What Market Makers Actually Do in Crypto and DeFi

Join us as we speak with Jonathan Mathai, Director at G20 Strategies, about what market making really means in crypto and DeFi. This episode covers how liquidity is provided across centralized and decentralized markets, the differences between AMMs and order books, and how firms manage risk, yield, and exposure across volatile assets. Jonathan also shares insights on market structure, institutional participation, AI-driven trading tools, and what is needed for crypto markets to become more resilient and widely adopted.

Disclaimer: These podcasts are produced by the Cardano Foundation. The views expressed in these podcasts are solely those of the participants and do not represent the opinions of the Cardano Foundation. These podcasts are for informational purposes only, and are not intended to provide legal, tax, financial, or investment advice. Listeners should consult their own advisors before making these types of decisions. The Cardano Foundation does not guarantee or make any warranties as to the accuracy, timeliness, or suitability of the information in these podcasts. The Cardano Foundation has no responsibility or liability for: any claim attributable to errors, omissions, or other inaccuracies in these podcasts; or for any decision, other acts or omissions made in connection with your use of the information presented in these podcasts. Unless stated otherwise, reference to any specific product or entity does not constitute an endorsement or recommendation by the Cardano Foundation or by the participants in these podcasts.

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Transcript

SPEAKER_00 0:00

Welcome to Let's Talk Cardano, presented by the Cardano Foundation. In each episode, we delve deep into the transformative world of blockchain technology. Join us as we explore how blockchain is a reshaping industry from finance to supply chain and talk with some of the key pioneers at the forefront of this revolution. Alright here on Let's Top Cardano.

SPEAKER_01 0:26

In this episode, we speak with Jonathan Mite, director of G20 Strategies. And why liquidity, risk management, and market structure matter for healthy digital markets.

SPEAKER_02 0:40

Good morning, everyone, or good day, everyone. Welcome to Let's Talk Talk Cardano. Today I'm joined by Jonathan Maitai. He is director at G20 Strategies, one of the most renowned market makers. And today we are gonna ask him some questions about what the hell is market making and uh in especially in the context of crypto and DeFi. Uh welcome to the show, Jonathan.

SPEAKER_03 1:05

Hi, thanks for having me. Yeah, good to be here.

SPEAKER_02 1:07

Uh could you maybe tell us a little bit about your your background? I know very well your colleague, Dr. Nag, but I haven't had a chance to meet you, so I would like to know maybe your academic background. If I'm not mistaken, you also worked at UBS. I also am a former UBS uh person, so it would be nice to know a little bit your background.

SPEAKER_03 1:26

Sure then, yeah. So I grew up in the UK and I studied at in London, electrical engineering, computer science, and then financial math. After graduating, I started at UBS as a quantitative analyst in the foreign exchange area. And over some time I moved into various different trading focused roles, initially in sort of quantitative trading strategies and then in emerging market options trading. It's at that point I actually met the founder and CEO of G20, Dr. Nag, and um I left UBS to work at G20 about 10 years ago or so. And and since that point, we've kind of grown the firm from being traditional finance focused to being a mixture across asset trading trading firm. So from my background wise, started in quantitative analysis, moved into trading, and then across different asset classes.

SPEAKER_02 2:15

So and and when did you decide to join the market making for crypto? Was it how was the transition from triti to crypto? And maybe could you tell us a little bit what you do today? You do both your Yeah, that's right.

SPEAKER_03 2:27

Yeah. So interestingly, in one the last role I did at UBS was actually as a as a market maker, as an options trading market maker. In traditional finance in FX, uh that the market making role is to provide liquidity to large hedge funds and institutions and private clients in the FX options space. At G20, we started off in quantitative trading and discretionary trading. But as we saw the crypto market develop in the 2015-2016 uh region, we saw the opportunity to bring a lot of what we knew about traditional finance into crypto because it was still an emerging asset class, emerging liquidity as well. And we saw a lot of similarities between the traditional finance FX space and the crypto market as it was developing. Uh so we were able to successfully uh extend our operations from traditional finance into crypto.

SPEAKER_02 3:17

All right, and and what are some of the typical clients you have in the crypto space are crypto foundation, hedge funds, banks, what are your main clients?

SPEAKER_03 3:27

Exactly that. And and what what's what I find really interesting about the journey has been the mirror between traditional finance and the client base over there and what actually is appearing in the crypto space now as well. So let's say at UBS at a large bank, you have corporates, private clients, hedge funds, and various other institutions who want access to liquidity in various different asset classes, let's say equities or foreign exchange or whatever. It's the same thing in the crypto market, except it's a different, a slightly different client base. You have the same sort of private clients, the clients who are wealthy individuals looking for places to invest, but you also have hedge funds, you also have VCs, you have foundations and corporates all looking to gain exposure and liquidity within the crypto market as well.

