At Woolypooly, we’ve always been at the forefront of demystifying the complex world of cryptocurrency trading. Our trading category has consistently provided cutting-edge insights into this ever-evolving market. Today, we delve into the intriguing realm of crypto market makers, the silent architects of the cryptocurrency trading world.

What is Crypto Market Making

Market Making Explained

Market making, in its essence, is a foundational activity in financial markets, and it’s no different in the world of cryptocurrency. It involves a market participant – the market maker – who consistently offers to buy and sell assets, thereby providing liquidity to the market. This role is crucial because it ensures that there’s always a counterparty for traders wanting to buy or sell, thus facilitating smoother and more efficient market operations. Market makers quote both a buy and a sell price in a financial instrument or commodity held in inventory, with the aim of making a profit on the bid-offer spread, or turn.

From Wall Street to Crypto Streets

The concept of market making isn’t new; it has been a cornerstone of traditional financial markets like stocks and commodities for decades. However, its adaptation to the crypto market brings a unique flavor to it. Unlike the more regulated and structured environment of Wall Street, the crypto markets operate 24/7 and are known for their high volatility and relatively lower liquidity. This environment presents both challenges and opportunities for crypto market makers. They must adapt their strategies (especially intraday trading strategies) to handle sudden market movements and the relatively nascent infrastructure of the crypto trading world, all while ensuring they maintain efficient market operations.

The Profit Paradigm

The primary way market makers earn their profits is through the bid-ask crypto spread. When a market maker buys an asset, they pay the bid price, and when they sell, they receive the ask price. The difference between these two prices, known as the spread, is the market maker’s potential profit. In the crypto world, where price fluctuations can be sudden and significant, managing this spread is both an art and a science. Market makers must carefully balance the risk of holding inventory against the potential profits from the spread, all while contributing to the market’s overall liquidity and stability.

In the crypto market, the role of market makers becomes even more significant due to the inherent volatility and emerging nature of this space. They not only help in price discovery but also in stabilizing the market, which can otherwise be prone to extreme fluctuations. By ensuring that there are always enough buy and sell orders, market makers help in creating a more orderly market where crypto traders can execute their trades more predictively and efficiently.

How Crypto Market Makers Work

How Crypto Market Makers Work

A market maker’s primary function is to provide liquidity to the market. In practical terms, this means offering a steady supply of stablecoins (or other forms of liquidity) to facilitate smooth trading. This liquidity is essential in ensuring that trades can be executed quickly and efficiently, without significant price slippage.

Token Management

In exchange for providing liquidity, the market maker receives tokens from the project they are supporting. This exchange forms the basis of a symbiotic relationship between the market maker and the project. The market maker then manages this portfolio of tokens, applying their expertise to maximize its value.

Profit and Return of Tokens

The agreement between the market maker and the project typically includes a set duration, often around a year or as specified in the contract. During this period, the market maker utilizes their skills in trading and market analysis to generate profits from the token portfolio. At the end of the agreed term, the market maker returns the tokens to the project, retaining the profits earned during this period.

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The Mechanics of Crypto Market Making

Key Components in Crypto Market Making

ComponentDescriptionImportance in Crypto Market MakingExample Tools/Strategies
Algorithmic TradingAutomated trading using algorithmsEssential for real-time market analysis and trade executionCustom-built algorithms, AI-driven trading systems
Trading BotsSoftware programs that execute trades based on set criteriaAutomate trading, ensuring continuous market presenceBots like HaasOnline, Gunbot
Risk Management SystemsTools to monitor and mitigate financial riskCrucial for managing the inherent volatility of the crypto marketPortfolio management tools, stop-loss mechanisms
Order Book ManagementContinuous placement of buy and sell ordersProvides market depth, reduces price volatilityDepth of market (DOM) strategies, liquidity algorithms
High-Frequency Trading (HFT)Executing a large number of orders at high speedsExploits minute price movements for profitHFT algorithms, low-latency trading systems
Statistical ArbitrageExploiting price differences across marketsTakes advantage of inefficiencies in different exchangesArbitrage bots, cross-exchange analysis tools
Spread ManagementBalancing the bid-ask spreadDirectly impacts profitability and market liquiditySpread analysis tools, dynamic pricing algorithms

Crypto Market Making Strategy Unveiled

In the crypto market, market makers employ a variety of strategies to maintain liquidity and manage risk. These strategies can range from simple bid-ask spreads to more complex algorithmic trading. Some market makers use high-frequency trading (HFT) techniques to execute a large number of orders at extremely high speeds, capitalizing on minute price movements. Others may employ statistical crypto arbitrage, leveraging the price differences across various exchanges. The key is to maintain a balance between risk and reward, ensuring that their presence adds value to the market in terms of liquidity and price discovery.

