Roles and Models of Market Making in Crypto Explained: Insights from DWF Labs

As the crypto market has matured, so did the role of professional financial institutions became more visible. The digital asset market structure gets more complicated, while more professionals become involved in trading operations. Apart from retail traders, the crypto market is largely driven by market makers, entities that aim to create and foster a convenient trading environment, and ultimately profit. DWF Labs shares more about the two main models employed by market makers of crypto, and explains what services these firms provide, apart from ensuring liquidity and trading operations.

Crypto Market Making in a Nutshell

Crypto market making is essentially about creating a market for a given asset. Who will trade this token, on what platforms and protocols, and what amount is required for efficient trading—these are all the questions addressed by market makers.

Nowadays, market makers work on both centralised and decentralised crypto exchanges to ensure liquidity for their clients, necessary for executing a sufficient amount of buy and sell orders at various price levels. Crypto liquidity means that tokens can be traded with narrow spreads, thereby, reducing trading costs and, ultimately, instilling confidence among traders.

Without a dedicated crypto market maker, a token’s liquidity would likely be fragmented, leading to erratic price movements and unreliable trading conditions. We believe that, while major crypto assets like Bitcoin (BTC) might maintain liquidity organically due to their global demand, most altcoins, especially emerging ones, need active market making to prevent volatility and ensure orderly market functioning.

How Crypto Liquidity Provisioning Stabilises Prices

A healthy market relies on a continuous supply of orders that counterbalances natural selling pressures. Without professional market makers of crypto, the order book could become disjointed. Imagine a scenario where buy and sell orders are separated by large gaps, leading to an ‘empty’ chart even if there are plenty of orders. 

Furthermore, the absence of crypto market makers would likely result in significant arbitrage opportunities across exchanges, as price discrepancies would no longer be efficiently neutralized. This underlines the importance of market makers: not just providing liquidity but also maintaining a fair and stable price range.

Crypto Market Making Models: Loan vs. Retainer

Business-wise, market makers of digital assets follow two main models: Loan and Retainer.

In the Loan model, which DWF Labs employs in particular, a market maker uses cryptocurrencies provided by the issuer, a blockchain project, to inject their own cash liquidity across various exchanges. This arrangement means the crypto asset issuer does not risk its dollar reserves, while the market maker’s success is directly tied to the quality of the market they help create. In the Loan model, the upside potential is significant if the price rises, as the crypto market maker can capture profits above a certain price threshold. However, there is also inherent risk if the market fails to move favorably.

Under the Retainer Model, which is used by some other firms, the Web3 project supplies its own liquidity and pays a fixed fee to the market maker of crypto, which then acts more like a facilitator. While this reduces the market maker’s exposure to financial risk, it transfers the burden of operational costs, such as exchange fees, to the project. Consequently, the market maker might have less incentive to actively manage liquidity since its profit is not directly tied to market performance.

In our opinion, the Loan model for a crypto market maker is more preferable because of its alignment with long-term market health, where both parties (market maker and blockchain project) share a vested interest in a robust and well-regulated trading environment.

Why Loan-Based Crypto Market Makers Favor Long-Term Strategy

What is also important is that there’s the repayment mechanism embedded in the Loan model: crypto market makers initially take cryptocurrency from the issuing project they work for as a form of ‘loan’ and later repay a predetermined ‘strike price’, often in tokens, that is set lower than the original acquisition price. 

This approach is designed to protect the token’s long-term value: if a market maker were to liquidate all the crypto at once, it could drive the price down drastically, damaging the project’s reputation and financial prospects. Instead, by managing the token supply carefully and repaying at a lower effective cost, a Loan-based market maker of cryptocurrencies helps sustain a healthy liquidity environment, ensuring that the token remains attractive to investors over time.

Furthermore, there is one more important circumstance. Crypto market risks are naturally asymmetrical: the downside is capped (a crypto asset’s price can only fall to zero), while the upside potential is theoretically limitless.

This risk-reward dynamic incentivises a long-term strategy for crypto market making rather than aggressive, short-term dumping. By avoiding a strategy that might yield only marginal gains (for example, a mere 10-20% upside), market makers position themselves to benefit significantly when the crypto appreciates. The example of Bitcoin, which has rebounded from perceived lows to record highs despite initial skepticism, highlights this point. 

Ultimately, this measured, long-term approach not only supports market confidence and liquidity but also aligns the interests of market makers with the sustainable growth of the digital asset ecosystem.

The Role of Crypto Market Makers in Token Launches: TGE and Community Sentiment

Market making of crypto extends well beyond day-to-day trading: it plays a crucial role during token generation events (TGEs) and early market launches. We are confident that involvement of professional market making firms in early crypto liquidity provisioning is crucial for a smooth market debut. Prior to a launch, market makers help ensure that there is enough liquidity to minimize slippage losses, providing traders with confidence that orders will execute at expected prices. 

Moreover, market makers of crypto often serve as strategic consultants for blockchain projects.

Specifically, DWF Labs offers not just market making but a suite of services, including liquidity provisioning of crypto before the markets are even open. The market for any digital asset needs to be launched beforehand, and a certain amount of tokens must be present on exchanges. That’s all part of crypto market making services (despite popular stance, liquidity provisioning is distinct from market making). 

If necessary, our company is able to establish certain partnerships for a crypto startup, including negotiations about exchange listings. We don’t negotiate on behalf of the project. Instead, we make introductions, offer recommendations, and also work with the community, influencers, and other institutional players.

DWF Labs also provides consulting on go-to-market strategies on request. Among our portfolio companies, there are crypto projects, with which our firm engages actively, as well as those that are very independent.

At the same time, crypto market makers can influence the sentiment around the asset, impacting the community’s perception. For instance, during a token launch, blockchain projects might face negative sentiment from early airdrop recipients or panic selling. One example is Hyperliquid’s airdrop in November 2024, where controlled distribution and managed order book pressure helped mitigate extreme volatility, securing a price increase of the HYPE token at the opening of markets.

Institutional Players and Organic Engagement in Crypto Market Making

Institutional investors and coordinated fund activities can play a huge role in boosting a token’s value. In the cases of Solana and Toncoin, significant purchases of their native coins by institutional players helped create upward momentum. When crypto whales buy in substantial volumes, they reduce the circulating supply and attract retail investors and individual traders, setting off a positive feedback loop that drives prices higher.

This interplay between crypto market makers’ liquidity provision and institutional buying underscores a critical point: a stable market environment encourages broader participation, which in turn supports sustained price appreciation. 

The market maker’s role is not to manipulate prices but to maintain an orderly market where such growth can occur naturally. Market makers of cryptocurrencies do not drive the price upward or manipulate it in any other way: instead, they rather follow its movement caused by traders’ actions, earning from the trading volume.

Conclusion

Crypto market making is the work of both art and science. It is a multifaceted practice that underpins liquidity, stabilises price movements, and supports both the initial launch and long-term growth of digital assets. Whether through the proactive risk-sharing of the Loan model or the fixed-fee approach of the Retainer model, crypto market makers are indispensable for creating robust and resilient trading environments, with the broader trading community being the one that benefits the most from tight spreads and sufficient liquidity.