Market making’s traditional, proprietary model has played a part in this by incentivizing risk-taking, instability, and volatility.
The model necessitates the proprietary trader taking a potentially large portion of a token’s supply as an interest-free “loan” from the issuer to get the tokens to be supported. Then, the trader adds its own funds as collateral to market make.
Proprietary trading produces profits in three main ways: on the bid–ask spread, on arbitrage, and by exercising the call option, the trader’s contractual right to buy the borrowed tokens at a predetermined price basically anytime — and selling the tokens.
Because proprietary trading can often be intransparent, without sufficient oversight, projects risk losing a large share of their tokens. To maximize profits from the bid–ask spread, proprietary traders can take risky bets. Contractual call options, an inherent conflict of interest, incentivize token price increases. This way the proprietary trader can exercise its right to buy the tokens cheaply — effectively trading against its client. This fosters system-level pump-and-dump volatility rather than providing stable liquidity.
FTX’s main market maker, the leading proprietary trading firm’s Alameda’s downfall made it perfectly clear: we need a better way of providing liquidity. Trustless, transparent, scalable, and asset-agnostic market making. One that guarantees full alignment of interests between token projects and the service provider.
Unlike proprietary trading, it does not require a loan. Strictly speaking, MMaaS does not provide liquidity. It is not even a financial service, but a liquidity management solution. Similarly to “software as a service”, it gives access to the MMaaS provider’s trading infrastructure as well as the support of its sales and trading teams. So the provider does not make profits on trading, but on service fees — making it interested in the long-term success of its clients. An MMaaS provider cannot and would not trade against its client.
Using MMaaS, token projects can earn profits on market making, but they also own any losses from it — incentivizing more responsibility in the ecosystem.
Flowdesk combines the strengths of the MMaaS model with institutional-grade prudence available to projects of all sizes:
- strict adherence to legal regulations,
- rigorous due diligence checks,
- internal conflict-of-interest policies,
- focus on IT security, and
- conservative risk management strategies.
Flowdesk’s comprehensive, trustless MMaaS platform delivers higher capital efficiency coupled with full transparency. Its live dashboards allow asset monitoring and getting support in real time, anytime, anywhere in the world — while giving access to a full suite of brokerage, custody, as well as treasury management solutions as well.
With Flowdesk, token projects can build sustainable markets autonomously. This is how we foster a responsible, secure, steadily growing digital asset ecosystem — to achieve the vision of a tokenized economy, efficient, equitable, and accessible to all.
About the author
Guilhem Chaumont is the CEO and co-founder of Flowdesk, a global digital asset service and technology provider. He started his career as a trader at HSBC and holds graduate degrees in engineering and international finance. Prior to Flowdesk, he co-founded and served as the CEO of X-Network, an open-source private cryptocurrency after trading and mining bitcoin.
Flowdesk is the leading Market Making as a Service (MMaaS) technology provider. MMaaS offers a new approach to managing liquidity on secondary markets. Crypto projects can bootstrap their own liquidity using Flowdesk’s MMaaS infrastructure and its trading team’s global coverage.
Founded in 2020, Flowdesk is based in Paris with offices in Singapore and expanding in the US for sales, trading, and regulatory coverage. In two years, the company scaled rapidly. This is due to the inherent scalability of its infrastructure and business model. It delivers subscription-based services that are agnostic to market risks as well as counterparty risks.
This post is commissioned by Flowdesk and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.
© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.