Tools of the Trade

The tools and technology used by crypto market makers are sophisticated and varied. They often rely on advanced algorithms that can analyze market trends and execute trades automatically. These algorithms are designed to respond to market conditions in real-time, adjusting buy and sell orders to maintain optimal spreads. Trading bots are another crucial tool, automating the trading process based on predefined criteria. These bots can operate round the clock, which is essential in the 24/7 crypto market. Additionally, market makers use comprehensive risk management systems to monitor their exposure and mitigate potential losses.

Order Book Dynamics

Order Book Dynamics

The order book is a fundamental element in the mechanics of market making. It’s a real-time list of buy and sell orders for a particular asset, showing the price and quantity that traders are willing to trade. Market makers play a crucial role in managing the order book by continuously placing buy and sell orders. Their activity helps to ‘thicken’ the order book, providing depth and reducing the likelihood of large, erratic price swings. Effective order book management by market makers leads to a more stable market with tighter spreads, benefiting all market participants.

The Ripple Effect of Crypto Market Makers

Crypto market makers not only contribute to the technical aspects of the market but also play a crucial role in its overall health and growth. The real-world impact of market makers is a testament to their indispensable role in the cryptocurrency ecosystem, influencing everything from individual asset stability to the broader market dynamics.

Impact AreaDescriptionBenefitsExamples
Liquidity ProvisionContinuous buy and sell ordersReduces slippage, facilitates faster trade executionIncreased trading volume in major cryptocurrencies like BTC and ETH
Price StabilityNarrowing the bid-ask spreadReduces price volatility, lowers trading costsMore stable price trends in highly traded crypto assets
Market MaturityContributing to the orderly functioning of the marketAttracts institutional investors, enhances market credibilityGrowth and stability in established cryptocurrencies
Support for New CryptocurrenciesProviding liquidity for emerging coinsAids in price discovery, encourages investor participationSuccessful launches and initial growth phases of new altcoins
Crisis ManagementMaintaining order during market stressPrevents panic selling, stabilizes the marketRole in stabilizing markets during high volatility events

Choosing the Right Market Maker

For traders and exchanges, choosing a market maker is a decision that hinges on several factors, including reliability, technology, and track record.

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CriteriaDescriptionWhy It’s ImportantConsiderations
Liquidity ProvisionAbility to provide continuous buy/sell ordersEnsures efficient trade execution, reduces slippageDepth and consistency of order book
Technological CapabilitiesUse of advanced trading algorithms and systemsFacilitates effective trading and risk managementReliability, speed, and sophistication of technology
Track Record and StabilityHistorical performance and market presenceIndicates experience and ability to handle market fluctuationsPerformance during volatile market conditions
Regulatory ComplianceAdherence to financial regulationsEssential for legal operation and trustCompliance with AML, KYC, and other relevant regulations
TransparencyOpenness in operations and feesBuilds trust and aids in informed decision-makingClarity in order execution, fee structure
Spread ManagementMaintenance of competitive bid-ask spreadsDirectly impacts trading costs and profitabilityConsistency and fairness of spreads
Reputation and TrustIndustry standing and client feedbackReflects reliability and ethical practicesClient testimonials, industry reviews
Customer Support and ServiceQuality of client interaction and supportEnhances trading experience, resolves issuesResponsiveness, expertise, additional services
Asset CoverageRange of cryptocurrencies and instruments coveredImportant for diversification and risk managementVariety and breadth of assets handled
Innovation and AdaptabilityCapacity to integrate new technologies and strategiesKeeps pace with market evolutionApproach to new trends, technologies, and market changes

