The current crypto market is facing deep problems with the market maker mechanism, and the case of GPS and Shell is just the tip of the iceberg. As retail buying weakens, the interest game between project parties and market makers intensifies, and market bubbles and risks coexist. This article will delve into the operational logic of market makers and the challenges they face. This article is derived from an article written by @octopusycc and was compiled, compiled and written by wublockchain. (Synopsis: GPS market maker "full pending sell order" plunged 80% in three days!) Binance announces blocking and freezing of improper earnings: will compensate users) (Background supplement: In-depth analysis of the seven major market makers: the amount of funds, positions and market-making style at a glance) If the market maker problem occurs at the same time between GPS and shell, it is not a special case, which is obviously the tip of the iceberg of the industry problem. 1. To talk about the problem of market makers, we must first talk about the operating mechanism of market makers The market-making business of market makers is to give bilateral quotations to buyers and sellers to maintain market liquidity and price relative stability. In the traditional market, this part does not have much oil and water, and in the crypto market, the same is true, so exchange incentives, fees and project incentives are needed to subsidize (or match funds with spot). It is very normal for a normal Delta one market making trade to lose money. Foreign commodity markets CME or Eurex They basically have additional incentives in addition to handling fees. Otherwise, market makers don't earn or earn little. That is to say, "money-making market makers" may all be making markets, and rarely in market making. But at the same time, the market also urgently needs market makers, there is no market maker market slippage is huge, and no one trades, so it is generally the exchange or the target party to subsidize this part of the liquidity. 2. The core reason why market makers lose money Market makers earn the difference, but are very afraid of a unilateral collapse in price. And the current crypto market has a commonality, at the time of TGE, there are a large number of directly unlocked selling orders, and retail investors generally no longer take orders. That is, after the launch, the selling pressure is most, which is contrary to the project party's desire to pull up shipments when it is launched. The real situation of GPS and shell When most people in the market are selling, market makers will be constantly filled as Maker's buy orders (forced to buy at a low price), resulting in a backlog of underlying items (inventory) in hand. If the price continues to fall, the underlying (inventory) will continue to shrink. This belongs to the unrealized loss of market makers. The difficulty of dynamic adjustment for market makers Market makers may lower the purchase price (e.g. from 1 knife to 0.8 knife quickly), but if the market crashes too quickly, there is simply no time to adjust. In times of market downturn, market makers tend to be more passive in hooking up the list of targets. The crash of GPS is from 0.14 rapid crash to 0.07, from the result, it is not a benign market behavior, market makers can never make a profit here in the sell order, unrealized loss sharply increased. The current selling order in the market is much lower than the average cost price of the subject matter itself. 3. So what do market makers do if they don't anticipate buying and potential selling? Just like the previous Trump and Milai coins, it provides unilateral liquidity, only putting coins, not U. That is, the liquidity of buying is sufficient, and the liquidity of large selling is extremely poor. And there is a small trick here, the token in the hands of the project party has no cost, and the matching capital (allocation U) of the market maker is the actual cost. So here, if the disclosure @GSR_io is the market maker of the accident project, it is seriously backstabbed by the "active market maker", and it is also a victim. (Note: Often the passive market makers of crypto projects will allocate equal amounts of funds to the target, which is equivalent to OTC buying the project token.) ） 4. Where is the cost of a market maker? The difficulty and professionalism of the market-making business is extremely high, and it is a fact that exchanges are extremely dependent on external market makers. So how do exchanges restrain market makers? Often the market maker and the exchange sign a contract need to give a margin to the exchange, when there is a market-making problem (such as the needle is too large, the world needle amplitude is too large), the exchange will deduct the margin to compensate the corresponding investment victims. (Note: The altcoin needle is clearly a reflection of market makers not doing a good job of liquidity management.) So why are GPS projects, market makers still doing evil? The market has entered the stage where retail investors will no longer take over new coins, and the selling order after listing on the exchange is obviously greater than the buying order. Traditional market-making businesses can't make money for market makers, and if the amount that can be cashed out (plus unilateral liquidity) is obviously greater than the margin on the exchange, they will be willing to accept the penalty of Binance deducting margin and cash out in large amounts. (Note: The author privately believes that a considerable source of profit is @GSR_io market-making losses.) Past Crypto Market vs. Current Crypto Market In the past crypto market, retail investors generally believed that the big exchanges had a wealth effect, so the project did not worry about whether there were enough buying orders after listing. Now, most retail investors will no longer chase higher when they first went online, resulting in a far decline in buying expectations after