A Confession from Frontline Market Makers: A Self-Rescue Guide for Project Parties in the Dark Forest

Starting with the "Observation Label" of GPS…

When I heard that GPS was given an "observation label" by @binance, I was chatting with a project founder I had known for over a year, who planned to list in Q2. This young man is capable and handsome, but I could hear the fatigue in his voice during our conversation—his project had raised several million, achieved some good results, and everything seemed to be going smoothly. However, for the founder, the funds raised are actually debts. After more than a year of constantly pivoting the narrative, the market is so tough. He is trying to close a new round of financing while negotiating with top-tier exchanges, all while watching tokens recently break below their listing prices, worrying whether the exchange price can perform well and how to explain it to investors. The pain, worry, and confusion can only be understood by friends who have worked on projects… Just as we were chatting about various topics, Binance's notice suddenly caught our attention. Although there was no market-making cooperation with the project, we had been in touch with team members over the past two years, and it was a moment filled with emotions.

I won’t analyze or comment too much on this matter; let's wait for Binance and the project party's notifications and announcements. However, in the past two years, I have indeed seen too many project parties and retail investors get badly hurt by market makers. Taking this opportunity, I wrote this article hoping to help project parties and industry friends. Alright, enough chit-chat, let’s get to the main content.

The Business Model of Market Makers: Not as Mysterious as It Seems, Just "Placing Orders"

Market makers are not a new term in crypto; there are also "market makers" in traditional finance, but this service has a more relaxed name called Greenshoe (because it was first used in 1963 when the Boston-based Green Shoe Company went public). Although the mechanisms are slightly different, the responsibilities are basically the same: to provide both buy and sell quotes during an IPO, maintaining market liquidity and relatively stable prices. However, due to strict compliance regulations, the greenshoe business is a standard trading desk sub-business with little "profit margin," and not a single major trading desk would publicly PR that they are doing this. Ironically, such a standard business has become a big scythe in the eyes of many in the crypto industry.

However, if market makers truly operate within industry norms and provide liquidity, there is really no "scythe" to speak of. The so-called provision of liquidity mainly involves placing dual-sided quotes on the trading book. Of course, in the broader crypto industry, there are other types and services of market makers, but today we will focus on the narrow category that is most relevant to project tokens listed, which can be roughly divided into several business models:

Proactive Market Makers

Much of the demonization of market makers in the industry largely stems from the existence and operations of proactive market makers in the early days. In Cantonese, there is a saying "做厨房" (doing the kitchen), which in Mandarin means "doing the庄" (manipulating the market). Proactive market makers fulfill all the fantasies the market has about "market makers." Generally, proactive market makers will collaborate with project parties to directly manipulate market prices, pump and dump, and profit from it, sharing the gains with the project party. Their cooperation terms vary widely, involving borrowing tokens, API connections, margin trading, profit sharing, and other models. There are even cases where rogue market makers do not communicate with project parties and directly use their own funds to grab tokens, and after acquiring enough chips, they operate on their own.

What proactive market makers are there in the market? In fact, the market's active PR, event hosting, and well-known market makers you’ve heard of are all passive market makers, at least they must claim to be, otherwise, there will be compliance issues, let alone marketing openly (but it cannot be ruled out that some market makers did some proactive cases in the early days or may still be doing so secretly).

Most proactive market makers are very low-profile and have no names because they are inherently non-compliant. As the industry gradually standardizes, previously high-profile ZMQ and Gotbit have been named by the FBI, falling into serious compliance troubles, and the remaining proactive market makers have become even more anonymous, with some larger ones having done some so-called "successful cases," thus gaining "status" in the community, with most deals being referred through acquaintances.

Passive Market Makers

Passive market makers, including ourselves and many other competitors, belong to this category. What we mainly do is place dual-sided maker orders on the order book of centralized exchanges to provide market liquidity. The business model is mainly divided into two types:

Token Loan (Borrowing Tokens)
Retainer (Monthly Fee)

Token Loan (Borrowing Model)

This is currently the mainstream and most widely adopted cooperation model. In simple terms, it involves lending tokens to market makers for a certain period, during which the market makers provide market-making services.

A typical token loan deal consists of several aspects:

Borrowed Token Amount x%: Generally a percentage of the total supply of the token.

Borrowing Period x months: The duration for which the tokens are borrowed, after which the service ends, and settlement will occur according to the agreed options.

