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What is a Market Maker in Crypto, and How Do They Act?


Liquidity is probably the most important characteristic of the cryptocurrency market. It indicates how easily assets can be sold and bought and at what price. If the buying and selling price difference (spread) is tight, the market is attractive for traders. If there is a big difference, it means prices are volatile, and there is a huge imbalance between demand and supply.

Liquidity largely depends on market makers. This article explains the role of market makers in the crypto market.

Liquidity Providers and Crypto Market Makers

Crypto liquidity providers are companies or individuals that facilitate trading within the crypto market. Their task is to provide a pool of assets for trading for other market participants so they can easily buy and sell assets. This pool is called a liquidity pool. On decentralized exchanges, this pool is made up of funds that users have locked into a smart contract. These users, in return for providing their assets to the pool, earn trading fees based on the volume of transactions that occur using their funds. The concept behind liquidity pools is to create a self-sustaining trading environment where assets can be exchanged directly between parties without the need for traditional market makers. 

Liquidity providers may also act in the centralized trading environment, such as a market maker crypto exchange. In this case, they are called market makers. Market-making strategy in crypto is to provide bid-ask spreads (buy/sell price difference) for assets in the exchange’s order book. A tight spread creates a stable and favorable trading environment, attracting other traders and increasing exchange activity.

The Essence of Crypto Market Making

Crypto market making is a trading strategy used by individuals or firms known as market makers. They support the trading of digital assets by always offering to buy and sell prices on both sides of the order book. The main goal of market makers is to earn profits from the spread.

Arbitrage is the most common crypto market-making strategy, which implies making a profit from the price differences on crypto platforms. Market makers simultaneously place buy orders on one platform (where the price is lower) and sell orders on another one (where the price is higher). In such a way, market makers may gain short-term earnings. This strategy requires quick order execution and reliable access to different trading platforms.

Market making in crypto helps create a stable and efficient trading environment for traders and investors by ensuring liquidity, narrowing bid-ask spreads, and facilitating smoother price discovery. This role is crucial in the volatile crypto markets, where liquidity can vary significantly across different exchanges and assets.

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