Market Making in DeFi

Profits and perils: An in-depth exploration of market making in DeFi.

In this piece we pull back the curtain on market making: we cover what market making is and what makes a sophisticated market maker. In analyzing where DEX trading volumes are concentrated, we demonstrate a simple but powerful framework that can help us understand which liquidity models work best for which kinds of markets, and where 0x RFQ fits in.

The world of decentralized exchanges (DEXes) kicked off in earnest in 2020: starting at $666 million in January 2020, monthly trading volume exploded to $68 billion by January 2021, about a 100x increase. Needless to say, the industry is still undergoing a maturation process. DEXes are innovating on their liquidity models, traders are experimenting with new trading venues including aggregators, and liquidity providers and market makers are chasing each new way to maximize their profits. In this piece, we will explore one dimension of this process: how DEX market making is continuing to evolve.

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