SPEAKER_02 4:16

And so maybe if you could summarize in one sentence what is a market maker? What is uh Sure, yeah.

SPEAKER_03 4:23

Yeah, I th I think it's one way to think about it is that a market makers make markets work. I think when you think about market making, sometimes it gets uh blurred with the with the area of trading and and discretionary trading and lots of things. But a market maker's primary role is to make a market work by showing continuous liquidity. And I think that's what uh essentially makes creates liquidity by by having someone there, a market maker, who is there all the time to show a price at which you can buy and sell.

SPEAKER_02 4:54

The follow-up question in crypto what is uh an AMM an automated market maker?

SPEAKER_03 4:59

That's it's really interesting, actually. Yeah, so to actually do a market making role where you are a market maker, you have to solve a number of problems. Like you have to you have to be there to you have to have enough liquidity as and have enough inventory. Uh you have to have algorithms to show prices on uh at different levels, um, and you you have to think about how to maintain operations 24-7 all around the clock, right? So that's a traditional market maker or a crypto market maker. With an AMM, a lot of those, the algorithmic part of it, the automate, the way that you create an order book or the way that you create liquidity is handled by an algorithm automatically. So effectively, anyone can become a market maker. If you if you're LPing into a uh a DEX which has an AMM algorithm, you become a market maker as well. So it's uh it's an automated market maker. It takes away some of those complications or barriers to entry for in in market making by giving that access to everyone.

SPEAKER_02 5:57

Could you could you tell us a little bit on uh in your opinion, why did AMM versus order books emerged uh initially on crypto as the most dominant form of DEX? Was it because of the high transaction fees or for order books or or for other low liquidity scenarios? What was the main driver that you think that's drove things like Uniswap to to be so so popular?

SPEAKER_03 6:23

Yeah, I think the the intro the interesting thing about that that distinction, and it's a it's a it's kind of a crypto-specific thing, is that uh the liquidity when you're on a centralized exchange or an exchange in traditional finance or crypto is defined by the presence of the of different market participants putting in orders into this order book. And uh what you're what you're relying on is that they will be there, that there are these market makers or there are people around to show liquidity in these order books. A way to get around that is by defining liquidity by this algorithm, and then you get deterministic uh to liquidity based upon this algorithm instead. So instead of relying on a market maker, you rely upon people LPing into a pool, and you rely on the algorithm to give you the same a similar effect. So you it's it's not so you're not so reliant on particularly technical people who are market making. You're relying on the fact that it's a community there to LP into these pools.

SPEAKER_02 7:24

Yeah. In my mind, I have the distinction AMM versus order book. Is this the wrong dichotomy, or you see could an AMM exist in an order book environment? Because I have maybe have a bit of a naive understanding here.

SPEAKER_03 7:39

Yeah, so so I think that the way to think about it is that they're both ways of achieving the same result, which is liquidity in the market. Yeah. It's just in different you achieve it in different ways. Within the way that that market making usually works is that a market maker or a group of market makers or a group of market participants, they place orders in the market representing where they are happy to buy and sell in the market. So in very active markets, let's say in Bitcoin or in NASDAQ or in other markets across the world, you have many people who want to buy and sell at different prices across lots of a range of different prices and sizes, right? And the sum of all of those comes up with your liquid the liquidity that you have in the market, right? With an AMM, you have people collateralizing or LPing into these into this algorithm, and the algorithm decides upon where the liquidity is. Instead of people placing orders in these limit order book style markets like centralized exchanges and limit order club-based DEXs, you have an algorithm deciding upon where the liquidity is. And I think it it's a it's an it's a really interesting innovation within crypto about how to think about that. And it it kind of makes it you know what you get with a DEX. You don't really know what you get with a uh a sex because you don't know what where people are gonna place orders and so on. It's it's very much more in the market participants' hands.

SPEAKER_02 9:05

And uh how does the market making on top of an AMM look like?

