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What is a market maker?

What is a market maker?In addition, market makers quote prices through various trading platforms, and eliminate market confusion through arbitrage, which helps to improve the overall efficiency of the market.

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How does a market maker work?

To maintain liquidity in financial markets, many market makers provide liquidity to exchanges and financial protocols in the blockchain space. For example, each market maker will display buy and sell quotes for a pre-determined minimum number of tokens. In addition, after a buyer places an order with a market maker, the market maker will quickly liquidate their token positions from the inventory, thereby fulfilling the order. Market making increases the liquidity of financial markets by simplifying the process of buying and selling for investors and traders. In the absence of market making, there may be low trading volume and reduced investment activity.

Low liquidity makes it easier for malicious actors to manipulate the price of cryptocurrencies, as it does not require large amounts of capital to manipulate prices. Market makers such as DWF alleviate this problem by providing high levels of liquidity, enabling users to trade tokens while making it difficult for malicious actors to manipulate prices.

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Market Making in Cryptocurrencies

The ability of retail investors to engage in market making in traditional financial markets is hindered by high barriers to entry. On the other hand, the blockchain industry removes these barriers and makes it easier for retail investors to participate. More precisely, independent traders have the same access to the protocols used by digital asset exchanges as institutional traders. This enables them to programmatically submit quotes and execute trades. There are also digital asset marketplaces that provide users with completely free sources of market data.

Traders (those who fill market quotes) typically pay higher fees on exchanges. In contrast, market making fees are usually reduced, or even zero in most cases (for traders providing quotes).

The presence of a market maker gives the exchange several advantages. The most critical point is that market makers promote the liquidity of transactions, reduce transaction costs, and allow buyers and sellers to easily obtain assets at a fair price. That means market makers are working hard to narrow bid-ask spreads, suggesting a healthy order book. Stable token prices and low levels of volatility are indicators of a robust order book.

Due to the high volatility of the cryptocurrency market, traders may lose money due to price drops when placing orders on DEX. Additionally, a lack of liquidity could make markets more prone to “flash crashes,” which can happen when a flood of sell orders cancels the best bid offer in the order book, causing prices to drop sharply.