In the wake of the FTX collapse, the crypto industry has faced one of its most turbulent periods. Alameda Research, once a dominant force in market making, ceased operations on November 10. Genesis, a key player under DCG, suspended withdrawals and new lending due to solvency concerns. These events have exposed systemic vulnerabilities, with market makers—critical providers of liquidity—suffering severe setbacks.
As a result, market liquidity has sharply declined. Trading volumes have dropped, volatility has surged, and investor confidence has wavered. In this environment, understanding market makers, their strategies, risks, and evolving roles in both centralized and decentralized ecosystems becomes essential.
Let’s demystify the world of market making in crypto—how it works, why it matters, and what the future holds.
What Is a Market Maker?
A market maker (MM) is an institution or entity that continuously provides buy and sell orders for a given asset, ensuring that traders can execute transactions quickly and efficiently. In traditional finance, they’re known as specialists or "the invisible hand" that maintains market stability.
In both traditional and crypto markets, liquidity is the lifeblood of trading. Without sufficient liquidity, trades become slow, expensive, and unpredictable. Market makers solve this by quoting two-way prices:
- Bid price: the price at which they’re willing to buy
- Ask price: the price at which they’re willing to sell
The difference between these two prices is called the bid-ask spread—this is where market makers earn their profit.
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For example:
Buy price: $103
Sell price: $97
Spread: $6 (profit per round-trip trade)
Market makers use sophisticated algorithms to manage risk and execute thousands of trades daily. Their success depends on volume, precision, and speed—not directional bets.
The Role of Market Makers in Crypto
In cryptocurrency markets, market makers are often referred to as liquidity providers (LPs). Their role remains fundamentally the same: enhance liquidity, reduce slippage, and stabilize prices.
Why Are Market Makers Essential?
- Liquidity Provision
Without market makers, buyers may struggle to find sellers—and vice versa. MMs ensure that orders are filled instantly, even during volatile conditions. - Price Discovery & Stability
By continuously updating bid/ask prices based on real-time data, market makers help establish fair market value. Platforms like 1inch rely on quotes from professional MMs such as Wintermute. - Market Efficiency
Market makers arbitrage across exchanges, reducing price discrepancies. For instance, Kairon Labs connects over 120 exchange APIs to minimize volatility and improve execution quality. - Support for New Token Listings
Projects launching tokens need immediate liquidity to attract investors. Market makers create initial trading depth, helping new assets gain visibility and credibility. - Facilitating Large Trades
Institutional investors often need to move large positions without disrupting the market. Market makers act as reliable counterparties for such over-the-counter (OTC) transactions. - Boosting Confidence & Volume
Consistent trading activity signals health and draws more participants. This creates a positive feedback loop: more volume → better liquidity → higher confidence → rising prices.
Common Market Making Strategies
Market making strategies revolve around placing limit orders on both sides of the order book and profiting from the spread as price fluctuates.
Key approaches include:
- Delta-Neutral Market Making: Hedging inventory risk by balancing long and short positions (e.g., using perpetual futures).
- High-Frequency “Immediate” Making: Ultra-fast execution using algorithmic bots.
- Grid Trading: Automated buy-low/sell-high orders within predefined price ranges.
- PMM (Proactive Market Making): Dynamic pricing models that adjust based on external market signals (used by DODO).
At the core of all strategies lies a critical challenge: estimating the fair mid-price and setting optimal bid/ask spreads around it.
However, market makers fear sharp one-sided moves. Rapid directional trends can lead to:
- Accumulation of unwanted inventory
- Increased exposure
- Potential losses if prices reverse
This brings us to one of the biggest risks in market making: inventory risk.
Risks and Opportunities in Crypto Market Making
Key Risk: Inventory Risk
When a market maker ends up holding too much of an asset (due to unbalanced trades), they face significant downside:
- If the price drops, their inventory loses value.
- If they’re forced to sell during a rally to cover costs, they miss out on gains.
In DeFi environments like perpetual swaps, many MMs hedge using funding rates—locking in positions across spot and futures markets. But during extreme volatility, margin calls and liquidations can wipe out profits.
Hidden Gains: High-Frequency Profits & Liquidations
Despite risks, rewards can be substantial:
- Even a $0.01 spread multiplied by millions of daily trades yields significant returns.
- When traders get liquidated on leveraged positions, market makers often act as counterparties—and collect the margin.
According to CoinGlass data, daily crypto liquidations range from $100 million to $1 billion, presenting lucrative opportunities for well-capitalized MMs.
The Dark Side: Manipulative Tactics in Unregulated Markets
Due to limited oversight, some actors exploit market-making mechanisms for manipulation:
- Wash Trading: Placing fake buy/sell orders to inflate volume.
- Pump-and-Dump Schemes: Artificially inflating prices via social hype before offloading holdings.
- Ramping: Creating illusions of high demand to trigger FOMO-driven buying.
- Cornering the Market: Buying up large portions of supply to force competitors to raise prices.
While profitable in the short term, these tactics erode trust, damage project reputations, and risk delisting from major exchanges.
AMM vs. Traditional Market Makers: Bridging Two Worlds
What Is an Automated Market Maker (AMM)?
Unlike traditional order-book exchanges, decentralized exchanges (DEXs) like Uniswap use AMMs—smart contracts that determine prices algorithmically using formulas like x * y = k.
Users provide liquidity to pools and earn trading fees in return. This model enables permissionless participation—anyone can become a liquidity provider.
Hence the slogan: "Everyone is a market maker."
But reality paints a different picture.
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Why Do LPs Lose Money?
