Confessions of front-line practitioners of market makers: Project parties’ Dark Forest Self-Rescue Guide

Author:Maxxx

Confessions of a front-line practitioner in market maker, a guide to self-rescue of Dark Forests in Projects, I hope it will be helpful to you :)

Let me introduce myself: I am Max, a post-00s born in the 2000s who feels very old. I was originally a poor financial student in Hong Kong, but I have been in the currency circle for 21 years (thanks to the industry for saving it). Although the industry has not been in the long run, I first entered the industry as a project party, and later started my own business and started a developer community and accelerator, which has always been close to front-line entrepreneurs. Now I am responsible for our market maker business line at @MetalphaPro . Thank you for your boss for your appreciation and gave me a title of Head of Ecosystem, but in fact I am responsible for BD and sales. In the past year, I have handled more than a dozen coin listings and subsequent market making in the second-tier exchanges for @binance , @okx , @Bybit_Official and second-tier exchanges. I have some shallow experience.

Recently, it is a turbulent spring, and the topic of market maker is also at the forefront. I have always wanted to systematically talk about the special roles in the market maker industry. I just took this opportunity to sort out some things. The business is not good, so please forgive me if there are any mistakes. This article only represents my own point of view and is 100% from my own hands.

Attached photos of my dog

Start with the "observation tag" of GPS...

When I heard that GPS was "observation tag" by @binance , I was chatting with a founder, a project that I had known for more than a year and planned to be listed on Q2. This guy is very young, handsome and capable, but I could hear the tone of the chat was full of fatigue - the project has raised several Mils and achieved some good results. Everything seems to be going well, but for the founder, the financing is actually a debt , and it has been pivoting for more than a year. The market is so difficult, and on the same side Trying to close the new round of financing, while having difficulty negotiating with first-tier exchanges, while watching the tokens that have recently broken the issue, worrying about whether the exchange price can perform well, and how to explain to investors. Among them, only friends who have done projects understand the pain, worry and confusion... Just as we were talking, Binance's notice suddenly came into our eyes. Although we did not cooperate with the project, we happened to have some contact with the members of the team in the past two years, and we were filled with emotion in an instant.

I will not analyze and evaluate this matter much. I will be disgusted by the fact that I will wait for Binance and the project party’s notice and announcement . But in the past two years, I have 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 who are working in the industry. Okay, no trash, just add some real stuff.

The business model of market makers: not as genius as they are, they are

just "order-placing people"

Market maker is not a new term for crypto. There are also "market maker" in the traditional financial industry. However, this service has a more relaxed name called Greenshoe, Green Shoes (because in 1963, the US Green Shoes Company used this mechanism for the first time when it was IPO). Although the mechanisms are slightly different, the responsibilities assumed are basically the same, that is, to make bilateral bids for buying and selling during IPOs to maintain market liquidity and price relative stability . However, due to strict compliance supervision, the green shoe business is a very standard trading station branch business, and no large trading station will even take it out separately and say we are doing this. But what is strange is that such a standard business has become a scythe in the minds of many people and control the market .

However, if market makers really conduct liquidity in accordance with industry norms and regulations, there is really no "sickness". The so-called liquidity is mainly to make bilateral quotations at the trading market. Of course, market makers in the broad sense of crypto industry have some other categories and businesses. Today, we are only focusing on the narrow category that is most closely related to everyone, serving the project party token, which is roughly divided into these business models:

Active market maker

In fact, many of the demonization of market makers in the industry come largely from the existence and operations of market makers in the early stages of the industry. There is a saying in Cantonese "make a kitchen", which is called "make a market" in Mandarin. It actively market makers satisfy all the market's fantasies about "market makers". Generally, the market maker chamber of commerce and project parties cooperate to directly manipulate market prices, raise and suppress, and make profits from it, harvest retail investors in the market, and share the share with project parties . The terms of their cooperation are also diverse, involving different models such as borrowing coins, accessing APIs, allocating funds, and sharing profits. There is even a situation where Ye Zhuang did not communicate with the project party and directly grabbed the funds and traded it by himself after grabbing enough chips.

What are the active market makers in the market? In fact, active is more famous in PR and event management in the market. The market makers you have heard of are passive market makers. At least everyone must claim that they will be compliance issues, let alone marketing (but it is not ruled out that some market makers have made some active cases in the early stage of the industry, or are still doing sneakily now).

Most proactive market makers are very low-key and have no names because they are not in compliance with the rules. As the industry gradually standardized, ZMQ and Gotbit, which had previously been high-profile , were named by the FBI and fell into serious compliance troubles. The remaining active market makers were also more incognito. Some of them had done some so-called "successful cases", so they had "a position in the world", and the main deals were also referred to by acquaintances.

