Role of Market Makers in the Crypto Economy

What is the role of market makers in the crypto economy? The role of the market makers in the crypto economy is quite important just as it is in any other field.

If you are wondering what exactly it is, you are in the right place to know all about them.

This article deals with their roles related to the opportunities created by them and the impact they have on the future of the crypto economy.

You may not know that market making is not a new concept. It is something that has been around for centuries now.

This concept of market making was invented by two brothers, Christoffel and Jan Raphoen, in Amsterdam sometime in the 1620s!

At that time the scope of market making was very limited, quite naturally, and involved buying the shares of the Dutch East India Company.

The shares of this first publicly traded company of the world were bought from the people who were interested to sell them and were sold to those people who were interested to buy them.

This means that the two brothers were the missing link and simply connected the buyers and sellers of the shares of the Dutch East India Company. and for that, these buyers and sellers did not need to be present at the same place at the same time.

That was their role as the market maker. 

What is the Role of Market Makers in the Crypto Economy?

Role of Market Makers in the Crypto Economy 

The concept of market makers now, more than five centuries later than it was first introduced, has not really changed much from what it was then.

It is still a useful concept that is followed whenever there is a need to swap a financial asset.

The role of the market makers ideally is to stand in the middle and act as a liaison between the two parties buying and selling an asset.

In this way they make a little bit of money, mainly as commissions in exchange of their service provided to the two parties in action.

Ideally, the basic role of the market makers is to provide the traders with the much needed liquidity during a trade.

Now, a question may naturally come across in your mind which is where exactly do these market makers fit in the crypto world given the fact that it is supposed to be decentralized.

Well, decentralized as the crypto market truly is, the market makers still find a way to get their cut some way or the other.

You will be surprised to know that even the Wall Street muscle to find a place in the middle.

In fact, believe it or not, the market makers have already put their feet deep into the crypto space, especially when it comes to dealing with Bitcoin and Ether.

These are the two of the most popular and widely traded cryptocurrencies on several crypto exchanges and platforms all over the globe.

For example, if you want to purchase Bitcoin worth $1 billion, you will need to look for it in different sources and platforms, which may be possible but certainly will not be easy or quick.

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Here is where the market makers come to your rescue.

These market makers will take the pain of sourcing the desired number of coins, bit by bit, from different trading platforms and venues on which that particular crypto asset is available.

This will save a lot of your time and hassles. In exchange for their painstaking service all you have to do is pay them a specific amount as service fees.

The market makers however do not only help the traders to trade with the big crypto coins only.

This, however, is just the start and the major market makers have a different perspective altogether.

They believe, just like most crypto optimists and advocates, that the blockchain technology and crypto tokens will become mainstream one day and will command an extensive swath of the world economy.

And with the current rate at which both crypto and blockchain is developing and is being used all over the world, they are not wrong in any way.

It is highly likely that blockchain technology in particular will run everything from financial exchanges to the internet and from game software to data storage.

Therefore, with their involvement with crypto, these market makers are simply trying to make the head start.

Typically, the market makers today are actually following the primary principles of trading and are getting back to it.

They are creating a ‘Buttonwood tree’ under which everyone can meet and make their trades, easily, quickly, and more conveniently just as the Wall Street has done being the originator of the New York Stock Exchange.

However, in the olden days, the exchanges were owned, governed, and operated by the traders using these platforms.

It is the traders themselves who shaped out the accurate design but now, the market makers have become the part of the designing process of the future market in crypto. 

Opportunities 

The crypto market has not only created an opportunity for the traders and investors to earn big money (few have really made millions from this space) but has also created an opportunity for the market makers to make money with their services.

Typically, the market makers of today cannot be termed as market makers only.

Instead, it will not be exaggerating even by an iota if it is said that they are high frequency traders.

However, the market makers typically hate to be termed as such.

Nonetheless, the market makers surely expedite the process of trading by establishing a connection between the buyers and the sellers.

They are today found to be involved in almost everything right from stocks to bonds to cryptocurrencies and to derivatives.

However, when it comes to cryptocurrencies, these market makers salivate at the prospects and potential offered by this market space having never seen anything like this.

Quite naturally they consider it to be an opportunity of a lifetime to trade with this entirely new asset class.

