FTX and Alameda Research Collapse Sad Event but ‘Good for the Long Run’ Says DWF Labs Managing Partner

While the illness of the crypto speech FTX and its affiliate Alameda Research is thought to person near galore crypto players, including marketplace makers, successful the worst imaginable position, according to Andrei Grachev, managing spouse astatine DWF Labs, this incidental whitethorn person helped to “flush retired companies that were not sustainable capable to run during a storm.” As a result, the “market volition beryllium healthier” going forward.

The Art of Market Making

Besides weeding retired anemic players, Andrei Grachev suggested successful a written effect to questions from Bitcoin.com News that the illness of cardinal crypto manufacture players similar FTX and Terra has highlighted the value of adopting measures that support users. One specified measure, which tin beryllium utilized by planetary integer plus marketplace makers similar DWF Labs, is the alleged pump-and-dump extortion scheme. The strategy is fundamentally a liquidity absorption method crossed exchanges.

Meanwhile, Grachev besides shared his views connected topics that scope from the misconception astir marketplace makers to however market-making differs betwixt centralized exchanges (CEXs) and decentralized exchanges. Below are the managing partner’s responses to the remainder of the questions from Bitcoin.com News.

Bitcoin.com News (BCN): Can you concisely specify marketplace making arsenic good arsenic what happens erstwhile a idiosyncratic buys a crypto plus connected a centralized speech oregon sells this connected a decentralized exchange?

Andrei Grachev (AG): A marketplace shaper creates liquid markets, quotes bid books (puts bargain and merchantability bounds orders successful bid books) and maintains spread. In elemental words – marketplace makers make tradable markets. [Decentralized exchanges] DEXs (especially the automated marketplace maker-based) are a spot much constricted successful presumption of market-making tools, but adjacent present – a marketplace shaper maintains a capable liquidity level crossed AMM [automated marketplace maker] pools and does immoderate further enactment successful bid to support the aforesaid terms level crossed centralized and decentralized exchanges.

Because marketplace makers marque wealth by spreading betwixt the bid and inquire prices, based connected a fixed proposal, the marketplace shaper would [for instance] merchantability a token connected Coinbase a fewer [basis] points (bps) higher than connected a DEX and merchantability a token connected the DEX a fewer bps cheaper than connected Coinbase.

BCN: What would you accidental is the communal misconception astir marketplace making?

AG: This is precise adjacent to a conspiracy theory: portion a token goes up, the marketplace shaper is pumping; portion a token is going down, the marketplace shaper is dumping. You cognize that concern erstwhile you bought thing and past it went down instantly? The same. A marketplace shaper had a look astatine your presumption and traded against you.

The world is wholly antithetic – a marketplace shaper maintains liquidity connected some sides (buy and sell) and keeps a constrictive spread. More precocious ones tin besides instrumentality bounds orders from an bid publication successful bid to amended the marketplace and boost integrated volumes.

BCN: Does marketplace making disagree betwixt decentralized exchanges and centralized exchanges?

AG: I would disagreement it a spot otherwise – bid publication based (it could beryllium CEXes and DEXes) and different ones (only DEXes. It includes the AMMs connected DEXes and concentrated liquidity connected Uniswap V3).

Order books based exchanges let marketplace makers to usage antithetic bid types (limit, Immediate-or-Cancel, market, etc.) successful bid to make a marketplace and supply oregon instrumentality liquidity from the books.

AMMs are overmuch little flexible due to the fact that the trades hap successful liquidity pools. The biggest situation for AMMs is to support the aforesaid terms connected DEXes arsenic their centralized counterparts by adding oregon removing liquidity arsenic needed. They besides perpetually show ample and predatory trades to mitigate their impact.

Concentrated liquidity is akin to AMM, but it allows traders and marketplace makers to determine a terms scope for liquidity provision. It gives overmuch much flexibility compared to AMM, but it’s inactive little flexible than the bid book-based platforms.

Given that precocious marketplace makers usage their proprietary systems for operations, astir of them, including DWF Labs, interact with DEXes via a virtual bid publication that is emulated based connected blockchain transactions and the presumption of the AMM and concentrated liquidity pools.

BCN: How has the illness of FTX and Alameda Research affected marketplace makers and however is the marketplace dealing with the crypto liquidity crisis? Also, are whales present wary of trading ample volumes?

AG: First of all, each due marketplace makers had funds connected FTX, due to the fact that it was not imaginable to debar trading connected the second-largest speech successful the crypto world. Some of them were severely affected and collapsed. Many others are going done a unsmooth fiscal concern now.

In general, it’s a precise bittersweet event, but it’s bully for the agelong run. The marketplace is flushing retired companies that were not sustainable capable to run during a storm. As a result, the marketplace volition beryllium healthier.

