Market makers contribute significantly to reducing volatility and transaction costs by providing substantial liquidity, ensuring efficient trade execution, fostering investor confidence, and enabling smoother market operations.
Market makers utilize various structures to provide liquidity, most commonly token loan agreements and retainer models. In the token loan agreement, market makers borrow tokens from the project to ensure market liquidity for a specified period, typically 1-2 years, and are granted call options as compensation. On the other hand, the retainer model involves market makers receiving compensation for maintaining liquidity over time, typically through monthly fees.
As in traditional markets, clear rules and regulations on market-making activities play a crucial role in well-functioning cryptocurrency markets. Given its nascent nature, there is an urgent need for smart regulations that prevent illicit practices and ensure fair competition. Such regulations will go a long way in fostering market liquidity and protecting investors.