Introduction — Limit Order Books & Market Makers
In order to better understand what Black Whale is, how it works and what the purpose of it is, I thought that it might be a good idea to start with a short recap of how limit order books work. Feel free to skip this part if you already know how they work, what market makers are and why they are so important for limit order books.
A central limit order book (CLOB) is used by most exchanges these days as preferred way of exchanging assets. The way it works is that the system matches customer bid (= buy) orders and ask (= sell) orders. The highest (“best”) bid order and the lowest (“cheapest”) ask order will represent the current market. In order to function properly a limit order book needs liquidity, which consists of limit-buy and limit-sell orders that are sitting on the order book. Trading participants who place such orders are “creating or making a market”, since they are providing the markets with liquidity for other traders. In order to incentivize traders to place limit-orders instead of market-orders, hence deepening the liquidity of an order book, exchanges usually charge a smaller fee for such orders (”maker-fee”). However, this method on its own usually does not ensure that there are enough offers at different price levels, often resulting in a large spread, which is the difference between the best bid and the best ask, and high price volatility. That’s where market makers come into play. They are placing both buy and sell orders for the same asset and by doing that ensure that the bid-ask-spread is kept as narrow as possible. This is important, because a large spread means that traders will suffer from high slippage, meaning that the price at which an order is executed does not match the price at which it was requested. This effect has a negative impact on the trading experience since it makes trading much more unpredictable.
What is Black Whale?
Two months ago, Kujira, a L1 blockchain in the Cosmos ecosystem, launched FIN, the first decentralized limit order book within Cosmos. As already mentioned before, the success of limit order books highly depends on one thing: having deep liquidity in order to ensure a great trading experience. Therefore, in order to increase the depth of FIN’s order books, the need for a market maker becomes apparent. Black Whale aims at filling this role by becoming the first decentralized market maker on Kujira in order to make FIN the best limit order book exchange in the entire Cosmos ecosystem.
What is Black Whale’s purpose?
A common way to solve the liquidity issue of thin order books on exchanges is to make use of automated trading services (bots) in combination with grid trading strategies. The idea is to place several buy and sell orders at different price levels around a set price, creating a “price grid”. As a result, traders won’t encounter high price volatility and large slippage, since the placed orders narrow down the spread as well as eat up potential price spikes. Black Whale as a Market-Maker-as-a-Service provider operates such trading bots, which place buy and sell orders on FIN for a given set of price levels, hence increasing the overall liquidity of the order books.
But increasing the liquidity and therefore enhancing trading experience on FIN isn’t the only goal of Black Whale. It also wants to give everyone the opportunity to participate in market making. Of course, everyone could either manually place buy and sell orders on FIN or operate a trading bot. However, not everyone has the skills to write one and even if one knows how to do so, one still has to maintain it and enforce security to protect one’s assets. Moreover, in order to optimize profits a substantial amount of funds is needed to capitalize on price movements. For instance, if a large sell order is placed, resulting in a big decline in price, one would need to place multiple buy orders in order to catch the lowest price, hence achieving the best possible result.
How does Black Whale work?
After understanding what Black Whale is and why there is a demand for such a service, we can now take a look at how exactly Black Whale works.
One thing that Black Whale has in common with liquidity pools is that users place their funds into one of Black Whale’s vaults at a 50:50 ratio of the current vault balance and receive a LP token in exchange (“bToken1Token2”), which represents the user’s share of that specific vault and is calculated as percentage against the total value of existing deposits in the vault. The deposited funds in those vaults are than going to be managed by trading bots who are using advanced market-making algorithms to place limit-buy and limit-sell orders on FIN above and below a target price. This process creates a grid, which consists of different orders at incrementally increasing and decreasing prices. For instance, in the picture below we can see that the bot has placed several buy orders below the current price of $12.45 as well as sell orders above it, hence the bot will automatically start buying as soon as the price reaches the predetermined levels below the set price and selling when the price of starts to increase.
Black Whale’s trading bot continuously adjusts the order price as well as the order size taking into account the current market conditions as well as the inventory size. Black Whale aims to achieve a 50:50 ratio between the two assets in each of the vaults to have the highest risk adjusted returns.
