Introduction: Market Making demystified
In the past five years, one of the fastest growing segments of the Web3 ecosystem of “service providers” is: Market Making as a Service (“MMaaS”).
MMaaS refers to a subset of specialized institutions that partner with blockchain projects to provide liquidity for their native token as they transition from the Primary to Secondary market. By providing liquidity for a project’s native token, MMaaS institutions promote trading efficiency for the asset. This is accomplished via the institution’s willingness to provide a foundational layer of liquidity – despite an absence of existing marketplace activity.
By providing a strategic injection of liquidity immediately following a project’s TGE, MMaaS institutions provide other “organic” market participants the opportunity to buy and sell with minimal market impact – effectively creating positive externalities in the Secondary market. A consequence of this liquidity provision is more efficient price discovery as traders assess a newly listed token’s fundamental value. Additionally, price volatility is minimized as natural buying and selling occurs based on a project’s Token Emissions schedule.
The business models employed by MMaaS institutions vary. For example, some MMaaS institutions operate as an extension of the project’s core team – trading their balance sheet of stablecoins and tokens and charging a monthly fee. Other institutions operate as fully independent third parties with blockchain projects extending a loan of tokens with a “call option” granting the institution an opportunity to purchase tokens at a favorable price if certain conditions are met.
While the business models employed by MMaaS institutions vary, one universal theme persists – blockchain projects must incentivize the service provider so that the expected value for providing liquidity is attractive enough for them to deploy resources, despite the absence of “traditional” profit opportunities that exist for Market Makers such as capturing the bid/ask spread or yield farming via AMM revenue share.
There are three types of institutions operating in MMaaS:
For each type of service provider we will provide an overview of:
- Business model overview
- Incentives
- Risks
- Examples of service providers
- FAQs when assessing if the service is right for your project
Fee-based Model - Designated Market Maker (“DMM”)
Business Model Overview
Designated Market Makers or “DMMs” are medium-sized trading institutions that will operate as an extension of your team. DMMs charge a one-time integration fee and a monthly recurring fee for their services. DMMs trade on various centralized and decentralized exchanges that list your project’s native token. To fund this trade activity, the DMM utilizes your project’s balance sheet and trades on their behalf. This is referred to as a “Trading Capital Deposit.”
Most DMMs will also engage in a form of “profit sharing” with the projects they engage as a means to align financial interests. Simply put, if the DMM can grow the value of the Trading Capital Deposit, then a percentage of the increase in value is paid out to the DMM. The methodology used to track profit varies across service providers, but in general, this aspect of the relationship can be thought of as similar to an asset manager that takes a 20% cut of performance upside achieved by a fund.
Some DMMs will also include a high watermark policy that specifies that they only be paid a percentage of profits if the value of the Trading Capital Deposit exceeds its previous highest value. This precludes the DMM from being paid large sums for poor performance and ensures that any losses must be made up before performance fees are paid out.
While providing the DMM with a Trading Capital Deposit should not be thought of as a fee, it will require you to allocate both “quote” currency (ex: USDT, BTC, ETH, SOL, etc.) as well as “base” currency (tokens). The DMM uses the quote currency to provide buy-side liquidity (bids) and the base currency to provide sell-side liquidity (offers). The US Dollar value of your Trading Capital Deposit will fluctuate over time as the price of each base and quote currency appreciates or depreciates relative to the US Dollar. The composition and breakdown of the Trading Capital Deposit will also fluctuate. For example, the DMM will likely request a 50/50 split between base and quote currencies to start the engagement, but depending on their buying and selling behavior, the balance of assets may change. If the DMM is a net seller of tokens due to an abundance of organic buyers in the market, then the portfolio will contain more quote currencies such as USDT from the proceeds of their sell orders. In contrast, if the DMM is a net buyer of tokens due to an abundance of organic sellers in the market, then the portfolio will contain tokens from the proceeds of their buy orders.
Funding requirements for the Trading Capital Deposit vary dramatically, but you can expect to allocate roughly $150,000 - $300,000 worth of “quote” currency, such as USDT, and $150,000 - $300,000 worth of your tokens. Variables that will impact funding requirements include:
- your project’s valuation,
- token emissions schedule,
- exchange coverage, and
- prevailing macroeconomic conditions.