Top Crypto Market Makers

Market MakerSpecializationTechnology/ApproachServices OfferedUnique Features
Acheron TradingAdvanced crypto market makingInnovative software engineering, algorithmic trading toolsMultiple exchange access, real-time analyticsRigorous human oversight for accuracy
Algoz Crypto Market MakerAlgorithmic crypto tradingAutomated algorithms, multiple exchange APIsCustomized trading strategies, backtestingIntegration with TradingView
Alpha ThetaDepth and liquidity in marketBetter bid-ask spreadsPortfolio management, asset custodyEducational resources for traders
GotbitDEX and CEX market makingAdvanced trading tools for continuous market reassessmentConstant performance trackingSupport for a wide range of both CEX and DEX
Antier SolutionsQuote-making and trading in crypto marketsAutomated algorithmic platformMulti Trades Analytics moduleSpecialized in capital management
Blue Sky CapitalLiquidity for digital asset industryProprietary algorithmic trading technologySpot and derivatives markets executionStrategic partner to exchanges, institutional clients
NinjaPromoFocused on token projectsAdvanced data analytics in its market making programStrategic initial assessment for market entryCollaboration with entities like Y Combinator and Techstars
CLS GlobalLiquidity in digital asset marketsProprietary algorithms for order managementBids and asks on exchanges and OTC desksFast order placement in milliseconds
CumberlandLiquidity solutions for institutional investorsPrice improvement technology, algorithmic strategiesSuperior execution on large tradesActive price seeking for better deals
EmpiricaLiquidity in crypto marketsAutomated algorithms, machine learningSpot and derivatives markets liquidity24/7 support, competitive fees structure
FalconXSuperior liquidity in global crypto marketsProprietary technology for automated order executionAutomated order execution, low latencyLarge order capacity
FlowdeskAutomated trading platformAI-driven algorithm for trade matchingNo order books or bid/ask spreadsAdvanced analytics and predictive algorithms
GravityTeamMarket making for major exchangesOTC trading services, liquidity managementProfessional brokers, educational resourcesBest prices in market trading
GSR MarketsLiquidity for digital asset trading platformsAutomated, algorithmic approachCustomized liquidity solutions, advanced trading strategiesDeep market insights and analytics tools
Jane StreetAlgorithmic trading and market making for cryptocurrencyProprietary algorithms for efficient executionLiquidity management, risk managementPersonalized service and advice
Jump TradingLiquidity services for digital asset exchangesSmart order routing, real-time algorithmsLiquidity for spot and derivatives marketsCustomized API integrations
Kairon LabsAutomated liquidity solutionsSophisticated algorithms, advanced analyticsPrice discovery and execution servicesRisk management tools
KeyrockEasy access to cryptocurrency marketsProprietary trading algorithmsAlgorithmic trading tools, market data analysisAutomated portfolio management
Amber GroupGlobal reach covering, supporting over 150 countriesProprietary execution algorithms designed to offer tight spreads and low feesLiquidity solutions, validator, digital asset platformActs not just as a market maker but also as miners and validators
Pulsar Trading CapBridging decentralized and traditional financial marketsMulti-algorithm execution engineTools and infrastructure for digital asset tradingIntegrated risk management system
VirtuDigital asset trading with automated arbitrageSophisticated algorithms for portfolio managementReal-time pricing, automated arbitrage tradingProfit generation in rising and falling markets
WintermuteLiquidity in digital asset exchangesAI algorithms in trading engineEfficient, low-cost tradingAccess to multiple exchanges simultaneously

Acheron Trading

Acheron Trading

Acheron Trading leverages innovative algorithmic trading tools with human oversight to ensure seamless market making.

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Pros & Cons

ProsCons
Combination of algorithmic tools and human oversightHuman oversight may limit scalability
Innovative trading solutionsBalancing technology and human intervention can be challenging
Focus on seamless market integration

Algoz

Algoz crypto market making company

Algoz is equipped with advanced algorithmic tools that help traders and market makers analyze markets, create, and implement market making strategies.

Pros & Cons

ProsCons
Advanced algorithmic analysis toolsComplexity of tools may require advanced understanding
Comprehensive market strategy developmentFocused on strategy creation, which may need constant updates
Suitable for both traders and market makers

Alpha Theta

Alpha Theta Crypto Market Maker

Alpha Theta aims to create more efficient and secure trading markets by bringing more depth to order books and shortening bid-ask spreads.

