The inside story of virtual money market makers failing! How did the big dump in October cause liquidity to evaporate instantly?

On October 11, the Crypto Assets market experienced a big dump, with Bitcoin and Ethereum suffering significant falls, while altcoins faced a tragic drop to zero. The key driver behind this catastrophe turned out to be the "failure of Virtual Money market makers". These professional institutions, which usually act as market lubricants, were unable to cope with the dual pressures of liquidity exhaustion in small coins and the decoupling from USD, triggering a chain reaction that led to the market crash.

What is a Virtual Money Market Maker? The Secret of a Market That Never Closes

In the cryptocurrency market, virtual money market makers are referred to as the "lubricants" of the market. Their main job is to continuously quote both buy prices (Bid) and sell prices (Ask) for a certain cryptocurrency on exchanges, ensuring smooth transactions. In simple terms, when ordinary investors want to buy or sell a certain coin, market makers are always the "present" buyers or sellers, ensuring that the market does not stagnate due to a lack of trading counterparts.

The Two Core Functions of Market Makers

1. Providing liquidity is the primary task

Liquidity refers to the ability of an asset to be quickly bought and sold in the market without causing significant price fluctuations. Virtual Money market makers enable investors to execute trades at reasonable prices at any time by continuously placing orders, preventing price vacuums caused by imbalances in buy and sell orders.

2. Control Price Differences and Stabilize Market Conditions

Market makers dynamically adjust their quoting ranges through algorithmic strategies to narrow the bid-ask spread and reduce market uncertainty. When the market experiences severe volatility, virtual money market makers leverage their asset scale and risk control models to prevent irrational price fluctuations, thereby playing a role in "smoothing the price curve" to a certain extent.

For example, a market maker is like a convenience store that operates 24 hours: whether it's three in the morning or peak hours, you can always buy products (Liquidity), and the prices are clearly marked (stable price difference), without sudden price increases or shortages due to the number of customers.

How Do Virtual Money Market Makers Make Money? Unveiling the Threefold Profit Model

Although virtual money market makers bear the responsibility of maintaining market liquidity, they are not a "public welfare role"—the fundamental driving force behind their operations comes from a diversified profit source mechanism. Overall, the main profit sources for market makers can be divided into three categories.

Core Earnings: Arbitrage on Buy and Sell Price Differences

The core profit comes from the bid-ask spread. Virtual Money market makers simultaneously post buy and sell prices in the market, for example, buying at 99 USD and selling at 101 USD. When traders transact with them, market makers earn a profit of 2 USD from the spread. Although this profit is small, due to frequent trading and large capital scale, it accumulates and forms a stable income base.

Platform Rewards: Transaction Fee Rebate

Many crypto exchanges, in order to enhance liquidity, will refund a portion of the transaction fees to virtual money market makers, and even offer additional rewards to encourage them to continue providing deep quotes. This allows market makers to operate at a lower cost in high-frequency trading, forming a symbiotic relationship with the exchanges.

Advanced Strategies: Quantitative Trading Returns

Some professional virtual money market makers also use quantitative trading strategies to obtain additional profits. For example:

Cross-exchange arbitrage: Utilizing price differences between different platforms.

Statistical arbitrage: Using historical data models to capture price deviations

Algorithmic Hedging: Locking in risks through derivatives such as futures and options.

This is like a large supermarket wholesaler: it makes money both from the "difference between the purchase price and the selling price" and benefits from the rebate policies of suppliers (exchanges), while also earning additional profits through flexible pricing and inventory management.

CEX Market Makers vs DEX Market Makers: Two Completely Different Operating Models

In the crypto market, the role of virtual money market makers varies depending on the type of exchange, and understanding this difference is key to grasping the big dump mechanism on October 11.

Centralized Exchange (CEX) Market Makers: Active Professional Players

Centralized exchanges rely on professional institutions or internal teams to actively place orders to provide liquidity. These virtual money market makers can:

1. Flexibly adjust buy and sell quotes based on market conditions.

2. Instant control of positions and leverage strategies

3. Actively cancel orders to protect funds during extreme market conditions.

4. Maintain price stability and market order through risk control models.

Decentralized Exchange (DEX) Market Maker: Passive Algorithmic Mechanism

In contrast, the liquidity of DEX mainly relies on algorithmic automated adjustments, forming a liquidity pool (LP) from the tokens deposited by users. Features include:

1. The price is automatically calculated by the smart contract formula (such as Uniswap's X*Y=K model)

2. Market makers cannot actively cancel orders or adjust prices.

3. The ability to withstand risks is relatively weak in the face of severe fluctuations.

4. Attract liquidity providers by relying on an impermanent loss compensation mechanism.

Key Difference Summary: CEX market makers guarantee market liquidity through professional operations but rely on centralized institutions; DEX market makers achieve decentralization through algorithms and liquidity pools, but are more prone to failure in extreme market conditions.

Why did virtual money market makers collectively fail on October 11? Three fatal factors

This big dump revealed the fragility of the virtual money market maker mechanism, with three major factors creating a perfect storm.

Liquidity exhaustion of small coins: the fatal weakness of fund allocation

Regardless of the size, the funds of virtual money market makers are always limited, and they usually concentrate their main liquidity on mainstream coins like Bitcoin and Ethereum, while support for small and medium-sized alts is relatively weak. When the market experiences severe fluctuations, market makers are unable to provide sufficient liquidity in a timely manner, leading to a cliff-like drop in the prices of these alts. For example, tokens like IOTX almost dropped to zero during this big dump, becoming a typical case of liquidity exhaustion.

Time Factor: Human Vacuum on Friday Night

The big dump occurred on Friday night (early Saturday morning in Asia), when trading activity decreased and market makers had limited manpower. Many virtual money market makers do not have their risk control teams on standby 24 hours a day, which caused them to be unable to timely fix the market liquidity gap, further exacerbating the market crash.

USDe decoupling triggers a chain liquidation: market makers also caught in the crossfire

More deadly is the de-pegging of USDe and its associated high-leverage cyclic lending system. Within hours, the price of USDe deviated from its peg to the USD, and a large number of investors relying on USDe for cyclic lending were passively liquidated.

Chain Reaction Mechanism:

1. Many Virtual Money market makers also use USDe as contract margin.

2. When its value approaches a halving in a short period of time, even low-leverage positions face the risk of liquidation.

3, The price formation of small coin contracts and USDe creates a "chain double kill".

4. Market makers are forced to stop quoting or significantly widen the spread for self-protection.

It's like how supermarket wholesalers usually make money from price differences and ensure supply, but in extreme situations (insufficient inventory of small goods + fewer staff on weekends + sudden devaluation of the main currency payment tools), even the wholesalers themselves can't cope, and the market comes to a standstill.