Market makers provide both buy and sell quotes, creating a token trading service provider with liquidity and depth.
➬ There is no market maker, the trading depth is insufficient, users cannot sell tokens at the holding price, nor can they buy the required number of tokens, which increases transaction costs
For example, in an order book-based transaction, if you want to buy 10 tokens, if there is a market maker that provides sufficient liquidity and the price of each token is 4000U, you only need to spend 40000U to buy 10 tokens; on the contrary, if there is no market maker to guarantee sufficient liquidity, the possible situation is 5 sell orders of 4000U and 5 sell orders of 5000U, and your purchase of 10 tokens will cost 45000U, which is 5000U more than with a market maker.
For example, in LP (liquidity pool)-based transactions on decentralized exchanges, due to insufficient tokens in the liquidity pool, the transaction slippage needs to be set very high to complete the transaction, and the slippage percentage may be the loss of this transaction.
➬ Without market makers, the project’s tokens may appear illiquid and unattractive
There are few buy and sell orders, and the transaction volume is low, which may even make users suspect that the project owner has run away and expose the real user data of the project.
➬ Market makers can solve the above problems, but there is also the risk that market makers may maliciously manipulate the price of coins
In the cooperation between project parties and market makers, the "lending tokens + call options" method may give market makers the motivation to manipulate currency prices.
Lending tokens means that the project party lends tokens to the market maker, as long as the market maker repays the tokens within the prescribed cooperation period.
For example, if the price of a currency drops by 50%, the market maker can buy back the tokens at 50% of the original price and return them to the project party. The market maker can then get the borrowed tokens at zero cost, which gives the market maker an incentive to make the tokens fall.
A call option is the right to buy a certain amount of the underlying asset at the exercise price within the validity period.
In plain words, this means that if the token price rises, the market maker can buy back the tokens at the originally stipulated price and repay them.
For example, if the price rises by 100%, the market maker can purchase the tokens at the original price and return them to the project party, and the market maker will directly obtain double the profit, which gives the market maker an incentive to increase the price of the tokens.
This form of cooperation allows market makers to choose to oppose project owners and retail investors and continue to short sell;
You can also choose to cooperate with project owners and retail investors to promote the rise of tokens. However, the ultimate goal of market makers is to make a profit, and they will eventually sell the tokens to the market.
➬ End
This article provides a relatively basic description of market makers, but it is sufficient for a preliminary understanding. More in-depth content requires professional traders to explain.
There are more ways to cooperate with market makers. There are also ways to provide fixed salary and additional bonuses, and require market makers to guarantee basic requirements such as liquidity and depth. However, the "borrowing tokens + call options" method seems to be the most common.