Pros & Cons

ProsCons
Enhances market efficiency and securityMay need continuous market analysis for effective spread management
Focus on deepening order booksFocused on market efficiency, which may not suit all trading styles
Reduces bid-ask spreads

Gotbit – Web3 Crypto Market Making

Web3 Crypto Market Making

Since its inception in 2017, Gotbit has carved out a niche in both centralized and decentralized exchanges, supporting 70+ CEX and 50+ DEX platforms and serving 370+ live clients. Nowadays, Gotbit is one of the biggest market makers in crypto.

From an interview with a Gotbit representative, it emerges that they provide crypto market making services for projects that are beyond the 200th line in the CoinMarketCap rankings.

Pros & Cons

ProsCons
Advanced trading tools for continuous market reassessmentListing tokens may come with a significant fee
Platform-based solutions catering to diverse client needsListing prerequisite of being on two smaller exchanges
Constant performance tracking, ensuring 24/7 operation
Monthly tips and utilities to enhance client performance
Versatile support for both DEX and CEX platforms

Antier Solutions

Antier cryptocurrency market making firm

Known for its innovative approach, Antier Solutions develops bespoke crypto market maker software that excels in mitigating risks of slippage by offering relevant bid-ask orders 24/7. The software supports multiple strategies and allows market makers to experiment with new strategies.

Pros & Cons

ProsCons
Tailored solutions for specific market needsMay require customization for specific market conditions
24/7 bid-ask order provisionReliance on continuous innovation to stay competitive
Supports multiple trading strategies

Blue Sky Capital

Token Market Making Program

Blue Sky Capital specializes in providing liquidity for the digital asset industry through its proprietary algorithmic trading technology. They focus on execution in both spot and derivatives markets.

Pros & Cons

ProsCons
Proprietary algorithmic trading technology
Spot and derivatives markets execution
Strategic partner to exchanges, institutional clients

NinjaPromo

ninja crypto market maker

Specializing in token projects, NinjaPromo‘s market making program is designed to not only enhance market liquidity but also to strategically manage risks for maximized profitability.

Pros & Cons

ProsCons
Strategic initial assessment for market entrySpecific supported tokens not disclosed
Continuous market analysis for sustained performancePerformance reliant on expert market insights and fluctuating market dynamics
Integration of advanced data analytics
Collaboration with renowned startup accelerators, ensuring credibility

CLS Global

cls market maker

CLS Global offers liquidity solutions in digital asset markets, utilizing proprietary algorithms for efficient order management across exchanges and OTC desks.

Pros & Cons

ProsCons
Proprietary algorithms for order management
Bids and asks on exchanges and OTC desks
Fast order placement in milliseconds

Cumberland

cumberland crypto market making

Cumberland provides liquidity solutions tailored for institutional investors, employing price improvement technology and algorithmic strategies for superior execution on large trades.

Pros & Cons

ProsCons
Price improvement technology, algorithmic strategies
Superior execution on large trades
Active price seeking for better deals
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Empirica

empirica cryptocurrency market making

Empirica cryptocurrency market making firm specializes in providing liquidity in thin markets with its software package capable of effectively increasing the depth of order books.

Pros & Cons

ProsCons
Effective in thin market conditionsFocused primarily on thin markets, may not be as effective in more liquid markets
Enhances order book depthRequires continuous monitoring for optimal performance
Automated liquidity provision

FalconX

FalconX crypto market making

FalconX offers substantial liquidity with low latency, large order capacity, and automatic trading execution.

Pros & Cons

ProsCons
Low latency in order executionMay require significant infrastructure support
Capable of handling large ordersFocused on larger market players, possibly less suitable for smaller entities
Automated trading execution

Flowdesk

Flowdesk Market Making

Flowdesk is an automated trading platform that uses AI-driven algorithms for trade matching, eliminating the need for traditional order books or bid/ask spreads. Supports more than 80 CEXs and 20 DEXs.

Pros & Cons

ProsCons
AI-driven algorithm for trade matching
No order books or bid/ask spreads
Advanced analytics and predictive algorithms

GravityTeam

GravityTeam Market making

GravityTeam provides market making services for major exchanges, offering OTC trading services and liquidity management with a focus on securing the best prices in market trading.

