Crypto Market Making Just Got Its First Real Transparency Tool

Coinwatch launches game-changing tracking technology that exposes what market makers actually do with your tokens in real-time.

Key Takeaways

• Crypto market makers operate as unregulated hedge funds, not traditional liquidity providers like in equity markets
• Toxic market making deals in 2024 involved coordinated price manipulation between founders, market makers, and insiders
• Most crypto market making contracts include massive call options worth millions, creating misaligned incentives for price dumping
• Traditional market making tracking relied on unverified self-reporting, like students grading their own exams
• Coinwatch Track uses trusted execution environments to provide real-time, verified market maker activity data
• Thirteen major market makers have already onboarded to the transparency platform within two months of launch
• The technology preserves market maker privacy while giving projects unprecedented visibility into trading behavior
• Market makers now view transparency as a competitive advantage and badge of honor for winning new deals

The Broken Foundation of Crypto Market Making

• Market makers in crypto function as pure hedge funds despite claiming to provide neutral liquidity services, operating without the regulatory constraints that govern traditional market makers like Citadel. Unlike regulated equity market makers who must meet strict KPIs and maintain continuous presence in order books, crypto market makers face no such oversight or accountability measures.
• The fundamental business model centers on obtaining massive token loans from projects, typically worth millions of dollars in call option value when priced using Black-Scholes models. These loans create a safety net allowing market makers to sell aggressively without risk, knowing they can exercise their strike price protection if prices rally beyond their short positions.
• Traditional arbitrage opportunities that supposedly drive market maker profits have largely disappeared from crypto markets, with only sporadic price differences of 3-5% appearing during major launches or exchange-specific events. The Kimchi premium on Bithumb represents one of the few consistent arbitrage plays, but most cross-exchange spreads offer only basis points that carry significant settlement and custody risks.
• Volume-based profit models that work in equity markets fail completely in crypto's long tail of tokens, where daily trading volumes often measure just a few million dollars compared to the massive flows seen in S&P 500 stocks. This fundamental difference forces crypto market makers to seek alternative compensation structures beyond simple bid-ask spreads.
• Market makers generate profits through gamma trading around their option strikes, selling more aggressively when prices rise above their protection levels and buying back when prices fall below. This creates systematic selling pressure during rallies and buying support during crashes, directly impacting natural price discovery mechanisms.
• The lack of natural buyer-seller balance in crypto markets exacerbates directional trading pressures, with retail investors typically buying during hype cycles and selling during downturns rather than providing the balanced flow seen in traditional equity markets.

The 2024 Toxic Market Making Epidemic

• Projects began systematically misrepresenting their actual token float, advertising 20% circulation while maintaining true floats closer to 1%, creating artificial scarcity that enabled coordinated price manipulation schemes. This deception became standard practice as founders realized they could engineer better charts through financial engineering rather than organic growth.
• The multi-step manipulation process involved projects first accumulating cash through selling locked tokens to liquid funds or partnering with market makers who provided balance sheet financing. This cash then funded aggressive token buybacks designed to create upward price momentum and attract retail FOMO buying.
• Coordination between founding teams, market makers, and select insiders created cabals that deliberately painted attractive charts to maximize retail extraction before inevitable crashes. These schemes became bolder during the Trump era as participants perceived reduced SEC enforcement risk compared to previous regulatory periods.
• Market makers holding enormous token loans could safely oversell their positions, dumping entire allocations while maintaining bid-side market making obligations through cash reserves accumulated from earlier selling. This strategy weighted heavily on circulating supply, creating downward pressure that persisted until projects bought back their float.
• The compressed timeline of these schemes accelerated from six-month unlock periods to just three weeks before perpetual markets caught up with spot prices, forcing increasingly aggressive and short-term extraction strategies. VCs largely remained uninvolved since their longer investment horizons conflicted with the immediate cash generation focus.
• Projects treating price as an engineering problem rather than a market reflection led to founders viewing token appreciation as something they could control through technical solutions, similar to fixing bugs on landing pages. This fundamental misunderstanding of market dynamics created widespread adoption of manipulative practices.

Traditional Finance vs Crypto Market Making Models

• Equity market makers operate under strict exchange requirements from NYSE and NASDAQ, maintaining 99.99% uptime in order books with spreads of 0.01% and minimum depth requirements of $10,000 at specified distances from mid-price. These regulatory frameworks ensure consistent liquidity provision rather than speculative trading.
• Payment structures in traditional markets flow from exchanges to market makers rather than from issuers, creating alignment between liquidity provision and compensation without introducing conflicts of interest. Market makers earn through volume-based rebates and meeting liquidity metrics rather than holding speculative positions.
• The massive trading volumes in equity markets, orders of magnitude larger than crypto, enable profitable market making through pure inventory turnover without requiring directional bets or option protection. High-frequency trading around natural buyer-seller flow generates consistent profits through small spreads captured repeatedly.
• Penny stocks in traditional markets do require additional market maker incentives and retainer payments, but these arrangements still operate within regulatory frameworks that prohibit market manipulation and maintain transparency requirements. The extra compensation addresses liquidity challenges without creating systemic conflicts.
• Regulatory oversight prevents traditional market makers from receiving call options or engaging in the coordinated price manipulation schemes common in crypto markets. Wall Street Journal rule compliance and market integrity standards create clear boundaries for acceptable behavior.
• Settlement systems and collocation advantages in traditional markets enable immediate capture of arbitrage opportunities, unlike crypto's AWS-based infrastructure where basis point spreads carry significant execution and custody risks that often exceed potential profits.