the project went public. The high cost of listing on the exchange The hard cost of the project when listing on the exchange is extremely high: • B A comprehensive cost may be 3 million US dollars (each deal is different, do not delve into it). • The comprehensive cost of a second-tier firm is $1.5 million (each deal is different, let's not talk about it). Additional hidden costs of exchange listing Airdrops to platform coins: The proportion taken is quite large, and most of the airdrops to the stakers will be converted into selling orders, and this part of the money is what market makers/project parties have to eat. Marketing: The cost of finding KOLs and community publicity is also real, ranging from tens of thousands of U to one million U. And these projects can hardly get so much money before the financing of the strategic wheel, and the strategic round has become a core problem here. You need to take millions of dollars as a cost to go to the exchange, and you need other institutions to inject funds into you. In the traditional market, this is much like a bridge, the difference is that the institution of the strategic round does not ask for interest, but for a share of the token's earnings after the launch. (Obviously, the potential benefits of going online are substantial.) Therefore, it will force the project team to directly increase the market value after the launch, and the FDV is even more than 5 times higher than the valuation of the strategic round. The fundamentals of the project (on-chain data, actual users, social media profiles, marketing) lacked the motivation to continue to implement it after the launch of Binance. I will not repeat it here, most of the information when the slotted block chain project is listed is mostly the result of false prosperity and wool studio. This will also directly lead to a significant downside risk for all retail investors who invest several times above valuation. The original intention of restricting the project party's deposit / listing fee vs. the actual consequences The original intention of binding the project party's deposit / listing fee is of course good. Those project parties with strong market competitiveness and poor ability to find resources can be screened out. But the evil result is that when the market is not good, the project party can only push up the coin price / market value, overdraft the project growth and create a bubble to earn the cost of listing in order to go online. As @Max_Sunxxx said, the financing of the strategic round is a debt for the project party. As a result of false booms and bubbles, participating institutions make huge profits in the bubble and retail investors in value investing continue to backstab. In such an altcoin market environment, we cannot expect any reason for traditional funds to enter the market to buy copycats. In my opinion, this is also the biggest problem in the Web3 industry...
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"GPS and SHELL expose market makers to evil? A rotten corner of the crypto industry
The current crypto market is facing deep problems with the market maker mechanism, and the case of GPS and Shell is just the tip of the iceberg. As retail buying weakens, the interest game between project parties and market makers intensifies, and market bubbles and risks coexist. This article will delve into the operational logic of market makers and the challenges they face. This article is derived from an article written by @octopusycc and was compiled, compiled and written by wublockchain. (Synopsis: GPS market maker "full pending sell order" plunged 80% in three days!) Binance announces blocking and freezing of improper earnings: will compensate users) (Background supplement: In-depth analysis of the seven major market makers: the amount of funds, positions and market-making style at a glance) If the market maker problem occurs at the same time between GPS and shell, it is not a special case, which is obviously the tip of the iceberg of the industry problem. 1. To talk about the problem of market makers, we must first talk about the operating mechanism of market makers The market-making business of market makers is to give bilateral quotations to buyers and sellers to maintain market liquidity and price relative stability. In the traditional market, this part does not have much oil and water, and in the crypto market, the same is true, so exchange incentives, fees and project incentives are needed to subsidize (or match funds with spot). It is very normal for a normal Delta one market making trade to lose money. Foreign commodity markets CME or Eurex They basically have additional incentives in addition to handling fees. Otherwise, market makers don't earn or earn little. That is to say, "money-making market makers" may all be making markets, and rarely in market making. But at the same time, the market also urgently needs market makers, there is no market maker market slippage is huge, and no one trades, so it is generally the exchange or the target party to subsidize this part of the liquidity. 2. The core reason why market makers lose money Market makers earn the difference, but are very afraid of a unilateral collapse in price. And the current crypto market has a commonality, at the time of TGE, there are a large number of directly unlocked selling orders, and retail investors generally no longer take orders. That is, after the launch, the selling pressure is most, which is contrary to the project party's desire to pull up shipments when it is launched. The real situation of GPS and shell When most people in the market are selling, market makers will be constantly filled as Maker's buy orders (forced to buy at a low price), resulting in a backlog of underlying items (inventory) in hand. If the price continues to fall, the underlying (inventory) will continue to shrink. This belongs to the unrealized loss of market makers. The difficulty of dynamic adjustment for market makers Market makers may lower the purchase price (e.g. from 1 knife to 0.8 knife quickly), but if the market crashes too quickly, there is simply no time to adjust. In times of market downturn, market makers tend to be more passive in hooking up the list of targets. The crash of GPS is from 0.14 rapid crash to 0.07, from the result, it is not a benign market behavior, market makers can never make a profit here in the sell order, unrealized loss sharply increased. The current selling order in the market is much lower than the average cost price of the subject matter itself. 