SPEAKER_03 9:14

Yeah, so it really depends on what you what you're actually market making. In the end, actually, what the way that we think about it is that and if we're market making on a DEX or on a on with an AMM or with on a centralized exchange, it's all the same in in some regards, right? You you know how much collateral you're placing or inventory you're placing into the order book, and you you are you manage the risk of what positions you get on the back of this. So whether it's a DEX or whether it's a centralized exchange, we don't really distinguish too too much on our side. The how do we decide upon what we what sizes we put in and so on depends on on a risk tolerance to accumulating one of those assets or another, right? So if we are on a on a DEX which has two different stable coins, we're we're we're we're maybe apathetic to having either one. It doesn't really matter to us. If it's on something which is let's say Bitcoin versus USDT, for example, we would be depositing or managing our inventory based upon how much risk tolerance tolerance we have for accumulating Bitcoin or USDT.

SPEAKER_02 10:18

With your typical crypto client, what are the KPIs of the metrics that they are the most interested in? I would imagine on sexes would be something like slippage and and then volume on uh decentral DEXs maybe is probably the same. It's TVL and Slippage. Are there other KPIs or metrics that your clients focus on?

SPEAKER_03 10:44

Yeah, that's a that's a good question. I think the going back to like how we define what a market maker is, the the point of a market maker is to make the market work. And and then you have to define what that means for a market to work. I think one very important part of that is the uptime. So you expect a market maker to be there the whole time to be able to uh provide liquidity in in in in all kinds of situations. I I think that's a very important KPI, like uptime. From a DEX point of view, that comes pretty much part of the of the of the package, especially in a V2 style AMM. If you've got liquidity within a if you're LPing, you're providing liquidity. In a centralized market making sense, you you've got to make sure that the that you trust the market maker you're working with and they that they have a good track record of being there in difficult situations and in good times as well. So uptimes are definitely one one big characteristic. Um another thing which which we look at is the amount of volume as well, that that we see as a part of the total volume and the volume that we're able to facilitate by being there in the market. So what you generally want to see working with a market maker is that the volume trajectory is positive and that there are increased volumes. You also want to see that the market maker is a sensible proportion of the volume of the total volume. We we would aim for something like 15 to 20% of the volume, and that is a very healthy amount for a market maker to be providing. I think the the other thing that you mentioned, which is also really important, is slippage. Um, for a market to work correctly, people have to be able to buy and sell without incurring too much, without incurring too much cost. And so the the where we place the orders and how much liquidity we provide, that's something that we agree upon with each of our clients just based upon the mandates that we that we work on.

SPEAKER_02 12:33

When those clients, what is something that they ultimately would like to achieve? Uh is it also in the case of crypto, is it being listed on bigger exchanges or is it uh considered for being ETFs? Because many of those projects, they they the one emerging, right? They're they're they will try to be listed on Binance Coinbase and they need to prove their worth on other avenues. What is interesting for me becomes a bit of um a slippery slope when your project might not have a lot of organic demand and you kind of do a lot of market making to then and it's kind of you try to to to bring attention to your project through this kind of market making, it becomes a bit sketchy in a way, right? And how do you see this?

SPEAKER_03 13:19

Yeah, that's unfortunately some of the the negative sides of the crypto markets because you know that every project has a path and a goal of reaching, let's say, Binance liquidity or to be listed on all the major venues. And unfortunately that's really driven by the amount of engagement from the community and the amount of resulting volume done the right way. That's that there are there are projects who have managed that whole path of creating of creating a good product, building a good community, and then seeing the tr the trajectory on the centralized exchanges and other places. But there are like you like you mentioned, unfortunately bad characters as well, which try to artificially create this distraction, which results in in some of the challenges that we have in crypto. Um I I think a lot of projects want that trajectory. And I think what we try to advise upon, apart from being market makers and and and providing the technology and the capability to show markets, is a thought process around how do you grow liquidity and what trajectory do you take to achieve that. So we we generally work with a lot of our clients on on that roadmap and and how do we scale from a starting point to uh an end result where they're listed everywhere. Well, that typically some of the things that we think about as an example, we make a distinction that like DEXs and the the native DEXs for projects tend to be for the community. But that they're not generally where the volume is traded. So generally speaking, to have large volumes, you have to look at centralized venues from um uh Bybit, Coinbase, OKX, and Binance as well. Those are where the volume is traded. And so generally speaking, the community wants to see a strong DeFi presence in their decks, but the in order to manage things like treasury and manage things like trajectory, you need to also be on centralized exchanges and also to provide access to large institutional players who tend to be more focused on those large venues.

SPEAKER_02 15:17

So once you do the market making for a project, do you it it it seems to me it gets a bit blurred aligned with being a hedge fund and a market maker? You probably not exploit but take advantage of the arbitrage to create uh similar price levels. How do you see in your in your mind the difference between a market maker and a hedge fund? Or is it is it the two things can coexist?