For example, if your project has a higher valuation and an aggressive token emissions schedule immediately following TGE, the DMM will likely require a larger deposit of “quote” currency to provide buy-side liquidity (bids) in anticipation of lots of aggressive selling. Similarly, if your token is listed on a large number of exchanges, the DMM will likely require larger deposits of both base and quote currencies to ensure they can provide ample two-sided liquidity across all major venues.
DMMs can be engaged by projects in two distinct ways:
The project transfers the Trading Capital Deposit directly into an account owned by the DMM. The DMM then distributes the deposit to various CEX accounts and online wallets to trade the assets. If the engagement is terminated, the DMM returns the entirety of the account balances, less any profit share. TL;DR: The DMM owns the accounts that manage the Trading Capital Deposit.
The project transfers the Trading Capital Deposit directly into accounts they have ownership of – this includes CEX accounts they have opened (and completed KYC for) as well as online wallets. The project then provides the DMM access to trade the assets by transferring API keys, and public / private keys. TL;DR: The Project owns the accounts that manage the Trading Capital Deposit and the DMM trades via API access.
Incentives for DMMs
As is the case with all types of MMaaS, DMMs must be incentivized so that the expected value for providing liquidity is attractive enough for them to deploy resources, despite the absence of “traditional” profit opportunities that exist for Market Makers such as capturing the bid/ask spread or yield farming via AMM revenue share. Some examples of incentives offered to DMMs to influence their expected value and motivate them to provide liquidity for a project’s native token can be found below:
- Upfront retainer ($5 - $50K),
- Monthly service fee ($2 - $15K),
- Profit sharing (10 – 50%) of profit generated from the Trading Capital Deposit.
Risks when engaging a DMM
There are inherent risks that you should be aware of when engaging a DMM. Some of the most important risks to consider are detailed below:
Most DMMs will not be willing (or able) to provide projects real-time reporting and metrics on trading activity.
- Some DMMs will provide reports on a semi-regular basis, which provides retroactive insights on KPIs such as depth, spreads, and volume.
- Real-time reporting is critically important for projects to keep DMMs “honest” and ensure they adhere to their obligations to promote efficient trading conditions through two-sided liquidity provision with favorable uptime percentages (> 95%).
DMMs have no downside as it relates to capital at risk. They collect upfront & recurring fees, and carry no balance sheet risk – they utilize the Trading Capital Deposit to provide both orders to buy and orders to sell. DMMs do not trade with their own capital.
- DMMs are incentivized to allocate the Trading Capital Deposit intelligently thanks to profit sharing agreements; therefore, they are rationally inclined to trade intelligently and in a manner that serves to benefit a project’s long-term sustainable growth (while also not burning capital trying to counteract macroeconomic trends) simply because they want to maximize profits.
- Additionally, it would be unintelligent for a DMM to allocate a project’s Trading Capital Deposit in a haphazard capacity. Presumably, a project would terminate its relationship with a DMM if this were to occur; accordingly, the DMM would miss out on future revenue from monthly recurring fees.
If a DMM can grow the value of trading capital, then they will share in the profits with a project – similar to an asset management structure. The growth of this trading capital may be attributable to price appreciation of the native token (i.e., beta) and not due to any sort of trading PnL generated by the DMM (i.e., alpha). While there is nothing inherently “wrong” with this methodology, in theory, the DMM can extract value from positive trends that they have had no hand in influencing.
Examples of Service Providers
- Skynet Trading
- GotBit
- Darkpool Liquidity
- Kairon Labs
- CoinLiquiditySolutions (“CLS”)
FAQs when assessing if a DMM is right for your project
| Question | Answer |
|---|---|
| What is the core business model of a DMM? |
|
| What type of project is a DMM best suited for? |
|
| How can you mitigate risks of working with a DMM? |
|
| When is the best time to engage a DMM? | At least two months prior to your TGE and initial listing; however, a DMM can be engaged as earlier as one week prior to a TGE. If your asset is already listed, a DMM can integrate and begin deploying strategies within one week. |
| Does Forgd offer DMM services? | Yes! Forgd offers designated market making services to select projects through a trusted affiliate partner. We have serviced over 300 projects and provide real-time reporting on trading metrics. If you are interested in learning more, please submit your information to Full Service Market Maker. |
Loan + Call Option - Principal Market Maker (“PMM”)
Business Model Overview
Principal Market Makers or "PMMs" are mid to large trading institutions that have a symbiotic relationship with projects; however, they operate as entirely independent market participants when trading your token. This is in contrast with Designated Market Makers (“DMMs”) that operate as an extension of your team. PMMs operate as market makers for projects by utilizing a “loan + call option” business model. In this model, the project loans the PMM a significant amount of their native token (anywhere from 1 - 5% of the total token supply) and offers the PMM the option (but not the obligation) to purchase the tokens at a favorable price at any time during their relationship.