Regarding whales and trading volumes, we observe a batch of activities connected the over-the-counter (OTC) marketplace arsenic the speech liquidity has declined dramatically since the crash. For example, the aforesaid tokens that utilized to spot lone [a] 10-12% terms driblet aft a $500,000 merchantability bid won’t adjacent beryllium capable to sorb a $100,000 merchantability bid present without the prices crashing 60-70%.

Fortunately, the marketplace is recovering. We person begun to spot this affirmative dynamic since the opening of January 2023.

BCN: There is this conception among immoderate task founders that liquidity is not a relation of the marketplace but of marketing. In fact, immoderate founders judge that making definite determination are capable buyers for sellers of their tokens is capable to lick their liquidity issues. How close are these assertions?

AG: It’s existent and not existent simultaneously. Without marketing, liquidity is benignant of inactive and artificial. If cipher trades oregon trades rarely, it would punctual a marketplace shaper to foretell terms deviations decently and they would request to summation the dispersed successful bid to support an acceptable hazard level. That could pb to a decease spiral – the dispersed gets worse and trading measurement falls further, which results successful an adjacent worse spread.

In different scenario, let’s accidental a task relies wholly connected integrated traders. It’s imaginable – Bitcoin started without immoderate marketplace makers and it was fine. But it tin beryllium challenging to repetition this success.

Traders spell to the marketplace and person a wide scope of tokens disposable for trading. If we are talking astir a processing token – it would astir apt person a anemic marketplace operation adjacent with bully marketing. Why? Because compared to marketplace makers, integrated traders commercialized by their ain imaginativeness alternatively of quantitative models. That makes spreads wider and execution velocity slower due to the fact that retail orders person to lucifer against each other, alternatively of being bought and sold by a marketplace shaper instantly. For example, DWF Labs has a marketplace stock of 40-70% of trading volumes for galore tokens and successful lawsuit if we region our configs from those markets, volumes would collapse.

BCN: Some marketplace players person incorporated what is known arsenic pump and dump protection. Can you concisely explicate what this is each astir and however marketplace makers usage this to guarantee that the participants are harmless successful the lawsuit of utmost terms volatility?

AG: If we exclude truly melodramatic events similar FTX oregon Terra LUNA marketplace crashes erstwhile the selling unit was insane and cipher could help, we would spot that marketplace makers mitigate terms actions by liquidity absorption crossed exchanges. In 99% of cases, pump oregon dump is executed connected a peculiar speech and past extended to different venues arsenic a plague. If it’s not truthful dramatic, the plague could beryllium prevented by fixing the terms connected the peculiar exchange. If it doesn’t work, marketplace makers fto the terms find instrumentality spot organically, and support a applicable marketplace extent astir the spread.

BCN: On the surface, marketplace making seems similar the smartphone manufacture wherever the products connected connection are seemingly indistinguishable. How past bash marketplace makers differentiate themselves from the competition?

AG: [The] times marketplace makers could connection conscionable a elemental bot to physique an bid publication are gone. Market makers play an important relation successful the markets. We are not visible, but without us, the marketplace would beryllium overmuch little businesslike and spreads would beryllium overmuch wider.

I besides judge that a due marketplace shaper is besides a due partner, advisor and sometimes adjacent capitalist that tin leverage their cognition and relationships with exchanges, funds and portfolio companies successful bid to propulsion the task up and fto it grow. DWF Labs builds relationships with projects lone successful this manner, acting not conscionable arsenic a marketplace shaper but besides arsenic a partner. As you said, it’s similar the smartphone industry, but determination is lone 1 Apple adjacent successful the smartphone industry.

BCN: Many projects are often said to beryllium wary of launching their tokens successful a carnivore market. Is this existent (and if truthful does this makes sense)?

AG: There are 2 sides to each coin. During a bull market, a task could rise astatine a monolithic valuation, get listed connected exchanges with a ample marketplace cap, and beryllium pumped further by the market. Most specified projects travel crashing down erstwhile the marketplace turns bearish. It’s hard to past and conscionable the expectations of investors, particularly erstwhile the crushed world lags acold behind.

Compared to bullish markets, bearish markets person immoderate beauty. Yeah, it is existent that it’s much analyzable to rise funds and valuation is usually smaller. But erstwhile a task goes to an speech with a tiny cap, it is highly apt to beryllium pushed by the marketplace and past stabilized. Then fixed the information that the task went to the marketplace erstwhile everything was selling astatine depressed valuations, the marketplace tin lone reverse to a bullish mode – which volition propulsion the task up and springiness it further chances to succeed.

What are your thoughts connected this story? Let america cognize what you deliberation successful the comments conception below.

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