Pros & Cons

ProsCons
OTC trading services, liquidity management
Professional brokers, educational resources
Best prices in market trading

GSR Markets

GSR crypto market maker

GSR aims to supply unwavering liquidity to cryptocurrency trading platforms, focusing on stability and continuous market presence.

Pros & Cons

ProsCons
Automated, algorithmic approach
Customized liquidity solutions, advanced trading strategies
Deep market insights and analytics tools

Jane Street

jane street cryptocurrency market making

Jane Street is known for its algorithmic trading and market making in the cryptocurrency space, offering liquidity management and risk management services with a personalized approach.

Pros & Cons

ProsCons
Proprietary algorithms for efficient execution
Liquidity management, risk management
Personalized service and advice

Jump Trading

jumptrading crypto market maker

Jump Trading offers liquidity for spots and derivatives markets, facilitating the efficient execution of large orders without impacting the markets.

Pros & Cons

ProsCons
Smart order routing, real-time algorithmsMay not be as effective for small-scale trading
Liquidity for spot and derivatives marketsLarge order focus could limit flexibility in rapidly changing markets
Customized API integrations

Kairon Labs

kairon labs Crypto Market Maker

Since 2019 Kairon Labs provides automated liquidity solutions using sophisticated algorithms and advanced analytics, focusing on price discovery and execution services with robust risk management tools.

Pros & Cons

ProsCons
Sophisticated algorithms, advanced analytics
Price discovery and execution services
Risk management tools

Keyrock

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Keyrock offers easy access to cryptocurrency markets through its proprietary trading algorithms, providing algorithmic trading tools and market data analysis for automated portfolio management.

Pros & Cons

ProsCons
Proprietary trading algorithms
Algorithmic trading tools, market data analysis
Automated portfolio management

Amber Group

1 trillion Crypto Market Makers

Beyond providing liquidity solutions, Amber Group plays a multifaceted role as miners and validators across over 150 countries. Their digital asset platform, WhaleFin, is tailored for individual investors, featuring proprietary execution algorithms designed to offer tight spreads and low fees. Amber Group is one of the largest crypto market makers with $1T+ traded volume and $500M return generated volume.

Pros & Cons

ProsCons
Global reach, supporting over 150 countriesInvesting products are subject to varying regulatory constraints
Catering to a diverse range of client sizes
Dual role as principal and designated crypto market maker

Pulsar Trading Cap

image 29

Pulsar Trading Cap bridges decentralized and traditional financial markets with its multi-algorithm execution engine, offering tools and infrastructure for effective digital asset trading.

Pros & Cons

ProsCons
Multi-algorithm execution engine
Tools and infrastructure for digital asset trading
Integrated risk management system

Virtu

image 30

Virtu specializes in digital asset trading with automated arbitrage, utilizing sophisticated algorithms for real-time pricing and portfolio management, aiming to generate profits in both rising and falling markets.

Pros & Cons

ProsCons
Sophisticated algorithms for portfolio management
Real-time pricing, automated arbitrage trading
Profit generation in rising and falling markets

Wintermute

wintermute Crypto Market Maker

Wintermute utilizes an algorithmic cryptocurrency market maker that maintains liquidity across multiple markets and trading platforms.

Pros & Cons

ProsCons
Maintains liquidity across various marketsAlgorithmic focus may require frequent updates to stay relevant
Algorithmic approach for consistent performanceBroad market focus might not cater to niche market needs
Suitable for multiple trading platforms

Understanding crypto market making challenges is crucial for anyone involved in the market, as it sheds light on the complexities behind maintaining a stable and efficient trading environment in this dynamic and often unpredictable space.

ChallengeDescriptionImpactMitigation Strategies
Market VolatilityRapid and unpredictable price changesAffects inventory value and profit marginsUse of hedging strategies, real-time analytics, and risk management tools
Regulatory ComplianceEvolving legal landscape and compliance requirementsLegal and operational risksStaying informed about regulatory changes, implementing AML and KYC protocols
Technological AdvancementsNeed to keep up with fast-paced tech developmentsOperational efficiency and security risksInvesting in advanced trading and security technologies, continuous innovation
Security ThreatsVulnerability to hacks and cyber-attacksPotential loss of assets and reputation damageRobust cybersecurity measures, regular security audits, secure trading practices
Liquidity ManagementMaintaining sufficient liquidity in fast-moving marketsRisk of inventory depletion or excessDynamic liquidity management strategies, diversified asset holdings
Decentralization ChallengesUnique issues in a decentralized marketOperational complexitiesDeveloping decentralized finance (DeFi) compatible tools, adapting to blockchain technology