3. So what do market makers do if they don't anticipate buying and potential selling? Just like the previous Trump and Milai coins, it provides unilateral liquidity, only putting coins, not U. That is, the liquidity of buying is sufficient, and the liquidity of large selling is extremely poor. And there is a small trick here, the token in the hands of the project party has no cost, and the matching capital (allocation U) of the market maker is the actual cost. So here, if the disclosure @GSR_io is the market maker of the accident project, it is seriously backstabbed by the "active market maker", and it is also a victim. (Note: Often the passive market makers of crypto projects will allocate equal amounts of funds to the target, which is equivalent to OTC buying the project token.) ） 4. Where is the cost of a market maker? The difficulty and professionalism of the market-making business is extremely high, and it is a fact that exchanges are extremely dependent on external market makers. So how do exchanges restrain market makers? Often the market maker and the exchange sign a contract need to give a margin to the exchange, when there is a market-making problem (such as the needle is too large, the world needle amplitude is too large), the exchange will deduct the margin to compensate the corresponding investment victims. (Note: The altcoin needle is clearly a reflection of market makers not doing a good job of liquidity management.) So why are GPS projects, market makers still doing evil? The market has entered the stage where retail investors will no longer take over new coins, and the selling order after listing on the exchange is obviously greater than the buying order. Traditional market-making businesses can't make money for market makers, and if the amount that can be cashed out (plus unilateral liquidity) is obviously greater than the margin on the exchange, they will be willing to accept the penalty of Binance deducting margin and cash out in large amounts. (Note: The author privately believes that a considerable source of profit is @GSR_io market-making losses.) Past Crypto Market vs. Current Crypto Market In the past crypto market, retail investors generally believed that the big exchanges had a wealth effect, so the project did not worry about whether there were enough buying orders after listing. Now, most retail investors will no longer chase higher when they first went online, resulting in a far decline in buying expectations after the project went public. The high cost of listing on the exchange The hard cost of the project when listing on the exchange is extremely high: • B A comprehensive cost may be 3 million US dollars (each deal is different, do not delve into it). • The comprehensive cost of a second-tier firm is $1.5 million (each deal is different, let's not talk about it). Additional hidden costs of exchange listing Airdrops to platform coins: The proportion taken is quite large, and most of the airdrops to the stakers will be converted into selling orders, and this part of the money is what market makers/project parties have to eat. Marketing: The cost of finding KOLs and community publicity is also real, ranging from tens of thousands of U to one million U. And these projects can hardly get so much money before the financing of the strategic wheel, and the strategic round has become a core problem here. You need to take millions of dollars as a cost to go to the exchange, and you need other institutions to inject funds into you. In the traditional market, this is much like a bridge, the difference is that the institution of the strategic round does not ask for interest, but for a share of the token's earnings after the launch. (Obviously, the potential benefits of going online are substantial.) Therefore, it will force the project team to directly increase the market value after the launch, and the FDV is even more than 5 times higher than the valuation of the strategic round. The fundamentals of the project (on-chain data, actual users, social media profiles, marketing) lacked the motivation to continue to implement it after the launch of Binance. I will not repeat it here, most of the information when the slotted block chain project is listed is mostly the result of false prosperity and wool studio. This will also directly lead to a significant downside risk for all retail investors who invest several times above valuation. The original intention of restricting the project party's deposit / listing fee vs. the actual consequences The original intention of binding the project party's deposit / listing fee is of course good. Those project parties with strong market competitiveness and poor ability to find resources can be screened out. But the evil result is that when the market is not good, the project party can only push up the coin price / market value, overdraft the project growth and create a bubble to earn the cost of listing in order to go online. As @Max_Sunxxx said, the financing of the strategic round is a debt for the project party. As a result of false booms and bubbles, participating institutions make huge profits in the bubble and retail investors in value investing continue to backstab. In such an altcoin market environment, we cannot expect any reason for traditional funds to enter the market to buy copycats. In my opinion, this is also the biggest problem in the Web3 industry...