Source: B2Broker

WHAT IS MARKET MAKING?

Market making as it concerns cryptocurrency means providing liquidity to the crypto market by making it easier for people to purchase and sell assets. To enhance trade execution and give users a better trading experience, crypto market-making involves supplying exchanges with additional liquidity.

Market makers are individuals or organizations constantly purchasing and selling a certain cryptocurrency to ensure a ready market for traders to buy or sell that crypto asset. Market makers are an essential part of ensuring the efficient operation of the crypto market as they are the links between buyers and sellers, they bring stability as well as liquidity.

The crypto market is extremely volatile and with the small trading volume of many cryptocurrencies, it is challenging for traders to locate buyers and sellers at a fair price. Market makers consistently provide quotes to ensure that there is always a buyer or seller available.

This increases trading efficiency.

HOW MARKET-MAKING WORKS

Quote buy and sell prices for assets: Market makers quote buy and sell orders for cryptocurrencies regularly. They are ready to purchase and sell assets.

Bid-ask spread: the bid price is the price that market makers are willing to pay to buy crypto assets. The ask price is the price at which they are willing to sell crypto assets. The difference between the two prices is called the spread and it is from this spread that market makers take their profit because they buy at a much lower price than they sell.

Provision of liquidity: market makers always have liquidity (in various cryptocurrencies) at hand to facilitate easy buying and selling of crypto assets on request. Being able to provide liquidity as required is what keeps the demand and supply of crypto assets stable.

AUTOMATED MARKET MAKER (AMM)

Market makers use automated algorithms, tools, or techniques to study the market to adjust their quotes and trade automatically. This is referred to as Automated Market Making (AMM).

Automated market makers, or AMMs, use liquidity pools in place of traditional buyer-seller markets to enable automated, permissionless trading of digital assets. The growth of DeFi brought about more use of automated market makers. Individuals can contribute to liquidity pools by depositing cryptocurrencies in them. The prices of the cryptocurrencies in the liquidity pools are determined by an algorithm, unlike in traditional market making where prices are determined by the providers of the liquidity (the market makers). Unlike in traditional market making where buyers and sellers interact for trade to happen; with AMMs, users interact with liquidity pools when they wish to trade/exchange one crypto for another.

AMMs offer some benefits, one of which is decentralization - to eliminate autonomy and control that central bodies or individuals may exercise over users (in terms of price manipulation).

Uniswap, SushiSwap, Curve, PancakeSwap, Balancer, and KyberSwap are some popular AMMs.