A project completes TGE, the token is listed — and the price swings 20% from a single $5,000 sell. Spread is 3%, the order book is empty, investors are nervous. This isn’t a tokenomics problem — it’s the absence of a market maker. Market making is a critical but often overlooked element of tokenomic architecture that determines how “alive” a token is after launch.
What Is Market Making
A market maker (MM) is a professional market participant who simultaneously places buy (bid) and sell (ask) orders for a token, providing liquidity and tightening the spread. An MM doesn’t invest in the project — they provide a pricing service.
Why a Project Needs a Market Maker
| Task | Without MM | With MM |
|---|---|---|
| Spread | 2–5% (up to 10%+ on low-tier exchanges) | 0.1–0.5% |
| Order book depth | $0–$10K | $50K–$500K per side |
| Slippage ($50K) | 5–20% | 0.3–1% |
| Investor perception | “Dead” token | Liquid market |
| CEX listing | Difficult | Easier (most major CEXs expect or require MMs) |
Three MM Functions
Providing liquidity. The MM continuously maintains a two-sided quote: bid and ask. This allows any participant to buy or sell the token at any time without waiting for a counterparty.
Price discovery. The MM “transfers” price between venues (cross-exchange arbitrage), ensuring a unified token price across different CEXs and DEXs.
Volatility absorption. When a large seller dumps tokens, the MM absorbs them into the order book, smoothing the decline. This isn’t manipulation — it’s shock absorption.
Contract Models with Market Makers
1. Retainer (Fee-Based)
The MM receives a fixed monthly fee for providing liquidity.
| Parameter | Typical value |
|---|---|
| Monthly fee | $5K–$50K (from ~$5K for a single exchange to $50K+ for multi-venue coverage) |
| Contract duration | 6–12 months |
| MM obligations | Spread < X%, depth > Y$, uptime > 95% |
| Tokens from project | Not required (or minimal) |
When it fits: projects with budget that want controlled costs and transparent terms.
2. Loan + Call Option
The MM receives tokens as a loan plus an option to buy at a fixed price (strike). This is the most common and most dangerous model.
- Cost — real option cost for the project
- Tokens — number of tokens transferred to the MM
- P_market — token market price
- P_strike — option strike price
| Parameter | Typical value |
|---|---|
| Loan volume | 2–5% of total supply (note: even 3% of total supply can be 30%+ of circulating supply at TGE) |
| Duration | 12–24 months |
| Option strike price | At or below TGE price |
| Upfront payment | $0–$50K |
Example. A project gives the MM 3% of supply (3M tokens out of 100M), strike = $0.50. After one year, price = $2.00:
- The project effectively “paid” $4.5M — the MM exercised the option at $0.50 and sells at $2.00
- Supply dilution: 3M / 100M = 3% of total supply transferred to the MM
3. Hybrid Model
Retainer + a small token volume without an option (or with a strike well above market price).
| Parameter | Typical value |
|---|---|
| Monthly fee | $5K–$25K |
| Token volume | 0.5–1% of supply |
| Option | No option or strike = 1.5–3x TGE price (varies widely) |
| Obligations | Strict KPIs |
When it fits: optimal balance of cost and alignment. The MM is motivated by price growth (holds tokens) but the project doesn’t lose millions on an option.
Model Comparison
| Criterion | Retainer | Loan + Call Option | Hybrid |
|---|---|---|---|
| Upfront cost | High ($15–50K/mo) | Low ($0–50K) | Medium ($5–25K/mo) |
| Cost on success | Fixed | Very high (option) | Moderate |
| Dilution | None | 1–5% of supply | 0.5–1% |
| Interest alignment | Weak (MM indifferent to price) | Skewed toward MM | Balanced |
| Transparency | High | Low (hidden terms) | Medium |
Key Parameters and KPIs
What to Control in the Contract
| KPI | Definition | Target value |
|---|---|---|
| Spread | Bid-ask difference / P_mid | < 1% (ideally < 0.3%) |
| Depth | Order volume per side within 2% of mid | > $50K (ideally > $200K) |
| Uptime | % of time with active quote | > 95% |
| Trading volume | MM’s share of total volume | 60–80% is normal early on; if consistently > 90% with no organic growth, investigate for wash trading. Cross-check with unique address count |
| Max spread under stress | Spread when market drops > 10% | < 3% |
Spread Cost Formula for Traders
- Spread_cost — cost of spread for a single trade
- Trade_size — trade amount ($)
- Spread — current bid-ask spread
- Divided by 2 because a trader pays half the spread on a market order
Example. A $100K purchase at 0.5% spread:
Cost = $100K × 0.005 / 2 = $250
At 3% spread (without MM) the same trade would cost $1,500 — a 6x difference.
