Tokenomics: Intro to Market Making as a Service
Crypto volatility attracts traders and speculators at the expense of repulsing real users. Web3 founders should highly consider using a Market Making as a Service infrastructure in their tokenomics to stabilize their token price for the benefit of their users.
Crypto Volatility — A Double Edge Sword
Real users in decentralized applications (dApps), often represent a tiny fraction of the total community for a given token, this is because speculators are attracted through Fear of Missing Out (FOMO) to new crypto assets, while traders can generate significant income taking advantage of the real users which is detrimental for the sustainability of any dApps. On one hand, speculators can pump the price of crypto assets to returns sometimes exceeding 10,000% in a single year, while traders financially benefit and sometimes even engineer pump and dump cycles to extract gains out of a project community. The pump phase is often accompanied by massive exposures through catchy headlines, which leaves the real users getting onboarded at the peak of a crypto asset value, ultimately resulting in massive capital loss to these users. Meanwhile, tokens that do not grow as fast, often find it difficult to reach visibility to attract their ultimate customers. This is the typical lifecycle of dApps, yet in the traditional tech world, sustained organic growth is the common practice… could the crypto industry start adopting such a growth paradigm?
The Causes of Volatility
Most crypto assets are currently categorized in two categories: 1) stablecoins, and 2) non-stablecoins. Stablecoins are usually pegged $1 for $1 against US currencies (i.e. not volatile at all), while non-stablecoins suffer the full effects of volatility.
Stablecoins annihilate volatility by having external treasury that is fully collateralized to the in-circulation token value. For example, if $1B of USDC is in circulation in the market, then $1B of US currency is held by the company’s treasury behind the stablecoin. This ensures that when users sell their USDC, that there is always money left in the treasury to satisfy the selling volume to ensure the price remains equivalent to $1 USD.
Meanwhile, the vast majority of web3 ventures do not maintain an external treasury of collateralized liquid assets, implying that when sellers outpace buyers, the token price starts to fall… there is no shock absorption essentially. The only treasury in this case, is the liquidity pools that have been deployed on decentralized exchanges, and the market makers providing order fulfillment for tokens. However, liquidity pools only provide a liquid market, while market markers provide a liquid market while generating a profit for themselves. This means, market markers can have corrupted intentions toward the stability of a token, since they earn income from the volatility at the expense of the community. Some of them even get caught in market manipulation such as wash trading.
Automated Market Makers
Automated Market Makers (AMM), are typically used by decentralized exchanges (DEX) to ensure buyers and sellers orders are fulfilled immediately. The liquidity providers for the AMM usually start with the token issuers, and later attract community provided funds later on. In either case, volatility is lowered by having very large capital locked in the liquidity pool in comparison to the trading volume, but at this point, the transaction fee collected as passive income becomes negligible as a pure yield farming opportunity. It doesn’t really solve the problem of volatility. Uniswap (a popular DEX released recently V2 of their AMM), which allows liquidity providers to specify a range of operations for their liquidity, this means that if the range selected is between $10 and $15, the liquidity provided will be used and earn transaction fees between this range of the token price but if the price falls below $10, or increase past $15, there will be no more fees earned. While this feature was built to reduce impermanent loss, it can also be used to to create pools of resistance and support in the token price, however this currently is provided by third party solutions such as the one from Flowdesk.
Market Making as a Service
For web3 founders looking to really protect their community of real users against market manipulation and extreme volatility, it is recommended to build an external treasury allocated into a Market Making as a Service (MMaaS) infrastructure. The results can have significant advantage to dynamically adjust the liquidities in a way that induce a floor price of the token based on the size of the external treasury. As explained earlier, stablecoins with their fully collateralized treasury can maintain a $1 for every $1 peg, while un-collateralized tokens suffer the full volatility of supply and demand. A hybrid model with a partially collateralized treasury can create a floor price, while also protecting against excessive growth that attracts speculators: i.e. creating a soft ceiling of token price that moves over time along a smooth corridor of operation for the token price.
Conclusion
Stablegrowth tokens, an hybrid crypto-asset category between stablecoins and standard crypto currencies will be an active area of development in 2023 and beyond as the crypto industry mature and replace pump and dumps FOMO with sustainable organic growth models for web3 companies offering real utility. If this topic is of interest, please join our Smooth DAO community (collective web3 builders, backers, and partners looking to participate and collaborate on the development of the infrastructure of MMaaS and stablegrowth tokens)
Use my referral code below for various crypto tools used for trading:
Centralised Crypto Exchanges to trade with Leverage and Grid Bots:
