Introduction
Market making has evolved from phone calls on trading floors to real-time algorithms reacting faster than a blink. Today, it's not just about quoting prices — it's a race for speed, spread control, and adaptive infrastructure. Especially now, across CEX and DEX, high-frequency strategies, smart contracts, and on-chain intelligence define the new battlefield.
This article explores how market makers (MMs) have changed, what works across centralized and decentralized venues, and which models are shaping the future of liquidity.
The Origins: Traditional Market Making
Market Makers on Traditional Exchanges
Traditionally, MMs are participants who commit to maintaining two-sided quotes (bid/ask) and providing continuous liquidity. In return, they get privileges: lower fees, execution priority, or volume-based rebates.
It worked like this:
- manually placing quotes in the order book,
- calculating spreads based on volatility,
- managing inventory to avoid imbalanced exposure.
Fact box: The first official market makers appeared on NASDAQ in 1971.
From Intuition to Quantitative Models
With growing data and volatility, decision-making needed automation. Enter models like the Avellaneda–Stoikov framework, helping calculate optimal spreads depending on volatility, inventory, and risk tolerance.
The Rise of CEX and High-Frequency Trading
Algorithms + Infrastructure
On centralized exchanges (Binance, Coinbase, etc.), market making became:
- HFT-driven,
- API-powered, co-located with exchange servers,
- and fully automated inventory management.
MMs now operate as:
- quant teams with custom-built infra,
- strategies coded in Python/C++,
- microstructure analysis at sub-millisecond granularity.
Fact box: A market making bot reacts in ~50μs. A human blink? ~300ms.
Why Speed Wins
Because:
- the fastest MM captures arbitrage,
- late quote updates suffer slippage,
- slow reactions expose alpha signals to competitors.
DeFi and the New Challenges for Market Makers
AMMs: Liquidity Without Active Makers?
Since 2020, DeFi introduced AMMs (Automated Market Makers): Uniswap, Curve, etc.
Here, smart contracts set prices algorithmically, e.g., x*y=k, and LPs (liquidity providers) simply deposit assets to earn a fee.
Pros:
- permissionless access,
- 24/7 liquidity,
- no custody risk.
Cons:
- impermanent loss,
- slow price responsiveness,
- unfair fee capture (exploited by bots).
Fact box: Per Angeris et al., LPs in AMMs suffer from LVR (Loss Versus Rebalancing), especially in volatile markets.
Active Market Making Returns to DeFi
RFQ, CLOB, JIT: The New DeFi MM
- RFQ (Request-for-Quote) model, like in Hashflow, lets professional MMs offer off-chain quotes with on-chain execution.
- CLOB (Central Limit Order Book) — order books on-chain (e.g., dYdX, Vertex).
- JIT (Just-in-Time liquidity) — where an MM briefly injects liquidity for a single trade and immediately withdraws.
Fact box: In 2022–2023, JIT bots processed over 31,000 trades worth $4.5B+.
Who Benefits?
- Traders — get CEX-grade execution,
- MMs — deploy HFT strategies directly on-chain,
- Passive LPs — often lose fees and alpha.
Bottom line: DeFi MM is going pro, with speed and predictive execution becoming key advantages.
4 Key Insights for Market Makers (2024+)
1. DEXs are evolving toward active MM formats (RFQ, CLOB, JIT).
2. On-chain HFT is becoming viable — via Solana, MEV, modular L2s.
3. Post-FTX, MM margins dropped ~30%, forcing efficiency.
4. New DeFi formats reduce slippage and MEV-exploitation risks.
Gaps and Open Questions
- Where is the line between “reactive trading” and MEV-extraction?
- How do we measure profitability of DEX-based MM?
- Can we build “fair” protocols that protect LPs from JIT/MEV?
Conclusion
Market making has evolved from manual quoting to algorithm-driven strategies across both CEXs and DEXs. Today, success hinges not just on speed, but on adaptability — to changing market structure, tighter margins, and hybrid on/off-chain mechanics.
As DEXs mature beyond passive AMMs into active formats like RFQ, CLOB, and JIT, the line between traditional and decentralized markets continues to blur. For market makers, this means new tools, new risks, and new opportunities.
In this new landscape, the edge belongs not to the fastest — but to those who can read the system, react smartly, and evolve continuously.
Call to Action
If you're building MM strategies or protocols, it’s time to explore:
- RFQ for quote precision,
- CLOB for order book control,
- JIT for on-chain execution.
DeFi is no longer about “just supplying liquidity.” It’s about timing, tech, and tactics.
