Demystifying Market Making Why Liquidity is Necessary for Every Successful Project

here who leads BD at wiam mute and then I have Amos who is founder of met meta web VC and and ech um if you guys would like to introduce yourselves and tell me a little bit about what you do that would be great David we can start with you awesome thank you so much for having me how's everyone doing how's everyone doing let's make some noise let's give it up for the coral stage if you guys hanging in this late in the afternoon for a panel While most people are outside drinking or doing something else respect um my name is David mickley I do BD at wintermute I've been working crypto for four years over half that time at wintermute uh based in Boston before working in crypto I was in traditional Finance I was a client adviser at Bridgewater Associates uh macro hedge fund in Connecticut and excited to be here on my first e Denver panel ever so thank you guys for making this happen hello every hello everyone my name is Amos uh I'm the founder of meta web VC uh SOA web is early stage uh VC focusing crypto and we're backed by Sequoya dragonfly andz of the world uh at the same time we also have a sister company called lch uh lch is both a product studio uh but also uh a trading firm uh so we do lots of like prop trading but at the same time we're also a market maker uh for for project in the in the crypto space uh I've been crypto pretty much since 2013 uh this is my sir East dmer uh really excited to here today it's also my first SE Denver it's it's pretty incredible so far a lot of people here um David I'm wondering if you can speak to us a little bit about um winter mute being one of like the largest market makers in the industry um if there's a particular Focus could you speak to that yeah absolutely sorry um a lot of noise here we'll get through it so uh first just want to get a sense of the audience um how many people here are familiar with the concept of Market making all right good awesome um how many people here are Traders themselves how many people here are Builders Developers for how many people is this your first crypto conference awesome very cool very cool also uh in the background is my brother and sister-in-law who came from not so far but some distance to be here so round of applause thank you for showing up um yeah Round of Applause family it's not all about crypto family is important too so uh yeah winner mute we're one of the the world's largest crypto market makers we've been around for seven years uh basically what we do is really simple and we just do it at scale we are providing liquidity across dozens of venues centralized exchanges decentralized exchanges in a market neutral way so when you look at an order book at you know an exchange coinbase binance you look at all those orders a large percentage of those orders are ours we're providing liquidity we're putting those orders up on both sides of the book and we're basically allowing for there to be a market to buy and sell against for individual Traders for long-term investors um and we do a few things with external parties the first is OTC trading so if you're an investor a fund uh institutional broker aggregator and you want to move large amounts of crypto it's more efficient to go directly to a market maker through an OTC desk to move those blocks you know let's say it's $100,000 or $100 million you'll get better pricing by going directly to a liquidity provider and we offer that through our OTC desk the second thing we do is we help projects with liquidity if you're a project and you're launching a token to get that initial liquidity to make sure those order books are filled and that the project has that liquidity which is one ingredient but an essential ingredient for its growth we're there to provide it so we can talk more about what that means and would love to also hear from people that are interested in working with us either on the OTC desk or the liquidity providing side you can find me on Twitter David mickley just hit me up on DMS if any of those things interest you and obviously we'll get into the details as we go through the talk Amos can you speak a little bit about your relationship as a market maker yeah for sure so a lot of people are more familiar with meta web on the VC side uh but at the same time you know like our training firm has also been training the space for for quite a while uh I think like in the past a couple months we're actually uh usually rank as some of the top Traders on binance in terms of like pnl uh and more Rel to Market making size so you know obviously shout out to the winter Mill they're being some of the the largest you know market makers in the world uh so we have a slightly different approach uh because we both have the the VC side The Venture Ste set of things and also the trading side uh so we tend to like you know grow together uh with the the projects uh especially for project you know that that we have invested or or incubated uh in the sense uh so obviously in the market making component we we obviously do lots of you know um without a neutral strategy uh but sometimes we also like to to trade some of the Bas uh to really help the the project to to grow in terms of the the market cap so so we do have you know a historical record uh of growing a couple projects you know originally from like I don't know like ranking 100 um or even like you know 200 um I guess like uh uh ranking on coin market cap uh but eventually you know bring them up to to you know top 50 right um uh so that's kind of like uh I guess like our approach in terms of you know Market making so uh if you're interested or if you're like building a project uh obviously you know just just you know contact me um either on Twitter or just you know go to our website and you know left a message there yeah um I think it'd be interesting to hear more about that why is liquidity so important um for particularly early stage crypto projects and as they progress um if you can speak to that from the sort of VC perspective and also a market making sure I mean like first of all let's start with token uh so yesterday I actually did