The token loan generally carries a 0% annualized interest rate (or some de minimis APR) with a multi-year contract term – usually 2-3 years. The loan will be divided into 2-4 ”tranches”. Each tranche will be assigned a strike price that governs an “American” call option. American options give the PMM a high degree of flexibility and offer them the right to exercise the option at any date during their loan contract at the pre-determined strike price. In contrast, a European option restricts the option holder and dictates they only have the right to exercise the option at a pre-agreed future date, at the pre-determined strike price. The strike price for each tranche of the loan will vary, but in general, they are negotiated to be favorable to the PMM to increase their likelihood of profiting from exercising the option at some point during the engagement. The below table illustrates an example of a token loan + call option structure with a PMM:
| Name | % of Total Token Supply | Duration of Loan | Strike Price | |
|---|---|---|---|---|
| Tranche 1 | 1% | 3 Years | Private Sale Price | American |
| Tranche 2 | 1% | 3 Years | 50% Discount to Public Sale Price | American |
| Tranche 3 | 1% | 3 Years | TWAP from the 30-day period from “TGE” to “TGE + 30 days” | American |
| Tranche 4 | 1% | 3 Years | 20% Premium to TWAP from the 30-day period from “TGE” to “TGE + 30 days” | American |
Note: TWAP is the time weighted average price.
Whereas engaging a DMM requires a project to allocate a Trading Capital Deposit denominated in both base (i.e., tokens) and quote (i.e., USDT, BTC, ETH) currencies, projects are only required to extend a loan of tokens when engaging a PMM. At face value, this can make the PMM business model more attractive for projects looking to preserve their stablecoin treasury; however, it does require the project to trust the PMM with a significant portion of their native token, fully unlocked, immediately following TGE.
Allocating a significant portion of your project's circulating supply to a sophisticated trading institution introduces risk given that they wield massive influence on the overall marketplace.
PMMs do not charge fees for their services. Instead, the PMM has two distinct opportunities to profit from their relationship with a project:
Profit Mechanism #1 – Proper, Aligned Interests:
The PMM can exercise options that are “in the money” or “ITM”, purchase the tokens from the project, then sell them for profit. This is the most desirable outcome from the perspective of a project engaging a PMM. The outcome aligns with the narrative that institutions will communicate to projects they hope to partner with. In this approach, the PMM will sell some tokens immediately after TGE in order to balance their portfolio with adequate quote currency (i.e., USDT, BTC, ETH) to provide bid-side liquidity. While this initial selling activity may have some negative impact on the token price, the slippage is largely mitigated by an abundance of organic demand in the market. As the market finds stability in the weeks and months following TGE, the PMM may elect to begin exercising options with the hopes of liquidating the tokens at a price higher than the exercise price, thus profiting an amount equal to the “spread” or difference between the strike and exit price. Recall that the first two tranches of the loan generally carry strike prices that are priced relative to Primary market valuations such as Private Sale Funding, or Public Sale Prices. Assuming that the token has experienced positive price performance since listing, these options will be “in the money”.
The PMM will only exercise these options and liquidate the tokens if they believe there is adequate “organic” demand to absorb their sell pressure. In this sense, it can be argued that the PMM is highly incentivized to promote and actively encourage bid-side liquidity for the token by catalyzing the virtuous feedback loop of “Liquidity begets Liquidity”. If there is no organic demand to sell into, then the PMM will not exercise their options given that the tokens would not be able to be liquidated without inducing significant market impact. Significant market impact would mean that the actual exit price may be lower than the strike price, thus resulting in negative trading PnL, which the PMM would, of course, want to avoid.
If the PMM exercises an option, they will purchase tokens directly from your project’s treasury. This will increase your treasury’s US Dollar balance. This will also result in a decrease to your treasury’s token balance – albeit from a purely accounting perspective. There will not be an additional drawdown of tokens from your treasury given that the tokens that are being sold to the PMM are those that were loaned out at the onset of the engagement. How this actually plays out is that PMM is essentially paying you cash (or stablecoins) and indicating that they will no longer be returning this “tranche” of the token loan because they now own it. The tokens now belong to them and they no longer have the obligation to return them after the engagement. As a result, the “Loan Receivable” will be voided as an asset on your balance sheet.