The way Black Whale generates profits is by taking advantage of the bid-ask spread. They are assuming that markets have a tendency to reverse to the mean within a given price range. When the price is close to the lower end of the predefined range, the trading bot starts buying and when the price reaches the upper end of the price range, it will start selling. Or in simply terms: the trading bot tries to buy low and sell high. Therefore, market making bots such as Black Whale are able to make profits even in sideway markets, where prices usually move within a specific range (support and resistance acting as borders) for an extend period of time without showing signs of a continuous trend.
Black Whale’s vaults are auto-compounding, meaning that profits stay within in the vault and will be used for future trades until the user decides to withdraw. Speaking of withdrawals: users can redeem their deposits together with the accumulated profits or losses at any given time, since there is no lock-up period for deposited funds. Black Whale charges a management fee of 4 % p.a. on all funds deposited into their vaults, of which 50 % will go to KUJI stakers. It has to be noted that the fee is not performance based. Therefore, it will be charged regardless of profits made or not. The transaction costs resulting from placing buying and selling orders on FIN will be covered by Black Whale and not by the user’s deposits.
As of right now, Black Whale has vaults for the following 6 token pairs: KUJI/axlUSDC, KUJI/USK, USK/axlUSDC, ATOM/USK, KUJI/ATOM, ATOM/axlUSDC.
Team
The team of Black Whale claims to have a lot of experience in equity and DeFi trading and running highly profitable bots and consists of 3 members:
- Member 1: He worked in asset management, hedge fund, and the banking industry building trading systems and web applications as a quant and full stack software developer. He built bots to arbitrage between DEXes on Terra.
- Member 2: Claims to have +10 years of experience as an IT consultant specializing in cloud solutions. He’s also highly experienced with app development, passionate about equity and DeFi trading, building bots and has strong analytical skills.
- Member 3: A full stack software developer that has many years of experience building web applications and APIs for large companies and is currently working as a cloud engineer.
From the descriptions the team looks really solid and definitely has the necessary experience and skills for creating such a complex product. Since none of them is doxed, it is not possible to verify this information.
Information channels & Transparency
Black Whale’s website consists solely of their application. There is no additional webpage containing information about what Black Whale is and how it works.
In terms of communication channels, they operate a Twitter account, have an account on medium and a sub section within the Kujira discord. In addition, they have an active Telegram group, where users can ask questions and usually receive an answer within a short period of time.
Apart from that, there are no other sources of information about Black Whale: there is no Whitepaper available, no documentation and no GitHub repository.
The Road Map & Vision
After the launch of their market making vaults, there are plans to create additional vaults for the following strategies in the future:
- Trend following strategies
- Swinging trading strategies
- Short term reversal strategies
- Enabling fund managers to run custom strategies
Conclusion
In my opinion, Kujira has the potential to become one of the best DeFi platforms within the entire IBC economy, especially considering what they have already achieved within a few months (FIN, ORCA, BLUE, USK). However, in order to be successful, new applications have to be built on top of the existing ones. Therefore, I am really excited to see that with Black Whale the first 3-party protocol has arrived at the Kujira blockchain.
With the concept of Market-Making-as-a-Service, Black Whale will deepen the liquidity of FIN’s order books which will improve the overall trading experience, hence attracting more users and therefore more liquidity, creating a positive feedback loop. Speaking of users, considering how popular automated market making services are on centralized exchanges, one can expect that Black Whale will bring in a lot of new users to the Kujira ecosystem.
Since the protocol launched only 2 weeks ago, there are still a lot of things that need to be done in order to maximize the user experience. For instance, at the moment it is quite cumbersome to tract one’s portfolio performance. In addition, the question remains, why the management fee is not based on the vault’s performance. I think that a performance-based fee structure will be beneficial for Black Whale since it shows that the team really believes in their product.
All in all, I am really impressed by the work that the team of Black Whale has done so far. It remains to be seen if their trading strategies will be profitable, but as for now the performance of the different vaults are looking really promising.
If you enjoyed reading this article, maybe consider following me here on medium and / or on Twitter, because I plan on creating more content like this is the future.
Disclaimer: Crypto trading always carries a lot of substantial risks both to the upside as well as to the downside. Therefore, Black Whale won’t be liable for any loses users may encounter when using their services.
Sources:
https://medium.com/@blackwhalemoney/frequently-asked-questions-dbfaa528154
https://medium.com/@blackwhalemoney/black-whale-community-funding-fafe8def66bc
