Crypto Market Making

Market making provides liquidity and earns profits from the bid-ask spread.

What is Market Making?

Definition

• Continuously quoting buy and sell prices
• Profiting from the spread
• Providing liquidity to markets
• Essential for market function

How it Works

• Place limit buy orders (bids)
• Place limit sell orders (asks)
• Earn the difference when both fill
• Manage inventory risk

AMM Market Making (DeFi)

Automated Market Makers

• Uniswap, Curve, Balancer
• Deposit token pairs into pools
• Algorithm sets prices
• Earn trading fees

Concentrated Liquidity

• Uniswap V3 innovation
• Set price range for liquidity
• Higher capital efficiency
• More active management needed

Impermanent Loss Deep Dive

• Loss vs simply holding tokens
• Increases with price divergence
• Permanent if withdrawn during divergence
• Offset by trading fees earned

CEX Market Making

Order Book Strategy

• Place orders on both sides
• Earn spread when filled
• Requires API trading
• Active inventory management

Grid Trading

• Set price grid with buy/sell levels
• Automated on many exchanges
• Works well in ranging markets
• Loses in strong trends

Risk Management

Inventory Risk

• Accumulating too much of one asset
• Market moves against your inventory
• Need hedging strategy

Execution Risk

• Orders not filling simultaneously
• Latency in execution
• Exchange downtime

Getting Started

DeFi Path

1. Start with stable-stable pools (low IL)
2. Graduate to major pairs (ETH/USDC)
3. Try concentrated liquidity
4. Monitor and adjust positions

CEX Path

1. Use exchange grid bots
2. Start with high-volume pairs
3. Small position sizes initially
4. Track performance carefully

Key Metrics

1. Fees earned vs impermanent loss
2. APR from trading fees
3. Capital utilization rate
4. Net portfolio change