What Are Market Makers?
On the internet, you can find this definition:
A market maker in the cryptocurrency industry is a professional who provides liquidity on exchanges, creates supply and demand for trading pairs.
And most articles online revolve around this definition, superficially retelling who a market maker is without going into the essence.
In this article, I want to immerse the reader in the market-making industry and answer the following questions:
What role do market makers play in the market?
What types of market makers exist and how do they earn?
Why do projects need a market maker?
Why can't a token/coin survive without an MM?
The Main Role of a Market Maker
The main role of any market maker is providing liquidity. It doesn't matter what market we're talking about: futures, spot trading, or micro-cap projects.
The key requirement for a market maker is maintaining liquidity within a given range from the current price.
Requirements may differ, but the goal is always the same: to give traders and investors the opportunity to trade normally on the market - buy slightly higher and sell slightly lower. Without a market maker, the word "slightly" simply wouldn't exist here. In that case, the market becomes chaotic, and the picture would look like this:
Buy orders start at $0.5 for Example-coin
Sell orders start at $2.0 for Example-coin
I think only the most desperate would still want to trade such an Example-coin. This is a clear example of a market without a market maker.
Types of Market Makers
We've figured out the role of market makers, now let's understand what types exist.
In the crypto industry, we can roughly distinguish two types of MMs: institutional market makers and project market makers. They differ in their work specifics.
Institutional market makers are, as a rule, large companies or teams that work directly with top exchanges and service popular trading pairs. The exchange itself pays them for providing liquidity.
Project market makers, as the name suggests, work directly with the project.
Why Does a Project Need a Market Maker?
At this point, some readers might ask: why should a project work directly with a market maker if there's an exchange? Isn't a CEX listing enough to get market making?
No, it's not enough. After listing on a CEX, the project separately pays for market maker services so that its coin looks attractive to traders and meets the exchange's requirements.
And here a hidden problem arises for inexperienced founders: they don't account in advance that when entering a CEX, they will need a market maker. If a trading pair doesn't meet the exchange's criteria, delisting occurs. And delisting for a project usually means not only losing the trading pair, but also losing aggregators, community trust, and market status.
It's also worth noting that a market maker protects the market from manipulation. A competent MM is interested in keeping the trading pair healthy and stable - that's the only way to earn in the long term.
Conclusion
I hope this article was useful and helped you better understand who market makers are. If you want to develop in the crypto industry or stock market, understanding the logic of MM actions is an essential skill, because today a market maker is an indispensable participant in the exchange market.
P.S. Example-coin is a fictional asset used as an example.