The allure of PMMs exercising options can be very attractive for projects hoping to increase their US Dollar treasury balance post-TGE. It should be noted that the credit of US Dollars that results from an option being exercised will almost always be lower than the debit of tokens from your treasury – based on their US Dollar value at the time of the option being exercised. This is because PMMs are rational actors and will not exercise the options unless it is profitable for them to do so. Regardless, this type of transaction is an effective way to convert large amounts of tokens into a more fungible asset, such as US Dollars, which can be used to fund ongoing operational costs.
In sum, the PMM will assert that they are highly motivated to provide liquidity in the secondary market for your project’s token. If they fail to do so, the market will struggle to attract organic liquidity from retail and other institutional traders. If there is no organic liquidity, then the PMM will be unable to sell tokens for profit. Furthermore, the PMM will argue that they are encouraged to facilitate long-term “growth” for your project (i.e., sustainable token price appreciation) to increase the profitability profile of exercising all tranches of the loan. For example, most PMMs will purposely price “tranche 4” at a premium price relative to the time weighted average price (“TWAP”) from the first 30 days of trading to emphasize that at least 1 of the 4 options is not yet “in the money”. In order for the option to become profitable to exercise, token price would need to appreciate. Therefore, the PMM is able to display a clear alignment of interests with the project, from a purely profit motivated perspective. Again, this is the most desirable outcome when engaging a PMM given its strong alignment of interests between parties.
Profit Mechanism #2 – Predatory, Misaligned Interests:
The PMM can go “short” by selling tokens aggressively in the period immediately following TGE, then repurchasing the tokens at a more favorable price at a later date before finally returning the loan at the conclusion of their contract with a project. This is a predatory outcome from the perspective of a project engaging a PMM. This approach has become viable to PMMs because the predictable nature of supply & demand for tokens mitigates the risk the PMM bears by shorting the tokens.
PMMs anticipate that most tokens will experience an initial surge in demand coupled with low supply immediately following TGE that will push the price to high multiples above the listing price. These multiples are further exacerbated by the trend of facilitating post-TGE “pops” – accordingly, the PMM actually has a great deal of influence on this phenomena. Speculative demand is abundant in the post-TGE marketplace and the organic buy-side liquidity allows the PMM to sell large quantities of tokens aggressively without inducing an egregious degree of market impact. As the initial frenzy subsides, token price falls and finds stability at less aggressive multiples relative to the listing price. As a project’s emissions schedule begins to distribute tokens to various groups of stakeholders, the supply curve shifts aggressively outward. Coupled with diminished demand, this shift drives a gradual decrease in token price, often falling below the token’s listing price.
The PMM may actually have a hand in suppressing any positive price action by TWAP purchasing tokens (inducing minimal market impact), then aggressively selling the tokens (inducing significant market impact) to prevent the likelihood of a market rally and price reversion to previous highs. The resulting down-only pricing trend further exacerbates the already low levels of demand by deterring speculative investors.
