Pantera Partners: Understanding the Cryptocurrency Market Maker Wintermute

This article is from Pantera Capital, authored by the firm's partner Paul Veradittakit, translated by ChainNews.

For every token issuer, market making is one of the important components of project issuance, especially on larger, reputable centralized exchanges where market making has even become "a requirement." Pantera and Lightspeed recently invested in Wintermute, a global leader in digital asset algorithmic market making, which has successfully created efficient and liquid markets on many top cryptocurrency exchanges and trading platforms.

• Liquidity, usually referring to the amount of liquid assets (that can be accessed quickly), is also a key factor in effectively assessing the market. Brokers and exchanges need to have sufficient market liquidity and third-party buy and sell demand; otherwise, they cannot ensure that their clients can trade freely and openly. In the cryptocurrency industry, liquidity is particularly important, as crypto protocols require substantial liquidity to support token collateral, loans, or to facilitate trading.

• Market makers (MM) are financial institutions that buy and sell assets on exchanges and other trading platforms, profiting by optimizing their bid-ask spread. The bid-ask spread is the difference between the price at which an asset is offered for sale and the price at which a buyer is willing to purchase the asset. In some of the largest global markets (including the U.S. securities market and public stock market), market makers are a key component in providing liquidity.

• Most cryptocurrency market makers view cryptocurrencies as peripheral business to traditional markets (primarily the U.S. stock market), focusing on highly specialized markets (such as East Asia). Most cryptocurrency market makers are automated market makers (AMM) and rely on existing user trades to effectively allocate liquidity. Although several characteristics of cryptocurrency market makers have drawn attention, there are very few market makers truly capable of providing liquidity for various exchanges and protocols.

• Wintermute is a market maker specifically designed for cryptocurrency trading, with a founding team that has decades of experience in market making and trading, having developed hundreds of proprietary trading algorithms that help Wintermute hedge risks, generate profits, and provide liquidity for various cryptocurrency exchanges and protocols. Wintermute has already achieved significant trading volume from major cryptocurrency trading platforms such as Coinbase and Binance.

• In the cryptocurrency industry, leading automated market makers like Wintermute primarily enhance the efficiency of the cryptocurrency trading market by collaborating directly with platforms like aggregators, which can aggregate liquidity from hundreds of DeFi protocols. Moreover, by combining the network characteristics of aggregators with Wintermute's liquidity supply, the cryptocurrency market can become extremely efficient, attracting more attention from traditional traders and ultimately bringing in (and processing) more trading volume.

• In the coming months, as the popularity and market value of cryptocurrencies and DeFi continue to explode, market maker platforms like Wintermute will be absolutely crucial in providing the necessary liquidity for various DeFi protocols. Reportedly, as a leading trader on the Bitfinex platform, the company ranks first by trading volume. By powering efficient markets, Wintermute can fully realize the DeFi vision of providing efficient and consistent access to capital for end users of crypto protocols.

Liquidity Demand

Liquidity, or the availability of liquid assets (that can be accessed quickly), is absolutely fundamental to any effective market. In the past week, we have seen Wall Street go into a frenzy, with unprecedented market turmoil forcing many trading platforms targeting retail investors (such as Robinhood) to begin restricting trading on certain assets. Why did this happen? Mainly because these trading platforms lack the necessary liquidity, and insufficient liquidity leads to two problems:

1. Inability to meet traders' clearing demands;
2. Inability to provide collateral for other partners.

For financial platforms and DeFi protocols, ensuring sufficient liquidity is paramount if they want to provide users with effective open access to trading. Cryptocurrency protocols and exchanges also require substantial liquidity to support:

1. Collateralizing their tokens;
2. Offering various loan products;
3. Providing token exchange and trading service support for retail and institutional investors.

With the recent surge in interest from investors and traders in cryptocurrencies and DeFi, the demand for liquidity in DeFi protocols is higher than ever, and the sector may see unprecedented capital inflows. Therefore, it is crucial that the crypto community proposes novel and innovative market-making solutions to effectively allocate funds and liquidity to these protocols, thereby facilitating the efficient operation of the crypto market and maximizing returns.

What is a Market Maker?

In the securities market, the primary agents providing liquidity are market makers (MM). In traditional finance, market makers are institutions or platforms that submit various buy and sell transactions for securities to multiple exchanges. They continuously quote buy and sell prices (i.e., two-way quotes) for certain specific securities to public investors and accept buy and sell requests from public investors at those prices, trading securities with their own funds and securities. Buyers and sellers do not need to wait for a counterparty to appear; as long as a market maker is present to take on the counterparty, a transaction can be completed. Market makers maintain market liquidity through the market-making system, satisfying the investment needs of public investors. They compensate for the costs of the services provided through an appropriate spread between buy and sell quotes, achieving a certain profit while optimizing a metric known as the "bid-ask spread," where the selling price (or asking price) is higher than the buying price (or bidding price).

