Market Making

Become the counterparty of a trade

Market Makers make two-sided markets in financial assets. It is no different in DeFi. Market makers help define the depth and liquidity of markets. Makers post a bid and offer price to a given coin and readjust those prices as the market’s transaction activity unfolds. Market makers monitor coin prices in real time and seize upon market trends by establishing positions as marginal buyers and sellers transact. Simply put, when most traders on the market try to sell an asset, market makers would buy it, and when most traders on the market try to buy an asset, market makers would sell it. By doing so, market makers play a critical role in coin prices while preventing unpredictable spikes in price due to poor liquidity.

The bid/offer spreads that market makers enjoy are how they get paid for providing liquidity to a coin. They play an essential role in the market, smoothing out price adjustments and helping ensure an orderly market over time.

Traditionally, a market maker is a firm or individual who actively quotes two-sided markets in a given financial instrument. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid. However, DeFi allows any investor to become a market maker using smart contracts with no central “institution”.

With an order book mechanism, market makers can post their resting prices and readjust as positions get bought or sold. With AMM’s, the market making function has been ceded to an algorithmic function and implemented via smart contracts.

Market making is essential to the liquidity and orderly functioning of an asset and trading venue. Markets without makers tend to be disorderly, with abrupt and volatile price changes. This in turn dissuades market participants from entering the market, which in turn dries up liquidity. Without liquidity, a market cannot survive in any meaningful way. 

Market makers are paid, in the form of bid/offer spread, to take on the risk of liquidity provision. Generally speaking, a market maker is more agnostic to the price of the underlying asset than a position trader. Market makers concern themselves with buying at a slightly lower price than they are selling. While Makers have been automated to an algorithmic function in AMM’s, the economics are still the same, as liquidity providers share in the transaction fees of the AMM, thus filling the role of the market maker.

Video by: Keytango

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What is SushiSwap?

SushiSwap is an automated market making (AMM) decentralized exchange (DEX) currently on the Ethereum blockchain. 

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