Market Making
Web3 / exchanges trading
The activity of continuously providing buy and sell liquidity for a financial instrument, profiting from the spread between bid and ask prices while taking on inventory risk. Market makers place resting limit orders on both sides of an order book, enabling other market participants to execute trades immediately without waiting for a counterparty. In traditional finance, market making is performed by specialized firms including Virtu Financial, Jane Street, and Citadel Securities using high-frequency algorithms. In crypto, market making occurs both on centralized exchanges with order books and in DeFi through automated market makers (AMMs) that encode market-making logic in smart contracts. In the context of intent-based trading systems and CoW Protocol, 'solvers' perform a market-making-adjacent function by finding optimal settlement paths for user trade intents, effectively acting as liquidity intermediaries competing on execution quality rather than price. Example: Within UniswapX and CoW Protocol's solver networks, market makers operate as solvers that compete to fill user trade intents by sourcing liquidity from wherever it is cheapest, whether that is their own inventory, DEX liquidity pools, or private order flow. The competitive solver model means that market-making profit margins are competed down more aggressively than in traditional AMM pools, with the surplus returned to users as better prices. Why it matters for Web3: Market making is essential infrastructure for liquid, efficient crypto markets. The quality of market making directly determines trading costs for all other participants. DeFi's innovation of encoding market-making logic into immutable smart contracts through AMMs democratized liquidity provision, allowing any capital holder to become a market maker without specialized technology. However, AMM market making is mechanically disadvantaged against informed order flow compared to active market makers, creating ongoing research into optimal liquidity provision designs.
Explore the full Web3 Glossary — 2,000+ expert-curated definitions. Need guidance? Talk to our consultants.