Option Structure: The settlement price at which the market maker will settle at the end of the service.

Liquidity KPI: The depth of orders the market maker will place on the order book, possibly involving different exchanges and different price ranges.

How do market makers make money in this model?

Market makers earn money in two parts: one is the spread between buy and sell orders during the order placement process, which is generally a small part; the other is the options given to market makers by the project party, which is usually the larger portion.

If friends familiar with finance may know, every option (option) has value from the first day of signing, and this value is a percentage of the value of the borrowed tokens. For example, if I borrowed a total of 1 million U worth of tokens, and the value of this option on the first day is 3%, it means that if I strictly place orders neutrally according to the algorithm (delta hedge), I can realize a relatively certain profit of 30,000 USD. In general circumstances (excluding extreme situations like token prices skyrocketing or plummeting), the profit from signing this cooperation for the trading desk would be 30,000 USD plus some money earned from the spread during order placement.

Does it feel like market makers don't earn as much as imagined? But in fact, the profit margin I mentioned is not entirely detached from reality; market makers are currently very competitive, and the option prices are increasingly devoid of excess.

Retainer (Monthly Fee Model)

This is currently the second relatively mainstream model, where the project party does not lend tokens to the market maker but keeps them in their own trading account, and the market maker provides market-making services through API integration. The advantage of this model is that the tokens remain in the project party's hands, and all operations in the trading account are transparent to the project party. In theory, the project party can withdraw funds from the account at any time, so there is no need to worry about the market maker acting maliciously. However, in this model, the project party needs to prepare tokens and USDT in the account for dual-sided order placement, and generally needs to pay the market maker a monthly service fee.

In this case, the market maker places orders according to the client's liquidity KPI, and earns the monthly service fee. The funds in the account are unrelated to the market maker, and in cases of poor liquidity or extreme situations, placing orders may incur losses, which the project party must bear.

I believe that both Token Loan and Retainer have their pros and cons. Some trading desks may only focus on one, while others, like us, can do both. Project parties should choose based on their needs and project circumstances.

Common Misconceptions

Market makers are responsible for "pumping," "drawing lines," and "building mouse warehouses."

Qualified passive market makers are neutral and do not actively participate in pumping, market cap management, or harvesting.

Providing liquidity means "washing volume."

The order book of exchanges has two types of orders: maker orders and taker orders. Passive market makers mainly place maker orders, with taker orders being very few. A skilled cook cannot make a meal without rice; no matter how deep the maker orders are placed, if there are no taker orders to execute, it does not directly increase trading volume. However, if one hand guides the other to execute their own maker orders, known as "self-trading," it poses compliance risks, and top exchanges will strictly investigate such behavior. If the self-trading ratio is too high, both the market maker's account and tokens may face warnings and actions from the exchange.

So it sounds like passive market makers are not very useful?

Not directly responsible for token prices and trading volumes sounds like they are not useful. However, good liquidity is the foundation of everything. Small amounts of money care about price trends, while large amounts of money first look at trading volume and depth. A token with active trading and a healthy price is closely related to the project party's product strength and marketing capabilities, and indeed requires close cooperation with market makers. To take a step back, top-tier exchanges rarely allow you to list without a professional market maker; otherwise, the opening is likely to be a mess, and market makers need to register in advance. Therefore, at this stage, cooperating with passive market makers is still a necessary step for every project party looking to list on top-tier CEXs.

It sounds like market makers just place orders, and the threshold is not high, so project parties can do it themselves?

Yes and no. If you indeed have a self-operated trading team and your project is relatively large, some second-tier exchanges may allow you to do it yourself. But if not, or if you need to build a new team, I suggest leaving professional matters to professionals. On one hand, the cost and risk of building a team may not be worth it compared to finding a reliable market maker; on the other hand, if you are not familiar with market makers, you may lose quite a bit of money when facing various extreme market conditions.

The Ecological Position of Market Makers: Opening Liquidity is the Most Precious Resource

After explaining the business model, let's talk about the current situation, which may help you understand better.

