate with the project party, directly uses its own funds to raise funds, and then manages the market itself after grabbing enough chips.
What active market makers are there in the market? In fact, the market is relatively famous for being active in PR and organizing activities. Market makers you have heard of are all passive market makers. At least everyone must claim that they are, otherwise there will be compliance issues, let alone doing marketing with a swagger (but it does not rule out the possibility that some market makers have done some proactive cases in the early days of the industry, or are still secretly conducting them now).
Most active market makers are very low-key and have no names because they are not compliant. As the industry gradually standardized, ZMQ and Gotbit, who had previously been high-profile, were named by the FBI and fell into serious compliance trouble. The remaining active market makers have also become more anonymous. Some of them have done some so-called “successful cases”, so they have “Jianghu status”, and the main deals are also made through acquaintances referrals.
Passive market maker
Passive market makers, including ourselves and many other friends, fall into this category. The main thing they do is to place maker orders bilaterally at the orderbook of centralized exchanges to provide market liquidity. There are two main business models:
- Token Loan
- Retainer (monthly fee)
Token loan (borrowing model)
This is currently the mainstream and most widely adopted cooperation model. In short, it is a model in which currency is lent to a market maker for a certain period of time and the market maker provides market-making services.
A typical token loan deal consists of several aspects:
- Amount borrowed x%: Generally a percentage of the total supply of tokens
- Borrowing period x months: the borrowing time, expiration service ends, and delivery will also be carried out in accordance with the signed option
- Option structure: The delivery price of the market maker at the expiration of the service
- Liquidity KPI: That is, the depth at which market-making chambers place orders at the market, which may involve different exchanges and different price ranges.
Under this model, how can market makers make money?
Market makers make two parts of money. One is the price difference between the buy and sell orders during the order placement process, which is usually a small part; the other is the options given to the market maker by the project party, which is generally relatively large.
If friends familiar with finance may know that every option is valuable on the first day of signing, which is a percentage of the value of the borrowed currency. For example, if I borrowed a total of 100wU of coins, the value of this option is 3% on the first day, which means that if I place orders strictly and neutrally according to the delta hedge, I can realize a relative certainty return of 3w US dollars. So under normal circumstances (excluding extreme situations such as the currency price rises or quickly returns to zero, which cannot be used for an effective delta hedge in this market), the gain from signing the cooperation at the trading desk is 3w US dollars + some money earned from the price difference when placing the order.
Do you feel that market makers don’t make as much money as you think? But in fact, the profit margin I am talking about is not completely divorced from reality. Market makers are also very active at present, and the price of competitive options is becoming less and less fluid.
Retainer (monthly fee model)
This is currently the second relatively mainstream model, which means that the project party does not lend the currency to the market maker, but keeps it in its own trading account, and the market maker makes the market through API access. The advantages of this model are that the currency is still in the hands of the project party itself, and all operations in the trading account are open and transparent to the project party. In theory, the project party can withdraw the funds in the account at any time, so there is no need to worry about the risk of market makers doing evil. However, under this model, the project party needs to prepare tokens and U in the account for bilateral placing orders, and generally has to pay the market maker service fee on a monthly basis.
In this case, the market maker places orders according to the customer’s liquidity KPIs, and earns the monthly service fee. The funds in the account have nothing to do with the market maker. In the extreme case of poor liquidity/pins, placing orders will lead to losses, and these losses will be borne by the project party itself.
I think Token loan and Retainer have their own advantages and disadvantages. Some trading desks can only focus on one of them, and others like us can do both. Project parties should choose based on their own needs and project conditions.
Several common misunderstandings
Market makers are responsible for “pulling plates”,”marking lines” and “building rat warehouses”
Qualified passive market makers are neutral and will not actively participate in bidding, market value management, and harvesting
The liquidity provided by market makers is the “amount of credit”
There are two types of orders in exchange order books, one is maker order and the other is taker order. The main thing passive market makers do is to place maker orders, and the proportion of taker orders will be very small. It is difficult for a clever woman to make a meal without rice. No matter how deep the maker order is placed at the Handicap, if there is no counterparty taker to complete the transaction, it will not directly increase the transaction volume. However, if the left hand leads the right hand to trade his own maker order, that is,”self-trading”, there will be compliance risks, and the head exchange will also strictly investigate this behavior. The self-trading ratio is too high, and both market-making accounts and tokens may face warnings and handling from the exchange.
Does that sound like passive market makers are of no use?
Not directly responsible for the currency price, not directly responsible for the transaction volume, it sounds like yes, but it is of no use. But good liquidity is the cornerstone of everything. Small amounts of money value the trend of the currency price. The first thing to look at for large amounts of money is transaction volume and depth. A token with active transactions and healthy currency prices is closely related to the product strength and marketing capabilities of the project party, and indeed requires close cooperation from market makers. To take a step back, the top and second-tier exchanges will rarely let you place coins without professional mm, otherwise there is a high probability that you will be a mess at the opening time, and mm will have to register in advance. Therefore, at this stage, cooperation with passive market makers is still a step that every project party leading the CEX must go through.
It sounds like market makers are just putting orders, and the threshold is not high. Project parties can do it themselves?
Yes and no. If you do have a proprietary trading team and the project is relatively large, some second-tier firms may allow you to do it yourself. But if you don’t have it, or you need to build a new team, then I suggest leaving professional things to professional people. On the one hand, the cost and risk of building a team are not as good as finding a reliable market maker. On the other hand, if you are unfamiliar with mm, you will really lose a lot of money when you place an order in the face of various extreme markets.
Ecological position of market makers: Opening liquidity is the most valuable resource
After popularizing the business model, let me talk about the current situation, which may help you better understand.
2024-2025 What kind of currency circle is the currency circle in 2009? From a flow perspective, I think this is how:
- BTC has an independent market and has been rising all the way, with sufficient liquidity at the head. There has been a correction recently, but the foundation has not been shaken. Miners ‘mining costs start with 5 or 6 characters. They are very happy, and traditional institutions that are running into the market are also very happy. happy
- The end of PVP was fierce and the liquidity was relatively abundant for a time. The young players on @pumpdotfun,@gmgnai,@solana,@base and @BNBCHAIN were addicted to losing money (I also contributed a little, damn it), and the outlier and insider were happy to make money
- The liquidity in the waist is exhausted, with the wave of trump and libra as the peak, which has almost sucked up the liquidity and buying demand in the waist. Moreover, it is structurally and irreversibly sucked from inside to outside the circle. Tokens with a market value of hundreds of millions to billions are positioned awkward. No one pays for newly launched tokens on first-and second-tier exchanges. The trading volume of the tokens dropped sharply within two months after they were launched. Most of the trading volume and depth occurred at the opening of the market, and soon fell below the primary price of VCs. When VC unlocks, there is a high probability of losing money, and when team token unlocks, there is a high probability of returning to zero
In this cycle, these tokens on the waist seem to have the most difficult times. But another cruel fact is that more than 90% of the so-called “web3 native” employees in our industry are employees who actually pay, receive wages, go to conferences, and do business every day, including VCs, project parties, accelerators, BD, marketing, development, etc., everyone is doing the business of waist tokens. If you look at the series of behaviors such as investment and financing, product making, marketing, hairdressing, and going to the exchange, it is actually based on the waist projects of these centralized exchanges. Therefore, in this cycle, many employees have not made any money and their lives have been difficult.
Only market makers, I think, hold the scarcest resource of waist tokens: “opening liquidity”. Yes, liquidity alone is not enough. Liquidity must come early and be available at the opening of the market. Otherwise, when the project returns to zero, no matter how many coins you have on hand, it will be useless. If a project opens at 15%, there will always be 1 to 2 points, or even more. For market makers, this liquidity unlocked at the opening is an extremely valuable resource under the current market. Therefore, not only are market makers becoming increasingly involved, but many VCs and project parties have also set up temporary teams to start doing MM. Some teams do not even have basic trading capabilities, so they also bring the coins first. Anyway, they will be returned to zero in the end, so they are not afraid of being unable to pay.
The dark forest where bad money drives out good money: An honest giving personality is no match for the “scumbag”
Under the evolution of this market, a very unique ecosystem of today’s market makers has been formed: on the one hand, there are more and more market makers, and the quotations are also outrageous; on the other hand, service quality and professional capabilities differ greatly, and various after-sales problems often arise, the most common of which are withdrawal of liquidity and breach of contract. First of all, to be clear, it is not that market makers cannot sell coins. In fact, if the coins go up, the order will be shifted in the direction of selling according to the algorithm, because I borrowed coins, and finally settled with the project party is U (If you don’t understand, you can read the part about the token loan option again). However, a qualified passive market maker should place orders normally according to algo, rather than making takers. Such an operation will be extremely harmful to the project.
Why do market makers do this? Back to the part we just talked about option, a market maker gets a token loan quota and places orders according to algo’s normal order. If the market remains tepid, he should have successfully realized the value of option and earned 3%. But if he believes that the project will return to zero when settlement expires, he can achieve 100% of the income by opening it, which is 33 times the income of normal mm. Of course, this is the most intuitive and extreme example. Most real operations will be much more complicated, but the underlying logic is to bear short the tokens, sell them in advance when the coin price is high and the liquidity is good, and then deliver them when they expire. Buy back and settle.
Of course, in addition to being unethical and non-compliant, there are additional risks. On the one hand, the market maker is completely unable to store liquidity in accordance with kpi during the contract period because there is no healthy inventory on hand; on the other hand, if the token bets in the wrong direction, you will lose a lot of money and cannot be redeemed.
Why is this kind of behavior so common?
