Adequate liquidity is crucial for crypto asset transfer, especially for DeFi projects. As the crypto industry grows, so do the number of projects and their associated tokens, which increases the quantity of crypto assets requiring liquidity support.
Different projects overcome liquidity challenges differently: some prefer to work with automated market makers, and others choose to work with professional market makers.
Market makers are individuals or organizations that help exchange crypto assets on different platforms. They keep liquidity levels appropriate for specific crypto pairs throughout the day by acting as buyers and sellers, thus balancing demand and supply and reducing volatility. Their help allows exchanges to maintain a seamless and enjoyable user experience, ensuring adequate speed and prices. Although profitable, market-making can be a demanding and complicated job. However, traders can simplify it by using market-making bots.
While large crypto companies and high-net-worth professional traders have dominated the market-making arena for a while, the crypto industry is growing and changing, providing more opportunities for individuals to participate.
However, more than just facilitating orders is needed to maintain a stable market. Therefore, market makers have to apply various strategies, such as placing orders with different prices, to offer a range of options for traders. They may also use algorithms to analyze market trends and execute trades accordingly. Additionally, they may use their own capital to buy and sell crypto assets to ensure that trading for specific asset pairs remains active.
To incentivize market makers to provide liquidity to DEXes, many DeFi companies offer rewards, such as LP tokens that can be used for DeFi services or a share of collected fees. Another incentive, arguably the strongest, attracting market makers to DeFi is arbitrage opportunities occurring less and less on centralized exchanges due to high liquidity and great competition between traders. Many tokens on decentralized exchanges have lower liquidity levels, making arbitrage opportunities far more long-lasting and advantageous. Therefore, market makers in DeFi can simultaneously support exchange flow, bridge liquidity between centralized and decentralized markets, and profit from the price differences between various DEXes and CEXes. If you want to learn more about the role of market makers in DeFi, you can read this post.
Automated bots can assist market makers in streamlining and optimizing their activities. By taking over most of the maker's actions, these bots save time, improve overall efficiency, and provide various helpful features, including assistance with market-making strategies. Therefore, bots allow players to stay on top of the market and make quick, informed decisions.
But how exactly do market-making bots work? Imagine a token is listed on an exchange but lacks sufficient market presence. It could result in a lack of liquidity, causing trading of the crypto asset to occur too slowly or not at all, which negatively affects its holders, exchange platforms, and traders.
In such a situation, a market-making bot can be deployed to identify struggling crypto assets and start placing buy and sell limited orders on either side of the current market price. Consequently, it will boost liquidity, enable the asset's exchange, and make it more attractive to potential traders and investors.
Market-making bots can use various strategies, including high-frequency trading, which involves executing orders at a high speed while holding them only for short periods. This strategy allows makers to determine prices and buy or sell crypto assets almost instantly, executing multiple trades in milliseconds.
Unlike arbitrage bots that often use flash loans to fill orders, market-making bots usually operate with the liquidity of their owners. As makers typically focus on one asset throughout a trading day, continuously placing buy and sell orders, they do not require a large balance to begin their market-making journey, making it a viable option for those with limited capital.
Like any other bots, market-making bots carry risks that traders, particularly novice ones, should be aware of. Firstly, competition with more technically advanced bots can lead to a gradual and persistent decline in trading profits.
Secondly, market makers also face competition with informed traders who may have access to significant inside information. As a result, such traders can take advantage of other market makers.
Thirdly, market-making bots are not immune to technical errors. Since makers rely entirely on bots to operate, even unsupervised, the safety and efficiency of such bots come to the fore. Technical errors can result in untimely and unhedged positions, wrongly calculated prices, etc.
Lastly, there is risk associated with third parties, such as exchanges or crypto projects. For instance, if a crypto project collapses, a maker who helped to provide its liquidity may lose that part of the capital.
Market makers are crucial in supporting DEXes that have struggled with liquidity, especially for lesser-known tokens. Market-making can help makers do their job more efficiently and beneficially, automating and improving this process. Despite the multiple risks that market makers face, it remains a highly profitable and promising field for crypto enthusiasts to explore.
The Kinetex team plans to develop smart bots that quickly analyze the market and adapt to ever-changing trends. With the help of these self-learning bots, Kinetex resolvers will be able to perform transactions automatically, providing users with the fastest execution times and most profitable rates.