SPEAKER_03 15:41

Um yeah, again, very good question. So I think maybe just to pause and and give some context. I think the when you're looking at a market, let's say in the crypto market, there are a number of roles or participants in that market. So there's, for example, an exchange, Binance or Bybit or any of the other big centralized exchanges. There are market makers, people who provide liquidity, and then there are market takers, people who use that liquidity to exploit some strategy that they're looking at. And a hedge fund is an example of a market taker or a someone who takes liquidity. A market maker makes liquidity or provides liquidity, a a hedge fund will typically take liquidity. And that's that's the the primary distinction. And typically a hedge fund, their goal is to find an edge, something that works in the market that helps them to make money and to repeat that as much as they can to make returns for themselves or for their own clients. Whereas a market maker, their their job is to provide liquidity to liquidity to the market and to be there continuously that the market functions or works well. So the the distinction or the problem happens as let's say was as happened with let's say a a big exchange a few years ago which went down, where the those lines between those roles get blurred. So there was an exchange FTX, as you know, which had a proprietary trading firm and an exchange in the same firm effectively. And that's that's always a kind of a conflict of interest. But for our case, as market makers, we are acting on behalf of our clients or on behalf of ourselves to provide liquidity to the market. So we're not blurring that line in that case.

SPEAKER_02 17:21

What what does and then we we we can close the the more intro part, but does the the the typical contract look like with the let's say a crypto foundation such as the Cardano Foundation? How would the the contract look like? There would be perhaps a loan from the foundation and then there would be some sort of metrics, fees. What what how does it look like?

SPEAKER_03 17:42

Yes, I I think there isn't really a typical answer there because each what we found in our in our journey is that everyone's the way that each foundation or each individual or each participant that we work with thinks about the market is different. So there is no one size fits all. In general, the the idea is that we start with the what we're trying to solve for, what KPI we're trying to solve for. Is it more volume or is it order books or is it an amount of collateral LP'd into a DEX or whatever? We start off with that goal and then we work backwards from that into what contract makes sense. Like you said, a loan is is often part of the picture, but there are there are times that we are market making from our own collateral, from our own firm's balances, from our own balance sheet. So there is no one size at all, but there are there are loans and that are as part of these deals often and various other ways of incentivizing the market maker to do the job. I think one thing to bear in mind is that market making, as I've explained, is a service that we do to try and provide liquidity to the market. So it requires some incentivization or coverage of the costs that we incur as that as part of that process.

SPEAKER_02 18:51

One of the topics I wanted to cover with you is about yield and yield strategies, farming, fees, harvesting, and and and and whatnot. Could you define what yield is in a couple of sentences?

SPEAKER_03 19:03

Yeah, so yield, so yield is not something that's new to crypto. It's it's something that's been around for a very long time. And and if you think about it, yield just means the return on deploying capital. And it can be and when you think of the word yield, the first thing that comes to mind, especially from a traditional finance point of view, is bonds or fixed income. So it's it's a basically a return on capital deployed. So because why why should I deploy capital in a given place? I need to get something for it, right? So that that is the that's this yield. How does that yield actually occur or where does it come from? It in different markets across asset in in traditional finance and different places, there are lots of ways in which yield is is is created. And so it just depends what crypto has done is just create a new set of ways in which yield is created, or open up more access to that. Yeah.

SPEAKER_02 19:52

Yeah. Maybe uh how I see it is that there's different yields, there's different qualities, right? There's some yields are just plain, you know, dilution or inflation in a way, right? And some other yields maybe coming from protocol fees and and uh other real-world asset linked yield is this is uh real yield. Uh, do you agree or you what's what's your take on this?

SPEAKER_03 20:18

I think understanding where the yield comes from is really important and the sustainability of that yield is is really important. I think that's you're alluding to as well. Um if you don't know where the yield's coming from, you you uh you've got to you've got to wonder what where it you know where it's coming from and how sustainable it is. I think one person said if you don't know where it's coming from, then you are the yield. Um so yeah, I think understanding what what the mechanism for that yield is uh is is important in any of those things.

SPEAKER_02 20:46

It seems to be a race today between project and DeFi protocols to have the highest yield. And often this yield is provided artificially right through incentive programs from the reserve, from the from the treasury, and and and and perhaps this attract users, and hopefully those users are sticky or not. And and often those new projects they create their own new token, right, that they can genuinely disperse, and you see yields in the you know 30-40 percent magnitude.

