Cryptocurrency Market Making - How To Build A Liquid Decentralized Exchange
Iguana, an advanced anonymous currency application, will have a market maker integrated into it, and anyone can become a Liquidity Provider (LP) node. The LP nodes ensure that our decentralized exchange provides market liquidity for cryptocurrency daily trading.
The LP node will have funds on both sides: locally and on a centralized exchange. When someone buys coins through Iguana’s decentralized exchange, the funds are sent from the local wallet through an atomic swap, and then the trade is balanced (and profit is potentially made) by making an opposite trade through a central exchange.
The cryptocurrency market maker functionality will be implemented into the EasyDEX Graphic User Interface (GUI). Jl777 (James Lee) summarized it nicely on our Slack: "Since the market maker will be part of the iguana desktop app, we will decentralize the market making, and anybody can make a market with their parameters via a GUI.
The exact way to achieve this was not solved until recently when our SuperNET lead developer jl777 gave the following update:
I had been battling with how to implement the Liquidity Provider (LP) logic. Now I am on the right path, and it involves running a full market maker on an exchange so that it is in real-time making the spread on that exchange.
When a DEX request comes in, it can just adjust the net positions as appropriate, and the market maker will automatically balance the total exposure. Another advantage is that the LP market maker is a purely external application that calls iguana API so it won't affect any non-LP deployments. This separation also makes things a lot easier. I expect some minor changes will be needed in the iguana API to support this, but the layering achieved will be well worth it. To allow a low risk operating mode, I will need to add a special case of a very low activity market maker, but that will happen after the normal market maker is reliable.
To answer the obvious question, yes, it means that part of the SuperNET iguana release will include a fully functional market maker for supported exchanges as a side effect of this. Running an active market maker will have the usual risks, so it is not for everyone.
All in all, this won’t be a very advanced market maker, it just lets you set your risk capital limits, profit margin, and activity level. As long as price doesn’t significantly rise or fall, you end up making the specified profit margin.
The first version is live on Bittrex now, and SuperNET’s lead developer jl777 is testing it.