Insights from Synthetix Founder on Crypto Market Makers
In a recent discussion on X, Kain Warwick, the founder of Synthetix, provided a revealing perspective on the evolution of crypto market makers (MMs) and their impact on the industry over the years. He shared his personal experiences, both positive and negative, with various MMs, shedding light on how some have engaged in questionable practices, particularly during and following the Initial Coin Offering (ICO) boom.
Questionable Practices of Crypto Market Makers
Warwick began by reflecting on the market landscape during the ICO surge in 2017, explaining that securing funding often required establishing agreements with several MMs. He noted that the monthly expenses for these partnerships could soar between $50,000 and $300,000 or more. Despite the steep costs, these arrangements were deemed crucial for enticing significant investors and obtaining listings on major exchanges. However, he pointed out that many MMs quickly shifted to dubious tactics, which frequently led to their expulsion from leading exchanges. He highlighted that even by late 2017, exchanges like Binance were regularly removing these MMs due to various misconducts. Warwick detailed how these MMs engaged in volume manipulation on less reputable exchanges by executing trades with themselves, a strategy they were unable to employ on well-regarded platforms like Binance or Kraken.
The Evolution of Market-Making Strategies
According to Warwick, one significant change in market-making practices was the introduction of call option structures. He noted that numerous MMs resorted to “yolo pumping” tokens, exercising their calls and subsequently dumping their holdings. In contrast, he praised the “good market makers” who strive for tight spreads and aim to maintain a delta-neutral position. Warwick explained that Euro calls are less susceptible to manipulation than American calls due to their specific exercise conditions, asserting, “American calls were mostly for extraction.” He also traced the emergence of the “low float meta,” which he attributed to Sam Bankman-Fried (SBF), and described how certain MMs and funds take advantage of discounted tokens to create “exit liquidity.” With a limited number of tokens in circulation, orchestrating price increases becomes more feasible, allowing large holders to “short the top on TGE, cover at the bottom, and then pump it into low liquidity later.”
Cautionary Advice for Token Transfers
Warwick revealed his previous interactions with DWF Labs, stating that Synthetix was the first project to fall victim to their tactics. He argued that while such partnerships might bolster a project’s treasury temporarily, they often inflict long-term damage on the token and its community. In his closing remarks, Warwick urged market participants to carefully examine token transfers. He cautioned, “Be very wary if you see a huge block of tokens sent to a ‘market maker’; they are likely just prepping you as exit liquidity.” He called for increased transparency and skepticism towards sudden liquidity changes and behind-the-scenes transactions. Although Warwick recognized that today’s market environment differs from the ICO era, his observations underscore persistent concerns regarding the practices of market makers, serving as a reminder for both projects and investors to stay alert.
At the time of reporting, the total cryptocurrency market capitalization stood at $2.83 trillion.