SPEAKER_03 21:18

Do you think this is a a legit strategy or or what's what's uh so I think one of the big challenges of crypto, I think, is that there are so many different projects out there. And you know, if you look on CoinMarketCap, there are a thousand, two thousand different tokens traded in in across the diff across the space, maybe even more. And I think uh what what's a challenge is that a lot of people have a strong product and to it to and but that they've got to attract users to come and and experience the product in some form. So product by itself doesn't really work. Incentivization by itself doesn't really work, but you you have to have some sort of incentivizing incentivization to attract people from the the ten other different options that they have. To deploy their capital. So I think it's sometimes a necessary thing to incentivize users to come over, but it doesn't create that sort of sticky capital because people will just move on to the next opportunity. I think where where some projects have been very successful is where incentivization then meets a critical threshold of liquidity and then it becomes a community of people who are actively using that product. Hyperliquid, for example, is a good example of that. So yeah, I don't think those incentivization mechanisms are that sustainable on average. And they they result in this group of yield farmers or reward reward hunters who move from one protocol to another based upon where the best opportunities are to earn for a given period of time.

SPEAKER_02 22:52

You mentioned hyperliquid, and I think it seems to me nowadays the main driver of, let's say, a real yield or like sticky yield seems to be these perps exchanges, and there's this term I've I've heard from your colleague Nag that perpsification. So that the perps are are now the primary engine on in crypto, especially for fees. And do you agree on that? Do you do you have a view on that? Does G20 do anything on on this? Are you LPing on hyperliquid or any other perp exchange?

SPEAKER_03 23:27

The interesting thing about perps is that it reduces the barrier to entry to trading. With spot market making or spot trading, you need to have the underlying token to be able to trade. You need Bitcoin to be able to sell it. But with a PERP, you don't need that. You can have a dollar collateralization or a Bitcoin collateralization in some markets and be able to trade based upon collateral. It becomes a lot more like a futures market in traditional finance, where you're where you are margin, you're controlled by the amount of margin that you have. So it it I think there's it's it's a very valid thought process to say that perps are a very big part of the market. We're very active there ourselves as well. But I don't think it's the only market. I think that there is that the real the real market is the spot market because that's where you know people have the underlying. The perp market is a very trader-focused market. So high frequency firms and market makers and various folk who are interested in that space will be active in perps because the liquidity is large. There are many more participants, and the volumes are really large as well. So you can get things done in a quicker way.

SPEAKER_02 24:33

When you say spot market, these are you referring to the Binance, the Coinbase, or because those large exchanges which have large spot markets as well.

SPEAKER_03 24:44

You know that whoever's showing a whoever's a participant in the spot market really has the collateral. You can't fake that.

SPEAKER_02 24:51

Yes, because there, but then there you don't you don't have these yield components get that get distributed to participants in the protocol or stakers, right?

SPEAKER_03 25:00

And and uh so going back to the the the the perp market, so the the the it's an it's an interesting market because with with a uh a perp, you you need to find uh participants on either side of the of the of the perps, someone to buy the perp and someone to sell it. And to do that, the exchanges introduce these bases and and there's effectively a yield that is created out of that to make sure that the perp market functions. So that creates opportunity in the yield space, which is I I don't I wouldn't say it's risk-free. There is definitely a risk that that that people are taking on by being part of that basis trade or yield trade there.

SPEAKER_02 25:38

And when we look at the yield side of things, but maybe specifically from the stable coin angle, what's the approach of G20? Are you are you looking at it? Is there something that you're doing?

SPEAKER_03 25:51

Uh or yeah, so I think stable coins are a very interesting uh innovation within crypto that have that have really helped reduce settlement times. Uh so in traditional finance, when in the FX days that were at UBS, settlement was always T plus two and some cases T plus one. But the the innovation of stable coins and and and crypto in general is that you can have instant settlement. So I think stable coins have reduced a lot of friction in the transfer of money and the transfer of settlement or and settlements in general, um, and and made the uh made trading a much more functional in uh real-time process uh in comparison to, let's say, uh TradFi. The yields within stable coins in in crypto generally are a little bit higher than what you would get effectively on those dollars in TradFi. So there's obviously interest there to earn a higher yield. Nevertheless, the yields aren't that high compared to some of the opportunities that are available within crypto as well. So uh yes, we're interested in stablecoin yield, it's better than what you'd get in TradFi, but it's potentially not the only place that you can that a market-making firm or a trading firm could access uh opportunities within uh within crypto.

SPEAKER_02 27:02

How do you approach the let's say the currency hedging problem? Because you mentioned there's higher yield opportunities, but maybe those are denominated in uh in more exotic currencies that are not US dollar or are perhaps you know can be Ethereum, can be Cardano, can be Solana, or even smaller uh crypto projects. Do you do you do any hedging uh strategy? Do you do any yield tokenization? What's what's how do you do your risk management there?

