In any financial market, there are two participants – the market maker and the market taker. Just like traditional financial markets and other trading exchanges like Forex, stock exchanges, equities, etc.

The market maker and the taker form the lifeblood of the cryptocurrency market exchange as well. Without these two players, a viable crypto market cannot exist. These two entities create liquidity and create a favorable condition for trading.

Before going any further, let’s understand what market liquidity is.

Understanding market liquidity

Market liquidity determines the efficiency of a market. A market is said to be highly liquid if it allows seamless trading of assets at fair values. It also indicates that the demand and supply of traders who want to buy and sell the crypto assets are balanced and high. Here, there is a balance between the ‘ask’ price, or the lowest value for placing a sell order, and the ‘bid’ price. that is, the highest value to place the buy order. The difference between the ‘ask price’ and the ‘bid price’ is known as ‘bid-ask spread’, and is relatively low in a highly liquid market.

On the other hand, in a low-liquid market, there is less demand for the asset and the difference of the bid-ask spread is much higher compared to highly liquid markets. This increases the volatility of the market and it becomes difficult for traders to get a fair price for their assets.

Market liquidity attracts more institutional investors and accommodates orderly trading of transactions.

Who are market makers?

Market makers play an essential role in ensuring the liquidity of a market. Strong market makers determine the viability of a market.

Almost every trading platform maintains an order book, even in crypto trading. An order book is a manual or electronic record that contains a list of participants, the prices at which the assets are being bid or placed, the prices of the sell and buy orders, and the order history. The order book maintains the real-time price of the assets and also lists the highest price and the lowest bid of the day.

Market makers are individual traders or designated members of an exchange who help to buy or sell assets at the current bid price. Market makers are liquidity providers (LPs) who hold the assets and make profits from the bid-ask spread. Traders who want to upload an asset in the order book pay the ‘ask’ price, which is a bit higher than the market value. Traders who want to offload crypto assets pay the ‘bid’ price, which is slightly lower than the ‘ask’ price. Market makers make a profit out of this difference, or bid-ask spread, and also earn commissions as LPs in the market. In most markets, makers pay lower fees compared to takers as they are the liquidity providers.

Designated Market Makers and Automated Market Makers

Designated market makers, or DMMs, are appointed by exchanges against security. They are primary market makers who have the power to maintain quotes for buying and selling assets on trading platforms. DMMs have high expertise and can make hundreds of markets at one time.

On the other hand, an automated market maker, or AMM, works autonomously on a decentralized exchange platform. AMMs operate on smart contracts to provide liquidity to the exchange.

AMMs eliminate the barriers of centralized exchanges and order books and allow autonomous protocols through which users can initiate a trade through their personalized crypto wallets. They create liquidity pools where any liquidity provider can participate and earn a percentage as fees for transactions executed on the exchange.

Who are market takers?

As simple as it may sound, while the market maker makes liquidity, the market taker takes liquidity.

Market takers work in concert with market makers. They need immediate liquidity to make a trade in the exchanges. Traders and investors are market traders who make earnings out of the price movements.

Market takers take less risk and do not change their positions in the market as often as market makers. They prefer to liquidate assets immediately instead of waiting to make a profit from the bid-ask price difference. Generally, takers pay more fees than makers, because they do not generate liquidity in the market.

What is market making in digital assets?

Market making in digital assets is the process where market makers try to generate continuous liquidity for the traders, sellers, and buyers in the market. Market makers provide stability and accessibility to liquidity to investors and traders.

Market making provides critical help and stability to the market. It:

  • Provides liquidity
  • Establishes fair prices for trading
  • Ensures profitability through bid-ask spreads
  • Eliminates price volatility
  • Attracts big institutional investors
  • Maintains order books that ensure security and less slippage as it records the entry and exit of all traders

Bottom line

The maker-taker relationship in crypto trading is vital to facilitate the growth of the crypto market and attract big investors. Market making reduces volatility and friction. It ensures more liquidity in the market and more profits through bid-ask trades.