After the Profit Taking Frenzy, Crypto Market Makers Dive into the "Deep End"

Original Article Title: "Farewell to the Grassroots, Crypto Market Makers Welcome 'Coming-of-Age'"
Original Article Author: Ada, DeepTech TechFlow

In the cryptocurrency discourse, market makers always seem to stand at the top of the food chain. They are seen as "system-level winners" on par with exchanges, imagined by outsiders to not take directional risk, yet act as a "milking machine" that profits from every market swing.

However, when you truly enter this industry, what you see is a different and brutal scene: some get liquidated overnight in extreme market conditions, some exit in dismay due to a single risk control mistake, and many more are forced to redesign their entire business model in the midst of halved profits, failed price wars, and a scarcity of quality assets.

The days of crypto market makers are far from glamorous as imagined.

Over the past two years, this industry has undergone a quiet yet bloody purge. With windfall profits receding and regulations tightening, compliance capabilities, risk management systems, and technological accumulation have replaced the past courage and gray operations, becoming the new survival threshold. This is no longer a game of "who dares wins," but more like a long-term, professional, low-margin-of-error survival competition.

In in-depth interviews with several top market makers, a highly consistent judgment emerged: today's crypto market makers are no longer just "liquidity providers" but have evolved into a hybrid form of "secondary market investor + risk manager + infrastructure."

As the tide recedes, competition returns to rationality, risks are fully exposed, who is exiting? Who can stay at the table?

From "Grassroots Arbitrage" to "Highly Institutionalized"

If we turn back the clock to 2017, the modern sense of "crypto market maker" was almost non-existent.

Back then, market making was more like a frenzy of gray arbitrage. Borrowing coins, hitting the market, replenishing, returning coins... selling off chips when liquidity was abundant, and slowly absorbing chips in the long tail period. The boundaries between exchanges, projects, and market makers were extremely blurred, and practices like price manipulation and fake trading, considered serious crimes in traditional finance, were the norm at that time.

However, time is ruthlessly eliminating this model.

The consensus judgment given by multiple interviewees is that market makers in 2017 relied on courage and information asymmetry; whereas today's market makers rely on systems, risk control, and compliance.

The core of the change lies not in a simple "upgrade of tactics," but in a fundamental shift in the industry's underlying structure. In the past, whether market makers "played by the rules" might have been a moral choice; now, it is a matter of life and death.

Klein Labs Investment Partner Joseph revealed that all its current business must revolve around "auditability." Contract standardization, financial audits, transaction details, and delivery reports have shifted from being "optional" to "default settings." As a result, compliance costs now account for 30% to 50% of total operating expenses.

As the compliance process of trading platforms accelerates, the transparency of project financing paths, and the mainstreaming of regulatory narratives, the survival logic of market makers has been forced to restructure. The old "black-box operation + results-oriented" grassroots model is systematically being phased out.

An evident signal is that an increasing number of market makers are starting to incorporate "Regulation First" into their brand narrative, no longer avoiding the topic.

The transformation of roles is equally profound. In the grassroots era, market makers were merely executors, with projects providing funds and tokens while market makers were responsible for providing liquidity. Today, market makers are more like junior partners.

"Whether we onboard a project has become a decision similar to an investment decision. The project's fundamentals, circulation structure, trading platform configuration, volatility range are all quantitatively evaluated in advance," Joseph said. "Projects that don't make it into the top 1000 by market cap may not even qualify for a discussion."

The reason is simple. A low-quality project can consume a market maker's entire year's risk budget. In this sense, market making is no longer just a simple "service fee business" but a long-term game centered around risk exposure.

Of course, grassroots arbitrage has not completely disappeared but has been marginalized.

In the dark corners of the industry, high-risk, high-gray-area operations still exist, but their difficulty in scaling up has been increasing, and their survival space has been severely restricted. When trading platforms, project teams, and market sentiment all prefer "steady-state liquidity," players who do not play by the rules themselves become a systemic risk.

In today's crypto market-making field, "playing by the rules" has, for the first time, transitioned from moral restraint to a core competitive advantage.

Windfall Profits Are Disappearing

Compared to the last bull market, project teams have significantly reduced their budget allocation to market makers. "Data shows that this year, some projects have even reduced the token budget provided by 50% compared to the previous round," stated Vincent, Chief Information Officer of Kronos Labs.

But this is not just a problem of "budget cuts"; a more profound driving force comes from the first-party (project team) mindset evolution.