At this point, the PMM can repurchase tokens at a fraction of the price they were originally sold for, effectively covering their short position, before returning their loan. This predatory approach to PMM is illustrated below:
The below table summarizes the PMMs activity throughout each phase of the token’s post-TGE life cycle:
| Phase | Description | Price relative to Listing Price | PMM Activity |
|---|---|---|---|
| Post-TGE Pop | Token price appreciates aggressively above the initial listing price in what is (often) a highly orchestrated event. High trade volume, abundance of organic liquidity. | Significantly greater than (10-20x) | Aggressively selling tokens as a taker. |
| Price Correction, Stability | Token price depreciates to more “reasonable” levels – partly due to PMMs selling activity inducing slippage and partly due to speculation on valuation comparables. | Slightly greater than (2-5x) | Minimal activity - potentially still selling tokens as a taker. |
| Post Launch Calm | Excitement from the launch dies down and results in a significant decrease in volume, liquidity, and price volatility. Price finds relative stability. | Slightly greater than (2-5x) | Minimal activity - potentially selling tokens as a maker (i.e., providing liquidity on the ask). |
| Diminished Demand, Aggressive Inflation | Token’s supply curve shifts outward and speculative demand dries up. Weak demand drivers may not have the ability to counteract programmatic emissions / inflation, thus resulting in price depreciation. | Equal to, potentially less than | Potentially aggressively selling tokens as a taker to suppress the price further. |
| Down Only Price Trend, Community-wide Apathy | Unexciting price action since the initial open has created a toxic community environment for the token. Bid-side liquidity is almost non-existent due to an absence of demand. Token holders are unable to aggressively sell and most provide liquidity if they have any hope to exit their position. | Significantly less than | Repurchasing tokens to cover their short position. |
The risk associated with the PMM’s short position is mitigated by the options, which serve as a hedge to their downside. The worst case scenario that a PMM can encounter is that the token’s price trend diverges from the norm and actually experiences sustainable, long-term price appreciation following the post-TGE “pop”. In this case, the PMM does not risk unlimited loss potential as the price of the tokens exceeds their liquidation price. Instead, the PMM can simply exercise the options at the pre-determined strike prices and cover the short position they would have otherwise been required to repurchase from the market. If the options did not exist, the PMM would be less emboldened to short the tokens aggressively given that they would need to repurchase the tokens directly from the market to cover their short before returning their loan. This sort of “unhedged” short selling would present the potential for unlimited losses if the token price were to appreciate aggressively relative to their exit price; however, the options remove this concern for the PMM and allow them to quantify the expected value and risk incurred when shorting.
In sum, this approach employed by PMMs is highly predatory and can cause significant damage to a project (and its community). The PMM will dump tokens initially, banking on the expectation that prices will follow the customary pattern and nosedive over the term of the loan. Aggressive selling tactics are then employed to suppress any optimism and upward momentum, ensuring prices do not escalate and negatively impact their profits from short selling. This strategy is parasitic, feeding off the initial token demand and benefiting from detrimental effects on the health of the token market. Accordingly, proactive measures should be taken to prevent it being employed by PMMs partnered with your project at all costs.
Incentives for PMMs
As is the case with all types of MMaaS, PMMs must be incentivized so that the expected value for providing liquidity is attractive enough for them to deploy resources, despite the absence of “traditional” profit opportunities that exist for Market Makers such as capturing the bid/ask spread or yield farming via AMM revenue share. Examples of incentives offered to PMMs to influence their expected value and motivate them to provide liquidity for a project’s native token:
- 0% APR loan of 1 – 5% of total token supply, with 2-3 year term
- The loan will be divided into 2-4 ”tranches”. Each tranche will be assigned a strike price that governs an “American” call option. The strike price for each tranche will be favorable to the PMM to increase their likelihood of profiting from exercising the option. For example:
- Option 1: Private Sale Price
- Option 2: 25% discount to Public Sale Price
- Option 3: 120% of TWAP from TGE – TGE + 30
- Option 4: 160% of TWAP from TGE – TGE + 30
Risks when engaging a PMM
There are inherent risks that you should be aware of when engaging a PMM. Some of the most important risks to consider are detailed below:
As discussed extensively, PMMs can operate in a highly predatory manner if they anticipate your token will follow a typical price trend due to diminishing demand and highly inflationary supply.
- If a PMM chooses to operate in a predatory capacity, they can induce significant damage and even “kill” community sentiment by dumping tokens and crushing the price in the weeks and months following TGE. The best way to combat this potential outcome is to limit the size of the loan offered to PMMs and also ensure robust demand drivers outpace inflationary supply to promote long-term sustainable token price performance.
PMMs will likely sell a portion of the token loan immediately following TGE to accumulate quote-side capital that allows them to provide bid-side liquidity. The consequence of this sell pressure in an illiquid market may be slippage and subsequent price depreciation.
Assuming the PMM is not acting in a predatory capacity, it is within their best interest to provide liquidity; however, if they see no future upside via options, they will likely quote wide spreads and shallow depth to preserve their principal capital.
- It is worth noting that for the PMM to lock in profits once they exercise a call option, the market needs to have adequate bid-side liquidity to absorb their sell pressure without crashing the market. This bid-side liquidity needs to be provided by “organic” market participants. Accordingly, the PMM is incentivized to scale the presence of external, profit-motivated institutions (and retail) to provide liquidity for the native token.
For example, if one or more tranches uses a time weighted average price (“TWAP”) mechanism to determine a strike price during a tight window (ex: 30 days after TGE), then a PMM may actually be motivated to aggressively sell tokens during this timeframe to suppress the price and lock in a more favorable (i.e., discounted) strike price. Given the token was oversold, it may then be predisposed to organically recover and appreciate in price. If the price rebounds and scales to higher levels than the strike price, the PMM may then exercise the option and liquidate the tokens for profit.