Inventory Risk: How MMs Manage Position
The MM earns from the spread but takes on inventory risk: if the token price falls while the MM has accumulated a position — they lose money.
- PnL_mm — market maker’s profit/loss
- Revenue_spread — income from spreads
- Loss_inventory — loss from price changes on held tokens
- Cost_hedge — hedging costs
How MMs Manage Risk
| Method | Mechanism | Limitation |
|---|---|---|
| Asymmetric quotes | Shift bid/ask when position accumulates | Worsens spread for traders |
| Cross-exchange hedging | Sell on CEX-2 when buying on CEX-1 | Requires liquidity on multiple venues |
| Position limits | Maximum holding volume | Reduces depth during stress |
| On-chain hedging | Options, perpetuals on DEX | Only available for large-cap tokens |
AMM vs CEX Market Making
| Criterion | CEX MM (order book) | AMM (DEX) |
|---|---|---|
| Who provides liquidity | Professional MM | Any LP |
| Cost to project | $5K–$50K/mo + tokens | Initial pool ($50K–$200K early-stage, $200K–$1M+ established) + LP incentives |
| Quoting flexibility | Full (MM algorithm) | Constrained by formula (x·y=k) |
| Capital efficiency | High | Low (CPMM) / medium (V3) |
| Impermanent loss | No (risk on MM) | Yes (risk on LP) |
| Transparency | Low (OTC contract) | Full (on-chain) |
| Entry barrier | High (contract required) | Low (permissionless) |
When to Choose What
Liquidity budget > $15K/mo?
├── Yes → CEX listing planned?
│ ├── Yes → CEX MM (required by most CEXs)
│ │ └── + AMM on DEX for the long tail
│ └── No → Hybrid: AMM (primary) + DEX market maker
└── No → AMM on DEX
└── LP incentives from allocation (5–15% of supply)
└── Details → [AMM article](../amm/)
When an MM Isn’t Needed
A market maker isn’t a mandatory expense. In some cases, one is unnecessary or even harmful:
When you can skip an MM
Impact on Tokenomic Architecture
Market making isn’t a separate line item — it’s an integral part of tokenomics:
Allocation
In allocation, the “liquidity” category typically accounts for 5–20% of total supply (10–15% is most common in 2024–2026 practice). This pool funds:
- The initial AMM pool on DEX
- Tokens for the market maker (loan or grant)
- LP incentives (liquidity mining)
Vesting and Unlocks
Every large unlock (cliff) creates sell pressure. Liquidity depth must withstand this pressure without a price crash:
- Pressure — maximum sell pressure ($)
- Unlocked — number of unlocked tokens
- Sell_ratio — percentage sold immediately (20–80%)
- P — token price
If 10M tokens unlock at $1.00 and 50% sell within a week — that’s $5M of pressure. At $200K depth on the bid side, this will crash the price. Solution: extend vesting, notify the MM in advance, increase liquidity ahead of major unlocks.
Stakeholders
The MM enters the stakeholder matrix as a participant with conflicts of interest:
| MM’s interest | Project’s interest | Conflict |
|---|---|---|
| Maximize spread income | Minimize spread for users | Direct |
| Exercise option on price increase | Minimize dilution | Direct |
| Minimize inventory risk | Deep order book even under stress | Moderate |
| Short contract | Long-term stability | Moderate |
Common Mistakes
Market making pitfalls
Preparation Checklist
Before signing an MM contract
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