Project teams' understanding of market-making business has greatly improved. They have begun to grasp the profit space of market makers, no longer satisfied with vague liquidity commitments but demanding quantifiable KPIs, clear delivery logic, and a deep explanation of the efficiency of each fund's use.

In short, less funds, higher demands.

Faced with this pressure, top market makers did not blindly engage in a price war. Vicent emphasized that market making is an industry that values systems, risk control, and experience. Once quotes fall below the risk coverage cost, market makers will not face profit erosion, but a survival crisis. Therefore, when the risk-reward ratio is unbalanced, they would rather give up.

This means that the market has not been completely penetrated by "low-price players"; instead, it has filtered out a group of survivors who hold the line.

Another current phenomenon is this: high-quality clients are scarce, and long-tail projects are not profitable.

Reele from ATH-Labs stated: "The number of projects that truly have market-making value is far fewer than the number of market makers in the market." Many long-tail projects, due to lack of depth or susceptibility to arbitrage, even if they meet market-making criteria, find it difficult to generate sustainable returns.

This has led to a typical "high demand, low supply" situation: top market makers are concentrated in high-quality projects, while small and medium teams can only spiral inward in margin projects with thin profits and extremely high risks.

In this context, market-making business is evolving from a simple "profit center" to a "relationship entry point." Many market makers see market making as a stepping stone to long-term collaboration, allowing them to enter into project treasuries, OTC trading, structured products, and even become starting points for secondary market advisory or asset management.

In other words, true profit is increasingly not in the "market-making fee" but in subsequent structures. This also explains why many market makers that are still active are simultaneously expanding into investment, asset management, advisory, and other business lines. They are not transforming; instead, they are seeking "life-extension space" for an already compressed core business.

Industry Reshaping: Splitting the Table

In the previous cycle, market maker competition mainly took place at the same table, with the same trading platforms, the same product forms, and the same liquidity metrics.

However, this year, this table is being split.

The emergence of on-chain market making, derivatives, stock tokenization, and other new tracks is systematically changing the competitive landscape of market makers.

On the narrative level, on-chain market making is often labeled as "open, decentralized," but in practice, its barriers to entry are rising rather than dropping. The uncertainty of real liquidity, execution environment constraints, and normalized smart contract risks make it a completely different learning curve, rather than a simple task.

Compared to on-chain market making, derivatives market making exhibits the opposite characteristics. It has a high barrier to entry, but once established, the moat is very deep.

In the derivatives market-making, the contract market has extremely strict risk control and position management requirements, which makes derivative market-making naturally inclined towards institutions with larger capital size, richer risk control experience, and more mature systems. In this race track, new players do have opportunities, but the margin of error is extremely low.

As for stock tokenization, although it is seen as a key narrative connecting traditional finance, it is still in the early stages at the market-making level. The core challenge lies in the complexity of hedging and settlement structures, causing most market makers to adopt an attitude of "research first, cautious participation."

In other words, this is a track with extremely high potential but has not yet formed a stable market-making model.

From Reele's perspective, these new types of market-making tracks are not only reshaping the industry structure but also the source of their innovation pressure. Although the client base has decreased, they still need to quickly adapt to the constantly emerging new market trends and provide better market-making strategies to projects.

"The market-making industry is moving from a 'unified market' to a 'multi-track parallel' structured ecosystem. The competition among market makers is shifting from 'homogenized competition' to cross-track capability differentiation," Reele stated.

The Moat of Crypto Market Makers

As windfall profits recede, roles shift, and tracks differentiate, a reality is becoming increasingly clear: the competition between market makers is no longer about who is more aggressive but about who is less likely to make mistakes.

At this stage, what really sets them apart is not a single advantage but a whole set of hard-to-replicate system capabilities.

These system capabilities include a stable trading system, strict risk management system, strong research capabilities, compliance, and auditability, all of which together build the trust system of crypto market makers.

Joseph revealed that the credit cost and compliance cost spent on building this trust system are currently the biggest expenses. Although the crypto market-making industry is already a highly competitive market, for newcomers, establishing consensus and reputation, as well as dealing with risks, may not necessarily be more experienced than long-standing market makers.

The Crypto Market Cleansing of October 11, 2025, was a validation. Vicent stated that this event reflected that the propagation speed of leverage and liquidation is already much faster than traditional risk control response mechanisms; the industry is accelerating differentiation, teams with insufficient infrastructure and risk control capabilities will be eliminated, and the market will evolve towards greater concentration and institutionalization.