So much for the market makers! Now, on the other hand, take a look at it from the perspectives of the several participants of the market.

The presence and influence of the market makers in cryptocurrencies typically seems to be in contradiction to the guiding principle of it in the first place which is to eliminate the need of a middleman or an intermediary while making a trade or a fund transfer.

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Therefore, you may feel that their presence in the middle could be a threat to you as well as to the crypto business on the whole.

However, there is no gain without pain, and therefore, if you want to expedite and smoothen your trades, you will find the services of these market makers to be extremely useful.

As it is, the crypto market and the prices of the crypto assets are extremely volatile.

This means that there can be dramatic price swings, and there is no guarantee that every time it will swing to your favor.

Therefore, success in this field is far from guaranteed, especially if you explore the newer parts of this space, even if you are an established crypto trader or investor.

This is because in these areas there may be a few projects that you may want to trade with but be hardly acquainted with (though there is no reason why you should trade with them).

And, there may be a few projects that will not be suitable for the market makers while dealing with them such as the Decentralized Finance or DeFi projects.

The market makers are taken out of the equation from this particular realm because popular crypto token exchanges dealing with DeFi projects have Automated Market Makers or AMMs built in.

Therefore, there is no scope for the market makers in the DeFi world because they would not recognize them.

Instead, it is the AMM that will allow the users to put their coins into a liquidity pool that other users may be interested to trade with and in return earn a fee for tying up their coins with the pool temporarily.

It is this pool that acts as the market maker and ensures that the buyer and the sellers find their desired tokens they want to swap.

Once they do and go ahead with it, the math equation will then adjust the prices and carry out the trade automatically.

Therefore, human or a machine, the role of the market makers cannot be overlooked or ignored.

With their varied and useful services, the traders and investors of today are adequately benefited. 

Importance 

The importance of market making today is immense, especially in the case of those niche assets that are not traded widely.

And, given the fact that there are a lot of these new and obscure coins produced and launched into the crypto market every day, the importance of the market makers seems to be all the more pronounced.

Not only that. The importance of the market makers is also quite felt for assets that need to be tokenized.

Therefore, there is no doubt about the significance of the market makers.

However, the question is whether it needs to be an established firm or will the AMM be able to handle all the needs of the traders in the market space.

On that particular point it is worthy to mention that there is a little limitation on the part of the AMMs.

These are essentially the buyers of last resort that cannot match the tight spreads with the profundity of liquidity.

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This means that these AMMs will not be able to identify the small gaps that may exist between the buying and the selling prices of a particular crypto asset.

This is where the AMMs lag a bit behind the Raphoenian market makers.

Future 

The future of the market makers in the crypto space of today seems to be very bright.

This is because there are lots of startups coming up that are token-powered.

The market makers can help them immensely in making their venture capital investments in addition to their services provided to the usual crypto traders and investors.

They can provide valuable services to these startup companies and may even invest in them thereby providing the companies with more liquidity for their tokens.

Such types of services are considered sometimes to be much more valuable in comparison to the services provided by the traditional Venture Capital firms.

In addition to that, the market makers will also provide a lot of help to get a decentralized project off the ground since they will provide their services to it in order to prevent the dearth of liquidity even if it is momentary.

The market makers can help the startups in examining the relation of the tokenized economy of today with crypto as well as in building a market ecosystem for them that will not only be active but will also be fast moving.

They can explore this market and achieve their business goals easily.

Add to that, the market makers can also help in building a protocol that will help the crypto traders to get around the expense of using a specific blockchain such as Ethereum while making a transaction as well as its notoriously slow speed.

This type of service provided by the market makers are also very useful for those tokenized versions of stocks that use the popular blockchain technology that  underpins several different crypto projects but needs to make speed-sensitive trades.

The protocols built by them can process a transaction on a faster blockchain such as Solana and then pass the outcome of the transactions over to a slower Ethereum blockchain.

Therefore, with all such possibilities and different types of useful services provided by the market makers today to the crypto traders and investors, it can be said for sure that they are not going anywhere soon.

They will surely design the future of the crypto space just as they design their own.

Conclusion 

The importance of the market makers in the crypto scene is immense today even though their presence contradicts the primary principle of crypto trading.

They help all the different participants of the market. This article explained just how.