Author @octopusycc
In the foreign commodity markets like CME or Eurex, in addition to paying transaction fees, they also have additional incentives. Otherwise, market makers will not make money or make very little. That is to say, "profitable market making institutions" may all be engaged in market manipulation, and very few are actually doing market making. However, the market also urgently needs market makers, without market makers the slippage of the market will be huge, and even fewer people will trade, so it is generally the exchange or the underlying asset party that subsidizes this part of the liquidity.
If GPS and Shell appear at the same time as the market maker problem, it is not an isolated case, but clearly the tip of the iceberg of industry problems.
1. To talk about the problems of market makers, we must first talk about the operating mechanism of market makers
The market making business of market makers is to provide two-way quotes for buyers and sellers, maintaining the liquidity and relative stability of the market. In the traditional market, this part does not have much profit, and it is the same in the Altcoin market, so exchange incentives, transaction fees, and project party rewards are needed to subsidize (or leverage and spot). Normal Delta one market making trading is very normal to lose money.
In the foreign commodity markets like CME or Eurex, in addition to paying transaction fees, they also have additional incentives. Otherwise, market makers will not make money or make very little. That is to say, "profitable market making institutions" may all be engaged in market manipulation, and very few are actually doing market making. However, the market also urgently needs market makers, without market makers the slippage of the market will be huge, and even fewer people will trade, so it is generally the exchange or the underlying asset party that subsidizes this part of the liquidity.
2. The core reason why market makers lose money
Market makers make money on the spread, but they are very afraid of one-way plunges in prices. And the current Altcoin market has a common feature, that is, there is a large amount of sell-side directly unlocked during the TGE, while the retail investors generally no longer take up the orders. That is, after the listing, the sell-side pressure is dominant, which is contrary to the project party's intention to pull up the price and sell out at the time of listing.
The real situation of GPS and Shell
1. When most people in the market are selling, the buy orders of the market maker as the Maker will be constantly executed (forced to buy at low prices), causing the underlying assets (inventory) in their hands to accumulate. If the price continues to fall, the underlying assets (inventory) will continue to shrink. This is the unrealized loss of the market maker.
2. The difficulty of dynamic adjustment for market makers
Market makers may lower the purchase price (e.g. from $1 to $0.8 quickly), but if the market crashes too fast, they won't have time to adjust. When the market is sluggish, market makers often take a more passive approach to placing orders for the underlying assets. And the crash of GPS was from $0.14 to $0.07 in a flash, which, from the result, was not a healthy market behavior, and the market makers could not have profited from taking the sell orders, and the unrealized losses soared. The current sell-side in the market is far below the average cost price at which they took the underlying assets.
So what would market makers do if they didn't expect the buy-side and potential sell-side?
Just like the previous Trump and Milai token issuance, provide one-way liquidity, only put in tokens, not put in USDT.
That is, the buy-side liquidity is sufficient, but the large sell-side liquidity is extremely poor. And there is a small trick here, the tokens in the hands of the project party have no cost, while the leverage (USDT) of the market makers is the actual cost.
So in this case, if it is disclosed that @GSR_io is the market maker of the problematic project, it has been seriously betrayed by the "active market maker", and it is also a victim. (Note: Often the passive market makers of Altcoin projects will leverage the underlying assets in equal amounts, equivalent to OTC buying the project party's tokens.)
Where are the costs of market makers?
The difficulty and professionalism of the market making business is extremely high, and the exchanges are extremely dependent on external market makers is a fact. So how do exchanges constrain market makers? Often, market makers and exchanges need to provide a deposit to the exchange when signing a contract, and when there are market making problems (such as excessive needle insertion, excessive sky-earth needle amplitude), the exchange will deduct the deposit to compensate the corresponding investors.
(Note: The sky-earth needle of Altcoins is obviously a reflection of the market makers' failure to manage liquidity well.)
So why did the market maker still act maliciously in the GPS project?
The market has entered the stage where retail investors no longer take up new tokens after listing. The sell-side after listing is obviously greater than the buy-side. The traditional market making business cannot make money for the market makers, and if they go to act maliciously and cash out (add one-way liquidity), the amount they can cash out is obviously greater than the deposit they have with the exchange, they will be willing to accept the punishment of Binance deducting the deposit and cash out in large amounts.
(Note: The author personally believes that a considerable source of profit is the market making loss of @GSR_io.)
The past Altcoin market vs. the current Altcoin market
In the past Altcoin market, retail investors generally believed that listing on major exchanges had a wealth effect, so they didn't worry about whether there would be enough buy-side after the project was listed. But now, most retail investors no longer chase the high price when it is just listed, leading to a significant drop in the expected buy-side after the project is listed.
The high cost of listing on exchanges
The hard costs for projects to list on exchanges are extremely high:
• The comprehensive cost of Binance may be $3 million (each deal is different, no need to go into details).
• The comprehensive cost of a second-tier exchange may be $1.5 million (each deal is different, no need to go into details).
The additional implicit costs of listing on exchanges
1. Airdrops of platform tokens: The proportion taken is quite large, and most of the airdrops will be converted into sell-side when they are in the hands of the pledgers, and this part of the money is what the market makers/project parties have to eat.
2. Marketing: The cost of finding KOLs and community promotion can range from tens of thousands to hundreds of thousands of USDT.
And these projects, before raising the strategic round, can hardly come up with so much money, and the strategic round becomes a core issue. You need to put in millions of dollars as a cost to list on the exchange, and you need other institutions to invest in you. In the traditional market, this is like a bridge loan, the difference is that the institutions in the strategic round will not demand interest, but a share of the token revenue after listing. (Obviously the potential revenue after listing on a major exchange is considerable.)
So it will force the project party to directly pull up the market value after listing, with the FDV even more than 5 times the valuation of the strategic round. And the fundamentals of the project (on-chain data, actual users, social media data, marketing) lack the motivation to continue to be implemented after listing on Binance. I won't go into further details here, as the data of most blockchain projects at the time of listing is mostly the result of false prosperity and shearing workshops.
This will also directly lead to the retail investors who invested at a valuation several times higher facing huge downside risks.
The original intention vs. the actual negative consequences of requiring project party deposits/listing fees
The original intention of requiring project party deposits/listing fees is of course good. It can screen out project parties with strong market competitiveness and poor resource-finding ability.
But the negative consequence is that in bad market conditions, project parties can only push up the token price/market value to earn the listing cost at the time of listing, at the expense of the project's growth potential and creating a bubble. As @Max_Sunxxx said, the strategic round financing is a debt for the project parties.
The result of false prosperity and bubbles is that the participating institutions make huge profits in the bubble, while value investors are constantly betrayed. In such an Altcoin market environment, we cannot expect any traditional capital to enter the market to buy Altcoins. In my opinion, this is also the biggest problem in the Web3 industry.