Passive market maker

Passive market makers, including ourselves and many other competitors, belong to this category. The main thing they do is to place maker orders on the order book market of centralized exchanges to provide market liquidity. There are two main business models:

• Token Loan (borrow coins)

• Retainer (monthly fee)

Token loan (borrow coin mode)

This is currently the mainstream and adopts the most extensive cooperation model. In short, it is a model in which market makers lend coins to market makers for a certain period of time and market makers provide market makers with market makers.

A typical token loan deal consists of several aspects:

Number of borrowed coins x% : generally a percentage of total supply tokens

Coin borrowing period x months : The time for borrowing coins, the expiration service will be delivered according to the signed option

Option structure : The delivery price of the market maker at the expiration of service

Liquidity KPI : That is, the depth of the market maker's orders at the market quota, 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 market makers paying and selling orders during the order setting process. This is generally a small part; the other is the option given to market makers by the project party, which is generally a relatively large amount.

If you are familiar with finance, you may know that every option (option) is valuable on the first day of signing the contract. This value is a percentage of the value of the borrowed coins. For example, I borrowed a total of 100wU coins, and the value of this option is 3% on the first day. That means that if I place an order strictly according to the algorithm (delta hedge), I can realize a relatively certain return of 3w US dollars. So under normal circumstances (extreme situations such as the price of the currency rises or quickly resets to zero does not count, and this market cannot be effectively delta hedge), the income from the trading station signing this cooperation is 30,000 US dollars + some money earned by taking the price difference when placing the order .

Do you feel that market makers earn more than they imagined? But in fact, the profit margin I mentioned is not completely out of reality. Market makers are currently very frivolous, and the competitive option prices are becoming less and less watery.

Retainer (monthly fee mode)

This is the second relatively mainstream model at present, which means that the project party does not lend the coins to the market maker, but retains it in its own trading account, and the market maker makes the market through API access . The advantage of this model is that the currency is still in the hands of the project party, and all operations in the trading account are open and transparent to the project party. In theory, the project party can withdraw 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 to use them as bilateral orders, and generally pay the market maker service fee monthly .

In this case, if the market maker places an order according to the customer's liquidity KPI, what he earns is the monthly service fee. The funds in the account have nothing to do with the market maker. In the extreme case of poor liquidity/pin insertion, placing an order will lose money, and these losses are also borne by the project party.

I think each has its own advantages and disadvantages. Some trading desks only focus one of them, and some like us can do both. The project party should choose according to their needs and project situation.

Several common misunderstandings

• Market makers are responsible for "pulling markets", "scribing lines" and "building rat warehouses"

Qualified passive market makers are neutral and will not actively participate in market pull-up, market value management, and harvesting.

• Market makers provide liquidity as "volume brush"

There are two types of order book trading on the exchange, one is maker order and the other is taker order. The main thing that passive market makers do is to place maker orders, and the ratio of taker orders will be very small. A clever woman is hard to cook without rice. No matter how deep the maker order is on the market, if there is no counterparty taker to make a deal, it will not actually directly increase the trading volume. However, if the left hand leads the right hand to trade his own maker order, that is, "self-transaction", there will be compliance risks. The leading exchanges will also strictly investigate this behavior. The self-transaction ratio is too high, and market-making accounts and tokens may face warnings and handling from the exchange.

• It sounds like a passive market maker is useless?

Not directly responsible for the currency price or transaction volume, it sounds like yes, it’s useless. But good liquidity is the cornerstone of everything. Small-scale money values ​​the currency price trend. The first thing you need to do with large amounts of money is trading volume and depth. A token with active trading and healthy coin price is closely related to the product strength and marketing capabilities of the project party, and it does require close cooperation from market makers. To take a step back, the top first- and second-tier exchanges rarely allow you to list coins without professional mm, otherwise it is likely to be a mess at the opening, and the mm must be registered in advance. Therefore, at this stage, cooperating with passive market makers is still a step that every project party with top CEX must go through.

• It sounds like a market maker is just placing orders, and the threshold is not high. Can the project party do it themselves?

Yes and no. If you do have a self-operated trading team and the project is relatively large, some second-tier companies 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 that you leave professional things to professionals. On the one hand, the cost and risk of taking advantage of the team is better than finding a reliable market maker. On the other hand, if you are not familiar with mm, when facing various extreme market conditions, you will really lose a lot of money by placing your orders.

