Dialogue Wintermute: We are liquidity providers, not market makers

Interviewed and edited by: Jack, BlockBeats, Vision, Metastone

Organized by: Sharon, kaori, BlockBeats

Market Makers, or Liquidity Providers (LP), focus on providing liquidity to ensure the healthy development and stable operation of projects. In traditional finance, market makers are subject to strict regulation; however, in the crypto industry, the development of market makers appears to be quite "wild," leading to criticisms that they "contributed to the collapse of several projects," "made profits as intermediaries," and "created a false sense of prosperity in the industry."

The collapse of FTX and the subsequent impact on major platforms have made market makers and lending a disaster zone. For the average investor, discussing market makers often feels like playing a game of blind man's bluff. Behind all the controversies regarding regulation, liquidity, and competition, what are the thoughts of market makers? At the TOKEN 2049 conference, BlockBeats exclusively interviewed Yoann Turpin, co-founder of the well-known crypto market maker Wintermute.

Wintermute is one of the most recognized market makers in the cryptocurrency space, having participated in the market making for projects like dYdX, OP, BLUR, ARB, and APE. Its co-founder, Yoann Turpin, graduated from EDHEC Business School and has held positions such as co-founder and CFO of Innovify and founder of Kaifuku Capital.

Maintaining "Market Neutrality"

What is the current scale of Wintermute? According to information from Wintermute's official website, as of the time of writing, its cumulative trading volume has exceeded $2 trillion. According to watchers' data, the largest single asset traded by Wintermute currently comes from Ethereum, but this accounts for less than 1% of its trading token portfolio.

Image source: watchers

BlockBeats: Please introduce yourself and Wintermute.

Yoann: We co-founded Wintermute in 2017, and we now have a team of about 100 people. Compared to the 20 people we had in 2021, our scale has grown significantly, which also reflects that Wintermute is undergoing some changes. We are striving to become a more diversified platform, focusing more on the trading market, and in 2021 we entered the derivatives market in Singapore.

We are increasingly engaged in over-the-counter trading, so we have more clients, but we are actually focused on trading counterparties, trading on our proprietary accounts. Wintermute has now developed into the largest spot market maker globally, with our trading volume accounting for 16% to 20% of total trading volume. In the derivatives market, we rank among the top 5 in options. We are very active in investments, with about 100 investment projects, meaning we have around $100 million on various venture capital balance sheets.

We have also incubated some projects, such as Bebop. Additionally, we are increasingly making public investments. Wintermute aims to maintain a relatively small scale to stay focused on a single goal. Once you have two or three businesses within the same company, things can become somewhat chaotic, so we believe the best practice is to spin things off or let others support the execution of these ideas. People will see some results in the coming weeks, with more frameworks regarding incubation and exploration.

As a founder, I am currently focused on venture trading and business development trading, especially in Asia, which means I will be exploring a lot in South Korea. Earlier this year, I visited Japan and Peru, and I will go to New York next year. We will travel back and forth to Hong Kong and try to explore Southeast Asian markets, including Indonesia, in the coming years.

Avoiding Overexpansion

BlockBeats: How did you survive the bear market? What strategies will Wintermute adopt during the DeFi liquidation process? What impact will DeFi on-chain derivatives have on the subsequent market?

Yoann: Basically, when the market drops, we start buying first because people will actively push us into a position; we are essentially forced to go long and then buy and sell. Our idea is that even if we might incur losses on long positions, we can earn enough money through the buy-sell spread to cover those losses. This is how we navigate the bear market.

Regarding DeFi, this is an interesting question because sometimes people misunderstand and think we are selling on DeFi protocols. What they see online is actually more about buying on CeFi and then putting it into DeFi because DeFi has more abundant liquidity. Perhaps we just bought a lot of tokens on Binance or other exchanges, and then we need to sell somewhere, and DeFi is also a way to exit through P2P, etc. But overall, we maintain a very "market-neutral" stance. Market neutrality means we are not making money by going long or short, but rather by conducting millions of trades daily to earn the spread.

BlockBeats: Actually, regarding this follow-up question, I remember there was a massive market crash a few months ago, and there were rumors that it might have been due to liquidation providers or market makers withdrawing from the market, one of which could be Wintermute. What are your thoughts on this?

