Cryptocurrency is undergoing a transformative shift towards becoming more eco-friendly, addressing concerns about its environmental impact. One notable development is the increasing adoption of sustainable blockchain technologies. Some cryptocurrencies are transitioning from energy-intensive proof-of-work (PoW) consensus mechanisms to more energy-efficient proof-of-stake (PoS) or proof-of-authority (PoA) models. These alternatives significantly reduce the carbon footprint associated with mining activities. Moreover, initiatives within the crypto community are promoting the use of renewable energy sources for mining operations. Companies and projects are increasingly committing to carbon neutrality and offsetting initiatives, mitigating the environmental impact of their activities. As the awareness of environmental sustainability grows within the cryptocurrency space, ongoing efforts aim to reconcile the innovative potential of digital currencies with a commitment to eco-friendly practices, paving the way for a more sustainable future for the industry.
Crypto market makers are entities, high-frequency traders, or specialized companies, providing key services to active traders on crypto exchanges. They ensure a sufficient level of liquidity where trades are completed instantly and at a fair price.
Can working with a crypto market maker be good for the planet? Yes.
Indeed, crypto market makers are recognizing the importance of environmental sustainability and are actively taking steps to be more eco-friendly. Market makers play a crucial role in facilitating liquidity and maintaining orderly markets within the cryptocurrency ecosystem. One notable initiative involves the adoption of eco-friendly blockchain technologies. Market makers are increasingly favoring proof-of-stake (PoS) and other energy-efficient consensus mechanisms over traditional proof-of-work (PoW) systems, thereby reducing the overall carbon footprint of their operations. Additionally, some market makers are committing to using renewable energy sources to power their trading infrastructure, minimizing the environmental impact associated with cryptocurrency transactions. By integrating eco-friendly practices into their operations, crypto market makers are aligning with broader global efforts to address climate concerns and contribute to a more sustainable and responsible financial ecosystem.
In this article, we drill down on the principle of a market maker’s work and the services they provide.
How Does Cryptocurrency Market Making Work?
A crypto market maker strategy’s essence is to facilitate trading by consistently quoting buy and sell prices, thereby ensuring liquidity, narrowing bid-ask spreads, and contributing to the efficiency of the market.
A market maker, let’s call them a “Market-making company”, operates on a centralized cryptocurrency exchange and participates in its market-making program. They consistently quote buy and sell prices for a particular crypto, say Bitcoin. For instance, the Market-making company may place a buying price of $40,000 and a selling price of $40,050. The difference between the buying and selling prices is known as the bid-ask spread. In this case, the spread is $50 ($40,050 – $40,000). Market makers aim to keep this spread as short as possible to attract more traders.
A trader decides to buy BTC and places an order, agreeing to purchase at the best available rate. The Market-making company, with its standing buy price of $40,000, matches this market order, and the trade is executed. After the trade is fulfilled, the company holds Bitcoin in its inventory. To maintain liquidity, it continues to provide buy and sell quotes. If another trader wishes to sell BTC, the company might buy it at a price slightly lower than the current market price.
By consistently providing liquidity and facilitating trades, the company accumulates a series of small profits over numerous transactions. The volume and frequency of trades are key factors in a market maker’s profitability.
Services of Market Makers in Crypto
Market makers provide the following types of services:
- Hotlink Orders. Crypto market makers enhance liquidity on digital asset exchanges by connecting with third-party exchanges or any preferred liquidity provider through configurable API endpoints.
- Consistent spread. Market makers aim to reduce spreads, cutting the difference between buy and sell prices, and creating a more favorable trading environment for other exchange traders.
- Aggregate order books – merging the buy and sell orders from an exchange platform with the cryptocurrency available at a particular price from external liquidity providers.
Market makers influence different crypto markets by adjusting to market changes, narrowing spreads, and improving overall trading conditions. They are essential for crypto exchanges that want to maintain a large user base and attract new traders and investors.
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