The ecological location of market makers: Opening liquidity is the most

valuable resource

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

What kind of currency circle is the currency circle in 2024-2025? From a flow perspective, I look at it like this:

1. BTC independent market has risen all the way, with sufficient liquidity in the head . There has been a pullback recently, but the foundation has not shook. The mining costs of miners start at 5 or 6 characters. I am very happy. The traditional institutions that are running and entering the market are also very happy.

2. The tail PVP is fierce and the liquidity is relatively sufficient for a while . The young players on @pumpdotfun , @gmgnai , @solana , @base and @BNBCHAIN ​​lost money and lost money (I also contributed a little, it was abominable), and the outsiders and insiders were also happy to make money.

3. The liquidity of the waist is exhausted , with the wave of trump and libra as the peak, which almost drains the liquidity and buying of the waist, and is structurally irreversible from the inside and outside the circle. The token with a market value of hundreds of millions to billions of dollars is positioned awkward. No one pays for the newly launched tokens on first- and second-tier exchanges. The trading volume dropped sharply within two months after the token was launched. Most of the trading volume and depth occurred at the opening, and soon fell below the first-level price of VCs. It is likely to lose money when the VCs unlock it, and it is likely to return to zero when the team token unlocks it.

In this cycle, these tokens at waist seem to be the hardest to live . But another cruel fact is that more than 90% of the so-called "web3 native" practitioners in our industry are those who really pay salaries, receive salaries, attend conferences, and do business every day, including VCs, project parties, accelerators, BDs, markets, developments, etc. Everyone is doing the business of low-coin tokens. If you look at the series of behaviors such as investment and financing, product development, marketing promotion, hair removal, and Shanghai Stock Exchange, they are actually based on the waist projects of these Shanghai Centralized Exchanges as the centralized exchanges. So in this cycle, many practitioners have not made any money and their lives are not easy.

Only market makers, I think they have the most scarce resource of low-level tokens: "opening liquidity". Yes, liquidity alone is not enough. Liquidity comes early and you must have it at the opening. Otherwise, when the project returns to zero, no matter how many coins you have, it will be useless. A project has a circulating market for opening, such as 15%, and there are always 1 to 2 points, or even more, which is given to market makers. These liquidity unlocked at the opening is an extremely valuable resource under the current market. Therefore, not only are market makers becoming more and more intravenous, but many VCs and project parties also took the stage to temporarily start working as MMs. Some teams do not even have basic trading capabilities, so they will use the coins first. Anyway, they will return to zero in the end, and are not afraid of not being able to repay.

The dark forest where bad money drives out good money: an honest and

dedicated personality cannot beat the "scumbag"

Under such market evolution, a very unique ecosystem of market makers has been formed today: on the one hand, more and more market makers, and the quotations have also been infiltrated to an outrageous extent ; on the other hand, the service quality and professional ability are very different, and various after-sales problems often occur, the most common of which is to remove liquidity and breach of contract and smash the market . First of all, it is clear that market makers cannot sell coins . In fact, if the coins rise, the order according to the algorithm will shift to the direction of selling, because I borrowed the coins, and finally settled with the project party with U (if you don’t understand, you can read the token loan option part again). However, a qualified passive market maker should place orders according to the normal algorithm, rather than taking the taker and smash it hard. Such operations will be extremely harmful to the project.

Why do market makers do this? Going back to the option we just mentioned, a market maker got the token loan quota and placed orders normally according to the algo. If the market has been lukewarm, he should have successfully realized the value of the option and made 3%. However, if he believes that the project will return to zero when settlement expires, he can achieve 100% profit by smashing the market at the opening, which means 33 times the profit of mm normally. Of course, this is the most intuitive and extreme example. Most real operations will be much more complicated, but the underlying logic is to be bearish and sell tokens in advance when the currency price is high and liquidity is good, and then buy them back and settle after maturity delivery.

Of course, in addition to immorality and non-compliance, this also has additional risks. On the one hand, market makers are completely unable to store liquidity according to KPI during the contract period because they do not have a healthy inventory; on the other hand, if the tokens bet in the wrong direction, they will lose a lot of money and cannot be redeemed.

Why are such behaviors common?