a workshop uh essentially saying that you know uh token is the most powerful marketing Tool uh in crypto and say that again sorry what did you say token is the most powerful marketing tool in crypto uh because you know all the way since like 2017 you know the io Buran and then you know the defi summer then Solana and all the other ler ones and right now ler 2 MD uh almost all the you know were driven by fres right uh so so let's face it this is like very speculative market and people do want to make money uh and there's actually nothing wrong about it uh for example in in early stage you know when salana was like trading below a dollar uh they don't have that many projects building on it right but right now you know uh there's so many projects you know building on SOL and the same could be applied to lots of other ecosystem right um so so that's why I think token is quite important and the market making element part is just to make sure you know you provide like easy way for people to buy and sell the token uh and make sure it's like a liquid asset uh obviously this could be challenging uh for early stage project uh simply just because you know in the beginning maybe there are not that many like interest not that you know uh knowledge about a token uh people are be unsure like what to buy at the same time you know Market making does you know takes capital and the efforts to do it right uh but at the same time uh I would say especially since the the beginning of last B right you know especially started with D5 uh with you know amm and then you know conc liquidity you know am uh right now obviously the threshold uh and the requirements of doing Market making is uh much easier uh compared to before uh when you have to use a market maker uh so I'll say that's definitely you know uh a good start uh but but I would say like Market making is still quite essential uh you know having professional Market maker to do it uh it's just to make sure you know uh people can actually trade you know get access to your token uh which obviously in the long run will help with you know the token grows the project grows you know uh help with the product as well so thank you and David from your side of things why why is liquidity so important for crypto projects yeah um it's a great question people talk about liquidity all the time they talk about being important but what does liquidity really mean I just want to sort of Define that um looking at a non-crypto market you know say you go to the supermarket the shelves are stocked right you want to buy Captain Crunch you can find Captain Crunch who here likes Captain Crunch right I love Captain Crunch and if you want to buy one box of Captain Crunch or five or 10 the price really isn't going to change and it shouldn't because there's ample liquidity there's ample inventory on the shelves at the store so for a project that's just launching when you get listed on an exchange all the exchange is is a venue it's the grocery store but it's not the inventory of the actual item on the shelves who provides that inventory who provides that liquidity it's the market makers and unlike a grocery store store it's a market where anyone can come and buy and sell things because there are market makers posting that inventory posting that liquidity on both sides now if you are uh you know a crypto that has widespread adoption if you're Bitcoin or an ethereum you don't need a market maker because there's enough natural people buying and selling that there's natural liquidity in those order books across those markets across exchanges but if you're a new project that's up and coming you can have everything going for you you can have the product Market fit you can have the marketing you can have the team but if you don't have a professional Market maker that's there to fill those books across both sides across venues then Traders and investors are going to have a bad experience when they buy you know $10 versus $1,000 of the asset they'll see slippage that's not a good experience investors if they see spreads of 2 to 5% for low quantities it leads to a decreased likelihood that they're going to want to buy it or a feeling that they don't have confidence to be able to sell it when they alely need to obviously we heard about you know FTX having these huge Holdings on things that didn't have liquidity so you're can have a $100 million in something but if there's no liquidity there's no market and it doesn't matter so market makers play a role and just provide liquidity but it's really important to also know what market makers don't do they don't help move the price up they don't help push the price down they literally are there in a market neutral way providing liquidity and so when wintermute thinks about partnering with projects we try to identify products that have all those other things going for them they have the marketing they have the team they have the product Market fit they have the conviction and we use our you know team of developers Engineers that have been working on Market making a very simple idea but very complex in execution trading billions of dollars a day we apply that technology to provide liquidity to your token as part of our role and helping support that project great thank you um I'm curious about the way market making differs for centralized exchanges versus decentralized exchanges so I know at winom you you you provide liquidity for both right um how does that look because I think over the last sort of year or so we've seen decentralized exchange trading volume sort of not look as good as it did in previous years I think there was at one point we saw I think Unis swap um and a few other decentralized exchanges trading volume surpass coinbase which is pretty cool um I'm wondering how that looks from a market maker perspective and if there are diff like stockk differences or not yeah sure sorry that um yeah I mean definitely um train in general is picking up right now we're entering a bull market but def's market share has been decreasing a little bit um the peak for def's market share was around May of 2023 where 15% of trading happened on chain and now