See below for an illustration of price influencing trade activity that a PMM may engage in to lock in favorable strike prices.
Examples of Service Providers
- GSR
- Wintermute
- Amber
- FlowTraders
- DWF Labs
- Auros
- Jump Crypto
- XBTO
FAQs when assessing if a PMM is right for your project
| Question | Answer |
|---|---|
| What is the core business model of a PMM? |
|
| What type of project is a PMM best suited for? |
|
| How can you mitigate risks of working with a PMM? |
|
| When is the best time to engage a DMM? | At least two months prior to your TGE and initial listing; however, a PMM can be engaged as earlier as one week prior to a TGE. If your asset is already listed, a PMM can integrate and begin deploying strategies within one week. Note that PMMs will structure relationships differently for post-TGE projects than they do for pre-TGE projects. For example, the relationship may be positioned as a “strategic investment” in the project wherein the PMM purchases heavily discounted tokens from your project’s treasury. |
| Does Forgd offer PMM services? | Yes! Forgd offers principal market making services to select projects through a trusted affiliate partner. We have serviced over 300 projects and provide real-time reporting on trading metrics. If you are interested in learning more, please submit your information to Full Service Market Maker. |
Freemium Model - Self-Service Market Making (“SSMM”)
Business Model Overview
Self-Service Market Makers or "SSMMs" are pre-packaged trading algorithms made accessible for end users that allow them to provide liquidity across both centralized & decentralized exchanges. The user experience for SSMM varies, but in general, the end user does not need to have prior trading experience or a nuanced understanding of market mechanics to deploy or manage trading algorithms on the platform. SSMMs are a relatively new entry to the cryptocurrency ecosystem; however, they are gaining popularity given that they offer an alternative market making solution for projects issuing a token that may not want to engage a DMM or PMM.
A SSMM allows a project to act as its own market maker by deploying various trading strategies from a centralized dashboard. The types of strategies made available to the project are nearly identical to the algorithmic trading strategies utilized by DMMs and PMMs as part of their business models. For example, a project can deploy standard “Delta Neutral” strategies to provide two-sided liquidity in a price-agnostic capacity or utilize more advanced strategies such as “Decentralized Arbitrage” algorithms to profitably trade across mispriced liquidity pools.
Additionally, some SSMM platforms allow projects to monitor trading metrics such as volume, depth, and spreads in real-time for insights into the impact and efficacy of their strategies. This degree of transparency is not commonplace amongst most DMMs and PMMs and allows projects to iterate on strategies while also preserving the treasury they must deploy to fund the SSMM. \
To fund strategies deployed via a SSMM, a project must utilize its balance sheet. This is referred to as a “Trading Capital Deposit.” Unlike an engagement with a DMM, a Trading Capital Deposit is always maintained in accounts owned by the project. For example, if a project wants to provide liquidity on Binance, it will create a trading account on the platform, and deposit assets to the account. Similarly, a project can deposit assets to various online wallets if it hopes to provide liquidity on various decentralized exchanges. These funds are used by the SSMM via API calls to direct trades across exchanges. While a Trading Capital Deposit should not be thought of as a fee, it will require you to allocate both “quote” currency (ex: USDT, BTC, ETH, SOL, etc.) as well as “base” currency (tokens). The SSMM uses the quote currency to provide buy-side liquidity (bids) and the base currency to provide sell-side liquidity (offers). The US Dollar value of your Trading Capital Deposit will fluctuate over time as the price of each base and quote currency appreciates or depreciates relative to the US Dollar. The composition and breakdown of the Trading Capital Deposit will also fluctuate. For example, strategies on the SSMM might require a 50/50 split between base and quote currencies to start the engagement, but depending on their buying and selling behavior, the balance of assets may change. If the SSMM is a net seller of tokens due to an abundance of organic buyers in the market, then the portfolio will contain more quote currencies such as USDT from the proceeds of their sell orders. In contrast, if the SSMM is a net buyer of tokens due to an abundance of organic sellers in the market, then the portfolio will contain tokens from the proceeds of their buy orders. The Trading Capital Deposit can be accessed at any time and withdrawn immediately if a project wants to halt ongoing market making activity or utilize the capital for other purposes.