1. After all, industry compliance is still in the early stages. As for the token loan model, although the market maker chamber of commerce reports on service status to project parties through daily reports, weekly reports, dashboards and other methods, and there are third-party supervision agencies and tools in the market, the money does in the market maker account is still a black box, and the market lacks effective supervision methods. After all, the only conclusive evidence is that the centralized exchange itself can see every trade transaction of the market maker . However, many of the market makers are customers of the centralized exchange V8 V9, which brings hundreds of millions of handling fees and capital deposits to the exchange every year. The exchange also has an obligation to protect the privacy of their customers. How can they disclose their transaction details to help the project party protect their rights? Speaking of this, I cannot help but admire @heyibinance @cz_binance 's decisive behavior. I remember that this is the first time that the market maker's transaction details are fully disclosed, including the precise time to minutes, operation details and cash out amount. Whether such behavior should be done is worth pondering, but the original intention must be good.

2. The awareness of market makers among the entire industry still needs to be strengthened. Actually, what surprised me was that I had talked to many first-level investment masters, founders of projects that raised tens of millions of dollars, and even employees of exchanges, who didn’t know much about market maker business, which is also an important reason why I started writing this article. Because most project parties are actually "first time", but market makers are "scumbags" who have experienced many battles. As a front-line practitioner, sometimes when I see the project party choosing the so-called "better terms", I will ask myself, am I also matching the outrageous terms offered by my competitors and taking down the deal first? In this dark forest of market makers, it is difficult to keep the bottom line. Pretending to be a scumbag is always more attractive than the honest people who are responsible. Only when everyone understands the industry can the situation where bad money drives out good money continue to occur.

How do you choose your market maker

There are a few issues and tips that I think are important

• Do you have to choose if you take the initiative?

Actually, when the project party asked me this question, I would not just say no to choose. If compliance aside, I think this is a question worth debate. Some projects have indeed brought better pictures through close cooperation with active market makers, more transaction volume, more cash out, and of course there are countless money. I will only express one point here. You must realize that if you can help you get real money, you will definitely cut mercilessly. The market liquidity is only so much. At the end of day, you are in the opponent 's relationship . The market money is either you make or your active market makers make it.

• To choose token loan or retainer for cooperation?

At present, the token loan model is still more mainstream, but the market share of retainer is gradually increasing. This is a question of the taste and needs of the project party. For example, the project party that has strong control may not want to have uncontrollable bulk liquidity outside, and for example,

• Try not to choose only one passive market maker

Don’t put the eggs in the same basket. You can choose 2-4 market makers and compare terms with each other. If one goes down, there are other companies that can make up for it. In addition, in order to win deals, market makers usually propose various additional value adds. Choosing a few more can help you with more people. However, in order to avoid the problem of "three monks have no water to drink", it is recommended that market makers all divide different exchanges, and the difficulty of monitoring is rising sharply.

• Don't choose your market maker just by investing

You can accept investment from market makers and having more runways is always good. But you also need to understand that the investment of market makers and VC investment are not the same game, because they have a considerable amount of opening liquidity, and market makers have a complete way to lock prices, hedge and other operations on coins that they have not yet been unlocked. Therefore, market makers have to collect tokens, and a considerable part of the investment positions of tokens are not necessarily 100% for the project party. This is a good thing for the project party to lose tokens.

• Don't choose your market maker just through liquidity KPIs

It is difficult to verify liquidity KPIs in practice, so don’t just choose market makers through liquidity KPIs. No matter how beautiful the terms you write, it will be useless if you can’t do it. Before you borrowed coins, you were your father. Once the coins were lent to market maker, you became your son. They had many ways to fool you.

• Change your mindset: Be a "scumbag" yourself

Remember that you are the Party A. Before signing the mm, compare terms, talk about how to monitor, prevent market makers from breaching contracts, and choose a plan that suits your project development. You can use one term to suppress another, so that the price comparison is round-trip. There is no ambiguity in the terms. If there are any unclear points, don’t think about them yourself. Just ask clearly.

A little bit of emotion

I am a junior in the industry and cherish the opportunity to perceive and touch the industry with such depth. I often feel the dirty and confusion of the industry, but I always feel the vitality and vitality. I never think I am the smartest group of people. Many young people of the same age in the industry are excellent. They quickly found their position, but more young people are actually confused. Without the web3 industry, it is difficult to find a way to rise.

I also have a boss with extremely positive values ​​and a trading team with strong professional abilities to work as the backstage. Stable asset management business allows us not to rely on market-making business to support our team, but to make friends with market-making business. I have also been following my own pace and using the logic of making friends with the project party, and have missed some deals and talked about a few deals that I am proud of. Although some projects have not been completed in business, they have also become friends with the project party.

I talked a lot, and I was very confused about the process of posting this article. On the one hand, I was afraid that my business would be poor or that I could not express it well, which would mislead the project parties 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 standards well and touch those cakes.

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 and returned to the sun. I hope this article can play a little role.