One of the most overlooked success factors? Liquidity. Without it, even the most innovative token struggles to survive. That’s where Designated Market Makers (DMMs) play a critical role. In this article, we explore what a Designated Market Maker is, why they are indispensable in cryptocurrency exchanges, and how to select the right DMM for your crypto project.
What is a market maker?
A Designated Market Maker (DMM) is a professional liquidity provider that enters a contractual agreement to maintain continuous two-sided quotes, both buy and sell, for a token or asset. This means there's always someone to trade with, regardless of market conditions. In crypto markets, DMMs are often brought on by exchanges or token issuers before a listing to ensure liquidity is present from the start.
Unlike speculators, DMMs don’t aim to predict price direction. Their purpose is to reduce friction and facilitate smooth market operations. DMMs are evaluated on uptime, spread width, and order volume - ensuring efficient and stable trading environments. These partners work across centralized (CEXs) and decentralized exchanges (DEXs), leveraging algorithmic systems to provide liquidity in real time.
Why market making matters for token launches
DMMs are a cornerstone of crypto market infrastructure. Without them, order books remain thin, spreads widen, and volatility increases, conditions that deter both retail and institutional participants. Engaging a Designated Market Maker mitigates these issues and creates a more investable, stable market from launch.
- 1. Liquidity from day one
- Designated Market Makers (DMMs) populate order books with buy and sell orders, ensuring that early users can trade with minimal slippage. This prevents negative price action caused by shallow liquidity.
- 2. Improved market depth and stability
- A liquid order book absorbs large trades without causing major price shifts. Spreads can be tightened from 6% to as low as 0.2% - a critical difference for investor confidence.
- 3. Exchange listing support
- Exchanges often require liquidity guarantees. By working with a recognized market maker, projects can reduce listing barriers and increase their reach across multiple venues. Leveraging deep exchange relationships allows projects to streamline their entry into top-tier platforms like Binance, Coinbase, and OKX.
- 4. Stronger price discovery and fair valuation
- Market makers help reflect a token’s intrinsic value by mitigating price manipulation or hype-driven volatility. Over time, this builds a fair market value that supports long-term trust.
- 5. Institutional and retail confidence
- Tighter spreads and consistent liquidity signal maturity, attracting not only retail traders but also institutions.
- 1. Active and balanced order books
- Market makers ensure trading activity is smooth, with buy/sell order symmetry. This makes exchanges appear vibrant and trustworthy, especially during the critical launch period.
- 2. Lower spread and higher volume
- A narrow bid-ask spread reduces trading friction, driving up volume and, consequently, exchange revenues. This is vital for new listings, which rely on visible liquidity to attract participation.
- 3. Stable launch performance
- With a professional DMM involved, large orders can be absorbed without spiking or crashing the token price. This protects the exchange’s reputation and user experience.
- 1. Reliable trade execution
- Traders benefit from low slippage and the ability to enter or exit positions without delay, even in volatile conditions.
- 2. Tighter pricing and transparency
- With spreads as tight as 0.2%, retail investors can trust that they’re not overpaying or selling at a discount.
- 3. Reduced risk of “bag holding”
- Market makers maintain constant liquidity, providing investors with an exit route even during downturns - a key protection for those wary of being locked into illiquid positions.
Strategic considerations for projects
Choosing a DMM isn’t just about liquidity. It’s about alignment, trust, and performance.
Pre-launch coordination is key. Engaging a market maker early ensures technical and strategic alignment. This includes determining which exchanges to prioritize, preparing APIs, and syncing liquidity across platforms.
Smart liquidity allocation means avoiding overextension. Instead of spreading thin across many platforms, DMMs help ensure a few strategic venues receive meaningful support. This prevents fragmented liquidity and improves price stability.
Transparent performance tracking through formal KPIs ensures accountability. Professional DMMs provide consistent reporting and collaborate closely with project teams to refine execution and adapt to market feedback.
Why market makers matter more than ever
Crypto market makers have become indispensable to the modern token launch process. Their role extends far beyond simplistic notions of “boosting volume”. They are liquidity architects that build the foundation on which a token’s market can grow sustainably.
By maintaining liquidity, tightening spreads, and bolstering market confidence, market makers give new tokens a fair chance to succeed in the volatile crypto environment. Token projects benefit through improved market stability and investor trust, exchanges benefit from active and credible markets, and investors benefit from fair prices and the ability to trade freely. The strategies behind effective market making are increasingly professional and data-driven, encompassing everything from pre-launch planning, algorithmic trading, multi-exchange liquidity provisioning, to real-time risk management and compliance.
In an era where half of new tokens fail to gain traction, engaging a reputable market maker can be the difference between a token that languishes and one that thrives.
The takeaway? Build liquidity like you build a product: deliberately, professionally, and with the right partners by your side.
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The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
