From Uber to digital currencies - how market makers are the best match makers around
When it comes to market makers, they’re everywhere. Without them it would be infinitely harder for buyers and sellers to be matched up around the world. They don’t always arrive at the same time in the market, and prices could ebb and flow until they do, which creates unwanted volatility. On a fundamental level market makers exist to make markets where they otherwise don’t exist. It can be as simple as creating a market for finding a ride, much like Uber or selling your goods in a peer-to-peer (P2P) shop like Etsy. Market makers even exist in the finance world to facilitate currency exchanges and stock trading.
Meet your mate
Without a market maker like Uber that matches up a driver with a rider and provides a cost estimation for the fare ahead of time, the price you pay to get to your destination will depend on a host of factors that are out of your control. Gas prices vary as they do on a daily basis from one gas station to the next and from city to city. You may also be at the mercy of your driver’s mood,
Much like Benjamin Graham’s famous Mr. Market who is easily swayed by feelings of euphoria, panic and apathy when making decisions — and we all know what long stretches of traffic can do to a well meaning human.
Mr. Market teaches us to look at the big picture and make rational decisions that can provide us and others with the best outcomes instead of being driven by fleeting conditions.
In this way, market makers play a major role in creating price stability by maintaining liquidity and providing a fluid experience for all parties. Liquidity refers to how easily a product or service can be traded at steady prices. Let’s say, you’re selling vintage furniture on Etsy. The odds of someone offering to sell you a prized designer fashion piece in exchange for one of your vintage chairs — and your acceptance of the offer in return — is highly improbable. It is much more liquid for someone to pay for goods using cash or debit card.
Making the world a smaller place
In the world of cryptocurrencies, COTI, Currency of the Internet, aims to bring together buyers and sellers through an online transaction network supported by a native digital currency that supports tens-of-thousands of transactions per second. With zero fees for buyers, low-to-zero fees for sellers, and full buyer protection, COTI combines the best of traditional payment methods with the best of digital currencies.
COTI’s market maker, a supplement to the currency exchange, will make markets by creating liquidity in the COTI token and other currencies, both digital and fiat, thereby providing a more fluid transnational experience for all network participants. By using the COTI token as a common denominator, fair and orderly markets can be maintained in a range of currencies through deep liquidity and narrow spreads.
Transactions involving straightforward currency exchanges will incur lower market-maker fees relative to those involving more complex currency exchanges. The market-maker fee is not levied on transactions that are sent and received using COTI’s native currency.
Give some to get some
When it comes to international trade, market makers become all the more necessary for facilitating currency exchanges. If you want to trade your US dollars for euros, you need a willing buyer to meet you at the same time. Market makers step into the picture in this case and are tasked with buying whatever is being sold and vice versa. In doing so, they are making a market for this specific currency exchange. They are always tasked with taking the opposite of any exchange that is being conducted, otherwise it would take a long time until a buyer and seller are matched up and liquidity would be reduced in the process.
To compensate for the risk of holding certain assets, market makers charge a spread that is known as the bid-ask spread. Let’s say someone agrees to buy your US dollars in exchange for euros, but the USD’s value begins to fall before your buyer agrees to purchase them. A market maker would prevent this by maintaining a spread on the currency pair. As an example, a market maker could buy 1 USD for 0.85 EUR (ask price) and sell for 0.90 EUR (bid price). The spread would be 0.05 EUR, and with over a million trades daily, this would add up to substantial profits to offset any risk.
Hopefully you’ve gained a better understanding of market makers and their many compelling roles. From facilitating exchanges to creating efficiency, they provide price stability and satisfy demand for buyers and sellers all around the globe.
The COTI community is continuously growing at a rapid rate. If you have any questions, you are welcome to get in touch with us on Telegram or via email. We will be providing further updates in the near future.