SPEAKER_03 27:35

Yeah, so I think that that one of the primary what makes a good market maker a good trading firm is so they understand their risk at uh at any given time really well. And coming from a traditional finance background, that's what we kind of, in quotes, grew up on. Um, knowing your risk and and being able to understand how much risk you have in a given situation is what all good trading firms do. So we don't necessarily have to be delta neutral the whole time as in have no exposure, but we have to know what our exposure is and be comfortable with that. All market makers will be hedging, um, and that's part of what a market maker does. To be able to show continuous prices and to be able to continuously trade, you need to have your risk or exposure under control. And so we're we're always looking for ways of hedging. There are many ways of doing that. The market offers a really good way of hedging quickly. Uh, but there are also other ways like uh using options, for example. Um as a firm, our background actually is in traditional finance options. So using options as a way of hedging exposure as well is another great way of doing it because we're active in many different venues and across many different tokens. We can look at our gross exposure across everything and and hedge as a macro picture.

SPEAKER_02 28:45

When it comes to DeFi and you know, protocol risk or smart contract risk, do you have in in-house engineers to look at the smart contracts, the audits, and maybe quantify high risk premium or that is you know is warranted, or how how do you go about that?

SPEAKER_03 29:01

Yeah, yes, we do. Uh, I think that's essential to have um in-house expertise on a protocol. Apart from having in-house expertise, what we'll always look for is that there are certifications from third parties that that the smart contracts have been checked. But you can't always rely upon those. What is the greatest uh test of all this is time. If if something is battle tested and has has survived a long period of time, you can trust it more. And I think that's maybe the advantage that we see in traditional finance over emerging technologies and blockchain and smart contracts is that you know large exchanges, centralized exchanges in in traditional finance have been tested over time. And I think that's what we're seeing is the what we'll see is the emergence of battle-tested uh protocols and smart contracts where you where because they've gone through that various different situations have survived, and so you can trust them. That's in in in it that goes hand in hand with having engineers and having uh certification as well.

SPEAKER_02 30:00

There's uh with with pendle and and other yield splitting token tokenizer yield solution, is it also something you're using in your toolbox to to create more complex strategy and to parad hedge and the risk or or or or or leverage, right? Or betting on the risk?

SPEAKER_03 30:19

Yeah, I I think so. Leverage is an interesting thought. So as a firm, we are suspicious of of leverage in comparison to a lot of players in the market. And I think that view, a conservative view or or you know, a view that's that's backed up by years of surviving in difficult situations, you know, was was shown in on the October the 10th flash crash where the markets went haywire. I think leverage is is really what caused that. So I think the the great thing about crypto is that it opens up access to a lot of people to tools like leverage, but that it comes at the at the risk of people not really understanding what they're getting into some of the time. So I think leverage when it's used correctly is a great tool, but when it's used irresponsibly can create uh difficult situations like we saw on October the 10th. Uh, we tend to be less leveraged because you only really know what's uh what what what the real situation is when a difficult market situation happens like October the 10th.

SPEAKER_02 31:17

In terms of the the tooling and the infrastructure at the G20, could you speak a little bit about your, you know, your maybe if you have an execution engine, if maybe we could start with the TradFi part and then maybe we can speak about the differences of your infrastructure for Trad and then uh crypto.

SPEAKER_03 31:38

Yeah, sure, sure. So maybe we touch on it on a on a few different things there. So within the traditional finance area where we are very focused on the options area, we have sophisticated tools to help us look at and price options across FX and other traditional finance assets like commodities and like precious metals and soft commodities like agriculture and grains and so on. So our infrastructure there, it looks like technology that helps us price these contracts. And then there's also technology, there's also the other side of that infrastructure is around connectivity to different venues where we can trade that. So that there's kind of a pricing quant angle, and there's like an infrastructure access angle as well. Um, on the on the an interesting thing about traditional finance and potentially where crypto markets will end up at some point in the future as well, is around access to markets with credit intermediation, which allows for greater access to markets. So within the traditional finance space, you have this concept of a prime broker where you can gain access to many different venues from just one vet from one counterparty. And that works really well in places like foreign exchange, where you could be prime brokered with one large bank, but gain access to trading with many large banks through that process. In crypto, that that pro that has been a little bit slower to appear. And I think that's one of the challenges that we've seen as we're trying to port over our understanding from traditional finance into crypto, is that that credit intermediation layer is not really present as yet. It is not really done well. So liquidity tends to be, as a result, very fragmented amongst the different uh exchanges, and it it tends to be harder to move money between the different uh this is this is both for sexes and DEXs or only no no for sexes and DEXs, right? So in let's let's say, for example, if we look at a real world example, in in traditional finance, you could be prime broker, let's say, with Citibank, a large investment bank, and um by just depositing collateral with Citibank, you're able to trade with, let's say, JP Morgan or UBS or Goldman Sachs, or all of them, just through one market access, this this prime broker. It's very difficult to achieve that in crypto. Traditionally, what you would do is that you'd open accounts with Binance and JPinance and Coinbase and OKX and all the other exchanges, and then have to deposit collateral on each one of these different places. So operationally it's a lot harder in comparison to traditional uh traditional finance. There are firms which attempt to do that prime brokerage uh work, but it it's a lot more expensive than it than you'd get in in traditional finance.

