In a thread on X this morning, Synthetix founder Kain Warwick offered a stark look into the inner workings of crypto market makers (MMs) and their evolution.
In a recent thread on X, Synthetix founder Kain Warwick shed light on the evolution of crypto market makers (MMs) and their role in the changing landscape of the industry. Sharing his personal experiences, both positive and negative, with various MMs over the years, Warwick highlighted how some have engaged in dubious tactics, particularly during and after the Initial Coin Offering (ICO) boom.
Warwick started by describing the initial market conditions during the 2017 ICO era. He explained that it was practically impossible to raise an ICO without having a deal in place with several ‘market makers.’ The monthly cost for such arrangements could vary widely, ranging from $50k to $300k+.” Despite the high costs, these deals were considered essential for attracting large investors and getting listed on major exchanges.
However, Warwick noted that some MMs quickly pivoted to questionable activities, which often led to them being banned from top-tier exchanges. “Even by late 2017 Binance was kicking them off the exchange regularly for various shenanigans,” he added. He described how these MMs would used to used to siphon liquidity from less reputable (or ‘tier 3′) exchanges by crossing orders with themselves, a strategy they could not sustain on platforms like Binance or Kraken.
One of the major evolutions in market-making arrangements, according to Warwick, was the adoption of call option structures. He noted that while “many ‘market makers’ just yolo pumped tokens, exercised the calls and dumped everything,” good market makers aim for "very tight spreads" and remain "delta neutral." Euro calls, he explained, are less susceptible to manipulation due to their limited exercise period, whereas American calls offered greater scope for exploitation. In Warwick's words, "American calls were mostly for extraction."
The rise of "low float meta," popularized by Sam Bankman-Fried (SBF), was another significant shift. Warwick described how some MMs and funds would buy tokens at a discount from projects to provide them with exit liquidity. With fewer tokens in circulation, it becomes easier to generate price surges, and those holding large token blocks could then short the token at the peak of the TGE, later buy it back at the bottom to cover their short, and finally pump it again in an attempt to drain liquidity from a lower tier exchange.
In his post, Warwick also mentioned his prior dealings with DWF Labs, stating that Synthetix was the first project to be grifted by DWF Labs." While he acknowledged that such deals might benefit a project's treasury in the short term, they ultimately harm the token and community in the long run.
As a final piece of advice, Warwick urged market participants to pay close attention to token transfers. "Be very wary if you see a huge block of tokens being sent to a ‘market maker,’ they are likely just preparing you as exit liquidity," he warned. He advocated for greater transparency and a healthy dose of skepticism when encountering sudden liquidity spikes and undisclosed arrangements.
Although Warwick noted that the current environment is different from the ICO heyday, his statements highlight ongoing concerns over exploitative market maker practices. In an industry still evolving and rife with new opportunities, both projects and investors must remain vigilant and informed to navigate the complexities of the crypto market.
