United States, 24th Sep 2024 – In Web3, tokens are launching at an unprecedented rate, but not every token can be successful. Liquidity—the ease with which a cryptocurrency can be swapped for other tokens or converted into fiat currencies without causing large price swings—is a key factor in determining a token’s future.
At the heart of this liquidity equation are market makers—entities providing buy and sell orders continuously, keeping spread tight, prices relatively stable, and trading smooth. Without them, many tokens would struggle to survive in the competitive crypto market.
So, we asked the Yellow Capital team to help us explain to our readers why crypto projects need market makers.
The Role of Market Makers in Crypto
Crypto market makers are silent engines in the background, ensuring that tokens have the liquidity necessary to function in the market. Their job is to maintain continuous buy and sell orders in the order book, reducing volatility and narrowing the bid-ask spread, which allows investors to trade with confidence.
“Liquidity is not just a nice-to-have. It’s fundamental,” says Camille Meulien, CEO at Yellow Capital. “Without it, the market for a token simply doesn’t exist in a meaningful way. Market makers guarantee that liquidity, ensuring there is always a buyer and seller, which keeps the price stable and the market functioning.”
For instance, imagine a token where a buyer wants to purchase at $1, but the closest seller is asking for $1.50. This wide spread discourages trade because the price offer is too far from the fair market value. Market makers fill this gap by providing continuous orders that keep prices closer together, ensuring trading can happen at a fair price. This increases traders’ confidence and leads to an increase in trading volume.
What Happens to Tokens Without Market Makers?
Tokens without dedicated market makers face a steep uphill battle. Prices can swing wildly with a single large trade, and low liquidity makes it difficult for investors to enter or exit positions. Without liquidity, tokens gain a reputation for being unreliable or risky, pushing away potential traders.
“I’ve seen projects start with great ambition but fail because they lacked liquidity,” says Meulien. “It’s like building a house on quicksand. No matter how solid the structure is, it can’t stand without a stable foundation—and in the crypto market, that foundation is liquidity.”
A clear example is the 2018 crypto crash, where many altcoins that were hyped during the bull market saw massive price declines. These tokens devalued quickly without liquidity providers as traders rushed to exit, finding no buyers. Market making may not be glamorous, but its absence can lead to disaster.
Liquidity as a Signal of Confidence
Liquidity does more than just facilitate trade; it sends a strong signal to the market about the health and viability of a token. Investors are naturally drawn to tokens with deep liquidity because it suggests stability and reduces the risk of price manipulation. For institutional investors, liquidity is often a prerequisite before considering a market.
For example, Uniswap’s UNI token benefited from deep liquidity pools from its inception, allowing both retail and institutional investors to trade without fear of large price swings. This deep liquidity, provided by automated and professional market makers, built confidence in UNI, making it a leading DeFi token.
According to the Yellow Capital team, liquidity creates trust. When retail investors see a token with a narrow spread and stable pricing, they feel more comfortable investing, knowing they can exit without issues. Getting that initial liquidity is key to building a loyal investor base for a new token.
How Market Makers Stabilize Prices
One of the key roles of a market maker is reducing volatility. Without a market maker, even small trades can lead to significant price changes, especially in low-volume markets. This kind of instability scares off investors who prefer more predictable pricing environments. Market makers provide continuous buy and sell orders, ensuring liquidity and price stability.
During the 2021 Dogecoin rally, while much excitement was driven by social media and retail traders, market makers played a crucial role in keeping the market functional. They helped smooth out price fluctuations, allowing Dogecoin to trade at more predictable prices even during periods of extreme volatility.
“Volatility is the enemy of growth,” says Camille Meulien, the CEO of Yellow Capital. “While some traders thrive on volatility, for long-term success, tokens need price stability. That’s what market makers provide—they’re the buffer between chaos and order.”
The Importance of Liquidity for Token Listings
Liquidity is critical for getting listed on major exchanges. Top exchanges require tokens to have a certain level of liquidity before listing. Market makers help tokens meet these liquidity requirements, giving them access to larger platforms and a broader investor base.
Tokens that struggle with liquidity are unlikely to get listed on major exchanges like Binance or Coinbase. Without these listings, tokens miss out on exposure and growth potential, limiting them to smaller, less reputable exchanges. A strong market maker can make the difference between being listed on top exchanges or languishing in the background.
“For any token aiming to be listed on a major exchange, liquidity is non-negotiable,” Meulien explains. “Without it, the project is dead on arrival. Market makers are the bridge between tokens and exchanges.”
Treasury Building: An Essential Service
Market makers go beyond simply providing liquidity; it often involves assisting with treasury building, a crucial service for token projects. Treasury management focuses on maintaining the financial stability of a project by effectively managing its token reserves. This includes allocating resources for future growth, making strategic investments, and maintaining a cash flow buffer to weather market downturns.
For token projects, the treasury acts as a war chest that helps them survive the volatile crypto markets. A well-managed treasury allows a project to fund development, marketing, and other operational costs without having to sell tokens during unfavorable market conditions, which could negatively impact the token price. Market makers with expertise in treasury management can optimize token reserves, balancing liquidity provision with safeguarding long-term resources.
“Building a solid treasury is about more than just accumulating capital,” explains Yellow Capital. “It’s about knowing when and how to allocate resources to ensure the project can weather market volatility and continue to grow. A market maker can hugely help with this process by assisting projects manage liquidity in ways that support long-term sustainability.”
Strategic Investments: Moving Beyond Liquidity Provision
In addition to providing liquidity and managing treasuries, market makers are often involved in strategic investments in the token projects they work with. These investments can take the form of direct capital injections or partnerships that help boost the project’s visibility and adoption. In some cases, market makers even act as early-stage investors, offering both liquidity and financial backing to ensure the project’s success.
These investments can also include relationships with exchanges, which are vital for tokens seeking listings on major platforms. Market makers often have established connections with key exchanges, helping to smooth the listing process for new tokens and ensuring they meet liquidity requirements from day one.
“Market making is as much about growth as it is about liquidity,” says Meulien. “We work with projects to ensure they have the resources they need to succeed, whether that’s through treasury management or direct investments. By aligning our interests with those of the project, we help set the stage for long-term success.”
Market Makers: More Than Just Liquidity
The order book with buying and selling orders is but a small part of the role of market makers. They are key partners in the overall strategy toward the token’s success, helping in everything from liquidity provision and price stabilization to treasury building and strategic investments. The experience lets projects not only survive but thrive in this competitive world of cryptocurrency.
As Camille Meulien puts it, “Market making is more than just keeping markets liquid. It’s about understanding the unique needs of each project and providing them with the support they need to grow, whether that be through stabilizing prices, bringing traders, managing their treasury, or helping them secure exchange listings. Market makers are an integral part of any token’s success.”
Market makers help by providing liquidity, building up a project’s treasury, and facilitating investments that allow tokens to overcome volatility and achieve their ultimate potential. For token projects looking to make their mark, working with a knowledgeable market maker is not just advisable—it’s essential.
We appreciate the insights shared by Camille Meulien and the team at Yellow Capital, whose expertise has helped many token projects succeed in an increasingly competitive environment. If you’re seeking further guidance on how to get liquidity and long-term stability for your token, we recommend reaching out to Yellow Capital for a free consultation. Their experience, ethic, and thoughtful approach will support your project’s needs.
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