There are no funding minimums for SSMM, and strategies can be deployed with a relatively small amount of capital if you are looking to preserve your treasury. For example, operating a conservative “Delta Neutral” strategy across a small handful of exchanges can be done with less than $5,000 worth of tokens and quote currency (ex: USDT, BTC, ETH, SOL, etc.). There are even strategies such as “Tunnel” that can be deployed using only tokens as a funding source.
The business model for SSMMs varies across service providers. Some charge subscription fees or require an onboarding fee, while others operate as a public good. Forgd offers a free-to-use SSMM called: AMM². AMM² supports trading on over 50 CEXs and 25 DEXs and allows users to pick curated trading strategies and fine-tune them across funding parameters and trading style (e.g., conservative, moderate, or aggressive). Once deployed, users can monitor metrics such as volume, depth, and spreads while monitoring the balance of their Trading Capital Deposit.
Incentives for SSMM
Whereas DMMs and PMMs must be incentivized to serve as market makers for your token, SSMMs are pre-packaged trading algorithms that can be deployed at your sole discretion. There is no need to allocate “incentives” to influence the expected value of an SSMM to motivate them to provide liquidity. This is a clear differentiator between SSMM and other types of MMaaS.
Products such as AMM² by Forgd offer projects the option to connect with a professional team of traders for guidance and support as they initially set up and deploy various SSMM strategies. Please contact the Forgd team directly if you are interested in learning more about this offering.
Risks when using a SSMM
There are inherent risks that you should be aware of when utilizing a SSMM to deploy trading strategies. Some of the most important risks to consider are detailed below:
You must deposit assets to online wallets and / or centralized exchange trading accounts to fund a SSMM. Once these assets are deployed across various trading strategies, their value may appreciate or depreciate. This is similar to depositing assets to an automated market maker (“AMM”) protocol on a DEX where “impermanent loss” may occur. SSMMs will offer real-time reporting on the value of your balance across various exchanges and online wallets to minimize this risk; however, it is important to remember that you are responsible for monitoring the value of your portfolio.
Unlike DMM services which have built in incentives to consistently iterate on trading strategies and grow the value of the Trading Capital Deposit for profit sharing upside, a SSMM does not have a dedicated trading team to monitor the impact of its strategies. Instead, a SSMM passess these responsibilities to the end user by offering real-time reporting on a centralized dashboard. This dashboard allows you to assess the impact of the SSMM across volume, depth, spreads, and overall trading PnL. These insights should be leveraged to inform which trading strategies are most impactful and aligned with your goals.
SSMMs direct the trading of assets that are depositing into various centralized exchange trading accounts and online wallets. This is conducted via API calls. SSMMs require these accounts to be created and funded by a project before they can be utilized. Keep this in mind when you are assessing SSMMs and be sure to allocate sufficient time to create trading accounts on various CEXs (and potentially complete KYC process) as well as creating new online wallets to fund trade activity across DEXs.
Examples of SSMM
- AMM² by Forgd
- Hummingbot
FAQs when assessing if a SSMM is right for your project
| Question | Answer |
|---|---|
| What is the core business model of a SSMM? |
|
| What type of project is a SSMM best suited for? |
|
| How can you mitigate risks of working with a SSMM? |
|
| When is the best time to engage a SSMM? |
|
| Does Forgd offer SSMM services? | Yes! Forgd offers self service market making (“SSMM”) to all projects, entirely free of charge. This solution has been used to service over 50 projects to date and provides real-time reporting on trading metrics. If you are interested in learning more, please visit AMM² by Forgd. |
Selecting the “right” Market Maker
There is no “one-size-fits-all” solution for projects as it relates to selecting a market maker. Ultimately, the most strategic selection will be determined by your project’s unique profile and the potential upside it can offer to the market maker.
Self-service market making (“SSMM”) is best suited for projects with a more conservative market capitalization (< $10M). SSMM is best utilized when a token has already undergone robust price discovery and is actively traded on at least one CEX. SSMM is not well suited to facilitate TGE and initial listings; however, this low-cost solution can help extend the runway for projects that are hoping to allocate capital to research and development and various protocol initiatives.
Designated market making (“DMM”) is best suited for projects with a mid-level market capitalization ($10M - $50M). DMM is a great solution for projects seeking to govern their go-to-market strategy with a firm grasp, given that DMMs operate as an extension of the core team. DMMs are sophisticated enough to facilitate TGEs and initial listings and will provide a great deal of transparency on the opening order book structures that will ultimately influence the post-TGE pop. Projects that are skeptical of the principal market making (“PMM”) business model but still want to align with a professional institution will be well suited to engage a DMM.
