On February 21, Bybit suffered a massive security breach, losing $1.5 billion in ETH. The incident tested the team’s resilience and leadership quality and raised the bar for crisis response in the crypto space. By February 24, the cryptocurrency exchange had replenished its reserves via 447,000 ETH in emergency funding from companies such as FalconX, Galaxy Digital, and Wintermute, a market maker that itself suffered a significant hack in 2022. Wintermute lost $160 million in this hack and admirably recovered from it.
Crisis management and damage control are not synonymous, and Bybit’s decision to immediately address the matter rather than stay silent sets an example for the industry. Making sound decisions under pressure is among the many aspects of a calibrated response.
Market makers should uphold the same standards
The inception of the crypto market was the launch of Bitcoin in 2009. In contrast, the Amsterdam Stock Exchange (1602) is considered the first stock market in history. Just like the crypto market is much younger than the traditional financial market, so are its market makers. The market for digital assets remains highly volatile with comparatively low liquidity, and market makers must be more meticulous when it comes to risk management. Crypto market makers are also known as the house. The relationship between them, exchanges, and third parties is very complicated because of how challenging regulating trading processes is. Market makers remain unobligated to comply with a strict code of conduct.
Kairon Labs was established in 2019 in recognition of the lack of professional market makers in the crypto industry. It provides institutional-grade liquidity solutions, bringing sustainable liquidity, transparency, and efficiency to crypto markets. Kairon Labs has become a trusted partner for investors, exchanges, and crypto projects over the years, optimizing liquidity strategies and maintaining sustainable and fair market conditions through proprietary trading software and other advanced tools.
As a provider of ethical market-making services, Kairon Labs understands that trust and liquidity are among the cornerstones of a healthy market. Like Bybit, the market maker is rooted in transparency and commends the exchange’s leadership for upholding an elevated crisis response standard.
How market makers can help after a hack
The Bybit hack was attributed to Lazarus Group from North Korea, a pervasive and well-organized cybercrime group, and occurred despite the exchange’s strict security protocols. Indeed, some attacks are inevitable, and the response of the parties on the receiving end is paramount. Market makers can help stabilize token prices after a hack, provide liquidity for recovery efforts, and maintain listings and market access. If a hack causes panic selling and subsequent price crashes, a market maker might step in to stabilize the market, either voluntarily or under agreement with the platform. This helps preserve investor confidence and prevents total liquidity wipeout.
Sometimes, platforms negotiate with market makers to assist with recovery efforts, like issuing new tokens or holding community compensation rounds. Market makers help keep tokens liquid on exchanges if a project is hacked but continues operating.
Large, well-regulated crypto exchanges will likely require an issuer to transfer significant amounts of a token to market makers to serve as insurance against rug pulls and ensure liquidity in the market. This will prevent the price from skyrocketing due to poor liquidity, among other risks. If a leading exchange like Coinbase or Binance were to list a coin, its price would surge, and without liquidity from market makers, the spreads would be excessive. Market makers help stabilize the price until holders and farmers can move the assets to the exchange and circulate them.
Prerequisites for reliable crypto market-making services
Conscientious market makers keep the crypto market functioning properly so that exchanges, project owners, and investors can operate as intended. Unfortunately, not all crypto market makers are ethical, and their behavior has consequences. Binance recently took punitive measures against a platform involved in one-sided market making, which is against the exchange’s rules. The market maker had made a profit of $38 million from Movement’s MOVE coin, and Binance froze all proceeds to compensate users.
Market makers need an in-depth understanding of market rules, trading strategies, liquidity, and traders’ behavioral patterns before launching. They must be able to capture the tendencies and opportunities in the market to gain an edge. This process starts with researching historical and current trading data to understand the market and its inherent volatility. They can obtain market data through trading software or data providers, by communicating with other traders at trading conferences or webinars, etc.
Market makers must also keep abreast of events and news that could impact the market, such as company reports, macroeconomic data, political events, etc.
They need a stable, efficient technological platform to support real-time data and trading analysis. It must have algorithms for secure trade settlement, instant trade execution, and high-speed data transfer and processing.
Market makers require substantial capital to support trading activities and must identify its source and amount before they enter the market.
Most risks market makers face are blockchain-related. If the smart contracts are hacked, the platform could lose its assets. Market makers may need to participate in dApps or on-chain protocols to provide liquidity, where on-chain risks like low transaction speed, a fork in an L1 blockchain where the protocol sits, etc., are transferred to each party involved. Market makers must enforce strict rules to mitigate risks, but they are not responsible for hacks suffered by other parties, like exchanges. They will not recover stolen funds, patch vulnerabilities, stop ongoing attacks, or reimburse users. Unless contractually agreed, they have no obligation to intervene.
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