Looking Ahead: The Future of Crypto Market Making

Future of Crypto Market Making

Evolution of Technology and Strategies

The future of crypto market making is poised to be shaped significantly by advancements in technology and evolving trading strategies. As the crypto market matures, we can expect to see more sophisticated algorithms, enhanced machine learning capabilities, and greater integration of AI in market making. These technologies will not only improve the efficiency of market making but also help in better managing the complexities and volatility of the crypto markets.

Increased Institutional Participation

The entry of more institutional players into the crypto space is likely to bring about a shift in market dynamics. Institutional investors typically bring larger volumes, which could lead to increased liquidity and stability in the markets. However, their participation also demands higher standards of compliance, transparency, and risk management, pushing market makers to adapt accordingly.

Regulatory Landscape and Challenges

Regulation will play a pivotal role in shaping the future of crypto market making. As seen with the recent developments involving Jump Trading and Jane Street scaling back their operations in the U.S. due to increased regulatory scrutiny, market makers will need to navigate a complex and evolving regulatory environment. The heightened attention from regulators is driven by concerns over market manipulation, investor protection, and financial stability. Market makers will have to ensure strict compliance with regulatory requirements, adapt to new regulations, and possibly face operational and strategic changes in response to regulatory pressures.

Decentralized Finance (DeFi) and Market Making

The rise of DeFi presents both opportunities and challenges for market makers. Decentralized exchanges (DEXs) operate differently from traditional exchanges, and market making in these environments requires a different approach. The automated market maker (AMM) models in DeFi, for instance, offer a unique set of advantages and limitations compared to traditional market making. Market makers will need to adapt their strategies to capitalize on the growing DeFi space while managing the risks associated with it.

Global Expansion and Localized Strategies

Market makers are likely to expand their operations globally, adapting to different regional markets. This expansion will require localized strategies to cater to the unique characteristics and regulatory requirements of each market. Understanding local market dynamics, regulatory landscapes, and cultural nuances will be crucial for success in these diverse markets.

Sustainability and Ethical Practices

As the focus on sustainability grows, market makers will need to consider the environmental impact of their operations, especially in terms of energy consumption used for trading and blockchain operations. Ethical practices in trading, transparency, and fair market operations will also become increasingly important, influencing the reputation and long-term success of market makers.

Conclusion

As we look towards the horizon of crypto market making, it’s clear that the industry is at a pivotal juncture. The landscape is evolving rapidly, shaped by technological advancements, regulatory shifts, and the increasing involvement of institutional players. Market makers, at the heart of this ecosystem, are not just passive participants but active shapers of its future.

The challenges are significant, particularly in the realm of regulation, as exemplified by the recent strategic shifts of industry giants like Jump Trading and Jane Street in the U.S. market. This scenario underscores the delicate balance market makers must maintain between innovation and compliance. The future success of market makers will hinge on their ability to navigate these complexities, adapting to regulatory changes while continuing to provide liquidity and stability in increasingly diverse and sophisticated markets.

In conclusion, the world of crypto market making is poised for transformative changes. Those who can adeptly manage the interplay of technology, regulation, and market dynamics will not only survive but thrive in this dynamic environment. For traders, investors, and market participants, understanding these shifts is crucial for making informed decisions in a landscape that continues to redefine the boundaries of finance and technology.

FAQs

What exactly does a crypto market maker do?

Market makers help facilitate trading by providing liquidity through continuous buy and sell orders.

How do market makers make money?

They earn profits from the spread between the buy and sell prices.

Are crypto market makers different from traditional market makers?

While the core principles remain the same, crypto market makers open 24/7, operate in a more volatile and less regulated environment.

Can market makers manipulate the market?

While they have a significant impact on liquidity and price stability, outright manipulation is mitigated by market competition and regulatory frameworks.

How important are market makers in DeFi?

As DeFi grows, market makers are becoming increasingly crucial in providing liquidity to decentralized platforms.

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