DeFiChain

<p>Few crypto services are as widely misunderstood as market making. Most crypto users have a superficial grasp of what they do but there are a number of misconceptions that persist. It’s known that market makers play an important role in providing buy and sell-side liquidity, matching orders on both centralized and decentralized exchanges.</p><p>There’s a mistaken belief, however, that the role of market makers extends to guiding price discovery and even engaging in practices that could be labeled market manipulation. The reality is more prosaic. Market makers, as a rule, are delta neutral, with no interest in the price movements of the assets for which they are providing liquidity.</p><p>Save for the fees they make on the bid-ask spread (i.e the difference between the closest buy and sell prices), market makers have no need to protect price pegs, provide a pricing “floor” or move assets upwards. When all things are working as intended, market makers are no more turbulent than the gentle swell of the sea; they ride the current rather than making waves.</p><p>In this explainer, we’ll cover:</p><ul><li>The history of market makers</li><li>The role they play in DeFi</li><li>Different types of market makers</li><li>Understanding liquidity aggregators</li><li>How DeFi users can participate to earn a passive income</li></ul><h3 id="the-history-of-market-making">The History of Market Making</h3><p>The role of market makers has a long history dating back to the early days of financial markets. In the past, market makers were typically associated with stock exchanges, where they would facilitate the trading of securities by standing ready to buy or sell them at any time.</p><p>With the advent of electronic trading, the role of market makers evolved. Market makers today are generally firms or individuals that provide liquidity to financial markets by standing ready to fulfill trades at any given time. They are an important part of the financial system because they help to ensure that there is always a buyer or seller available for any given security, which helps to maintain the smooth functioning of financial markets.</p><p>Market making services are generally provided by electronic trading firms that use algorithms to trade securities on behalf of their clients. These firms often use complex models to determine the prices at which they are willing to buy or sell securities, and they may also use their own capital to provide liquidity to the market.</p><p>In addition to providing liquidity to financial markets, market makers also help to reduce the cost of trading for investors. By standing ready to buy or sell securities at any time, they help to reduce the spread between the bid and ask prices, which can lower the costs of trading for investors.</p><h3 id="market-makers-in-crypto">Market Makers in Crypto</h3><p>In the cryptocurrency markets, it is digital assets rather than securities that are being swapped but the process is much the same. Because crypto markets operate 24/7, the need for market making services is even greater given that users expect to be able to trade at any time with sufficient liquidity to fulfill their order.</p><p>Just like in TradFi, specialist firms provide crypto market making services. Some of these are focused on centralized exchanges; in fact certain exchanges, such as Binance, are known to employ their own market makers. Within the world of decentralized finance, where orders are executed onchain, market makers are also in demand.</p><p>Because anyone can provide DEX liquidity, however, professional market makers are complemented by regular users who also have incentives to supply liquidity and help ensure orders are filled with minimal slippage.</p><p>Market makers in the DeFi space may use a variety of strategies to provide liquidity, such as using algorithms to trade on multiple exchanges or participating in liquidity pools. They may also use their own capital to buy and sell assets in much the same way as traditional market makers.</p><p>One key difference between CEX market makers and those in the DeFi space is the use of smart contracts. In DeFi, market makers often use smart contracts to automate their trading activities and facilitate the exchange of assets. This allows them to operate more efficiently and reduces the risk of human error.</p><h3 id="aggregating-your-liquidity">Aggregating Your Liquidity</h3><p>Another area where DeFi market making is required concerns liquidity aggregators. A DeFi aggregator is a platform that aggregates liquidity from multiple sources and makes it available to users in a single location. It allows users to access a wide range of liquidity sources, including exchanges and liquidity pools, in a single place, making it easier for them to find the best price and trade their assets.</p><p>Liquidity aggregators are involved with aggregators in helping to fulfill orders by sourcing liquidity from across a full spectrum of available sources. Usually this occurs on one particular blockchain, such as Ethereum or Avalanche, but there are also cross-chain aggregators that can source liquidity from multiple EVM (Ethereum Virtual Machine) compatible chains.</p><p>To summarize, crypto market makers can be divided into the following categories:</p><ul><li>Specialist companies, either exchange-owned or independent, that buy and sell on CEXs and profit through differences in the bid-ask spread</li><li>Crypto projects that use a portion of their treasury, generally including holdings of their native token, to provide liquidity for pools on CEX and DEX</li><li>Independent market makers that offer automated services for matching orders on decentralized exchanges and aggregators</li><li>Independent users who provide DeFi liquidity through locking their tokens into a DEX smart contract and earn fees in return</li></ul><h3 id="how-defi-users-can-get-involved">How DeFi Users Can Get Involved</h3><p>The decentralized nature of crypto means that anyone can participate and this doesn’t just apply to trading: it applies equally to market making. There are a number of ways in which you can earn a passive return on your assets through providing market making and similar liquidity-enhancing services.</p><p>Participate in liquidity mining on blockchains such as <a href="https://defichain.com/learn/liquidity-mining-how-to" rel="noopener noreferrer nofollow">DeFiChain</a> and you will be rewarded with fees and tokens based on your share of the total pool liquidity. Every time another user conducts a swap, you will earn a portion of the fees that are paid. Any time you wish to remove your liquidity, you are at liberty to do so. You can also provide liquidity to DeFi aggregators that unlock the full range of onchain liquidity.</p><p>DeFi market makers play a vital role in helping users access greater liquidity in decentralized markets and facilitate the exchange of assets at the desired price.</p>

Crypto Market Makers 101: How They Work and Why It Pays to Participate

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