Why can strongly borrowed tokens help you operate well? What happens after the project hands over tokens to market makers? This article will reveal the core logic of algorithmic market making and analyze how market makers use your tokens to exchange trading depth, price stability, and market confidence.
Conclusion first: Due to the current insufficient liquidity in the Altcoin market, the best solution for market makers under the bullish option model is to sell tokens immediately after opening. You might wonder, if tokens are sold at the beginning, won't market makers need to spend a lot of money to buy back if the token rises again in the future?
Reasons:
1. Market makers' strategy is Delta neutral, they don't hold positions, they just want to earn profits.
2. The bullish option actually limits the highest price, which means it limits the maximum risk exposure of market makers (even if you rise 100 times, I can still buy at 2 times the price)
3. These market maker contracts last 12-24 months. Currently, there are so many projects, most of which peak right after launch. How many can survive until a year later?
4. Even if you survive 1-2 years and the token price skyrockets, the profits from price volatility will be enough to cover the losses from selling in advance.
Introduction
The market has been doing well recently, and several of my friends' projects are planning to hold a TGE soon. Now they are stuck on choosing a "market maker". They all show me the market maker's terms and ask, what do you think about these terms? Are there any traps? What will market makers do after receiving our tokens? Will they really provide liquidity?
Especially after seeing the Movement report: https://cn.cointelegraph.com/news/movement-network-binance-38-million-buyback
Disclaimer: The plot is purely fictional, and any similarity is purely coincidental.
If you think I'm wrong, then you are right.
Entertainment Statement: This article is written with the greatest "malice" and does not target anyone. Just for entertainment.
1. Market Background
Generally, market makers have three common cooperation models:
- Renting market-making robots - The project provides funds (tokens + stablecoins), market makers provide "technology" and "personnel" support, and market makers charge a fixed fee and/or profit sharing (if any).
- Active market making - The project provides tokens (sometimes also providing stablecoins), market makers provide funds (sometimes not providing stablecoins) for market making and community guidance. The main purpose is to sell tokens. After tokens are sold, the project and market makers share profits proportionally.
- Bullish option (common) - The project provides tokens, market makers provide funds (stablecoins), but market makers have a bullish option. When the price exceeds the agreed price, market makers can exercise the option to purchase at a low price.
This article mainly explains the third model, which is the most common in the market: the bullish option model.
2. Market-Making Terms for Bullish Option Model
From the perspective of a Delta-neutral market maker, they usually offer the following project cooperation terms (typically 12-24 months):
Note: This is purely fictional. If it looks familiar, it's just a coincidence.
Centralized Exchange Market-Making Obligations
Market makers need to provide liquidity for ABC tokens on the following exchanges:
- Binance: Place buy and sell orders worth $100,000 within ±2% of the price range (you bear $100,000 USDT + $100,000 equivalent ABC). Control the bid-ask spread within 0.1%.
- Bybit and Bitget: Also provide $50,000 buy and sell orders within ±2% range (you need to invest $50,000 USDT + $50,000 equivalent ABC), with the spread also controlled within 0.1%.
- Decentralized Exchange Market-Making Obligations You need to provide $1 million liquidity pool for ABC on PancakeSwap, with 50% being USDT and 50% being ABC tokens (i.e., $500,000 USDT + $500,000 ABC).
- Project Resources The project will lend you 3 million ABC tokens (2% of total token supply, currently worth $3 million, meaning FDV is $150 million).
The current market price of ABC is $1 per token.
The project offers you option rewards (European call options) where if the future market price of ABC token rises, you can choose to exercise the option to buy tokens. Specific terms are as follows: Strike Price Strike Quantity (ABC) Exercise Condition 1.25 USD 1 million If market price > 1.25 USD, you can buy 1.50 USD 1 million If market price > 1.50 USD, you can buy 2.00 USD 1 million If market price > 2.00 USD, you can buy. If the market price does not reach the corresponding strike price, you can choose not to exercise the option without any obligation.
Based on these conditions, as a market maker strictly implementing a Delta neutral strategy, how will it conduct overall market making and hedging arrangements after obtaining these 3 million ABC tokens to ensure no losses due to token price fluctuations?
3. Think: What would you do if you were a market maker?
3.1. Core Objectives and Principles
Always maintain Delta neutrality (this is the primary premise): Net position (Spot + Perpetual Contract + LP + Option Delta) must always be close to zero to fully hedge market price volatility risk.