What will the crypto space look like in 2024-2025? From a liquidity perspective, I see it this way:

BTC has an independent market, rising all the way, with ample liquidity at the top, and although there has been a recent pullback, it does not shake the foundation. Miners' mining costs are in the 5s and 6s, making them very happy, and traditional institutions rushing in are also very pleased.
The tail end PVP is fierce, and liquidity was once relatively abundant. @pumpdotfun, @gmgnai, @solana, @base, and @BNBCHAIN have seen small players losing money to the point of addiction (I also contributed a bit, unfortunately), while outliers and insiders are making money happily.
The middle liquidity is exhausted, with the recent wave of trump and libra having almost drained the liquidity and buying power from the middle, structurally and irreversibly sucking it out of the circle. Tokens with market caps from hundreds of millions to tens of billions are awkwardly positioned, and newly listed tokens on top-tier exchanges have no buyers. Trading volume sharply declines within two months of listing, with most trading volume and depth occurring at the opening, quickly falling below the first price set by VCs. When VCs unlock, they are likely to lose money, and when team tokens unlock, they are likely to go to zero.

In this cycle, these mid-tier tokens seem to be having the hardest time. But another harsh reality is that over 90% of the so-called "web3 native" practitioners in our industry are actually the ones who receive salaries, attend conferences, and conduct business daily, including VCs, project parties, accelerators, BD, marketing, development, etc. Everyone is in the business of mid-tier tokens. If you look at investment and financing, product development, marketing, and listing on exchanges, this series of actions is actually centered around these mid-tier project parties listed on centralized exchanges. Therefore, in this cycle, many practitioners have not made money, and life has been tough for everyone.

Only market makers, I believe, hold the most scarce resource of mid-tier tokens: "opening liquidity." Yes, just having liquidity is not enough; liquidity must come early, right at the opening. Otherwise, when the project goes to zero, having more tokens won't help. For a project with an opening circulating supply of, say, 15%, there will always be 1 to 2 percentage points, or even more, allocated to market makers. This liquidity that unlocks at the opening is an extremely valuable resource in the current market. Therefore, not only are market makers becoming increasingly competitive, but many VCs and project parties are also stepping in to build teams to start doing market making. Some teams even lack basic trading capabilities and just grab the tokens first, as they will eventually go to zero anyway, so they are not afraid of not being able to cash out.

The Dark Forest of Bad Money Driving Out Good: Honest Contributors Can't Compete with "Scumbags"

In this evolving market, a very unique ecology for market makers has formed: on one hand, there are more and more market makers, and the quotes have become absurdly competitive; on the other hand, the quality of service and professional capabilities vary greatly, often resulting in various after-sales issues, the most common being withdrawing liquidity and defaulting on the market. First, let’s clarify that market makers are not prohibited from selling tokens. In fact, if the token price skyrockets, the algorithm for placing orders should shift towards selling, as I borrowed the tokens, and ultimately settle in USDT with the project party (if you don’t understand, you can review the token loan option section). However, a qualified passive market maker should place orders according to the algorithm and not act as a taker to aggressively sell; such actions are extremely harmful to the project.

Why do market makers do this? Returning to the option part we just discussed, if a market maker receives a token loan quota and places orders according to the algorithm, if the market remains lukewarm, they should successfully realize the value of the option and earn 3%. However, if they believe the project will go to zero by the time of settlement, they can achieve a 100% profit by crashing the market at the opening, which is 33 times the normal market-making profit. Of course, this is the most straightforward and extreme example; most real operations are much more complex, but the underlying logic is to short the token, selling it at a high price and good liquidity, and then buying it back at the time of settlement.

Of course, this approach is not only unethical and non-compliant but also carries additional risks. On one hand, market makers cannot fulfill the KPI of providing liquidity within the contract period because they do not have a healthy inventory; on the other hand, if they bet wrong on the token's direction, they can lose a lot of money and be unable to cash out.

Why is Such Behavior Common?

The industry's compliance is still in its early stages. In terms of the token loan model, although market makers report service conditions to project parties through daily reports, weekly reports, dashboards, etc., there are also third-party supervisory institutions and tools in the market, but what happens with the tokens in the market maker's account is ultimately a black box. The market lacks effective regulatory measures. After all, the only entity with concrete evidence that can see every trade made by market makers is the centralized exchange itself, but many market makers are clients of centralized exchanges at levels V8 and V9, bringing in billions in fees and capital to the exchanges each year. Exchanges also have an obligation to protect their clients' privacy, so how could they possibly disclose their trading details to project parties to help them defend their rights? At this point, I must admire @heyibinance and @cz_binance for their decisiveness. I recall this is the first time detailed trading information from market makers has been fully disclosed, including minute-by-minute timestamps, operational details, and cash amounts. Whether such actions should be taken is worth pondering, but the intention must be good.
The understanding of market makers among project parties and the entire industry still needs to be strengthened. I am often surprised that many top-tier investors I have spoken with, project founders who have raised tens of millions, and even exchange practitioners do not have a good understanding of market makers. This is also a significant reason I wrote this article. Because most project parties are actually "first-timers," while market makers are seasoned "scumbags." As a frontline practitioner, I sometimes look at project parties choosing what they believe are "better terms" and ask myself whether I am also matching the outrageous terms proposed by competitors just to secure the deal. In this dark forest of market makers, maintaining one's bottom line is difficult; the pretentious scumbags are always more attractive than honest people. Only when everyone’s understanding of the industry aligns can we avoid the situation of bad money driving out good from continuing.

