If GPS and Shell both encounter market maker issues, it is not an isolated case, but rather the tip of the iceberg of industry-wide problems.
1. To discuss the issues of market makers, we must first understand their operating mechanism. The market making business involves providing two-way quotes to maintain market liquidity and relatively stable prices. In traditional markets, this business is not very profitable, and the same is true in the crypto market. Therefore, exchanges need to provide incentives, fees, and project rewards to subsidize (or provide leverage and spot) the normal Delta one market making trades that typically lose money.
In foreign commodity markets like CME or Eurex, they usually provide additional incentives besides just covering the fees. Otherwise, market makers would not make or would make very little profit.
In other words, "profitable market making institutions" are likely manipulating the market, rather than truly market making.
However, the market also urgently needs market makers. Without market makers, the market slippage would be huge, and no one would trade. Therefore, it is usually the exchange or the underlying asset that subsidizes this liquidity.
2. The core reason for market makers' losses: Market makers make money on the spread, but they are very afraid of unilateral price crashes. The current crypto market has a common characteristic - during the TGE, there are large sell orders from direct unlocks, while retail investors generally no longer take the other side. After listing, the sell pressure dominates, contrary to the project's intention to drive up the price for exit.
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The real situation with GPS and Shell
1. When most people in the market are selling, the market maker's buy orders as a Maker will be continuously executed (forced to buy at low prices), causing the inventory to accumulate. If the price continues to fall, the 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 may not have time to adjust. During market downturns, market makers often take a more passive approach to placing orders tracking the underlying asset. The crash of GPS from $0.14 to $0.07 was not a healthy market behavior, and the market makers could not have profited from taking the sell orders, leading to a sharp increase in unrealized losses. The current sell orders in the market are far below the average cost price at which the market makers acquired the underlying asset.
3. So, if market makers do not have expectations for buy orders and potential sell orders, they may provide one-way liquidity, only providing tokens but not USDT, similar to the Trump and milai token issuances.
That is, they buy in, providing sufficient liquidity; but for large sell orders, the liquidity is extremely poor. And here's a small trick - the project team's tokens have no cost, while the market makers' leverage (USDT) does have a real cost.
So, if @GSR_io is disclosed as the market maker for the troubled project, it has been seriously betrayed by the "active market makers", and it is also a victim.
4. Where are the costs for market makers?
The difficulty and professionalism of market making business is extremely high, and exchanges are highly dependent on external market makers. How do exchanges constrain market makers? Often, market makers need to provide a deposit to the exchange when signing a contract. When market making issues arise (such as excessive slippage or large price swings), the exchange will deduct the deposit to compensate the affected investors.
(Note: The large price swings of Altcoins are clearly a reflection of market makers' failure to manage liquidity properly.)
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So why did the market makers still act maliciously in the GPS project?
The market has entered a stage where retail investors no longer take positions in new tokens after listing. The sell orders after listing are obviously greater than the buy orders. Traditional market making business cannot make money for the market makers, and if they choose to act maliciously and cash out (add one-way liquidity), the amount they can cash out is obviously greater than the deposit they may lose at the exchange, so they are willing to accept the punishment of the exchange deducting the deposit in order to cash out a large amount.
(Note: The author personally believes that a considerable source of profit is the market making losses of @GSR_io)
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In the past crypto market, retail investors generally believed that listing on major exchanges would have a wealth effect, so they were not worried about a lack of buy orders after listing.
But now, most retail investors no longer chase the price after listing, leading to a significant decrease in expected buy orders after listing.
The hard costs for projects to list on exchanges are extremely high. The comprehensive cost for a major exchange like Binance can be as high as $3 million, and for a second-tier exchange it can be around $1.5 million.
There are also additional implicit costs when projects list on exchanges:
1. The large proportion of platform token airdrops, which will mostly turn into sell orders when distributed to stakers, is something the market makers/project teams have to bear.
2. The costs of marketing, finding KOLs, and community promotion, ranging from tens of thousands to millions of USDT.
And these projects often cannot afford these costs before their strategic funding rounds. The strategic funding round becomes a core issue - you need to raise hundreds of thousands of dollars to list on exchanges, and you need other institutions to invest in you. In the traditional market, this is similar to a bridge loan, but the difference is that the strategic investors do not demand interest, but rather a share of the token rewards after listing (obviously the potential rewards of listing on major exchanges are considerable).
This will force project teams to directly drive up the market cap and FDV after listing, often more than 5 times the strategic round valuation. But the project's fundamentals (on-chain data, actual users, social media data, marketing) often lack the motivation to be continuously improved after listing on Binance. I won't go into further details, as the data of most blockchain projects at the time of listing is often the result of false prosperity and shearing workshops.
This will also directly expose all retail investors who invested at valuations several times higher than the strategic round to huge downside risks.
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The original intention of requiring project teams to provide deposits/listing fees was of course good. It can filter out projects with weak market competitiveness and poor resource acquisition capabilities.
The downside is that when the market is not doing well, project teams can only inflate the token price/market cap to earn the listing costs, 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 teams.
The result of false prosperity and bubbles is that the participating institutions make huge profits in the bubble, while value-investing retail investors are continuously betrayed. In such an Altcoin market environment, we cannot expect any traditional capital to enter and buy Altcoins. In my opinion, this is the biggest problem in the web3 industry.