Yoann: As the largest liquidity provider in the spot market, when a massive crash occurs, people think of us, but in reality, we are doing very well. Market trends fluctuate, and the entire market has a wealth effect. Imagine, we operate very well with a team of fewer than 100 people. Our competitors have 200-500 employees. I think their market opportunities might be the same or even lower. This is because we excel in cash management, and we do not want to overexpand. Although our performance in the summer of the crypto industry may not be as good as other companies, we did not overexpand in 2021, and our business model has survived well during the winter compared to other competitors.

Choosing Tokens Based on Scale and Longevity

BlockBeats: What criteria do you consider when selecting trading tokens? Do you need to borrow from the foundation to start trading? For example, which tokens do you prefer? What are your preferences? What assets do you decide to become market makers and provide liquidity for?

Yoann: Clearly, this is more like a partnership. We borrow assets from the foundation, and we hope that the interests of all parties can align, without occupying too high a percentage of overall dilution value. Therefore, we need to borrow at least $2 to $3 million of some token to make an impact on the business level. But we also do not want to borrow more than 2% to 3% of FDV, so when we choose, the project's scale must be large enough. Essentially, the FDV of the projects we select needs to reach over $100 million. If they are already listed, they need to have a sufficient presence on exchanges. Typically, people come to us because they need a reputable market maker to help them get listed on other exchanges.

Our trading volume on certain exchanges can reach 10%, 20%, 30%, or even 60%. This is a close partnership with exchanges. The standard is that most T1 teams will provide liquidity. We just need to ensure that the team meets good standards and whether they are committed to long-term building. At the same time, there are also commercial considerations; there needs to be sufficient trading potential or enough existing trading.

BlockBeats: Can you still make money in extreme situations? For example, during a sharp price drop?

Yoann: In the case of a sharp price drop, we usually have enough structure to profit from it, but a sharp price drop is generally bad for everyone. Because a sharp price drop means some people are getting liquidated, and those funds have essentially been lost. But even in traditional finance, you would see this situation. (When the market is bad) we see government balance sheets increasing just like back then. So basically, the better we do, the smaller the impact of liquidations on the market; I mean, this is a balance, but there will also be better prices entering the market.

Moral Self-Regulation Achieving Self-Regulation

The Rivalry with DWF Labs

In the niche of market makers, besides Wintermute, one must mention its competitor DWF Labs. The two companies had a public spat in March this year, with DWF Labs accusing Wintermute of instructing the blockchain media The Block to smear them, while Wintermute questioned DWF Labs' intentions and raised safety concerns. In response, Yoann stated that DWF Labs treats "over-the-counter trading as investment," which is fundamentally problematic.

BlockBeats: What are your thoughts on DWF Labs? Because I know you have strong opinions about their approach. Do you think this is market manipulation? Do you consider them market makers?

Yoann: In our terminology, they are not market makers, but what confuses many people is that they declare essentially over-the-counter trading as investment. People usually think of investment as always having a long-term nature, while trading is more associated with the short term. But if you declare an investment and then immediately sell it after the announcement, it becomes difficult to view it as an investment. In many ways, this is the essence of the open and almost permissionless system we are in. There are also more obvious cases, such as involving various bans and fundraising, etc. For example, you see people randomly sending cryptocurrencies to influence certain (bad) things, and the reasons are not sufficient.

I think it is best to keep the system open, and then people should become more aware of where they send their funds. I believe (this industry) needs some light regulation because you definitely do not want bad actors. In fact, this just repeats some mistakes from traditional finance, such as excluding many people from banking. Therefore, the crypto industry needs to find a balance, and this balance will ultimately be achieved over time. This is also why we started. Achieving self-regulation through moral self-discipline?

The biggest criticism of market makers in the market is that there are many people who "manipulate the market" rather than "providing liquidity to guide the market's healthy development." Wintermute prefers to position itself as a "liquidity provider" rather than a "market maker," and currently, Wintermute achieves self-regulation through the moral self-discipline of the entire company.

Staying Away from the U.S. Market to Avoid Regulatory Issues

BlockBeats: The next question is about regulation. If the SEC strengthens regulation and starts focusing on tokens or NFTs, will this fundamentally change Web3? I would like to know your thoughts on this.

Yoann: In 2021, we did not deal with the SEC at all, so we intentionally decided to register in the UK for spot trading; and in the UK, they clearly stated that they do not want to provide derivatives for retailers, so we completely avoided this risk by placing our derivatives business in Singapore. But in the U.S., we have almost no business because all commercial activities basically happen outside the U.S. So we intentionally avoid (SEC regulatory) issues in many ways, and we are actually now more focused on Asia, hence the move to Singapore.

