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Market Makers

Market makers are the entities that keep markets functional. They provide liquidity by continuously offering to buy and sell assets, ensuring that when you want to trade, there's someone on the other side.

In traditional finance, market makers operate under regulatory obligations. In crypto, they do not. This distinction has significant implications for market behavior and execution quality.

TL;DR

  • Market makers provide liquidity by posting buy and sell orders; they profit from the Spread
  • Traditional Designated Market Makers (DMMs) have legal obligations to maintain orderly markets
  • Crypto market makers have no obligations—they withdraw when conditions become unfavorable
  • The "loan model" creates misaligned incentives where market makers can profit from price crashes
  • Visible order book liquidity can disappear in seconds during market stress
  • Multiple 2025 scandals (MOVE, Mantra OM) revealed market maker-project collusion against retail

What Market Makers Do

Market makers populate order books with buy and sell orders at various price levels. When you execute a trade, you're often trading against a market maker's inventory.

sequenceDiagram
    participant Seller
    participant MM as Market Maker
    participant Buyer

    Seller->>MM: Sells 100 tokens @ $0.99
    Note over MM: Adds to inventory
    MM->>Buyer: Sells 100 tokens @ $1.01
    Note over MM: Profit: $0.02/token (spread)

Core Functions

  1. Liquidity Provision: Placing orders on both sides of the book so trades can execute
  2. Spread Maintenance: The gap between Bid and ask is the market maker's compensation
  3. Price Stability: Absorbing temporary imbalances in buy/sell pressure
  4. Price Discovery: Facilitating the process of finding fair market value

How They Make Money

Market makers profit from the Spread—the difference between what they pay (Bid) and what they charge (ask). If a market maker buys at $0.99 and sells at $1.01, they capture $0.02 per token.

This works when markets are stable. When volatility spikes, spreads widen to compensate for increased risk. When volatility exceeds their risk tolerance, market makers withdraw entirely.

Traditional vs. Crypto Market Makers

The fundamental mechanics are similar. The regulatory environment is not.

Traditional Finance: Designated Market Makers

On the NYSE, Designated Market Makers (DMMs) have legal obligations:

  • Must maintain fair and orderly markets
  • Must quote at the National Best Bid/Offer (NBBO) a specified percentage of the time
  • Must facilitate price discovery during opens, closes, and periods of volatility
  • Must provide liquidity during imbalances

Firms like Citadel Securities and Virtu Financial operate as DMMs. They're compensated through spread capture and exchange rebates, but they cannot simply walk away when markets get difficult.

Crypto: No Obligations

Crypto market makers have no regulatory obligations. They provide liquidity when it's profitable and withdraw when it's not. There is no requirement to maintain orderly markets, no mandate to quote continuously, no obligation to step in during crises.

ASPECT TRADITIONAL DMM CRYPTO MARKET MAKER
Regulatory oversight ☑ SEC, FINRA ☒ None
Quoting obligations ☑ Yes ☒ No
Withdrawal restrictions ☑ Cannot abandon market ☒ Can withdraw anytime
Transparency ☑ Public reporting ☒ Opaque
Accountability ☑ Legal liability △ Reputational only

This asymmetry explains why crypto markets experience liquidity vacuums that traditional markets do not. The October 2025 Flash Crash demonstrated this clearly—market depth collapsed 98% within 40 minutes as market makers withdrew.

Major Crypto Market Makers

Wintermute

One of the largest crypto market makers. Provides liquidity on major Centralized Exchanges (CEXs) and Decentralized Exchanges (DEXs). Handles significant volumes on Binance.

Jump Trading / Jump Crypto

Traditional finance background (Jump Trading is a major Chicago High-Frequency Trading firm). Jump Crypto was their crypto arm, though they've scaled back operations after 2022 losses and regulatory scrutiny.

GSR

Founded in 2013. Provides Over-The-Counter (OTC) trading, market making, and derivatives services. Works with token projects on liquidity.

DWF Labs

Operates as both market maker and investor. Known for the "loan model" where they receive tokens from projects and provide liquidity. Controversial due to opacity around their activities.

Alameda Research (Defunct)

Was the market making arm of FTX. Collapsed in November 2022 after misappropriating billions in customer funds. See Alameda/FTX Collapse for details.

Market Maker Business Models

How market makers structure deals with token projects varies significantly. The model chosen has implications for how incentives align—or don't.

Retainer Model

Project pays market maker a monthly fee ($50K-$500K) for liquidity services. Market maker provides defined services: spread targets, depth requirements, uptime guarantees.

  • ☑ Clear service relationship
  • ☑ Market maker compensated regardless of token performance
  • ☒ Expensive for projects

Loan Model

Market maker receives tokens as a "loan" and uses them to provide liquidity. At contract end, they repay at a predetermined strike price or return tokens.

  • ☑ Project doesn't pay cash upfront
  • ☒ Misaligned incentives when strike prices are set at multiples of current price
  • ☒ Market maker can profit by dumping loaned tokens, crashing price, buying back cheaper

Investment/OTC Model

Market maker "invests" by buying tokens at a discount (often 30-50% below market) with a lock-up period.

  • ☑ Project receives capital
  • ☒ Significant dilution
  • ☒ Large sell pressure when lock-up expires

The Loan Model Problem

The loan model has been implicated in multiple token collapses. When strike prices are set at multiples of the starting price, market makers have limited downside and significant upside from volatility—including downward volatility they can induce.

sequenceDiagram
    participant Project
    participant MM as Market Maker
    participant Market

    Project->>MM: Loans 10M tokens
    Note over MM: Strike price set at 3x current

    MM->>Market: Sells 5M tokens
    Note over Market: Price crashes 50%

    MM->>Market: Buys back 5M tokens at discount
    Note over MM: Keeps profit difference

    MM->>Project: Returns 10M tokens<br/>or pays (crashed) strike price

This structure has contributed to scandals including the MOVE Token Dump and Mantra OM Collapse.

Conflicts of Interest

The crypto market maker industry contains multiple structural conflicts:

Exchange-Market Maker Relationships

Many exchanges have undisclosed arrangements with market makers. Preferential treatment (lower fees, early information, special API access) creates information asymmetry.

Market Maker-Project Relationships

When market makers receive tokens from projects, their incentives may diverge from holders. The loan model in particular creates scenarios where market makers profit from price declines.

Internal Market Making

Some exchanges operate internal market making desks that trade against customer orders—raising questions about conflicts of interest.

The Liquidity Illusion

Market maker activity can create the appearance of liquidity that evaporates under stress.

Visible vs. Real Liquidity

Order Books show visible liquidity—the orders currently posted. But market makers can withdraw these orders in milliseconds. What looks like a deep, liquid market can become a vacuum instantly.

Self-Reported Metrics

Many liquidity metrics are self-reported. Projects and market makers can inflate volume and depth figures. The Mantra scandal demonstrated how this can mislead investors about actual market conditions.

Stress Testing

True liquidity is revealed during market stress. The October 2025 crash showed that crypto's liquidity was largely illusory—when it mattered most, it disappeared.

Risk Factors

When evaluating tokens and markets, consider:

RISK FACTOR CONCERN
Market maker concentration Single provider = one withdrawal from crisis
Deal structure opacity Unknown loan terms create hidden risks
Exchange dependencies Few listings + concentrated MM = vulnerable
No regulatory protection No circuit breakers, no halts, no intervention

References

Market Maker Fundamentals

Traditional Market Making

Market Maker Scandals

Changelog

DATE AUTHOR NOTES
2025-12-24 Artificial. Generated by robots.
2026-01-08 Denizen. Reviewed, edited, and curated by humans.