Principal market making (“PMM”) may appear to be the most attractive option to projects given that they only require a loan of tokens, rather than any US Dollar payment or trading capital. However, it is important to note that PMMs will only work with projects that (1) are likely to have lots of organic liquidity in the secondary market, (2) have a large market capitalization (>$50M) at TGE, and (3) top-tier private backers. PMMs are unlikely to partner with projects that exercise “fair launch” public sale mechanisms (e.g., Balancer Liquidity Pool, Dutch Auction Public Sale) given the uncertainty they present on opening TGE prices. These mechanisms also tend to remove aggressive buying pressure from the secondary market by offering an opportunity for bullish investors to purchase tokens in the Primary Market, which is ultimately disadvantageous to the PMM. In sum, PMMs are hyper-selective in who they choose to partner with and may not be willing to partner with your project unless you meet (or exceed) their rigorous criteria.
See the summary table below for a breakdown of each service provider.
| Type of Market Maker | Basics | Business Model | Pros | Cons | When to use |
|---|---|---|---|---|---|
| Designated Market Maker (“DMM”) | Operates as an extension of your team, using your balance sheet to provide liquidity | One-time integration fee and a monthly recurring fee. Project provides Trading Capital Deposit. | Provides professional market making services, aligns financial interests through profit sharing. | Requires upfront funding in both quote and base currency, monthly fees. | When you want professional market making services and are willing to fund these activities |
| Principal Market Maker (“PMM”) | Sells a large amount of your token over time, using the proceeds to provide bid-side liquidity | Loan + Call Option with favorable strike prices. No fees as upside is provided through various trading strategies. | No need for upfront payment in quote currency (e.g., USDT). Is motivated purely by the opportunity to profit. | Requires trust in the PMM with a large amount of your token. Will not provide liquidity if there is minimal opportunity to profit (e.g., price plummets). | When you want professional market making services but cannot provide upfront funding in quote currency. Note: PMMs are highly selective on who they will work with. |
Self Service Market Maker (“SSMM”) | You act as your own market maker, controlling your accounts across various exchanges | No fees. Trading Capital Deposit required to provide funding to market making activities. | Full control over liquidity provision, no need for third-party market makers, potentially lower costs | Requires upfront funding in both quote and base currency. Requires you to monitor strategies. | When you want full control over your token's liquidity and want to preserve your treasury when supporting these efforts. |
Helpful Prompts
- Understand the Importance of Liquidity: Recognize that liquidity is crucial for a well-functioning Secondary market. It allows stakeholders to trade tokens efficiently and can positively influence community sentiment.
- Consider Engaging a Market Maker: To support secondary market liquidity, consider engaging an external trading institution known as a "Market Maker". They can help in maintaining liquidity in the market. Contact us at Forgd for help and review the summary table above for what best suits your needs.
- Understand the Role of Liquidity: Liquidity is the appetite of patient buyers to purchase an asset, and the appetite of patient sellers to sell an asset. Liquid markets allow investors, protocol participants, and traders to buy & sell what they want, when they want, with minimal transaction costs.
- Understand the Impact of Poor Liquidity: Poor liquidity can lead to runaway price depreciation of your token, low trading volumes, and large discrepancies between your token’s price and its fair value.
- Appreciate the Benefits of Liquidity: Liquid markets can positively influence investor sentiment, promote higher trade volume, encourage efficient price discovery, and attract more liquidity.
- Understand the First-day pop: Calculated as the percentage difference between the opening and closing price of a token or a stock on its first day of trading. For example, if a token's opening price is $1.00, and the closing price is $1.50 after the first day of trading, the "first-day pop" would equal +50%, indicating a 1.5x return.\
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Schedule a workshop with the Forgd team if you are interested in discussing best practices for market making. We can review proposals from market makers or discuss the business in more general terms. You can also access our self-service market making solution: AMM² entirely free of charge. AMM² allows you to deploy advanced liquidity provision strategies across over 50 CEXs and 25 DEXs in a non-custodial capacity.
Forgd also offers full-service market making services to select projects through a trusted affiliate partner. We have serviced over 300 projects and provide real-time reporting on trading metrics. Contact us to learn more.