Numbers and Narratives: An Evaluation Framework For Crypto Liquidity

Below is a summarized version of The Block Research's Numbers and Narratives: An Evaluation Framework For Crypto Liquidity report. The full PDF version of this report is accessible here.

Selecting the right market maker is critical for any project, as their strategies can significantly impact token performance and ecosystem growth. However, some firms engage in questionable practices under the guise of “market making,” posing challenges for a project’s associated token(s). Market makers lacking experience or operating with ill intentions may make unrealistic commitments to reach specific price or volume targets, which can be considered unethical and impractical in a properly functioning market. Some clients may also engage with market makers without a clear understanding of their needs, only to then realize the mismatch in services.

To avoid such pitfalls, clients must understand the importance of liquidity in crypto markets and the market maker’s role within a partnership. They should differentiate between bad actors and quality market makers, conduct thorough due diligence, and prioritize criteria such as track record, liquidity provision capabilities, and client service quality. Clarifying expectations and setting clear boundaries in the partnership agreement are also crucial to ensure an alignment of interests. With the right partnership, a market maker can provide lasting benefits to a project.

This report will start with a quantitative analysis of liquidity in crypto markets, examining its impact on price volatility across different geographies and assets. It will highlight the significance of robust liquidity in diverse markets for project success. Case studies will illustrate how market makers' liquidity provision has positively influenced clients, such as by reducing price volatility, or spread.

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