Web3 Can’t Win Without Trust: The Case for Ethical Market Making
Web3 has emerged as one of the most transformative innovations in modern-day finance. According to a report by Grand View Research, the Web 3.0 market ecosystem was valued at $2.25 billion in 2023 with projections showing it is expected to grow at a compound annual growth rate (CAGR) of 49.3% between now and 2030.
But despite the promise of disrupting traditional finance structures, Web3 is still nowhere near legacy markets such as stocks whose latest market capitalization stands at around $124 trillion. The lag in growth can partly be attributed to Web3’s notorious actors who are often involved in malicious practices like rug pulls, insider trading and once ‘reputable’ market makers like Alameda Research that have mismanaged clients’ funds, earning the industry a bad reputation.
In this piece, we’ll specifically focus on the issue of ethical market making, highlighting why ethical practices aren’t just the right thing but the sustainable path forward for the Web3 market. One of the well established market makers in this space that has proven ethics could go a long way in building a budding Web3 ecosystem is Kairon Labs, having supported over 500 projects since the platform’s debut in 2019.
The Cost of Unethical Market Making Practices in Web3
Unethical market makers have cost Web3 stakeholders billions of dollars in recent years. A good example is Alameda’s downfall in 2022; this sister company to the now-defunct FTX exchange was one of the respected market makers at the height of the DeFi bull-run in 2021 only to be part of the mess that saw clients lose around $8 billion worth of funds.
To provide some more context, Alameda acted as both a market maker and a trader while having privileged access to FTX order flow. This provided the market maker with a loophole to engage in unethical practices such as front-running, insider allocations and artificially inflating token valuations. What was even worse is Alameda using customer funds from FTX to offset their trading losses and support illiquid tokens they had large positions in like FTT and Serum.
Alameda’s case is not unique in Web3, there are quite a number of market makers which employ shoddy tactics like ‘Exit Liquidity Market Making’ or ‘Support-Then-Exit’ to dump tokens on unsuspecting investors. The approach is simple; provide liquidity and support a launched token’s price only long enough to offload a large bag or hire external players to support liquidity post-TGE but only commit for a few weeks. Afterward, they pull out liquidity suddenly, causing price crashes.
Kairon Labs - A Case Study of Ethical Market Making in Web3
So, what standards qualify a Web3 market maker as ethical? While there’s no specific reference framework, some obvious qualities such as transparency, advanced trading systems and experienced teams are very important. It is because of these attributes we have selected Kairon Labs as a case study of an ethical Web3 market maker that has stood the test of time.
At the core, this market maker relies on two major pillars to anchor their ethical approach – a proprietary algorithmic trading software and service-based business model.
Proprietary Trading Software
Kairon’s proprietary trading software is meticulously integrated with over 100 exchanges, including prominent CEXs and DEXs. What particularly stands out is the software’s ability to seamlessly connect with all these exchanges and optimize liquidity with tight spreads, deep order books and controlled volatility. In addition, it is designed to monitor and tweak strategies real-time in order to manage inventory and execute trades that boost market efficiency.
More importantly, Kairon Labs’ team of quants is constantly refining the software and leveraging deep analytics to stay ahead of the game. This means that digital asset issuers who opt to launch through the platform are bound to experience more elite market-making services, free from manipulation or other malicious acts such as ‘pump and dump’ tactics, insider trading or front-running.
Service Based Business Model
To top it up, Kairon Labs operates on a service-based business model. This Web3 market maker offers tailored solutions for different types of clients, including DEXs, CEXs and digital asset issuers. The pricing model is a combination of retainers and performance-based fees, specifically designed to align with a clients’ long-term liquidity needs.
As such, Kairon Labs is able to deliver personalized support, ranging from smooth launches, improved liquidity and expert guidance. The service-based approach also opens up room for more niche clients, especially large token holders looking for ethical liquidity service providers that not only ensure transparency but support responsible management of significant positions.
Parting Shot - Ethics is a Key Growth Engine in Web3
As mentioned in the introduction, ethical practices are the only way to forge a sustainable path for this nascent ecosystem. Why? Fundamentally, ethical market making services could have a positive impact on the tokenomics of most Web3 projects, improving performance post-TGE, healthier price action and building community trust in newly launched projects that are promising. Digital asset issuers who partner with ethical MMs are in a better position to reduce risk of post-launch crashes and reputational damage.
It is also imperative that the back-end service providers must reflect the core values of Web3, especially when it comes to the aspect of programmable trust. These foundational values on which Web3 are built on should not be taken for granted as they are inherently designed to introduce critical aspects that were missing in traditional finance, including transparency and immutability as well.
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