We are frequently asked what the impact of market-making could be on a dead market. Is it worth it? Now that the harm is done, is it too late? No more trading volume, dropping prices, is market making going to move the needle and change anything about the situation?

We explained in this piece how liquidity should be considered a feature of your product. And how building, adjusting, and managing it should be an everyday concern, like product development is.

Let’s illustrate it now with a recent example from one of our clients in the gaming industry.

Before market making, the 15d volume was around 12Ξ, with only a few daily transactions. Liquidity was low on the market with a spread of ~20% (the difference between the best price to buy and the best price to sell). If you bought an NFT during this period and tried to resell it immediately, you would have lost 20% of your investment. Making it extremely costly for users to transact, holding back new users from buying from the market and existing users from selling.

The price was also very unstable during this period because of the lack of liquidity. Someone tried to sweep the floor, which raised the price by +65%. After his sweep, he tried to resell the assets, but the price immediately dropped by -40%. He tried again a few days later. Same result.

That’s a good illustration of how the lack of liquidity negatively impacts a market. It’s super costly to transact, and the price is very volatile, so participants prefer not to transact.

Market-making aims to provide more liquidity to a market (reduce the spread and increase the number of buy & sell offers) via algorithmic trading.

But can market-making reignite the activity on a dead market sustainably?

A few things happened after we started market making. First, the volume increased by ~3.2x. We were only responsible for ~30% of the volume, meaning the remaining 70% came from users. Sometimes from wallets that haven’t interacted with the market for months.

What’s interesting to notice is how much the price has been stable during this period. Only a ±7% variation, while the volume more than tripled. This resides in our trading method. We algorithmically compute and post optimal prices to buy and sell in real-time. Said differently, we made a price discovery and made the market agree on what is a good price for buying and selling during this period.

Overall the spread went from initially ~20% to an optimal ~5% - which is basically the marketplace + royalties fees.

Looking at the market, new users have been reassured by the liquidity (“I can buy because I know I’ll be able to resell it if needed”). Existing users purchased again (“It’s a good investment, let’s put more money in the machine”). Increasing the volume and activity in the market naturally.

We rebuilt the confidence in the market.

While price and volume are pretty good indicators of a market's health, you might argue they are not the main indicators of a business's success. The next article will show how the spread and order book depth connect to your higher-level KPIs.