For example, a market maker working with an exchange might allow that exchange to buy and sell a specific asset X, where the selling price of the asset is $100.05 and the buying price is $100. When the exchange receives buy and sell orders from clients, it can execute these orders through the market maker. Over time, if the market maker's trading prices are set reasonably, it can profit from the bid-ask spread:

Taking an order of 1,000 shares as an example, if the market maker sells more shares than it buys (1,000 shares), then it will have the opportunity to earn $1,000 * ($100.05 - $100.00) = $50 in profit.

Generally speaking, due to the large number of orders, the profits that market makers can earn are quite substantial.

In the U.S. public stock market, market makers play a key engine role, with some well-known market makers including GTS, Citadel Securities, Virtu, and Two Sigma Securities. As trading volumes continue to rise and a large number of new tokens emerge across hundreds of cryptocurrency exchanges, market makers will become crucial in ensuring the effective operation of the cryptocurrency market and meeting the interests of end users.

What is Wintermute?

In fact, there are already several market makers supporting cryptocurrency functionalities in the market, such as Jump Trading, Amber, and Alameda Research. However, most market makers view cryptocurrencies as peripheral services to their core products (usually the U.S. public stock market) or only target specific markets (such as Asia). Other market makers are automated market makers that can even facilitate decentralized trading, such as Uniswap. However, these automated market maker solutions still face limitations in user-injected trading volume and lack the ability to quickly inject funds when market gaps arise.

In contrast, Wintermute is an algorithmic market maker specifically designed for cryptocurrency. Since its launch in 2017, the company has established a set of proprietary trading algorithms in centralized finance (CeFi), decentralized finance (DeFi), and over-the-counter (OTC) markets, achieving great success. Last week, Wintermute ranked first in trading volume on the well-known cryptocurrency exchange Bitfinex, with weekly trading volume reaching nearly $2 billion, approximately double that of the second place.

Thanks to its crypto-native solutions, Wintermute has become one of the giants in the cryptocurrency market-making field and an attractive partner for many emerging protocols. Currently, Wintermute has established partnerships with over 50 cryptocurrency exchanges, with well-known partners including Binance, Coinbase, and Kraken. By collaborating with these top cryptocurrency exchanges, Wintermute has established itself as a leading market maker across the entire cryptocurrency market, supporting many different assets and users rather than focusing solely on specific markets. At the time of listing and beyond, Wintermute will also support the best blockchain projects globally, and it is expected that they will expand their business beyond Western markets, including entering the Asian market in the near future. Additionally, as liquidity providers operate through proprietary trading algorithms, Wintermute does not rely on existing user trades to optimize its bid-ask spread, allowing them to deploy liquidity more efficiently and easily.

What Does Wintermute Mean for the Future of Crypto Trading and DeFi?

Today, Wintermute has brought substantial trading volume to some of the world's leading cryptocurrency exchanges, with its trading volume share reaching double digits in some major exchanges. As more cryptocurrency exchanges and financial platforms emerge, Wintermute will become a key partner in supporting crypto protocols and providing the necessary liquidity to keep the cryptocurrency market operating efficiently while attracting various users.

Another growth trend in the DeFi space is aggregators, which are meta-protocols designed to integrate liquidity from hundreds of decentralized exchanges to improve market operational efficiency. Market makers like Wintermute can provide liquidity directly to these aggregators without having to interact directly with different liquidity pools, achieving seamless trade processing and incredible levels of efficiency. Moreover, market makers like Wintermute are key components in building efficient cryptocurrency markets, enabling the full promise of blockchain financial assets. Notably, Wintermute also plans to explore the derivatives market and expand its OTC activities by launching a request for quote (RFQ) platform for financial institutions, which may help provide a new generation of exchanges and protocols for these assets.

The Team Behind the Wintermute Project

The Wintermute team has over 70 years of industry experience in market making, trading, and managing the risks and compliance of complex financial assets. With their outstanding market-making trading experience, the team is ready to collaborate with top exchanges to develop top-tier market-making products. Key members of the Wintermute team include:

• CEO: Evgeny Gaevoy, who previously led the exchange-traded fund (ETF) business for the European market at Optiver;
• CTO: Valentine Samko, who has served as a software engineer at trading firms and banks, including Barclays and JPMorgan.

Final Thoughts

Liquidity is one of the biggest challenges any financial protocol faces, especially in turbulent markets. Cryptocurrencies are rapidly mainstreaming, with new tokens being listed on cryptocurrency exchanges every day. Therefore, the crypto community needs a stable and efficient market-making solution to ensure that exchanges and other protocols have sufficient liquidity, a demand that is more urgent and important than ever before.