How to Choose Your Market Maker

Here are a few important questions and tips I believe are essential:

Is it absolutely necessary to avoid proactive market makers?

When project parties ask me this question, I do not directly say to avoid them. If we set aside compliance, I think this is a debatable issue. Some projects have indeed brought better-looking charts, more trading volume, and more cashing out through close cooperation with proactive market makers, but there are also countless cases where things went wrong. I just want to express a viewpoint: you need to realize that those who can help you make real money will also cut you without mercy, and since the market's liquidity is limited, at the end of the day, you are in a competitive relationship; the market's money will either be earned by you or by your proactive market maker.

Should you choose token loan or retainer for cooperation?

Currently, the token loan model is still more mainstream, but the market share of retainers is gradually increasing. This is a matter of the project party's taste and needs. For example, project parties with strong control over their tokens may not want external uncontrollable large-scale liquidity.

Try not to choose only one passive market maker.

Don't put all your eggs in one basket; you can choose 2-4 market makers to compare terms. If one goes down, others can fill the gap. Additionally, market makers often propose various extra value adds to win deals, so selecting several can help you receive more assistance. However, to avoid the "three monks have no water to drink" problem, it is advisable to assign different exchanges to each market maker; mixing them together will significantly increase monitoring difficulty.

Don't choose your market maker solely based on investment.

You can accept investments from market makers, and having more runway is always good. But you also need to understand that market maker investments and VC investments are not the same game. Because they control a significant portion of opening liquidity, market makers can lock prices, hedge, and perform other operations with tokens that have not yet been unlocked. Therefore, if a market maker takes a token loan and also holds a significant position in tokens, it may not necessarily be a good thing for the project party.

Don't choose your market maker solely based on liquidity KPI.

Liquidity KPIs are difficult to verify in practice, so do not choose market makers solely based on liquidity KPIs. No matter how beautifully written the terms are, if they cannot be fulfilled, they are useless. Before borrowing tokens, you are the boss; once the tokens are lent to the market maker, you become the subordinate. They have many ways to fool you.

Change your mindset: Be a "scumbag" yourself.

Remember that you are the client. Before signing with a market maker, compare terms extensively, discuss how to monitor, and how to prevent market makers from defaulting. Choose a plan that suits your project's development. You can use one company's terms to pressure another, comparing back and forth. Ensure there is no ambiguity in the terms; if there are unclear points, do not ponder them yourself—ask for clarification directly.

A Few Reflections

I am a junior in the industry and cherish the opportunity to perceive and touch the industry at this depth. I often feel the dirtiness and chaos of the industry, yet I also constantly sense vitality and energy. I never consider myself to be among the smartest; many of my peers in the industry are excellent and have quickly found their positions. However, many young people are indeed confused, and without the web3 industry, it is challenging to find a path for upward mobility.

I also have a boss with a very positive value system and a highly capable trading team supporting us. Our stable asset management business allows us not to rely on market-making operations to sustain the team but rather to use market-making to build friendships. I have always followed my own pace, using the logic of making friends with project parties, missing out on some deals, but also discussing several deals that I am proud of. Some projects, although not turned into business, have allowed me to become friends with the project parties.

I have rambled on quite a bit, and I felt conflicted about publishing this article. On one hand, I worry that my business acumen is lacking or that my expression is poor, potentially misleading project parties and readers. On the other hand, market makers have always been shrouded in mystery in the industry, and I fear that discussing these matters may overstep boundaries and disturb someone's interests.

However, I genuinely believe that as the industry develops and compliance gradually becomes mainstream, there will come a day when the role of market makers will no longer be demonized and will return to the sunlight. I hope this article can play a small role in that process.

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