FTX and Alameda Research collapse event sad but ‘good in the long run’ says managing partner of DWF Labs – Interview Bitcoin News

While the collapse of crypto exchange FTX and its affiliate Alameda Research is believed to have left 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 to “eliminate companies that were not sustainable enough to operate during a storm.” As a result, the “market will be healthier” in the future.

The art of market making

In addition to eliminating weak players, Andrei Grachov suggested in a written response to questions from Bitcoin.com News that the collapse of key crypto industry players like FTX and Terra has highlighted the importance of adopting measures that protect users. One such measure, which can be used by global digital asset market makers as DWF Laboratories, is the so-called pump-and-discharge protection scheme. The scheme is essentially a liquidity management technique through exchanges.

Meanwhile, Grachev also shared his views on topics ranging from the misconception about market makers to how market making differs between centralized exchanges (CEXs) and decentralized exchanges. Below are the managing partner’s responses to the rest of the Bitcoin.com News questions.

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 (places buy and sell limit orders on order books), and maintains the spread. In simple words: Market makers create tradable markets. (Decentralized exchanges) DEXs (especially those based on automated market makers) are a bit more limited in terms of market making tools, but even here, a market maker maintains a sufficient level of liquidity in the pools. AMM (automated market maker) and does some extra work to keep the same price level across centralized and decentralized exchanges.

Because market makers make money by spreading between the bid and ask prices, based on a given proposal, the market maker would (for example) sell a token on Coinbase a few points (bps) higher than on a DEX and would sell a token on DEX a few bps cheaper than on Coinbase.

BCN: What would you say is the common misconception about market making?

AG: This is very close to a conspiracy theory: while a token is going up, the market maker is pumping; while a token is going down, the market maker is going down. You know that situation when you bought something and then it instantly fell off? The same. A market maker took a look at his position and traded against him.

The reality is completely different: a market maker maintains liquidity on both sides (buy and sell) and maintains a tight margin. The more advanced ones can also take limit orders from an order book to improve the market and increase organic volumes.

BCN: Does market making differ between decentralized exchanges and centralized exchanges?

AG: I would split it a little differently: based on order book (could be CEX and DEX) and other (DEX only. Includes AMMs on DEXs and concentrated liquidity on Uniswap V3).

Order-book-based exchanges 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 because trades are done in pools of liquidity. The biggest challenge for AMMs is maintaining the same price on DEXs as their centralized counterparts by adding or removing liquidity as needed. They also constantly monitor large, predatory operations to mitigate their impact.

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

Since advanced market makers use their own systems for trading, most of them, including DWF labs, interact with DEXs through a virtual order book that is emulated based on blockchain transactions. and the status of the AMM and concentrated liquidity funds.

BCN: How has the collapse of FTX and Alameda Research affected market makers and how is the market dealing with the cryptocurrency liquidity crisis? Also, are whales now wary of trading in large volumes?

AG: First of all, all the right market makers were funded in FTX, because you couldn’t avoid trading on the world’s second largest cryptocurrency exchange. Some of them were badly affected and collapsed. Many others are going through a difficult financial situation right now.

Overall, it’s a very sad event, but it’s good in the long run. The market is removing companies that were not sustainable enough to operate during a storm. As a result, the market will be healthier.

Regarding whales and trading volumes, we are seeing a lot of over-the-counter (OTC) activity as the exchange’s liquidity has dropped dramatically since the crash. For example, the same tokens that used to see only (a) a 10-12% price drop after a $500,000 sell order won’t even be able to absorb a $100,000 sell order now without prices dropping 60%. -70%.

Fortunately, the market is recovering. We have started to see this positive dynamic since the beginning of January 2023.

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

AG: It is true and not true simultaneously. Without marketing, liquidity is somewhat inactive and artificial. If nobody trades or trades rarely, a market maker would be encouraged to predict price deviations correctly and would need to increase the spread to maintain an acceptable level of risk. That could lead to a death spiral: the spread gets worse and the trading volume falls further, resulting in an even worse spread.

In another scenario, let’s say a project relies entirely on organic traders. It’s possible: Bitcoin started without market makers and it was fine. But it can be challenging to repeat this success.

Traders go to the market and have a wide range of tokens available to trade. If we are talking about a developing token, it would probably have a weak market structure even with good marketing. Why? Because compared to market makers, organic traders trade with their own vision rather than quantitative models. That makes for wider spreads and slower execution speeds because retail orders have to match each other, instead of being instantly bought and sold by a market maker. For example, DWF Labs has a 40-70% market share of trading volumes for many tokens and should we remove our setups from those markets, the volumes would collapse.

BCN: Some market players have incorporated what is known as pump and dump protection. Can you briefly explain what this is all about and how market makers use it to ensure that participants are safe in the event of extreme price volatility?

AG: If we exclude really dramatic events like the FTX or Terra LUNA market crashes when the selling pressure was insane and no one could help, we would see market makers mitigate price actions by managing liquidity across all exchanges. In 99% of cases, pump or dump runs on a particular exchange and then spreads to other places like a plague. If not so dramatic, the plague could be prevented by setting the price on the particular exchange. If it doesn’t work, market makers allow price discovery to happen organically and maintain relevant depth of market around the spread.

BCN: On the surface, the market maker looks like the smartphone industry, where the products on offer are seemingly indistinguishable. So how do market makers differ from the competition?

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

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

BCN: It is often said that many projects are wary of launching their tokens in a bear market. Is this true (and if so, does it make sense)?

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

Compared to bull markets, bear markets have a certain beauty. Yes, it is true that it is more difficult to obtain funds and the valuation is usually lower. But when a project goes on an exchange with a small cap, it is very likely that it will be driven by the market and then level off. Then, given the fact that the project came on the market when everything was selling at depressed valuations, the market can only reverse into a bullish mode, which will boost the project and give it additional opportunities to succeed.

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Terence Zimwara

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