Market Making in Crypto (Day 352)

Market makers' primary role is to provide continuous price quotes on both buy and sell markets, and buy and sell the assets at the quoted prices. They allow assets to be traded--hence, are liquidity providers to the market. Market makers make profits through placing spreads between the buy and sell prices while taking risks for holding the assets.

In the traditional financial markets, market makers are typically large banks or financial institutions because the amount of assets required to provide the liquidity is huge.

In DeFi (decentralized finance), any one can become a liquidity provider and earn a share of the profit through market making. The most well-known product is Uniswap, where any one can provide liquidity through depositing a crypto asset pair to the protocol (smart contract). Uniswap provides asset swaps through automatic market making (AMM), which is based on a formula that price the market based on supply and demand. The liquidity providers will receive a share of the trading fees through market making, while risking the price volatility of their assets (a.k.a. impermanent loss).