The role of market makers in crypto is often misunderstood, but in simple terms what they’re meant to do is provide enough liquidity to the market to ensure digital assets can be traded easily by participants. So if someone tries to sell a cryptocurrency, they’ll always find someone who’s willing to buy it, or vice versa.
However, some crypto market makers have developed a reputation for less-than-ethical trading activities in order to help somewhat suspect projects take advantage of investors. That’s because there’s a fine line between providing liquidity and engaging in more manipulative actions, such as wash trading, inflating transaction volumes and pumping and dumping token prices. These activities aren’t always so easy to spot.
Sadly, these illegitimate attempts at market manipulation have become all too common in the crypto world, giving market makers a bad name, even though the vast majority try to play by the rules.
While it’s not easy to find hard numbers regarding wash trading in crypto, there are a few studies that have published alarming findings. For instance, the crypto exchange Bitwise in 2019 admitted that up to 95% of trade volume on its platform was artificially generated by bots, while a 2022 study from the National Bureau of Economic Research revealed that wash trading on various decentralized exchanges it monitored accounted for around 70% of all trades.
The same study also revealed that regulated crypto exchange platforms, which always try to root out wash trading and other illicit trades, made up only 3% of all spot market transactions. It suggests that the vast majority of all trades in crypto are performed in the unregulated “wild west” of decentralized platforms, where virtually anything goes.
What Is Ethical Market Making?
In order to understand wash trading, it’s key to know what ethical market makers do in the crypto markets. Market makers cater to two kinds of customers, offering services to exchange platforms that aim to create a highly liquid yet stable trading environment for their users. They’ll employ carefully crafted trading strategies for each token pair, to ensure the exchange’s users can always buy and sell with minimal slippage. The second service is aimed at crypto projects seeking liquidity for their native tokens. It’s in the interests of these projects to ensure their tokens have sufficient liquidity so users can stage them, especially when they first launch a new asset. The general idea is that market making services can help new tokens to achieve visibility, increase adoption and find a relatively stable price.
Ethical market makers do this primarily by maintaining a healthy orderbook, making numerous buy and sell orders for an asset, so that real human traders can always fulfill their orders without any significant price impact. By continuously placing orders on both sides, market makers ensure there is always someone willing to match the requests of real traders. They boost the available liquidity of the asset
The strategy employed by market makers is complex, and they’ll generally use automated software algorithms to place multiple orders to buy and sell assets at different prices. The difference between the prices is known as the “spread”, and the idea is to keep this as narrow as possible. If an asset has a narrow spread, that means there is plenty of liquidity to absorb big orders, but if the spread is wide, this means the liquidity is limited, resulting in higher trading costs for users.
A narrow spread usually signifies that the market has sufficient depth in terms of open orders on the book, which is necessary to support traders. So long as there is lots of depth available, the market can absorb large volume trades without problems, without impacting liquidity.
The Darker Side Of Market Making
Market makers play a vital role in ensuring that tokens with smaller market caps can be traded easily, and it would be much more difficult for new cryptocurrencies to gain traction if they didn’t exist. Those who understand how markets work realize the need for these players. Indeed, market makers are also present on traditional financial markets.
However, the challenge is that market making isn’t too dissimilar from manipulation, where bad actors, sometimes known as “cowboys”, go to extremes to try and artificially inflate the prices of new assets. Wash trading is present on both centralized and decentralized exchange platforms, but it appears to be far more common on the latter. In a 2024 study, Chainalaysis published data showing how five DEX trading pools generated wash trading volumes of more than $78 million in April of that year. Interestingly, the same study showed that wash trading fluctuated wildly from month to month on those platforms, which indicates that such activity is being perpetrated by a relatively small number of bad actors.
Cowboy market makers attempt to inflate trading volumes far beyond their real level, primarily doing so through the use of trading bots. Investigations by the NBER showed that some cowboy market makers will charge a ballpark price of around $2,000 to generate up to $100,000 in trade volume using their bots. The trading bots cooperate with one another, buying and selling tokens back and forth repeatedly to artificially boost the trading volume. They’ll use multiple wallets while they’re at it to try and obscure the fact that these trades are fake. These cowboys also offer other services, such as front-running news events, to try and drive up token prices.
Unfortunately, it seems that some crypto exchanges are inadvertently incentivising some projects to engage in wash trading, due to their strict requirements regarding token listings. To protect their customers, centralized exchanges may insist that tokens exceed a minimum trade volume threshold. The thinking goes that if a token has a certain level of volume each day, it must be a popular and legitimate project, reducing the chances that their customers will be scammed by fraudsters. Exchanges will also insist on seeing the legal documents of tokens, including a legal opinion and any licenses the project holds, and evaluate its social media communities.
Still, some cowboy operators offer services designed to help crypto projects get around these safeguards and meet these minimum listing requirements, because if they can get listed on a major exchange platform, they can try to manipulate trade volumes and generate significant capital from their legitimate traders.
Building Healthy Markets
Genuine crypto projects are in need of market makers, but they need to look out for those providing ethical services that can help them to meet exchange requirements without resorting to dubious practices.
Kairon Labs positions itself as an ethical market maker that provides institutional-grade liquidity for crypto projects, ensuring they can maintain a healthy and sustainable market for their tokens without any funny business. It offers customized market making strategies for each token across various CEX and DEX platforms, allowing them to target their preferential platforms and markets. Its secret sauce is its proprietary algorithmic trading software, which spans more than 100 crypto exchanges and can adapt to even the most volatile market conditions on the fly, ensuring there is always adequate liquidity available for a token, without inflating trading activity.
Crypto projects can rely on Kairon Labs to maintain the highest standards, for it provides deep analytics for customers to audit trading activity across any exchange. The same analytics tools also help Kairon to refine its tailored market making strategies. It has a long, successful and verifiable track record of bringing stability to crypto tokens, illustrating the benefits of ethical market making.
These ethical market makers are going to become more prominent in future, and the ability to effectively maintain liquidity while ensuring tokens meet basic standards will become a crucial differentiator, especially as regulators begin to clamp down on cowboy operators. Last year, FBI investigators made headlines after creating a fake cryptocurrency company in order to entrap cowboys operators who engaged in illicit trading activities. Four market makers – ZM Quant, CLS Global, GotBit and MyTrade – were charged with fraud for advertising illegal market making services in what was a legal first for the U.S.
One of the cowboy traders provided its clients with a “volume support” dashboard, where they could select their desired wash trading volume on any crypto exchange they desired. In addition, it also offered a service generating sufficient trading volume for projects to avoid token listing fees.
Final Thoughts
Thanks to the efforts of lawmakers and enforcement agencies to clamp down on such practices, it would appear that wash trading is declining, and that can only be a good thing for the broader crypto industry, helping to bring greater legitimacy to the market.
Historically, those assets that provide genuine value are the ones that generate the most sustainable returns in the longer term, benefitting every stakeholder. And that is exactly what legitimate crypto projects trying to create a real service or product must aim for. =