The mysterious work of crypto world: Market Cap management/market maker/MM/MVM

Original author: @ZTZZBTC

Reprint: Lawrence, Mars Finance

Let’s talk about the legendary and mysterious job - Market Making/MM/MVM. This article is only for projects and institutions, not for retail investors and non-professionals. Since there seems to be no perfect information in this area, I will try to combine the actual situation of the currency circle as much as possible and explain it in detail. This is the first article ‘Subjective Market Maker’. The introduction is divided into three parts: ‘Subjective’, ‘Passive’, and the new profession ‘On-chain Market Maker’.

Definition of Market Maker

Market makers are an ancient profession, invented by the Dutch just like the order book matching trading used by CEX. It can be said that this profession came into being at the moment when the order book system was created.

First of all, what exactly do market makers do, and what is their scope of work? Here, in order to prevent some project parties from being fooled, we directly define market makers into two categories: active market makers and passive market makers.

Passive Market Maker

Passive market makers, also known as liquidity providers, most of the MM companies you see in the market, yes, those with prominent declarations, actually belong to this category.

The work of a passive market maker can be summed up in one sentence: to improve market liquidity.

I believe everyone must have experience in playing NFTs and inscriptions. Many NFTs and inscriptions have ended up with very high prices, but no one has made a deal. This is called liquidity death. Suppose you want to buy a coin for 0.9 US dollars, but no one in the market is willing to sell it to you at this price, then this transaction cannot be completed, and over time, liquidity death will occur. The job of a passive market maker is to buy the coin for 0.6 US dollars and sell it to you for 0.9 US dollars, making the transaction happen and efficiently matching funds and resources.

The most important thing for passive market makers is to have a large amount of funds and cheap chips for the project. The operation and profitability of passive market makers, as we discussed in the first article, is quite complex. But in fact, most of these market makers famous on Twitter are passive market makers.

Market Maker

Active market makers, commonly known as ‘dog banks’ among the general public. They are the favorite target of speculation for retail investors. Their main job is actually to improve market liquidity. It’s just that their methods are different, and their main job functions are probably:

1, Understanding Chip Distribution

2. Develop a market-making plan

Do you think it’s very simple? Come, let’s elaborate on these two points.

What a qualified MM should do

A qualified subjective market maker MM needs to:

Knowing which chips are in the hands of institutions and which are in the hands of retail investors, and when they will be unlocked. Can institutional chips be fought for in their own camp, such as collective selling, delayed selling, or lock-up? How to use various means to lock or retrieve chips from uncooperative investors. Whether to OTC to other institutions. Unified allocation of funds in various departments.

Do you think it’s over? This is the part where MM communicates with the “Chief Fund Manager” and the actual owner of the project. Next, MM will also communicate with the Chief Operating Officer:

What are the key operational nodes, and how should MM cooperate with operations to pull and smash the market? Are the channels and communities active after operation promotion, and do they have real buying interest? Who releases positive or negative news, and when?

MM still needs to communicate with their MM team, the larger the circulation, the more trading pairs, the more management is needed:

Normally, you need to manage the market-making team yourself and have control over the chips and capital. Develop a detailed market-making plan, as well as a plan for changes to the market-making plan, and be flexible in responding to unexpected situations. If your project is a regular one, market makers also need to pay attention to the overall market while conducting market-making activities. If the project is a special type, such as an ecosystem under a public chain, the market maker also needs to monitor the K-line of a certain public chain. In case of emergency situations such as a black swan event, the market-making plan needs to be adjusted immediately. When the project encounters difficulties in completing the market-making plan, it is necessary to proactively communicate with the boss, and so on.

If the next project is special, such as disk, X2E, full-chain games, etc., which involve complex mathematical models, MM needs to calculate the influencing factors of the mathematical models, and may also communicate with the extremely rare profession in the currency circle, ‘actuary’, to accurately formulate market-making plans based on the mathematical models.

An MM will communicate and exchange with the CEO, COO (CMO), CTO, and actuary. He is in charge of the project’s K-line and market value, directly managing the funds, is the boss’s confidant, and is almost the second in command in overall management.