SPEAKER_02 34:22

Yeah, I I I think in in DeFi there's this concept of DEX aggregator, right? I think there's uh OKX DEX or LeFi, there's others where you can just route orders are routed through many DEXs. Yeah, so you mentioned as your core tech, you have this pricing engine, then you have the let's say the connection uh layer.

SPEAKER_03 34:42

Um and then I guess the infrastructure, that's like you said, yeah, to be able to access those different markets. So it's like an a connectivity layer where we're connected to different venues or as many venues as we can. And there's a pricing layer which is which works out how to what we think the right price is, and then to be able to send orders to all these different venues. Uh and then another part of our technology and the way that we think about the market is around microstructure and macrostructure of the markets. And I think that again, that's a very interesting distinction between traditional finance and crypto. There are some quite key differences, but the underlying is kind of similar, right? So, for example, if we think about one of the points you mentioned earlier, crypto markets tend to have an inflation problem. Like there are more and more tokens in circulation, more getting unlocked. And this generally creates this top left to bottom right picture in crypto. As more supply gets distributed, more supply comes onto the market and get and gets sold. The incentives that protocols give out to attract volume and so on, they appear in the market eventually and then get sold and create downward trajectory in the price. So there's this what we call the industry TWAP, which which effectively is is pushing prices lower in in crypto. If you think about like a traditional finance market like equities, there's a industry TWAP, which is buying the market, right? For for example, pension funds and other and other structures like this, who have to deploy capital into a viable place. So you tend to see an upward trajectory in equities, which is which is quite different to the macro structure of crypto. And then there's really interesting micro structure elements in both in both places, in both crypto and equities and FX and so on, which are very similar, like volume-based techniques of working out what's going on in the market. You know, are there is this move expected or is there something unusual about it?

SPEAKER_02 36:41

And yeah, you you you mentioned price, right? And and uh intuitively I would think on on some of those projects where the VCs of foundation hold a large part of the the tokens, right, market making could even be decremental, right? Because then if there's only liquidity looking to exit, if you do market making, it's you it's gonna be very expensive. Is this a fair fair thing to say?

SPEAKER_03 37:06

I think market making by itself, when it's done correctly, is always going to improve the situation, regardless of what happens to the actual price of the token. A market maker doesn't affect the value the price of the token. It's there to support the functioning of the market. It doesn't change the price. Whereas uh the presence of the foundation or the VCs or people who hold tokens, the community as well, they affect price, like on whether they're selling into the market or whether they're extracting that's that that supply out of the market in some form. You know, buy-and-burn or buy-in stake or buy-and- and lp, different various different ways in which you can extract supply from the market.

SPEAKER_02 37:46

Going back to the to the infrastructure, do you have any additional piece of tech for the crypto space specifically and maybe the DeFi the DeFi angle?

SPEAKER_03 37:55

Yes, of course, we we have an extensive in-house uh tech that we've used that we use for our own operations and some which we expose to our clients as well. So uh we have a risk management software which we give to our client our clients, enables them to look to see their risk across different cryptos that they they own and different ways of analyzing whether they what hedging techniques would work well for them and so on. We also have techniques that enable people to understand what's what's going on in the market, one of our in-house tools, which uh looks at how extended markets are and gives gives some suggestions on whether it's a good time to hedge exposure now or whether to increase exposure and so on. Um within the DeFi space as well, we we are able to we are connected in LP for many different projects across the board in various of their native DEXs as well. So we have tools to look at our current exposures there across the board, what what the impermanent loss is and and the expected hedge costs, the expected change of positions, and so on.

SPEAKER_02 38:55

When it comes to the the challenging part of DeFi, like uh MEV or maybe some Oracle default, what's what keeps you up at night? Or maybe can you comment now on MEV, for example? Is it something that you're aware of?