Positioning as "Liquidity Providers" Rather Than "Market Makers"

BlockBeats: One more point about regulation is that in traditional finance, the role of market makers is strictly regulated; but in the crypto space, many market makers are not regulated to some extent, and they also cooperate with exchanges. So can you talk about the issue of market maker regulation in the crypto industry?

Yoann: Generally speaking, those who are unethical, whether in brand development or business expansion, will be exposed and will not have a good outcome. Typically, we decide to operate a very consciously ethical business, doing our best to do the most (ethical) things, which actually transcends the so-called "legal" and "illegal." Everything we do is legal, but beyond that, just because something is not illegal does not mean it is right, so we consider aspects like the consistency of long-term interests more.

In fact, there is a lot of educational work needed in the crypto space, which is very time-consuming and difficult. Some of the work I am doing now is to ensure that we are not misunderstood. We have largely stopped using the term "market maker" to describe ourselves; we only use "liquidity provider" (to describe ourselves), which is also completely applicable in traditional finance.

There might be a point in the crypto space that is confusing because liquidity providers are sometimes seen as "more passive LPs in DeFi AMM pools," but in reality, what we do a lot is providing liquidity and helping to discover prices, which means striving to find the true price of a token at any time. Some who claim to be market makers do not actually work hard to help find the true pricing of tokens, which is completely contrary to the ecosystem. But I believe these issues will gradually resolve over time, depending on one's hard-core competitiveness and the ability to operate a business honestly and correctly.

Of course, you cannot expect everyone to maintain high moral standards or have everyone follow the rules. We have this (moral) requirement for our own team. Internally, we clearly achieve this and require people to maintain a fairly high standard. But what about other participants? For competitors, we just have a rule that basically categorizes competitors into good and bad, and we do not judge people too quickly because reality is often more complex and gray than what people say.

So we believe that for good competitors, we invest together with them. For example, if we borrow funds from a foundation, and they need another liquidity provider to provide liquidity for their tokens, we sometimes recommend other competitors to each other. So in this sense, there is competition. But only those we believe have been around long enough and can truly get the job done, and in most cases have synergies, will be included in what we consider to be "good competitors." However, even within the realm of good competitors, if you dig deeper, we actually provide quite different services. We place a strong emphasis on engineering, primarily on building, which is why we only have about 8 people in business development, and if you include me, that makes 9.

Solana or Taking Over Polkadot

Yoann also discussed the future of public chains in this interview. According to information from defiLlama, Ethereum still ranks first in terms of locked value, while Yoann believes Solana is likely to replace Polygon as the second most influential public chain after Ethereum.

BlockBeats: The final question is, we know that ConsenSys has launched Linea, Coinbase has launched Base, and Layer 2 is emerging in the market. Modular blockchains have become an important way to scale Ethereum. What are your thoughts on this trend? Do you have other strategic approaches in Layer 2 or blockchain?

Yoann: Regarding Layer 2, the disclaimer has been very clear; we have invested in almost all projects except StarkWare. It’s not that StarkWare is a bad solution; it’s just that when we learned about StarkWare, it was already valued at $20 billion, and we prefer earlier-stage investments. Additionally, due to our choices in the DeFi space, we are often invited to integrate with various Layer 1 and Layer 2 projects because a lot of value now largely comes from trading.

As for Coinbase, I think they have intentionally supported DeFi and strengthened development in this area over the years, so I am not surprised by their initiatives. For us, we always face a dilemma about which chain to integrate and trade with. We are both commercial successes and face the same issues as the entire industry, which is finding reliable smart contract developers is very difficult.

BlockBeats: We have already seen some trends returning to Ethereum. It seems that EVM compatibility is actually very crucial; this is simply because Ethereum has the largest developer community. I remember Polkadot once had the second-largest developer community, but the situation is different now. Which chain do you think might be the next influential one?

Yoann: I would say that after Polkadot, it might be Solana. But even Solana, the numbers are hard to verify because if you consider the developers on Solana, many teams participate in hackathons, build the first applications on Solana, and then consider that the application is not specific enough and turn to build other applications.

Last year, we invested in three teams that participated in hackathons on Solana and ultimately developed there. So you will see many situations where the authenticity of the data is hard to determine. But Ethereum can be said to be the leading platform for building applications, although there are other teams, like many teams trying to realize Bitcoin functionalities. So that’s another aspect. We see some engineering progress, but not necessarily trading progress.