The Call Option Structure Driving Misaligned Incentives

• Projects extending multi-million token loans to market makers effectively grant valuable call options that protect against unlimited upside risk while enabling aggressive selling strategies. These options, when valued using standard financial models, typically range from $500,000 to multiple millions in mark-to-market value.
• The Solana example illustrates the protection mechanism: a market maker receiving 2 million Solana tokens at launch could sell continuously from $0.90 to $200 without risk, knowing their call option strike price protects against losses if the token continues rallying beyond their short position.
• Market makers become the primary source of selling pressure during early trading periods when airdrop recipients remain heterogeneous, investors lack liquidity, and founding teams stay locked up. This concentration of selling power creates systematic downward pressure on token prices during critical launch phases.
• Delta hedging strategies around option strikes enable sophisticated trading approaches where market makers increase selling pressure above their protection levels and accumulate positions below strike prices. This gamma trading generates profits regardless of underlying price direction while creating artificial volatility patterns.
• The option protection removes natural market making risks and enables behaviors impossible in traditional finance, where market makers must carefully manage inventory exposure without safety nets. Crypto market makers can pursue aggressive strategies knowing their downside protection eliminates catastrophic loss scenarios.
• Projects signing very large token loan agreements create situations where market makers control significant portions of circulating supply, enabling direct price manipulation through coordinated buying and selling campaigns that overwhelm natural market forces.

Coinwatch's Journey from Advisory to Technology Pioneer

• Matt's background as a 10-year options trader at Barclays handling oil books provided deep understanding of market making mechanics and option valuation, skills that proved essential when analyzing crypto market making term sheets. His transition to Coinlist in 2018 positioned him to negotiate early deals for projects like Solana, Flow, and Filecoin.
• The advisory business emerged organically when token sale projects approached with market making term sheets that were so disadvantageous they caused physical shock reactions. Early deals focused on negotiating better call option terms while requiring market makers to provide liquidity to Coinlist's exchange rather than just major platforms.
• Brian's engineering background at Coinlist and subsequent work on onchain protocols provided the technical foundation necessary to build tracking infrastructure that could monitor market maker performance across multiple exchanges and trading pairs. The combination of trading expertise and technical capability became essential for product development.
• Worldcoin's advisory engagement marked the transition from weekend consulting to full-time focus on market making transparency, with Andre Cronje's network providing referrals that rapidly expanded the client base. The NFT market peak in 2021 created perfect timing for launching a dedicated advisory business.
• Client relationships with major projects like Optimism, Aptos, Morpho, and Babylon created the critical mass necessary to pressure market makers into adopting new transparency standards. Without this leverage, individual projects lacked negotiating power to demand accountability measures.
• The three-year relationship building phase established trust with both projects seeking better deals and market makers who recognized Coinwatch's fairness despite the financial pressure their negotiations created. This dual credibility became essential for launching the tracking technology.

Revolutionary Transparency Through Trusted Execution Environments

• Coinwatch Track solves the holy grail problem of market maker monitoring by enabling real-time visibility into trading activity without exposing sensitive API keys that could be exploited by competitors. Trusted Execution Environments create secure computation spaces where market maker data can be processed without revealing underlying trading strategies.
• The TEE architecture allows market makers to submit API keys to encrypted environments that query exchanges, calculate performance statistics like depth and spread, and return only aggregated metrics to projects. Raw trading data never leaves the secure environment, preserving competitive advantages while enabling accountability.
• Implementation required just three weeks of engineering time but demanded the convergence of technical capability, client leverage, and market maker relationships that took years to develop. Thirteen market makers onboarded within two months of launch, with additional firms waiting in queue for capacity.
• Market makers increasingly view TEE participation as competitive differentiation, using transparency as evidence of ethical trading practices when pursuing new deals. The technology creates a verifiable badge of honor that replaces unverifiable marketing claims about trading behavior.
• Projects gain unprecedented insight into market maker performance through real-time statistics showing exact contribution to order book depth, spread maintenance, and trading volume across all exchanges and trading pairs. This eliminates the uncertainty and paranoia that characterized previous monitoring approaches.
• The platform establishes industry standards for market maker evaluation based on actual work provided rather than marketing spend, conference sponsorships, or relationship development. Performance metrics become the primary differentiator for market maker selection and deal renewal decisions.

Building Trust Through Verifiable Performance Data

• Previous monitoring relied entirely on market maker self-reporting through daily spreadsheets containing unverified statistics on depth, spread, and volume performance. This approach resembled students grading their own exams, with no independent verification of accuracy or completeness.
• The stress reduction during token launches became immediately apparent as projects could verify in real-time that their market makers were actively providing liquidity rather than dumping tokens. Founders could thank market makers for specific contributions rather than harboring suspicions about price performance.
• Real-time visibility into market maker activity enables immediate problem identification and resolution rather than discovering issues through monthly reports or price action analysis. Projects can address liquidity problems as they occur rather than conducting post-mortem investigations.
• The technology differentiates between legitimate liquidity providers and active market makers who specialize in price management, creating clear categories that help projects select appropriate partners for their specific needs. This disambiguation reduces confusion about market maker roles and expectations.
• Babylon's launch demonstrated the system's effectiveness with five participating market makers providing transparent competition for liquidity provision quality. The public announcement of market maker participation created additional accountability pressure through community oversight.
• Market makers now compete on verifiable performance metrics rather than relationship quality or fee structures, creating incentives for improved service delivery and innovation in liquidity provision strategies. The transparency platform rewards actual work while exposing underperformance.

Coinwatch Track represents more than a monitoring tool - it's the infrastructure for rebuilding trust in crypto market making. Projects finally have the sunlight they need to distinguish between legitimate liquidity providers and extractive actors, while market makers can demonstrate their value through verifiable performance rather than unsubstantiated claims.