Despite earning fees, many liquidity providers suffer impermanent loss (IL)—the divergence between holding assets and providing them in a pool.
A widely cited study by rekt.news analyzed Uniswap V3 pools with over $100M TVL:
- Generated ~$200M in fees
- Suffered over $260M in IL
- Resulted in a net loss of $60M+
Over 50% of LPs lost money—even with high trading volumes.
Why?
- Capital inefficiency: Liquidity spread across wide price ranges earns fewer fees.
- Impermanent loss amplification: Volatile assets increase IL exposure.
- JIT (Just-In-Time) attacks: Sophisticated actors exploit concentrated liquidity windows to capture fee revenue before withdrawing.
While innovations like Uniswap V3 allow users to concentrate liquidity in specific price bands (improving capital efficiency), they also raise the bar for success—favoring skilled traders over casual participants.
Concentrated Liquidity: A Double-Edged Sword
Protocols like Uniswap V3, Balancer V2, Curve V2, and DODO V2 enable customizable pricing ranges. This allows professional MMs to:
- Focus capital where trades are most likely
- Reduce slippage
- Increase fee income per dollar staked
But this complexity disadvantages average users who lack timing precision or market insight.
"Everyone can be a market maker—but not everyone can do it well."
After the Collapse: Rebuilding Trust and Liquidity
The fall of Alameda and Genesis didn’t just remove liquidity—it shattered trust.
Impact on Market Liquidity
Kaiko data shows BTC liquidity within 2% of mid-price dropped from 11.8k BTC to 7k BTC post-Alameda—a 40% decline.
Though recovery has begun (now up to ~9.1k BTC), rebuilding takes time.
Pressure on Projects & Tokens
Many projects relied on Alameda for liquidity support. Solana (SOL), for example:
- Held ~$1.2B worth of SOL by Alameda (as of June 30)
- Dropped from ~$35 to ~$11 after FTX collapse—a 68.5% crash
Smaller projects with illiquid tokens face existential threats when primary MMs vanish.
Crisis of Confidence
Two "Lehman Moments" in six months—Terra/Luna and FTX—have instilled deep skepticism.
Users now question:
- Who controls the liquidity?
- Can we trust centralized intermediaries?
- Is decentralization truly resilient?
The answer lies in moving toward trustless, transparent systems—on-chain solutions where code replaces counterparty risk.
How DODO Meets Modern Market Making Needs
DODO offers a compelling solution through its PMM (Proactive Market Making) algorithm and Private Pools (DPP)—designed specifically for professional market makers.
PMM: Smarter Than AMM
Traditional AMMs suffer from “lazy liquidity”—prices update slowly and inefficiently. DODO’s PMM adjusts pricing curves dynamically using oracle feeds, resulting in:
- Lower slippage
- Reduced impermanent loss
- Higher capital utilization
Studies show DODO V2 concentrates 83.1% of WETH/USDC liquidity within a 2% price range, outperforming competitors in efficiency.
DODO Private Pools (DPP)
DPPs are dedicated pools for professional MMs with full control over parameters:
- Adjustable fee rates
- Customizable price curves (via
Kcoefficient) - Real-time updates to external reference prices
- Flexible fund scaling
These pools operate on low-gas chains like Polygon and BSC (no DPPs yet on Ethereum mainnet), enabling cost-effective operations.
Performance Highlights:
- WETH-USDC pool on Polygon: +16% total return
- BSC pools launched mid-year: 10%–22% returns over four months
One MM firm reported 30–40% net profit margins after gas and operational costs—proof that efficient on-chain market making is achievable.
Frequently Asked Questions (FAQ)
Q1: Can anyone be a successful market maker in DeFi?
Not necessarily. While AMMs allow anyone to provide liquidity, profitability depends on strategy, timing, and understanding of impermanent loss. Casual users often lose money; professionals with tools and insights perform better.
Q2: What is impermanent loss?
Impermanent loss occurs when the value of assets in a liquidity pool diverges from simply holding them. It’s especially pronounced during high volatility and is a major reason LPs lose money—even while earning fees.
Q3: How does DODO differ from Uniswap V3?
DODO uses proactive pricing via oracles (PMM), while Uniswap V3 relies on static concentrated ranges. DODO adapts faster to market changes, offering superior capital efficiency and lower slippage for active traders.
Q4: Are private pools safe?
Yes. DODO Private Pools are secured by smart contracts and accessible only to authorized accounts. They offer full transparency and control without custodial risk—ideal for institutional-grade operations.
Q5: Why did FTX’s collapse impact market liquidity so severely?
Alameda was one of the largest crypto market makers. Its sudden exit removed massive order book depth across exchanges, triggering cascading effects—lower volume, higher spreads, increased volatility—and exposing systemic concentration risks.
Q6: Can DeFi replace traditional market makers?
Not fully yet—but progress is accelerating. With protocols like DODO enabling professional-grade tools on-chain, DeFi is closing the gap. The future likely involves hybrid models where decentralized infrastructure supports institutional-level liquidity provision.
Final Thoughts: Toward a Resilient, Transparent Future
The crypto market’s reliance on a handful of centralized players has proven fragile. The fall of Alameda and Genesis underscores the urgent need for decentralized alternatives that are transparent, efficient, and resistant to single points of failure.
DODO’s approach—combining PMM algorithms with private pools—represents a powerful step forward: bringing professional market making fully on-chain without sacrificing performance or control.
As the ecosystem evolves, so must our understanding of liquidity. The slogan “everyone is a market maker” should not imply equal outcomes—but rather equal access.
And with platforms enabling smarter strategies, lower costs, and verifiable trustlessness, the next era of crypto markets may finally live up to that promise.
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