it's around half that around 7 and a half% so it's still meaningful but you know as far as market share goes definitely the majority of trading happens on chain um as market makers both on CI and D5 were very active on chain um there's all s sorts of different venues that that you can trade on there's amm which introduce certain risk around imp permanent loss there's clobs which you know sort of eliminate that but have other sort of issues around optimizing for gas optimizing for transaction fees there's just a lot more things you have to consider when train on chain but for us it's really important that when someone's buying or selling a token we want them to feel like they got a fair price no matter where they traded it so we want to make the markets efficient across both types of venues CI and Defi and our ability to be active on Defi and active on CI allows us to keep the price in line through Arbitrage that's what market makers are essentially doing they're capturing the bid ass spread on a given exchange and arbitraging the price difference between exchanges and for for us we're not just arbitraging between you know different centralized exchanges but we're arbitraging between CI and defi to put the price in line and so that if you buy something on Unis swap or if you buy something on coinbase hopefully you'll still see relatively the same price um but you know obviously there's there's challenges there's more work there's more integration work you need to think about when doing Market making a train on chain and that's why we have a big team of D5 developers focus on that because we're very committed to furthering the decentralized world in general Amos I'm wondering if you can speak to that too yeah uh I think trading on Dex is actually very different from trading on a central exchanges uh especially if you're trading on amm because uh especially I'm talking about un SP way to style amm it's both like the the smartest and the the most stupid you know uh design in the world right um so it does you know Ru slipage and obviously you know uh right now I would say the general like user experience of trading on chain uh is still um not necessarily comparable to you know the experience of you know treading offchain on Central exchange right uh sometimes there latency uh and by the way you know right now there are lots of like other book like decentralized other book exchanges uh but it's not exactly you know fully onch yet uh and I guess one of the big benefit of training on Central ex change especially from like the project perspective because is at the same time VC right is that you know uh like David said you know uh Central exchanges there just like venue they like grocery store uh and they can actually bring you lots of users uh versus like on dexes in generally generally speaking is more like the project actually bringing users to to to the Dex versus sex is actually you know bringing uh user to the project right uh so definitely like uh much I'll say like stronger benefits uh for project to to get listed on Central extension compared to you know um de but in terms of you know all the the actual training mechanism uh I say there wouldn't be that much of a difference uh but but just in general like if you try to trade on amm uh it's not like a very efficient way of doing it uh in most cases uh obviously you still have to pay gas fee and and you know deal with all the me stuff uh which sometimes tend to like really complicate things right uh but at least like in this B run I'm actually quite bullish uh in terms of you know having more you know decentral exchanges especially all the brook exchanges like showing up uh we actually invest uh in two projects are working on this one is called Ally network uh which is actually pretty large project I think they're doing like billions of dollars of volume right now it's actually built by the wo team also invested in another project called warp uh which is a fully onent other book uh built by uh Joseph pong uh who actually show the lighting network uh wet paper together with vitalic back then uh so super excited about that um I'm wondering how early stage projects compete in terms of liquidity so David I think you explained this at the beginning like if an asset has like high trading volumes it's obviously advantages so how do the earlier stages stage projects compete with with that yeah um great great question so uh for early stage projects that is kind of the inherent problem is getting liquidity getting people to actually have the market that they can trade against and that presents a few problems right when you're trying to get listed on an exchange you have to think about their incentives all the exchange cares about is trading volume because that leads to trading fees so how do they know people are going to trade this new token that has being listed but when a market maker is working with a project that again goes back to the metaphor that's filling out the inventory that's putting the Cal on the shelves so that people can buy and sell it and that allows the exchanges to make money through trading fees that allows the market to be create be created so that there's people that can actually buy and sell the thing um so that's why again it goes back to why are market makers important it's for providing that liquidity before something actually has an organic market of people that are willing to post orders across both sides of the book again you sort of look at um the orders of magnitude of trading volume um BTC yesterday doing around 70 billion eth doing around 30 billion there's only a handful of projects that trade north of a billion and then it drops into a few in the hundreds of millions and then way less than the tens of millions and then way more in the tens of millions then way more way below that so if you want to get trading volume you need liquidity both those things go together liquidity brings volume volume brings liquidity but to bootstrap it from an initial stage especially when you're launching a new project that's when the market maker can really play a role and do does the market maker take on any risk by providing