Market Making as a Service (MMaaS)

Market Making as a Service (MMaaS) is a technology service that enables token issuers to set their strategies in market making, allowing them to trade and manage their own liquidity.

What Is Market Making as a Service?

Market Making as a Service (MMaaS) is a technology service that enables token issuers to set their strategies in market making, allowing them to trade and manage their own liquidity. Traditional market makers provide liquidity with a mix of tokens loaned from the projects’ and their own funds to create trading pairs. They do market making on their own terms and retain the profits from these activities.
With MMaaS, token projects use their own tokens and funds to provide liquidity with the MMaaS technology. Projects get control of the strategies and the potential rewards from the market-making activity in exchange for a retainer to use the technology.

How Does MMaaS Work? 

After setting the terms of market making, the token issuer creates an account on a selected centralized exchange, funds it, and connects the API keys to the market-making infrastructure and algorithms with custom permissions to allow the trading. Token projects can directly adjust their market-making strategies on the platform or send their instructions to the MMaaS provider. 

Figure 1: Proprietary trading vs. Market making as a Service 

Why Is MMaaS a Needed Alternative to Traditional Market Makers?

Market Making as a Service was developed to address the drawbacks of the traditional market-making model, to improve market liquidity, and to give power and control back to token issuers. Legacy market makers are incentivized to generate profits for themselves, which can mean working against their client’s best interests. 

Some of the ways these market-making strategies are implemented can be detrimental to the project’s tokens. Wash trading, for instance, distorts price, volume and volatility, which can harm the token’s reputation and value and reduces investors’ confidence in and involvement with a project.

Although most of these activities are banned in regulated markets, crypto remains largely unregulated, making it easier for market manipulation to go undetected. Token issuers who utilize traditional market makers are liable for the many risks with crypto. Their token, and ultimately their project, are potentially at risk when they blindly trust a market maker and hope they adhere to good practices and principles.

Contrastingly, with MMaaS, projects monitor and manage their funds, trades, orders and everything related to their market-making operations in real time. This provides a high level of transparency and trustworthiness of blockchain technology.

Additionally, a smooth market depends on the ability of market makers to absorb temporary imbalances in supply and demand. In practice, however, we often see traditional market makers reducing or removing their liquidity during times of volatility when projects need liquidity the most. With MMaaS, token projects do not need to fear this as they always control their funds and trades.

What Are the Benefits of MMaaS?

Strategy and Outcomes

Ultimately, token projects benefit from MMaaS in three main ways:

  • by regaining full control over their strategies and collateral;

  • by attaining full transparency (vs. the “black box” model of traditional market makers);

  • through higher cost efficiency thanks to MMaaS’s fee-based cost structure vs the loan-based proprietary trading model.

MMaaS gives token issuers full, instant control over liquidity, even during market turbulence. They can choose, set, and change their market-making strategies autonomously or with the support of their MMaaS provider. This full transparency allows liquidity to be used efficiently and sustainably.

Unlike the proprietary model, the MMaaS solution does not involve any token loan. Hence, in the long run, the cost of MMaaS for a growing project can stay well below the cost of a loan option.    

How Can MMaaS Support the Growth of Tokenization?

Tokenization is one of the main purposes of blockchain technology. It is key to creating new innovations for raising capital, boosting cost-effective access to liquidity, and establishing access to new markets. Although tokenization has thus far been used for applications like payments and trading of assets, it could be adopted generally by many mainstream industries. If mass tokenization is going to happen, which many believe it will, sustainable liquidity will be needed.

Traditional market-making as a business model is inherently unscalable. Proprietary market makers are limited by their balance sheets. They only have so much capital to deploy to the market, so the number of tokens they can trade is limited. This may compel them to enter into debt, further increasing the risks of their market-making operations and exposing their clients to systemic risk. 

Therefore, new liquidity models like MMaaS are vital to support the growth and sustainability of mass tokenization. 

Author: Guilhem Chaumont is the CEO and co-founder of Paris-based Flowdesk, which builds liquidity technology for digitalized financial markets. Prior to Flowdesk, he co-founded and served as CEO of X-Network, an open-source private cryptocurrency. Guilhem started his career as a trader for HSBC after obtaining degrees in engineering and international finance.