The recent collapse of crypto alternative FTX and its affiliate Alameda Research has left many cryptocurrency gamers and market makers in a precarious position. Andrei Grachev, the Managing Partner at DWF Labs, believes that this event may have helped to “eradicate companies that weren’t sustainable enough to survive during a storm.” The outcome of this, according to Grachev, is that the “market will be healthier.”
The Craft of Market Making
In addition to weeding out weak players, Andrei Grachev provided answers to questions posed by Steered Bitcoin.com News. Key crypto industry players such as FTX were hit hard by the collapse of Terra, and it is important to take steps to protect customers, as demonstrated by the aforementioned case. One such measure can be used by digital asset market makers worldwide, such as DWF. LabsThis is the so-called Pump-and-Dump safety scheme.
Grachev also shared his views on topics ranging from misconceptions about market makers to the differences in market making between centralized and decentralized exchanges (CEXs). Here are the responses from the Managing Partner to the remainder of the Bitcoin.com News inquiries.
Bitcoin.com News (BCN): Can you briefly explain market making and what happens when someone buys or sells a crypto asset via a centralized exchange?
Andrei Grachev (AG): Market makers create liquid markets, quote order books (buy and sell order books), and manage the spread. In plain terms: Market makers can create markets that are tradeable. Even on DEXs (especially those that are based on automated marketmakers) where market making tools may be more limited, a Market Maker still provides enough liquidity in AMMs [automated market maker] to pool funds and keep the same price level on all centralized and decentralized exchanges.
Since market makers make money by widening the ask and bid prices, which are based on a certain proposition. [for example] Sell a token on Coinbase at a few basis points (bps) higher than on a DEX, and sell a token on the DEX a few bps cheaper than on Coinbase.
BCN: What would you agree is the common misconception about market-making?
AG: It might be close to a conspiracy theory: A token that goes up means the market maker is pumping; while tokens go down, the markets maker is dumping. You know the situation when you bought something and then it immediately dropped off? The same. One market maker took a look at his spot and traded against it.
The truth is quite different. A market maker maintains liquidity on both sides (buy and sell) and keeps an adequate margin. To increase the market and natural volumes, advanced traders may be able to place a limit order from an order book.
BCN: What is the difference between centralized and decentralized market making?
AG: I’d cut it up slightly differently: It is based on order books (can be DEX and CEX) and different only (DEX). Includes AMMs for DEXs and concentrated liquidity (Uniswap V3).
Market makers can use different order types (limit, market, etc.) with an order book-based exchange. Or Immediate or Cancel (IOC) to create a market, supply liquidity or create it.
AMMs are less flexible as trades are made in pools of liquidity. AMMs face the biggest challenge in keeping the same price on DEXs and their centralized counterparts, by adding or removing liquidity when needed. To mitigate their impact, we monitor large and predatory operations continuously.
Although concentrated liquidity is the same as AMM, it allows traders and marketmakers to set a price range for liquidity provision. Although it provides more flexibility than AMM, it is still less flexible than order book-based platforms.
Since advanced market makers have their own techniques for trading. Most of them work with DWF labs together with DEXs through a digital order book that is based on blockchain transactions. The status of AMMs and concentrated liquidity pools.
BCN: How has the collapse of FTX and Alameda Research been and what are the implications for market participants and how will they deal with the liquidity crisis in cryptocurrency? Are whales more cautious when buying and selling large volumes?
AG: First, FTX is the currency used to fund all market makers. This allows you to trade and buy on the second largest cryptocurrency exchange. Some of them have suffered severe damage and even collapsed. Others are facing a dire financial situation right now.
Overall, although it is very sad, it is good for the long-term. The market is eliminating companies that weren’t financially viable enough to survive during a storm. As a positive outcome, the market could be healthier.
Regarding whales and buying and selling volumes. There is a lot of OTC (over-the-counter) activity because exchange liquidity has dropped significantly since the crash. They see the same tiles today that they saw previously only in one place. [a] After a $500,000 order, the price of your sell order drops to between ten and twelve percent. You won’t be able to place a $100,000 order right now without having to pay 60-70%.
Fortunately, the market is on the rebound. This positive energy has been evident since the beginning of January 2023.
BCN: Some challenge founders believe that liquidity should be an operation of selling rather than the market. In reality, founders may think that providing enough customers for their token sellers will solve liquidity problems. Are these claims accurate?
AG: It is both true and false at the same time. Without advertising, liquidity are significantly lower. This means that the token’s price will be highly volatile. On the other hand, if you don’t have enough liquidity, you won’t be able to attract buyers.
The recent market crash caused by the collapse of FTX & Alameda Research has been a sad event for many traders, but according to the Managing Partner of DWF Labs, it could be ‘good in the long run’. In an exclusive interview with Bitcoin News, Terence Zimwara asked Alexander Gorbunov to explain the role of market makers and how pump and dump protection works to protect traders in the event of extreme volatility.
Gorbunov then went on to explain the difference between market makers and competitors, as well as the pros and cons of launching tokens in a bearish market. He concluded that while bear markets may be difficult to survive, they can also offer an opportunity to increase the challenge and provide more options for success.
The Managing Partner of DWF Labs also discussed the importance of building relationships with people who are interested in the task, not just as a market maker, but as a partner. He believes that this can help to drive the challenge forward and allow it to grow.
When asked for his thoughts on the story, Gorbunov said, “The market can only reverse to a bullish position, as it recognizes that the challenge was presented in the marketplace at depressed valuations. This is able increase the challenge and gives the market additional alternatives to succeed.”
