If you’re launching a new cryptocurrency, one of the most important things you’ll need to think about is market making. But what exactly is market making, and why is it so crucial?
What is Market Making?
Market making is all about keeping your cryptocurrency available for trading. Market makers are companies that always stand ready to buy or sell your token. This helps make sure that when someone wants to buy or sell your token, they can do it easily and at a fair price.
Why is Market Making Important?
Imagine you have a store, but sometimes when customers come in, there’s nothing on the shelves. Or worse, the prices change wildly from one minute to the next. That’s what can happen to a cryptocurrency without good market makers. They help keep your token “in stock” and keep the price stable.
When you’re looking for a market maker, you’ll usually come across two main types of deals:
- The Retainer Model
- The Loan and Call Option Model
Let’s look at each of these in more detail.
The Retainer Model
How it works:
- You pay the market maker a monthly fee
- You also give them some of your tokens to trade with
- The market maker uses this to keep your token available for trading
- You might share some of the profits from trading
Good things about this model:
- You have more control over how the market maker operates
- It’s clearer what’s going on
- You can set specific goals for the market maker
Not-so-good things:
- You have to pay a monthly fee, which can be expensive
- You might need to top up the tokens you give them if the price goes down
This model is often good for:
- Projects that have been around for a while and have some money to spend
- Projects that want to keep a close eye on how their token is traded
The Loan and Call Option Model
How it works:
- You lend some of your tokens to the market maker
- You give them the option to buy more tokens at a set price in the future
- The market maker uses these tokens to keep your cryptocurrency tradable
- They keep any profits they make from trading
Good things about this model:
- You don’t have to pay a monthly fee
- The market maker takes on more of the risk
Not-so-good things:
- The market maker might end up owning a big chunk of your tokens if they use their option to buy
- It’s harder to see exactly what the market maker is doing
- The market maker might have more power to influence your token’s price
This model is often good for:
- New projects that don’t have much money to spend
- Projects where the market maker is willing to take a bigger risk for a chance at bigger rewards
Important Things to Remember
No matter which model you choose, there are some key things to keep in mind:
1. Performance Measures: Your market maker should keep your token easy to trade. This usually means:
- The difference between buying and selling prices should be small (usually 0.2% to 0.6%)
- There should always be a good amount available to buy or sell (usually $100,000 to $400,000 worth)
- The market maker should be active almost all the time (at least 95% of the time)
2. Multiple Market Makers: It’s often a good idea to have two or three market makers. This helps make sure no single company has too much control over your token’s price.
3. Avoid Conflicts: Be careful about using a market maker who also owns a lot of your tokens. They might be tempted to change the price in ways that help them, not your project.
Key Differences Between the Models
To help you compare, here’s a quick summary of the main differences:
Retainer Model:
- You pay a monthly fee
- You might share profits
- You have more control
- It’s clearer what’s happening
Loan and Call Option Model:
- No monthly fee
- The market maker keeps all profits
- Less control for you
- The market maker might end up owning more of your tokens
Remember, these aren’t set in stone. You can often negotiate the details to fit your project’s needs.
Making Your Decision
Choosing the right market making model is a big decision. Here are some final tips to help you:
- Know Your Project: Think about where your project is right now. Do you have money to spend on monthly fees? Or would you rather give up some control to save money now?
- Think Long-Term: Consider how each model might affect your project in the future. Will giving up tokens now cause problems later?
- Ask Questions: When talking to potential market makers, don’t be afraid to ask lots of questions. Make sure you understand exactly what they’re offering and what they expect from you.
- Get Advice: If possible, talk to other projects that have used market makers. What was their experience like?
- Read the Fine Print: Before you sign any agreement, make sure you understand all the details. If something isn’t clear, ask for an explanation.
- Plan for Change: The crypto world moves fast. Make sure your agreement allows for some flexibility if things change.