liquidity for like super small lower cap projects yeah do you want to answer that first of course I I'll say there definitely more risk uh in a bare Market because to provide really good liquidity the market maker need to both buy and sell the tokens right uh so if the token just know keep going down obviously to still try to remain the liquidity the market maker just going of you know keep buying buying the token uh so definitely like inherent risk and in terms of uh like hedging the risks uh because a lot of smaller project actually don't have you know futures or per uh it's also really difficult to to actually H it uh so I say that's definitely like one of the challenges of you know doing Market making for for smaller cat projects uh but I guess to answer your early question I will I would say you know just provide like different U perspective uh first I agree with uh what what David said uh but the other part is that you know once you figure out like all the market making stuff make sure you know people can trade somewhat easily have somewhat smooth experience of you know training our token uh it's also very important for project to actually compete for attention um which doesn't necessarily means like you know Market Market making but it's more like a marketing in that sense you know like the project is like Market making just like one of the instrument uh that's part is more about know getting more people to know what you're doing getting them excited obviously the product itself to have like good value proposition uh actually have good utility and capture value all those are important for a project to actually compete you know uh for the Traders for the retail users for the funds like attention to actually buy into the tokens and the market making is just you know facilitating you know the transaction uh in between so yeah and just just to build off that um really good point about the hedging risks it's hard to hedge something when it's not actively traded token but there's also the opportunity cost of trading a is that better now you can you not hear now you can hear okay great thanks oh you were scratching all right scratch you edged it it's good all right it's good great awesome so where was I um so yeah basically there's also the opportunity cost right so the way we structure our deals is we get a loan from the project in the token that will'll be Market making but we have to put up the other side of whatever that token is trained against whether that's BTC eth or Staples there's a capital cost there to put up that other side of the trade There's an opportunity cost of what we could be doing with that capital and right now the cost of capital the opportunity costs are very high because it's high cost to borrow there's a lot of training opportunities so the worst thing for a market maker well not the worst but one of the bad things is if we are posting liquidity but no one's trading against it that's just kind of destroys the business model so what you were asking before is the risk of working with an early stage project we want to make sure that if that project is launched and if there is good liquidity that there is a market out there that wants to buy and sell it cuz otherwise we're just poting our inventory and it's not being used and that's an opportunity cost and that's why we assess projects as part of our diligence process to basically see like are we working with projects that there is an active user base of people that want to trade it buy and sell it and so forth how do you gauge that demand it's really tricky it's really tricky I mean we it's almost like a VC type of um diligence we're looking at Community we're looking at product if it's already traded on a DEX then we can get that sort of information before at list on a centralized exchange and see how much volume is already there look at the backing um it is somewhat of an art you know as investing is um but I would say it's a a real decision of investing our resources and capital in Market making um and you don't always know until it launches and then just one more thing on the opportunity cost so so right now like the funding rate on binance for pers even for BTC the implied apy is actually more than 100% so that's like real you know opportunity cost you know to to Market makers uh in that sense so I want to ask you guys one last question so um at what point do you think we're going to see like a consistent sort of um within with in crypto there's a lot of spikes of trading volume like high act active periods at what point will the market sort of become consistent from a market make perspective from a trading volume perspective liquidity when are we going to see that um I actually don't care if it's like consistent uh I guess I guess more like consistently growing the the market share and get more and more volume right uh but you know like just as in traditional Finance there will always be like spikes in volume for whatever reasons uh and that's actually great in terms of the volatility to the Traders uh but overall I'm just hoping you know this Market especially with the the recent ETF approval just bring like more people into the space you know more money uh which obviously is great yeah yeah um great great points and just to add to that um obviously we're still early in widespread crypto adoption so much of crypto price action is based on sentiment based on news and that can shift very quickly so the more that we can have broader adoption broader use cases that create stability to pricing that creates stability to the markets um a wider sort of base of users buyers and sellers um then we'll see volatility come down so it's really this way with any emerging asset class um crypto is one example of it and I think as we see more adoption then we'll see more stability and obviously we're seen that over the past 10 years we just have a long more way to go thanks so much guys that's all we have time for appreciate it awesome thank you I'll say one more time if you want to follow up Twitter DAV mickley hit me up and thank you all for having me great be on the panel with you thanks both thank [Applause] you