The Inside Story of Algorithmic Market Making: How Project Party's Token is Utilized

Recently, the market has been performing well, and many projects are preparing for the Token Generation Event (TGE). The project party often encounters some questions when selecting market makers: Are the cooperation terms reasonable? What are the potential risks? How will the market makers operate after receiving the tokens? Can they truly provide liquidity?

This article will delve into the core logic of algorithmic market making, revealing how market makers utilize the tokens provided by the project party to create trading depth, stabilize prices, and win market confidence.

1. Market Status

Currently, there are three main cooperation models for market makers:

1. Renting Market Making Bots - The project party provides funds, market makers provide technical support, and charge fixed fees and profit sharing.

2. Proactive Market Making - The project party provides tokens, market makers provide funds and community guidance, with the aim of selling tokens and sharing profits.

3. Call Option Model - The project party provides tokens, the market maker provides funds, and has the right to buy at a low price when the price exceeds the agreed level.

This article mainly discusses the most common third model.

II. Typical Bull Call Option Market Making Terms

The following is a fictional example of cooperation terms ( usually lasting for 12-24 months ):

Market Making Obligation:

• Provide a certain depth of buy and sell orders on mainstream centralized exchanges.
• Provide liquidity pools on decentralized exchanges

project party provides resources:

• Lend 3 million Tokens ( accounting for 2% of the total supply, current valuation 3 million USD )

Options incentives obtained by market makers:

• You can purchase a certain quantity of tokens at a discounted price at different price levels.

3. Strategies and Operations of Market Makers

As a market maker strictly implementing a risk-neutral strategy, how will you operate after obtaining the project party's Token?

3.1 Core Principles

• Always maintain a risk-neutral position and do not take directional risks.
• Maximize non-directional returns through multiple channels

3.2 Initial Hedging Operation

The core is to immediately sell the majority of the obtained Tokens:

• Funds required to fulfill market-making obligations
• Hedge remaining Token positions

3.3 Dynamic Risk Management

• Continuously hedge the risk exposure of centralized exchanges and decentralized liquidity pools
• Maintain an overall neutral position through tools such as perpetual contracts.

3.4 Options Strategy

• Calculate and hedge option Delta using the option pricing model
• Profit from price fluctuations using Gamma Scalping
• Fine-tune operations near the strike price to achieve risk-free arbitrage

4. Summary

The success of algorithmic market makers relies on precise risk management and technical execution, rather than market prediction. Under the current mechanism, the large initial sell-off of tokens is not a malicious act, but rather the optimal strategic choice.

The project party should fully understand this mechanism and weigh its pros and cons. At the same time, they should recognize that seemingly favorable terms often contain intricate calculations behind them.

In this algorithm-driven market, it is crucial to maintain a sense of awe. Only by fully understanding the rules can you better participate in it.