Why Do Specialized Market Makers Provide Liquidity for Third-Party Tokens?

1. Profit from the Spread

Market makers profit from the bid-ask spread—the small difference between the buy and sell price.

• With high volume and good execution, even small spreads add up over time.
• The more volatile or illiquid the token, the larger the spreads can be (higher risk, higher reward).

2. Market Making Agreements (MMAs) with Projects

Many token issuers pay market makers or offer them incentives, such as:

• Discounted or vested tokens
• Monthly retainer fees
• A share of trading fees
• Early access to private rounds

✅ These deals are often formalized under a 6–12 month contract to keep liquidity healthy post-listing.

3. Building Reputation & Relationships

High-tier MMs want to maintain their status with top exchanges and projects. By supporting new assets:

• They strengthen partnerships with both projects and exchanges
• They get early access to promising tokens (sometimes before public launch)
• It positions them as reliable partners for future launches

🔹 Why Do Exchanges Provide or Support Liquidity for Third-Party Tokens?

1. Trading Volume = Revenue

Exchanges make money from trading fees. No liquidity = no trades.

• The more liquid a token, the more trades it attracts
• More volume = more fees for the exchange
• A smooth trading experience keeps users coming back

2. Attracting and Retaining Users

When an exchange lists a new token, it wants users to trade it easily.

• If there's no liquidity, it hurts the reputation of the exchange
• Exchanges often coordinate with MMs before listing to ensure liquidity is ready on Day 1

3. Competitive Advantage

In a crowded market, exchanges compete for exclusive listings and user experience.

• Offering liquid markets gives them an edge
• Some even subsidize market making (via rebates or incentives) to support less-known tokens

✅ TL;DR — What's in It for Them?

🔹 How Market Makers Provide Liquidity

1. On Centralized Exchanges (CEXs)

Market makers use trading bots and algorithms to constantly place orders on both sides of the order book:

• Buy orders (bids) at slightly below market price
• Sell orders (asks) at slightly above market price

This creates a tight bid-ask spread, allowing traders to enter/exit positions easily.

✅ Tools/Strategies:

• High-frequency trading (HFT) algorithms
• Latency arbitrage (buying low on one exchange, selling higher on another)
• Dynamic inventory balancing (managing risk between assets held)

✅ Setup:

• MMs often run API-connected bots on CEXs like Binance, OKX, Coinbase, etc.
• Exchanges may offer special accounts with lower fees, priority access, or custom APIs for MMs

2. On Decentralized Exchanges (DEXs)

On AMM-based DEXs (e.g., Uniswap, PancakeSwap, Curve), there’s no order book. Liquidity is provided through liquidity pools:

• Market makers deposit equal values of two tokens into a smart contract pool (e.g., ETH + USDC)
• Traders swap between the two assets, paying a small fee
• That fee is split among liquidity providers (LPs), including market makers

✅ Example:

Provide $50,000 worth of ETH and $50,000 worth of USDC into a Uniswap pool
→ Traders use the pool
→ MM earns a % of each trade (usually 0.3%)

⚠️ Risk:

• Impermanent loss if one token’s price changes significantly
• Front-running or MEV issues on some chains

3. On Hybrid/Order Book DEXs

Projects like dYdX or Serum (Solana) use on-chain order books, more like a CEX.
MMs here can:

• Run bots on-chain
• Quote both sides of the market using smart contracts
• Benefit from composability with other DeFi protocols

✅ Common Liquidity Tactics Used by Market Makers:

🔄 In Summary: