At the simplest level, market makers provide liquidity to keep assets tradable in the cryptocurrency market, ensuring that if a user tries to buy or sell a coin on a particular exchange, they’re usually able to.Many cryptocurrency projects hire them to goose their performance metrics using strategies like wash trading, which is where entities repeatedly trade the same asset back and forth to create the illusion of volume.
Regulated exchanges, as defined under New York’s crypto BitLicense, comply with stringent requirements around Anti-Money Laundering programs and customer information record-keeping, and they have a disaster recovery system. “Generally, what look for is they think that a market maker is there to create volume, increase price and do pump and dumps,” Jelle Buth, co-founder of market maker Enflux, tells Magazine. He explains that a market maker’s role is to make assets tradable by providing liquidity and maintaining a healthy order book, which contains all the buy and sell orders for an asset.
“It’s a market maker’s role to make this as tight as possible, while of course keeping in mind it not being a largely loss-making activity.” In a loan option model, a market maker borrows a certain amount of tokens from a crypto project with an agreement the tokens are initially priced at a set rate. These tokens are used to provide liquidity but often come with a primary goal of turning a profit, Buth says.For instance, consider a market maker that borrows 100,000 tokens from a cryptocurrency project at $1 per token.
At the end of the loan period, they can use some of these proceeds to buy back the tokens at the current market price if needed, or they might already have the tokens available to return. They can then settle the loan at $1 per token, which can be profitable if the repurchase price is less than the sale price during the loan period.This allows them to cover their obligation while potentially making a profit.
“Exchanges have unspoken requirements where the project must exceed a certain amount of daily trading volume, and this creates an incentive for projects to inflate their trading volumes,” according to MM.The source declines to elaborate on how a listing is achieved but says their market maker does things “competitors don’t.”
“In top-tier exchanges, if the project doesn’t maintain the requirements and can’t fulfill the minimum trading volume for a specific period, or doesn’t meet the terms and conditions of that exchange and shows unethical practices such as pumping and dumping the token, or manipulating the price, the token will be delisted,” Alizade tells Magazine.