Crypto Market Making- Legal Framework
The liquidity of CryptoCurrency and assets of Crypto token holders are provided by crypto market makers; much like traditional finance. But in contrast to traditional finance, the participating parties are sometimes non-human. Therefore, the legal framework of the system is also somewhat different.
The following article shall talk about Automate market makers, cross-chain market making, and how crypto token holders play a role as a liquidity provider. Plus, the legal framework tries to bind all of this together. Read on, and if this kindles your interest consider joining our Wealth Strategies Seminar to enrich yourself more on this topic.
The Framework Of Crypto Market Making
One of the main reasons behind the popularity and wide acceptance of CryptoCurrency was its ability to decentralize finance. And crypto market making helps just with that. This is essentially the process of providing liquidity to the crypto market. And it is accomplished by submitting both bid and ask limit orders on an exchange platform.
A crypto market maker will put their crypto assets on the exchange platform. Such as Coinbase or others. After that, they collect the bid-ask to make a profit. In other words, the market makers get a collective 'fee' from all the trades that take place on the exchange platform.
Ultimately the market makers are creating a liquidity pool. Here, the number of crypto assets they provide is defined by smart contracts and is in the form of tokens. And decentralized crypto exchanges make it possible for the crypto token holders to deposit their provided liquidity into a pool.
The importance of Market Making in Crypto
Market making is important in crypto for the same reason it is important in traditional finance. In the traditional world, sellers are always trying to sell their financial assets for the highest possible price. On the other hand, buyers are naturally trying to buy those assets at the lowest possible price.
If for some reason, the buyer and trader fail to comply with each other, market makers come in to find a common ground and make the trade possible. And as already mentioned, their strategy is to quote both a buy and sell price for the assets. This is known as the order book exchange model.
Automated Market Making Protocol
In the world of decentralized finance, applying this order book exchange is not impossible. But that would cost you a lot of money and time. Plus, the bad experience might discourage users from participating in the trade in the future. That's why instead of traditional market-making, Automated Market Making is used.
In an Automated market-making protocol there are trading pairs. This is much like the traditional order book exchange. However, instead of another human trader, you will be conducting the business against a "smart contract". These smart contracts are, in the simplest terms, robots that automate the crypto market-making process.
This is somewhat different than what happens on a DEX (Decentralized Exchange). For instance, you might be someone on a DEX who is trying to sell an Ethereum coin for a Binance coin. Meanwhile, someone else is trying to do the exact opposite. Now DEX will bring these two peers together and make the trade possible.
On the other hand, AMMs do not create a trade connection between two peers. Instead, it facilitates a peer-to-contract relationship. As a result, another human party does not set the buying or selling price. Instead, the AMM uses a mathematical formula to determine the price.
However, without the opposing parties, it is not possible to create a market. And this is where the liquidity pool becomes important. Because instead of opposing parties the user of the DEX will add funds to the liquidity pool to create the market. As a result, any user on the DEX can add funds and become a crypto market maker.
This is the general framework of the Crypto market. However, Automated Market Makers are going out of fashion, and Cross-chain marketing is taking their place.
Cross Chain Marketing
Automated Market Makers have one limitation. Which is they being not adept at operating on a foreign chain. In other words, suppose you built an AMM on an Ethereum based blockchain. Then, it would be hard to relocate the assets and trades done through this AMM to an IBM blockchain.
This can be solved by cross-chain marketing. When you use a Cross-Chain Marketing system, you can trade seamlessly between different blockchains. As a result, trades will be faster, more efficient, and less expensive.
Putting A Legal Framework On Cryptocurrency Market Making
All market makers have to abide by the exchange bylaws of their country. In the United States, the Securities and Exchange Commission oversees the crypto market making. However, due to the decentralized nature of this finance system, there was not much to regulate. But the SEC is trying its best to set up a legal framework.
This is evident in the new laws they propose to regulate the world of decentralized finance. Although there isn't an exclusive mention of cryptocurrency market making, there are certain laws, whose broader implications will have a serious impact on the crypto automated market making.
As mentioned in the prior section, there isn't a human market maker in a DEX, instead robots and algorithms are doing the work for you. But according to the new laws, people who take part in using these robots and algorithms can be also be considered 'dealers' from now on.
This can radically change what it means to participate in the world of decentralized finance. And some experts are considering it an attack on the free trading world of crypto. In other words, this will take out much of the appeal of decentralized finance. Because it won't be 'decentralized' anymore if the Government can regulate it.
Learn More From Our Seminar On Cryptocurrency
If all of these seem confusing to you, or if you want to know more in detail, then Wealth Strategies Seminars can prove much useful for you. From our seminar, you can learn about all the recent developments and future possibilities of the crypto market. Plus, you can also get a clear idea about the new and upcoming technologies.
Besides, all our speakers are experts and successful investors in their fields. So, they can give you the best advice and provide you with the most authentic guidelines to invest and build up a business in the crypto world. So, if you are seriously considering a career in the crypto arena, get a booking now.
As cross-chain market-making develops itself, the world of Crypto Currency trading will become enriched with more potential. However, the SEC laws that are trying to govern the DEX -es can put the whole decentralized finance world at risk.
But we are always hopeful that technology will find its way towards freedom.