In the final analysis, industry compliance is still in its early stages. As far as the token loan model is concerned, although the market-making chamber reports the service status to the project party through daily newspapers, weekly newspapers, dashboards, etc., and there are also third-party supervisory agencies and tools in the market, what the currency does in the market-making account is ultimately still a black box, and the market lacks effective supervision methods. After all, there is the only conclusive evidence that only the centralized exchange itself can see every trade made by market makers. However, many market makers are customers of the centralized exchange V8 and V9, bringing hundreds of millions of yuan to the exchange every year. In handling fees and assets, the exchange is also obligated to protect the privacy of its customers. How can it be possible to disclose their transaction details to the project party to help protect their rights? Speaking of this, I can’t help but admire @heyibinance @cz_binance for its vigorous and vigorous actions. I have the impression that this is the first time that a market maker’s transaction details have been fully disclosed, including the time accurate to minutes, operation details and cash amount. Whether such behavior should be done is worth considering, but the original intention must be good.
Project parties, including the entire industry, still need to strengthen their awareness of market makers. In fact, what surprised me was that I had talked about many first-level investment bosses, founders of projects worth tens of millions of dollars, and even exchange employees who didn’t know much about the business of market makers. This is also an important reason why I started writing this article. Because most project companies are actually “first-time”, but market makers are “scumbags” who have experienced hundreds of battles. As a front-line practitioner, I sometimes see the project party choosing the so-called “better terms” and ask myself, am I also matching the outrageous terms offered by my friends and winning the deal first? In this dark forest of market makers, it is difficult to keep the bottom line. A scumbag who pretends to be profound is always more attractive than an honest person who is honest. Only when everyone has a clear understanding of the industry can we prevent bad money from driving out good money. The situation continues to happen.
How do you choose your market maker
There are a few questions and tips that I think are important
Is it impossible to take the initiative?
In fact, when the project company asks me this question, I will not directly and arbitrarily say not to choose. If compliance is aside, I think it is an issue worth debating. Some projects have indeed brought better pictures, more transaction volume, more cash out through close cooperation with active market makers. Of course, there are countless things that have gone wrong. I just want to express one point here. You have to realize that whatever can help you pull real money will definitely be cut without mercy. There is only so much liquidity in the market. At the end of day, you are in a counterparty relationship. The money in the market either you make or your active market maker makes it.
Choose the cooperation method, token loan or retainer?
At present, the token loan model is still more mainstream, but the market share of retainers is slowly increasing. This is a matter of the taste and needs of the project party. For example, the project party with strong control over the financing may not want to have uncontrollable large external liquidity. For example,
Try not to choose only one passive market maker
Don’t put eggs in the same basket. You can choose 2-4 market makers and compare terms with each other. If one company goes down, another company can make up for it. In addition, market makers usually propose various additional value additions in order to win a deal. Choosing a few more companies can help you by more people. However, in order to avoid the problem of “three monks have no water to drink”, it is recommended to divide market makers into different exchanges, which will increase the difficulty of monitoring when mixed together.
Don’t choose your market maker just by investing
You can accept investment from market makers, and it’s always good to have more runways. But you also need to understand that market makers ‘investment and VC investment are not playing the same game. Because they have a considerable amount of opening liquidity, market makers have a way to lock in the coins they have not yet unlocked yet, hedge, etc., so the market maker takes the token loan, and a considerable portion of the token investment position is not necessarily a good thing for the project party.
Don’t choose your market maker based solely on liquidity KPIs
Liquidity KPIs are difficult to verify in detail in practice, so don’t just choose a market maker through liquidity KPIs. No matter how beautifully written terms are, they will be useless if they can’t be achieved. You were the father before borrowing coins. Once you lend coins to a market maker, you become a son. They have many ways to fool you.
Change your mindset: Be a “scumbag” yourself
Remember that you are Party A. Before signing for MM, compare terms more often, talk more about how to monitor, how to prevent market makers from default, and choose a plan that suits your project development. You can use one company’s terms to suppress another company, so that you can compare prices back and forth. Don’t contain any ambiguity in the terms, don’t think about anything unclear, and ask directly.
A little emotion
I am a descendant of the industry and cherish the opportunity to perceive and touch the industry with such depth. I often feel the filth and chaos of the industry, but I always feel the vitality and vitality. I never consider myself to be the smartest group. Many young people of the same age in the industry are excellent and quickly found their place, but more young people are actually confused. Without the web3 industry, it would be difficult to find a way to rise.
I also have a boss with very positive values and a trading team with very professional capabilities as the background. The stable asset management business allows us not to rely on market-making business to support our team, but to use market-making business to make friends. I have also followed my own pace and followed the logic of making friends with the project party. I have missed some deals and talked about several deals that I am proud of. Although some projects have not completed business, I have also become friends with the project party.
I talked a lot about it, and I was very conflicted in the process of publishing this article. On the one hand, I was afraid that my business would be poor or his expression would mislead the project party and readers. On the other hand, market makers have always been secretive in the industry. I was also afraid that I would not grasp the yardstick when talking about these things, and would touch someone’s cake.
But I really believe that with the development of the industry, compliance has gradually become the mainstream. One day, the role of market maker will no longer be demonized. I hope that this article can play a small role.
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