What Is A Market Maker In Crypto And Why Are They Essential For Blockchain Projects?
In Brief
Market makers are essential to the crypto industry, providing liquidity, stabilizing prices, and enabling smooth trading across centralized and decentralized exchanges.
They say money never sleeps, and the same is true of the crypto market. Whether you’re trading bitcoin or alts, farming, borrowing, shorting, or longing, there are any number of CEXs and DEXs only too willing to take your action. While the industry’s relentlessness depends on several critical spokes, perhaps the most important is the one that prevents trading from grinding suddenly to a halt. We’re talking, of course, about market makers.
Behind every great centralized exchange lies a powerful market maker, an entity that provides liquidity and, in so doing, guarantees there’s always a buyer or seller ready to trade. These players are the oil in the finely-calibrated Web3 engine, quietly powering liquidity and stabilizing prices in a space notorious for eye-popping intraday swings.
With the industry’s market cap sitting at $3.8 trillion, and exchange platforms processing an average quarterly trading volume of over $200 billion, the services of market makers have never been more in demand. Indeed, they can make or break a crypto project coming out of the gate. Let’s take a closer look at the role and responsibilities of today’s market makers.
Market Makers: The Backbone of Crypto Trading
If market makers shut up shop tomorrow, there’d still be a crypto market. It would just operate on a much smaller scale and more chaotically than you can possibly imagine.
By standing ready to buy or sell tokens at quoted prices, market makers narrow the gap between bid and ask prices (‘the spread’), and their presence means that you’re never left waiting for the counterpart of your trade to show up. In crypto, where volatility can turn fortunes upside-down in minutes, this continuous provision of liquidity is a lifeline. It’s why tier-1 platforms like Binance and Coinbase can do what they do, and why market makers for crypto generate enormous returns.
From the perspective of a new blockchain project, market makers enable investors to jump in or out of trades without causing massive price changes (price slippage) that could tank the token. Admittedly, some level of volatility remains; particularly given the number of projects operating on a wing and a prayer, their token trading hands among hardened DeFi degens; but that’s hardly the fault of liquidity providers.
There’s another reason for price volatility, though: decentralized trading. You see, away from the regulated platforms where users must complete KYC, there are dozens of decentralized exchanges (DEXs) dependent on automated market makers (AMMs): smart contracts that trigger based on the ebb and flow of supply/demand in liquidity pools funded by user deposits. This isn’t a knock on DEXs, but the deeper liquidity is very much on CEXs – and that’s thanks to market makers.
Why Blockchain Projects Need Market Makers
Blockchain projects launching a token without a market maker are like retailers who open a shop in the desert. Ultimately, you need to make sure liquidity is sufficient to facilitate trading – otherwise you’ll have no option but to take your chances with DEXs.
If liquidity is low, your token will also be at the mercy of brutal price swings and investors will understandably lose interest. Little wonder many projects recruit market makers to gain credibility and token stability out of the blocks.
Of course, these services come at a price: hiring a market maker (particularly a premium firm) can cost a small fortune, with some insisting on a generous slice of monthly trade volume. Partly this is due to the services provided, partly a result of the badge of authenticity they confer upon projects they partner with.
The Bigger Picture
Tight spreads. Deep liquidity. Credibility. Stability. Whatever benefit you choose to cite, market makers are absolutely worth their weight in gold.
By keeping trades flowing across thousands of tokens and attracting the users needed to scale a project, they have helped countless ventures find their feet in what is, after all, a hyper-competitive landscape.
The good thing is, these firms aren’t going anywhere. Despite the recent growth of DEXs, centralized trading platforms remain the industry’s bellwethers. So long as they’ve got market makers backing them, their status as go-to destinations for crypto traders and speculators remains secure.
Disclaimer
In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.
About The Author
Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
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Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
