FTX And ​​Alameda Research Collapse Sad Event But “Good Long Term,” Says DWF Labs Managing Partner – Interview Bitcoin News

While the collapse of crypto exchange FTX and its subsidiary Alameda Research is said to have put many crypto players, including market makers, in the worst possible position, according to Andrei Grachev, Managing Partner at DWF Labs, this incident may have helped “companies flush out that weren’t sustainable enough to work during a storm.” As a result, the “market will be healthier going forward.”

The art of market making

In addition to weeding out weak players, Andrei Grachev, in a written response to questions from Bitcoin.com News, suggested that the collapse of major crypto industry players like FTX and Terra has highlighted the importance of user protection measures. One such measure that can be used by global digital asset market makers such as DWF Labs is what is known as the pump-and-dump protection scheme. The scheme is essentially a cross-exchange liquidity management technique.

Meanwhile, Grachev also shared his views on topics ranging from the misunderstanding about market makers to the differences between market making between centralized exchanges (CEXs) and decentralized exchanges. Below are the Managing Partner’s answers to the rest of the questions from Bitcoin.com News.

Bitcoin.com News (BCN): Can you briefly define market making and what happens when a user buys a crypto asset on a centralized exchange or sells it on a decentralized exchange?

Andrei Grachev (AG): A market maker creates liquid markets, quotes order books (puts buy and sell limit orders in order books) and maintains the spread. In simple terms – market makers create tradable markets. [Decentralized exchanges] DEXs (especially the automated market maker based ones) are a bit more limited in terms of market making tools, but even here – a market maker maintains a sufficient level of liquidity via AMM [automated market maker] Pools and performs some additional work to maintain the same price level across centralized and decentralized exchanges.

Since market makers make money by allocating between the bid and ask prices based on a specific proposition, the market maker would do it [for instance] Sell ​​some tokens on Coinbase [basis] Points (bps) higher than on a DEX and sell a token on the DEX a few bps cheaper than on Coinbase.

BCN: What do you think is the common misconception about market making?

AG: This is very close to a conspiracy theory: while a token is rising, the market maker is pumping; As a token falls, the market maker folds. You know that situation when you bought something and it went down immediately? The same. A market maker has looked at your position and traded against you.

The reality is very different – a market maker maintains liquidity on both sides (buy and sell) and keeps a tight spread. Advanced traders can also take limit orders from an order book to improve the market and increase organic volume.

BCN: Is market making different between decentralized and centralized exchanges?

AG: I would split it up a bit differently – order book based (could be CEXes and DEXes) and other (DEXes only. It includes the AMMs on DEXes and concentrated liquidity on Uniswap V3).

Exchanges based on order books allow market makers to use different order types (limit, immediate-or-cancel, market, etc.) to create a market and provide or take liquidity from the books.

AMMs are much less flexible as trades take place in liquidity pools. The main challenge for AMMs is maintaining the same price on DEXs as their centralized counterparts, adding or removing liquidity as needed. They also constantly monitor large and predatory trades to mitigate their impact.

Concentrated liquidity is similar to AMM but allows traders and market makers to set a price range for liquidity delivery. It offers much more flexibility compared to AMM but is still less flexible than the order book based platforms.

As advanced market makers use their proprietary systems to operate, most of them, including DWF Labs, interact with DEXes through a virtual order book emulated based on blockchain transactions and the status of the AMM and concentrated liquidity pools.

BCN: How has the collapse of FTX and Alameda Research impacted market makers and how is the market dealing with the crypto liquidity crisis? Are whales now also wary of trading large volumes?

AG: First of all, all the right market makers had funds on FTX, because there was no avoiding trading on the second largest exchange in the crypto world. Some of them were badly damaged and collapsed. Many others are now going through difficult financial situations.

In general, it’s a very sad event, but in the long run it’s good. The market is flushing out companies that weren’t sustainable enough to operate during a storm. As a result, the market will be healthier.