This is what a qualified MM should do. MM in the coil circle must possess all of the above functions. MM in the traditional field basically does not need to communicate with the CTO and actuary.

Our cryptocurrency circle’s MM is amazing. In theory, the MM in the cryptocurrency circle should reach the level of the financial circle’s MM, at least the level of the traditional field’s MM.

In fact, the MMs in the circle are almost the most amateur and backward in all financial industries. They are lucky to be able to read the K-line well, not to mention communicating and coordinating with various departments. Some MMs are so awesome that they dare to defy the boss’s face. MMs in the currency circle have been alienated into a kind of service, which we will mention in the article about passive market makers. The strange situation of MMs in the entire currency circle is related to the wild growth of the currency circle and the distribution of interests of the head groups. However, it will eventually move towards regularization.

So, the way subjective market makers increase market liquidity is actually summarized as: dispersing chips as accurately as possible.

The dispersion of chips requires more help from capital. (Corresponding to CEO and capital) (Give chips to various institutions).

The dispersion of chips requires greater market driving force. (Corresponding to the operations director, marketing director) (Give the chips to retail investors)

The dispersion of chips requires more sophisticated mathematical models to support operation. (corresponding to actuaries and technical directors) (refined chip distribution)

The dispersion of chips requires the cooperation of K-line, which mobilizes the emotions of retail investors. (Corresponding to the MM team) (Give the chips to the retail investors and observe the institutional chip outflow)

The dispersion of chips means exchanging originally worthless chips for real gold and silver.

Merciless money-making tool is the essence of subjective MM. The more functional it is tied to money, the more it needs the support of experience and skills.

Many retail investors have a misunderstanding of subjective market makers and traders: buying high and selling low. This is actually incorrect. The function of subjective market makers is to use all means to distribute chips to the right people. The secondary represented by the K-line is only the most important part of it, and buying high and selling low is just one common technique. This point can be further elaborated and requires a deep understanding of ‘chips’, which we will discuss when we have time.

As long as the subjective MM can correctly diversify the chips, he is basically successful. The trading techniques of the K-line that retail investors are concerned about, and the ‘active strategy’ of the passive market makers bought by some projects for several thousand dollars, are actually not so important.

Please consider a fundamental logic:

In normal circumstances, the project party has an overwhelming majority of chips and a large amount of funds, and also has absolute control over the project’s information. How can such a person lose money on their own project in the secondary market?

Qualified Zhuang always makes money without losing! Old sickle is always sharp! Wall Street is awesome!

Many of the rumors circulating on the market, such as detecting the manipulative techniques of market makers through candlestick charts, can be ignored. Most of them are written by second-level traders to deceive retail investors and create a master image for themselves. This part of the knowledge is useful, but not much. As I have repeatedly mentioned, many classic second-level trading systems, such as technical analysis, already incorporate the game between market makers and retail investors.

The project team should understand the full job responsibilities of active market makers and subjective MM. As the old saying goes, MM is the person directly in charge of the money. You have worked so hard to get yourself listed on a major exchange, spent so much effort on product development and marketing, but in the end, you know nothing about the part that directly intersects with the money. Isn’t that irresponsible to yourself?

On-chain Market Maker

Finally, we’d like to mention the new sector of ‘on-chain market makers’, which is exclusive to the industry circle.

A cliché point: DEX is the greatest invention in the coin circle, and MEME is the most dazzling crown in this invention.

On-chain market makers were born because of the existence of DEX.

On-chain market makers are divided into active and passive, and the passive part is mainly managed by various swaps such as Uni. Some project parties related to staking also participate in it. I am not very familiar with this and dare not speak rashly.

On-chain market makers mainly deal with MEME or on-chain projects of some project parties. The functions of on-chain market makers are basically comparable to those of CEX market makers, but they have an additional role: managing all on-chain wallet behaviors.

This refinement involves a lot, involving on-chain market making. Let’s wait for the third article to talk about how to behave in the wallet, not being recognized by GMGN, and not being discovered by Gold Dog Hunter. On-chain market makers are not only tired but also compete with various immortals every day in a situation where the higher the road, the higher the devil.