Token market making is an essential service for every token project that wants to see its asset on an exchange. It allows investors and traders to engage with the token by providing liquidity, fostering long-term growth of the token ecosystem.
Market makers are responsible for ensuring that there is enough demand and supply for an asset in order to trade it, and this means they have to buy and sell the tokens on the order book to achieve this. This is done by buying low and selling high or taking positions that are either long or short. They do this to satisfy a market’s need for liquidity and immediacy, as these are the main drivers that encourage investors to trade.
To do this, they have a variety of tools at their disposal, including trading algorithms and advanced software that can make them money by buying or selling the tokens, depending on their price predictions. As such, they are able to maximize their profits and minimize their risks while keeping up with the constantly changing prices of the crypto market.
Often, when a new project enters the market and has no trading history, its prices are highly volatile as the lack of liquidity causes them to move up or down with little reason. MMs use options to reduce this volatility by buying a set amount of the tokens at a pre-determined strike price and then selling them at the higher current market price for a profit. This alignment of incentives is common for MMs who sign up with early-stage projects, as it gives them the opportunity to capture the gains from the initial surge in value (i.e., the token’s price increasing 100x).
However, while this can help stabilize prices, it is important to remember that a token has healthy liquidity only when there is an active community of buyers and sellers who are actively engaging with it. This is why it’s crucial for projects to partner with a reputable market maker that can provide the necessary liquidity and foster this engagement from day one. Token project teams should always consider the impact that a MM’s incentives might have on their pricing model and ensure that any contracts include provisions that protect them against unfavorable price movements.
