For Web3 Market Making to Be Successful, the Best Approach is an Ethical Approach

The Web3 ecosystem is one of the fastest growing areas of innovation, with the total crypto market cap now at $3.4 trillion; this figure was barely $1 trillion at the onset of 2023. Amidst this accelerated growth, one core principle has proven to be fundamental in the long term sustainability of the nascent Web3 industry - ethics.

Time and again the crypto industry has witnessed players that were considered ‘too big to fail’ going under with a significant amount of funds. This has resulted in major trust issues, with a recent survey from PeW research revealing that 63% of Americans are not convinced about the reliability and safety of trading or using cryptocurrencies.

Incidents of Broken Trust in Web3 Market Making

The large number of Americans who have little confidence in crypto is not by accident but rather the making of malicious actors in the space, especially those entrusted with critical market-making functions such as token listings, liquidity provision and due diligence process for onboarding investors or businesses into the digital asset market.

To provide some more context, here are two key incidents where ‘trusted’ market makers acted unethically, leading to the loss of billions of funds. Let’s take a step back to what triggered the taps to run dry after such a momentous bull-run in 2020 – 2021.

Alameda Research Collapse

The collapse of this FTX’s sister company is a classic example of broken trust in Web3 market making. At the height of the DeFi bull run, Alameda was one of the most dominant liquidity providers and market makers in crypto. The firm was handling as much as $1-5 billion per day across exchanges, including FTX and Binance. In addition, it was providing north of $1 billion in DeFi liquidity across prominent protocols at the time such as Serum, Raydium and other Solana-based dApps.

However, in an unexpected turn of events, it emerged that Alameda in collusion with FTX had misused the trust placed upon them. The two companies engaged in unethical practices like inflating token valuations of the positions they held, front-running, insider allocations and using clients’ funds from FTX exchange to offset trading losses. This particular incident led to the wiping out of over $8 billion, triggering a systemic bear market.

3AC-Backed Market Makers

The Three Arrows Capital collapse is another major incident that dragged down market makers that were doing business with 3AC. A good example of a crypto market maker that took a hit is Genesis Trading which had lent $2.36 billion to 3AC. Lending and borrowing providers, Voyager Digital and BlockFi, were also caught up in the 3AC mess. Both companies have since declared bankruptcy, leaving investors at the mercy of regulators such as the SEC. For context, Voyager Digital had lent over $650 million to 3AC while BlockFi’s allocation was over $1 billion.

What Are the Pillars of Ethical Success in Web3?

For Web3 to be successful in the long-run, then innovators have to take the history of market making in crypto more seriously. In this section, we’ll take a look at one of the trusted Web3 market makers that has been around the block since 2019 – Kairon Labs. This will help to better understand what it takes to uphold ethical market making services and avoid instances such as the ones witnessed post the 2021 bull-run.

One of the most important factors in ethical market-making is trustworthiness; Kairon Labs has managed to establish itself as a trustworthy crypto market-maker, having collaborated with over 500 digital asset issuers and 100+ crypto exchanges since it was launched.

In addition to positioning itself as a trusted brand, Kairon Labs complements its ethical services with proprietary trading software that is well connected with over 100 exchanges for liquidity integration. This means is that digital asset issuers looking to debut their tokens can do so without worrying about unethical market practices such as liquidity spoofing – a malicious action whereby DeFi traders or users manipulate buy or sell orders on a DEX to create the illusion of high liquidity or market demand without any intention of executing those trades.

Another pillar of ethical success, although highly debatable within crypto circles, is regulation. In Kairon’s case, the market marker has put in place a KYC/AML process that sufficiently supports both institutions and individuals looking to access regulatory-compliant services. Playing it safe by the referees guarantees more focus into ethical practices given that no market maker wants to be caught facilitating sanctioned funds or providing services to clients with a shady KYC background.

To sum it up, the three most important factors in ethical crypto market-making are; trust, fair liquidity provisioning and compliance as a growth lever that protects investors and counterc-checks industry practices to ensure continuous compliance.

Conclusion

As mentioned in the introduction, Web3 is a promising niche. But for this nascent industry to hit a solid inflection point, ethical practices have to be given an upper hand. The issues experienced in the past with Alameda and 3AC are just a sneak peak of what can happen if the market-makers in crypto go unchecked.

Luckily, there’s some hope given the advancements we’re seeing across the world in terms of comprehensive regulatory frameworks that are not only meant to protect consumers but also support ethical innovation amongst market-makers. The EU already made some great strides with the MiCA law and all eyes are currently in the U.S. where the Genius Act was recently passed by the Senate and now heads to the House.