Imagine that you want to sell a Bitcoin on an exchange. If there are only a few sparse buy orders on the exchange's order book, and the bids are far from your expectations, you may face two choices: either sell at a lower price and incur a loss, or wait for someone to offer a high price, risking further price declines. Both situations point to one issue: the market lacks liquidity.

The core task of market makers is to solve this problem. They act like stall owners at a market, simultaneously posting buy (Bid) and sell (Ask) quotes on the trading platform's order book, constantly adjusting prices. When a trader clicks 'buy', the market maker becomes the seller; when a trader 'sells', the market maker becomes the buyer. They earn a small profit through the bid-ask spread with each transaction. This seemingly 'small profit with high volume' model actually relies on vast amounts of high-frequency trading to amplify gains.

Active and Passive: Two Modes of Market Makers

With the development of the market, market-making strategies have gradually diverged into two main schools: passive market making and active market making. The fundamental difference between the two lies in how they respond to risk.

Passive market makers have a simple and elegant strategy: they place orders within a fixed price range based on a preset algorithm. For example, they might set 'buy Bitcoin at $10,000 and sell at $10,050', maintaining a 0.5% spread. Whether the market surges or plummets, these orders sit quietly like drinks in a vending machine, waiting to be 'selected'.

The advantage of this model is that risk is controllable, and there is no need to predict market direction. Their earnings come from sharing transaction fees, but the drawbacks are also evident—when market prices fluctuate sharply beyond the set range, liquidity may temporarily 'fail', or even lead to losses due to one-sided price movements (known as 'impermanent loss').

If passive market makers are like a lighthouse, active market makers are more like keen hunters. They rely on complex algorithms and low-latency trading systems to monitor market data (such as order flow, large trades, inter-exchange price differences) in real-time, adjusting quotes at the millisecond level. For instance, when they notice that the price of Bitcoin on a certain exchange suddenly drops, they may instantly withdraw existing buy orders and shift to a lower price point, or simultaneously arbitrage across multiple platforms.

Active market making requires extremely strong technical capabilities. Top teams invest millions of dollars in optimizing hardware, network latency, and strategy models, even deploying servers directly in the exchange's data center, just to execute transactions a few microseconds faster than their competitors. These institutions are often active on centralized exchanges (like Binance, Coinbase), capturing small price differences through high-frequency trading, but misjudging market trends can also lead to losses.

Currently, market makers have two means of collaboration with project parties: Token Loan (token borrowing model) and Retainer (monthly fee model). Together, they form the engine of market liquidity, but they also touch on sensitive nerves of interests for both sides.

The first model is straightforward: the project party lends out tokens, and the market maker provides services. There is generally a service period of 3-12 months, after which the settlement is done at a predetermined price. Settlement can be either in USDT or in cryptocurrency, with everything depending on the results of negotiations between both parties. The second model keeps both tokens and funds in the project party's account, while the market maker only manages them through an API, charging a monthly service fee. This method ensures the safety of the project party's funds.

In this incident, a certain market maker directly allocated tokens to their relevant fund account and executed continuous sell operations on Binance after listing the token, causing the price to plummet. It is reported that the notorious market maker sold approximately 70 million GPS tokens during this operation without providing corresponding buy quotes, leading to a 50% drop in GPS price within just a few days. This thoroughly exposes the wrongdoings of ignorant market makers.

Binance's penalty was also quite timely. To protect user interests, Binance has delisted this market maker and banned it from engaging in any further market-making activities on the platform, while confiscating related profits, which will be used to compensate affected users.

Market makers are like gears in a cable car system, collecting 'tolls' from each transaction while also bearing the responsibility of maintaining the system's operation. Their existence reduces the friction costs for ordinary investors, but it also makes the market structure and profit distribution more complex. For project parties, choosing a market maker is a gamble about trust and technical strength; for retail investors, every smooth transaction may conceal a web of risks and rewards woven by market makers with code.

In this market, the real question may not be whether 'market makers are necessary', but whether we can enjoy the benefits of liquidity while seeing through the hidden currents of interest lurking deep within the order book.