Cryptocurrencies have disrupted traditional financial systems by introducing innovative decentralized digital assets. Over the years, their widespread adoption has resulted in complex market dynamics, including fragmented liquidity and high volatility. Market making in cryptocurrency plays a crucial role in ensuring crypto exchanges’ smooth functioning and liquidity. This article explains who market makers are and how they act on different crypto exchanges.
The Essence of Cryptocurrency Market Making
Market makers are specialized companies or financial entities that work with crypto exchanges and participate in their market-making programs like https://whitebit.com/market-making-program.
The essence of market making is placing buy and sell orders for crypto assets, standing ready to fulfill any order from other market participants who come to a crypto exchange (takers). In such a way, makers bridge the gap between buyers and sellers, ensuring there is always an active trading environment.
The main goal of a market maker is to shorten the bid/ask spread. It is the difference between the highest price a buyer is ready to pay for an asset and the lowest price a seller is ready to take for it. Market makers create a liquid market by continuously placing competitive buy and sell prices for assets where buy and sell rates are not much different.
The spread constitutes a maker’s profit. A maker earns their profit by conducting thousands of trades per day (with the help of automated systems). In addition, crypto exchanges may offer fee discounts and incentive programs for makers to stimulate them for active trading.
How Do Crypto Market Makers Act on DEX and CEX?
There is a difference between market-making on CEX and DEX:
- DEX cryptocurrency market- Making operates on smart contracts and liquidity pools. Market makers (liquidity providers) add liquify (their tokens) into a liquidity pool, locking them into smart contracts. Those tokens are then used to execute other trades on DEX. On DEXs, anyone may become a liquidity provider.
- CEX market making requires thorough checking and verification of a potential market maker. CEXs stand as intermediaries for traders, so they are responsible for a transparent trading environment and safety. CEXs need to ensure they work with a reliable market maker that complies with regulations and offers fair services. CEX market makers are entities or specialized firms. It is rarely just individual traders.
Market makers play a crucial role in ensuring the liquidity of crypto exchanges by bridging the gap between buyers and sellers. While their role may differ between different types of exchanges, their goal remains the same: to create a liquid market and reduce price volatility.
