What do crypto market makers do? Liquidity, or fraud

Few casual crypto holders understand the role of market makers. At the simplest level, market makers provide liquidity to trade their assets in the cryptocurrency market, ensuring that they are often available if a user tries to buy or sell a coin in a different currency. Able to

However, unethical market makers control the token price, increase the amount and pump and dump.

Many cryptocurrency projects employ tactics such as wash trading to keep track of their performance metrics, creating the illusion of volume where entities repeatedly trade the same asset back and forth. In traditional markets, this is illegal market manipulation, where the demand for a particular asset misleads investors.

“a lot of [token] “The projects are their own business community or investors are cheating these washroom businesses or these volumes,” said Mathias Beke, head of market creation and business at Belgium-based Kyron Labs.

He added that these cowboys give legitimate market makers a bad name, but global regulatory developments are gradually making it more difficult for such businesses.

It is difficult to find hard data on the volume of laundry transactions. Bitwise famously reported in 2019 that 95% of the volume on unregulated exchanges is fake. A December 2022 survey by the National Bureau of Economic Research (NBER) found that figure had dropped to around 70%.

Yang Yang, co-author of the NBER study, told the magazine that according to the study, properly regulated exchanges account for less than 3% of spot market transactions.

Regulated exchanges, as defined under the New York Crypto Bitlicense, adhere to strict requirements around anti-money laundering programs and customer data record keeping, and have a disaster recovery system.

Since the BitLicense was launched in New York, other financial centers around the world – such as Singapore, Hong Kong and Dubai – have imposed stricter licensing requirements of their own.

“With an unregulated exchange, you can tell right away that the economic indicators are very far from the regulated market,” says Yang.

It is also where illegal marketers ply their trade.

Market makers and supply of funds

It is important to distinguish between the two main market makers. Exchange market makers focus on creating a stable, liquid trading environment for a particular cryptocurrency exchange.

Token market makers, on the other hand, are often engaged by the issuers of the tokens themselves. Their main purpose is to ensure liquidity for a particular token, especially in the early stages or during low trading volume.

This type of market practice helps new tokens get noticed and noticed in a crowded market.

But what some token projects hope to get from marketers and what legitimate companies offer are often the opposite.

“Generally what [token projects] They think the search market maker is going to create volume, add value and pump and dump,” Jelle Buh, founder of market maker Influx, told the magazine.

But that is not entirely correct.

He explains that the role of a market maker is to sell assets with buy and sell orders and maintain a healthy order book.

By placing orders on both sides of the book, you ensure there is always a match for incoming orders, increasing the liquidity of the asset.

Market makers offer to buy (bid) and sell (ask) a crypto asset at different prices. The difference between these two values ​​is known as the spread.

A narrower spread generally indicates a more liquid market, while a wider spread indicates less liquidity and higher trading costs.

“It's the marketer's role to make this as tight as possible, given that it's not usually a loss-making activity.”

A narrow bid-ask spread is often accompanied by strong market depth, which refers to the amount of buying and selling at different price levels in the order book at a given moment.

Market depth can measure the property of accepting large orders without significant price movements.

A market maker is expected to maintain a level of liquidity without compromising profitability.

According to Buh, there are two primary business models for token projects: the service model, where market makers receive bundled payments to create a liquid trading environment, and the credit option model.

In a loan option model, a market maker borrows a certain amount of tokens from a crypto project with an agreement that the tokens will be sold at an initially set price. These tokens are used to provide liquidity, but often come with the primary goal of turning a profit, Bhutto says.

Market manipulation and incentives for credit options

For example, consider a market maker that borrows 100,000 tokens from the Cryptocurrency project at $1 per token.

This is not just a direct loan. It comes with a built-in option for the market maker to redeem the loan by redeeming an equal number of tokens at the same price of $1 at the end of the agreed upon period, regardless of the current market price.

During the term of the loan, the market maker can sell these tokens on the open market and become profitable if the price rises.

Ideally, the market maker would retain the proceeds from selling the tokens at higher market prices during the loan period.

At the end of the loan term, they can use some of these proceeds to buy back the tokens at the current market price if needed, or they may already have tokens to redeem. Then you can settle the loan for 1 dollar per token, which can be profitable if the purchase price is lower than the sale price during the loan period.

