What are Market Makers and Market Takers in Cryptocurrencies?

In any financial market, there are two participants — the market maker and the market taker. Just like traditional financial markets and other trading exchanges like Forex, stock exchanges, equities, etc.

The market maker and the taker form the lifeblood of the cryptocurrency market exchange as well. Without these two players, a viable crypto market cannot exist. These two entities create liquidity and create a favorable condition for trading.

Before going any further, let’s understand what market liquidity is.

On the other hand, in a low-liquid market, there is less demand for the asset and the difference of the bid-ask spread is much higher compared to highly liquid markets. This increases the volatility of the market and it becomes difficult for traders to get a fair price for their assets.

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Market liquidity attracts more institutional investors and accommodates orderly trading of transactions.

Almost every trading platform maintains an order book, even in crypto trading. An order book is a manual or electronic record that contains a list of participants, the prices at which the assets are being bid or placed, the prices of the sell and buy orders, and the order history. The order book maintains the real-time price of the assets and also lists the highest price and the lowest bid of the day.

Market makers are individual traders or designated members of an exchange who help to buy or sell assets at the current bid price. Market makers are liquidity providers (LPs) who hold the assets and make profits from the bid-ask spread. Traders who want to upload an asset in the order book pay the ‘ask’ price, which is a bit higher than the market value. Traders who want to offload crypto assets pay the ‘bid’ price, which is slightly lower than the ‘ask’ price. Market makers make a profit out of this difference, or bid-ask spread, and also earn commissions as LPs in the market. In most markets, makers pay lower fees compared to takers as they are the liquidity providers.

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On the other hand, an automated market maker, or AMM, works autonomously on a decentralized exchange platform. AMMs operate on smart contracts to provide liquidity to the exchange.

AMMs eliminate the barriers of centralized exchanges and order books and allow autonomous protocols through which users can initiate a trade through their personalized crypto wallets. They create liquidity pools where any liquidity provider can participate and earn a percentage as fees for transactions executed on the exchange.

Market takers work in concert with market makers. They need immediate liquidity to make a trade in the exchanges. Traders and investors are market traders who make earnings out of the price movements.

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Market takers take less risk and do not change their positions in the market as often as market makers. They prefer to liquidate assets immediately instead of waiting to make a profit from the bid-ask price difference. Generally, takers pay more fees than makers, because they do not generate liquidity in the market.

Market making provides critical help and stability to the market. It:

  • Provides liquidity
  • Establishes fair prices for trading
  • Ensures profitability through bid-ask spreads
  • Eliminates price volatility
  • Attracts big institutional investors
  • Maintains order books that ensure security and less slippage as it records the entry and exit of all traders

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