In terms of whales and trading volume, we are watching a lot of activity in the over-the-counter (OTC) market as exchange liquidity has dropped dramatically since the crash. For example, the same tokens that used to only be seen [a] A 10-12% price drop after a $500,000 sell order will not even be able to absorb a $100,000 sell order without prices crashing 60-70%.

Fortunately, the market is recovering. We have been seeing this positive dynamic since the beginning of January 2023.

BCN: There is an idea among some project founders that liquidity is not a function of the market but of marketing. In fact, some founders believe that ensuring there are enough buyers for sellers of their tokens is enough to solve their liquidity problems. How correct are these claims?

AG: It is true and not true at the same time. Without marketing, liquidity is somehow dormant and artificial. If no one trades or trades infrequently, this would cause a market maker to correctly predict price variances and would need to increase the spread to maintain an acceptable level of risk. This could lead to a death spiral – the spread gets worse and the trading volume keeps falling, resulting in an even worse spread.

In another scenario, let’s assume that a project relies entirely on organic retailers. It’s possible – Bitcoin started without a market maker and it was fine. But repeating that success can be difficult.

Traders go to the market with a wide range of tokens available to trade. Speaking of an evolving token – it would likely have a weak market structure even with good marketing. Why? Compared to market makers, organic traders act according to their own ideas instead of quantitative models. This makes spreads wider and execution speeds slower as retail orders need to match each other rather than being bought and sold instantly by a market maker. For example, DWF Labs has a 40-70% market share of trading volume for many tokens, and if we removed our configurations from these markets, the volume would collapse.

BCN: Some market participants have installed what is known as pump-and-dump protection. Can you briefly explain what this is all about and how market makers use it to protect participants in the event of extreme price fluctuations?

AG: If we rule out really dramatic events like FTX or Terra LUNA market crashes, when the selling pressure was insane and nobody could help, we would see market makers softening price moves through cross-exchange liquidity management. 99% of the time, Pump or Dump is carried out on a specific exchange and then spreads to other places as a plague. If it is not so dramatic, the plague could be prevented by fixing the price on the respective stock exchange. When it doesn’t work, market makers let price discovery happen organically, maintaining a relevant depth of market around the spread.

BCN: On the surface, market making appears like the smartphone industry, where the products on offer seem indistinguishable. So how do market makers differentiate themselves from the competition?

AG: [The] Gone are the days when market makers could only offer a simple bot to build an order book. Market makers play an important role in the markets. We are not visible but without us the market would be much less efficient and spreads would be much wider.

I also believe that a real market maker is also a real partner, advisor and sometimes even investor who can use their knowledge and relationships with exchanges, funds and portfolio companies to help the project move forward and grow. This is the only way DWF Labs builds relationships with projects, acting not only as a market maker but also as a partner. Like you said, it’s like the smartphone industry, but even in the smartphone industry, there’s only one Apple.

BCN: Many projects are often said to be cautious about launching their tokens in a bear market. Is that true (and if so, does that make sense)?

AG: Every medal has two sides. During a bull market, a project with a massive valuation could rise, be listed on exchanges with a large market capitalization, and be pumped further by the market. Most of these projects collapse once the market turns bearish. It’s hard to survive and meet investor expectations, especially when reality lags far behind.

Compared to bullish markets, bearish markets have a certain beauty. Yes, it is true that raising funds is more complicated and the valuation is usually lower. But if a project goes to an exchange with a small cap, it will most likely be pushed by the market and then stabilized. Given that the project went public when everything was selling at low valuations, the market can only return to a bullish mode – which will propel the project higher and give it additional chances of success.

What do you think of this story? Let us know what you think in the comment section below.

Terence Zimwara

Terence Zimwara is an award-winning Zimbabwean journalist, author and writer. He has written extensively on the economic woes of some African countries and how digital currencies can provide an escape route for Africans.

Photo credits: Shutterstock, Pixabay, Wiki Commons

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