This allows them to cover their obligations while making a profit. It also allows the market maker to control the risk by knowing in advance the high price they will pay to return the borrowed tokens, while the token issuer benefits from the liquidity and market presence during the loan period.

The disadvantage of the loan option for projects is the lack of control over the tokens themselves. Boot says:

“I'm not saying they always do it, but there is something that encourages them to do unethical business. [and] Manipulating markets to maximize profits rather than being an incentive to create a healthy market or business environment.

According to Buh, market makers under the token lending model may artificially depress the value of the token before the deal expires in order to renew the partnership at a lower price.

“The moment the agreement is renewed, they will allow the price to increase significantly,” added Butt.

“Unethical” market makers

Operators of low-income companies – let's call them MM – exchanges who wish to remain anonymous have encouraged the use of unethical market makers.

“Exchanges have unspoken requirements that the project must exceed a certain daily trading volume, and this creates an incentive for projects to increase the trading volume,” said M.M.

MM Token projects offer their services to be listed on exchanges on decentralized or centralized platforms.

The source declined to elaborate on how to get the details, but said their market maker does “what competitors don't do.”

According to screenshots of documents seen by the magazine, some of the services MM offers or offers include unethical and potentially illegal tactics to increase prices and volume, such as front-page news events and bath marketing.

This is “clearly unethical,” says the Kyron Lab's BK of the tactics, and refuses to call businesses that offer such services “market makers.”

“This ultimately hurts investors and traders because they are caught up in these dynamics,” said Beke, adding that clients are often disappointed when their firm does not provide volume and price adjustment services.

Exchanges crack down on shadowy crypto market makers.

Asal Alizadeh, head of operations at Web3 consulting firm Bloglogica, confirmed MM's contention that transaction volume is one of the most important factors for listing projects on centralized exchanges. However, exchanges are also waiting for fraud.

“In high-level exchanges, if the project does not comply with the requirements and cannot meet the minimum transaction volume for a certain period of time, or if it does not meet the terms and conditions of the exchange and shows unethical actions such as pumping and so on, the token will be discarded or the price manipulated,” Alizadeh told the magazine.

“High-level exchanges not only check the token's legal documents, permits and legal opinions, but also check the project's organic community and evaluate the strength of this community, including the project's social channels,” she added.

Exchange Magazine details the proactive steps you can take to eliminate bad actors.

“The crypto space is highly competitive, and it's not uncommon for participants to invent information to stay ahead of the curve,” said Ryan Lee, principal analyst at Bitgate Research.

“The trading volumes on Bitget are real, including from retail traders, institutional clients and market makers. One of the main price arbitrariness is the updated platform algorithm that brings price arbitrariness,” Lee said.

Vivian Lin, chief product officer of crypto exchange BingX, told the magazine that as crypto platforms join the market, they are deploying better monitoring systems to identify and mitigate suspicious transactions.

“At BingX, in addition to enhancing clearing and settlement processes to combat money laundering, we have increased enforcement and introduced stricter penalties for violations,” he said.

Bitgate declined to comment when asked if exchanges have detailed fees or penalties for projects that fail to maintain a certain transaction volume. BingX says it doesn't charge listing fees or impose voice requirements.

It's difficult for ordinary consumers to know how much bathroom shopping is at any given time. CoinGecko CEO Bobby Ong told the magazine that the aggregator does not have its own internal mechanism to verify the amount that has been laundered. CoinMarketCap did not respond.

Regulations can curb the laundry business and other black practices

The European Union introduced the markets in the regulatory framework of Crypto-Assets, which was published on June 9, 2023, in the Official Journal of the European Union and entered into force 20 days later. Full compliance is required by December 30, 2024.

The MCA prohibits conduct that constitutes market manipulation, including making transactions that give false or misleading signals about the supply, demand or price of a crypto asset. Bath marketing falls under this definition.

“Because of regulations like MiCA, no one can promote this,” says MM. “Most market makers are now regulated, so you start to see less and less [unethical services]But there are always bad actors who are willing to do whatever the customer asks.

Booth of Enflux believes that dodgy market makers simply go offshore.

I think this rule is definitely good. [and] It has to go there, but still I think there are always ways as long as there are unethical actions.

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John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed as an editor to crypto media outlet Forkast and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.