No directional risk: Profit should not depend on the rise or fall of ABC token price.
Maximize non-directional revenue: Profit comes from four core channels:
a. Bid-ask spread on centralized exchanges (CEX).
b. Trading fees from decentralized exchange (DEX) liquidity pools (LP).
c. Gamma Scalping achieved through hedging OTC options.
d. Potentially favorable funding rates.
3.2. Initial Setup and Decisive First Step: Hedging
This is the most critical step in the entire strategy. Actions are not determined by price prediction, but by the assets received and obligations assumed.
3.2.1 Asset and Obligation List
Received Assets (also Liabilities): 3 million ABC tokens. This is a loan that we are obligated to repay 3 million ABC tokens in the future.
Obligation Deployment (Inventory and Funds):
- Binance Market Maker: 100,000 ABC (sell orders) + 100,000 USDT (buy orders) Bybit/Bitget Market Maker: 100,000 ABC (sell orders) + 100,000 USDT (buy orders) PancakeSwap LP: 500,000 ABC + 500,000 USDT
- Total Market Making Inventory: 700,000 ABC Total USDT Required for Market Making: 700,000 USDT
[The rest of the text continues in the same professional translation style]
Scenario 1: When the price rises from 1.00 to 1.10, the option's Delta will increase (because it is closer to the strike price), for example, from +400,000 to +550,000.
Our net position is no longer 0, but +150,000 Longing exposure. Action: Our system will automatically sell 150,000 ABC perpetual contracts to regain neutrality. Scenario 2: When the price drops from 1.10 to 1.05. The option's Delta will decrease, for example, from +550,000 to +500,000.
Our existing short hedging position is now "too much", creating a -50,000 net short exposure. Action: Our system will automatically buy 50,000 ABC perpetual contracts to close the position and again achieve neutrality.
Isn't it amazing?! Through hedging, we can naturally achieve "sell high, buy low". This process repeats continuously, and we "strip" profits from every market fluctuation. This is Gamma Scalping. We make money from volatility rather than directionality.
3.4.3 Operations Near Strike Price
When the price approaches and exceeds $1.25: Our first option becomes In-the-Money. Its Delta will quickly approach 1 (1,000,000).
Our short hedging position will also increase accordingly to near 1,000,000 ABC. Exercise decision: At option expiration, if the price is above $1.25, we will exercise the option. Action: Pay 1,250,000 USDT to the project and receive 1,000,000 ABC tokens. Immediately sell these 1,000,000 ABC tokens in the spot market. Simultaneously, close the 1,000,000 ABC perpetual contract short position we established to hedge this part of the option. Profit: Profit comes from the difference between the strike price and market price, and the accumulated Gamma Scalping income throughout the process.
For strike prices of $1.50 and $2.00, the logic is exactly the same. We are not betting on whether the price can reach, but continuously profiting by dynamically adjusting hedging positions during price fluctuations, and executing risk-free strike price arbitrage when the price indeed reaches.
3.5. Conclusion and Operational Recommendations
Initial token handling: 2.3 million ABC tokens will be immediately sold, with 700,000 used to obtain operational USDT, and 1.6 million for hedging remaining positions. Always maintain no unhedged token positions.
Price < $1.25: Do not actively buy or sell any non-hedged ABC. Continue CEX market-making, DEX LP hedging, and option Gamma Scalping. Profits come from spread, fees, and volatility.
Price > $1.25 (and subsequent strike prices): When the price is significantly higher than the strike price, our hedging engine has already established the corresponding short position for us. Exercising the option becomes a risk-free delivery process: buying tokens from the project at a low price, immediately selling at a high market price, while closing the hedging position.
This strategy breaks down a seemingly complex market-making agreement into a series of quantifiable, hedgeable, and profitable risk-neutral operations. The success of market makers does not depend on market predictions, but on excellent risk management capabilities and technical execution.
After reading this, I hope you understand that market makers are not targeting you or "deliberately" selling the market, but under this mechanism and algorithm, "selling" tokens and opening short positions at the beginning is the local optimal solution for market-making strategy.
It's not that they are bad, but a rational choice after weighing pros and cons.
The market is cruel. The better the protocol looks, the smaller the risk appears, the more likely it is a precisely calculated result.
When you cannot see the risk point, you are the risk point.
May we always maintain reverence for market algorithms.