SPEAKER_03 39:10

Is it something that you try to avoid in some way or the really cool thing about uh about DeFi is that it it is that it actually mirrors a lot of what you see on on the centralized and traditional world as well, but it's just a lot more exposed. You can see on-chain what's happening, and you can decipher the the steps at which uh you know someone has has exploited the uh information being available. And and I think the same thing is possible in in traditional finance as well. It it just looks a little bit different.

SPEAKER_02 39:42

Is it uh high frequency traders or is it exactly yeah?

SPEAKER_03 39:46

So it's like high frequency trading is the ability to sense a particular flow before other people have and position yourself ahead of that. So kind of uh in in a way front-running. And it this the same things have appeared in in DeFi as well, where people are able to understand what the next flow is before the the before other participants and position themselves or unposition the other the other party. So I think that that that's generally the technique, and it's a lot more transparent on-chain. You can actually work out what's going on by looking at the uh the transactions as well. So in terms of DeFi, I think it it pays to be conservative, again, in in crypto and in in in general in any market, it pays to be conservative and only do what you understand and you can see where there's an opportunity. Uh it and it and it it pays also to go to places which is which are generally safe, and it goes also to build your own infrastructure where you can, to avoid people front-running you or people seeing what you're doing ahead of the market and so on.

SPEAKER_02 40:46

Is is there is there a way you you try to prevent MEVs? You you maybe work with uh order books or so how do you see that?

SPEAKER_03 40:55

Yeah, so I think we use it we'll use a lot of our own infrastructure, and that helps us to be able to position ahead of uh attacks like this.

SPEAKER_02 41:03

When it comes to to AI, is it are you using any of the most modern AI techniques or some some agent-based uh market making techniques? Is it something in the industry that is talked about or is it it was already something many years ago that Yeah, it's it's very interesting.

SPEAKER_03 41:22

I think AI is obviously uh a game changer. We see that across the board, across different industries, and I think trading is no exception to that. And I think there are maybe three areas in which AI is really used across the board at the moment. One of them is in development. I think even traditional firms, with traditional software firms, are finding that AI now is is producing as competent coders as some of the best coders out there. I think there was a quote from a recent Mag 7 head of engineering, which said that I think it was Claude, had produced uh a solution which took their team of senior engineers many months to come up with in about an hour. So I I think we're seeing that that AI in particular is shortening the lifecycle of producing viable code to do a particular task. Um so that's one area. In programming in general, it's it's it's shortening the time to market on an idea or on a quant strategy or something like this. The second area where where AI is is used is in pricing. So a lot of what a market maker does is to understand what the price is, and that's part of the job is to be able to quote a price. Like part of the job is showing a price all the time, but if you are showing a price, then you need to know what that price is. So knowing what your price is is part of our is one of the key parts of the job. And AI can help there as well as to be able to predict or have a best guess at what you think the next price will be. Uh so that's where that's another part of where AI is used. And then this third part is around strategies. Like, can you create a strategy developed by AI where you feed it in factors which you think are going to affect the market? And can will that enable you to create a portfolio or a position which will make money in in the future? And again, that's another area which we're using as well for determining uh the next how to position ourselves better in the market. Cool. So yeah, it's a it's a very fascinating area, and I think it's going to become even more so in the next uh in the next period as well.

SPEAKER_02 43:24

When it comes to the the bit the the not so good aspect of of of market making, this is there's often spoken online about you know market manipulation or price depression of Bitcoin. Is this something real or is it just uh I I I don't buy into it because I just think markets are markets, right? And but is is there any merit to those speculation or accusations of large hedge funds or market making firms manipulating the price or is it completely unfortunate?

SPEAKER_03 44:00

I I think in any market there are always good actors, people that you trust, and there are there are also bad actors. And I think the journey in traditional finance has seen many scandals over the years from large regulated players even getting involved in in these sort of scandals as well, fund running and market manipulation and so on. So does market manipulation happen? Yes, it happens, and it happens a lot. It happens in traditional finance, and there have been lots of cases of that. In crypto as well, yes, there are there are there is market manipulation as well. That said, I I think when you look on Twitter and you see all these posts about market manipulation, I think most of the time it's not really that that. It's just the general functioning of the market. Prices tend to go in a direction just based upon a very simple rule, which is supply and demand. If there is more supply, the price is going to go lower. If there is more demand, the price is going to go higher. At a basic, a basic at a basic point or a viewpoint, that's the rule of how markets work. And nothing really, you know, manipulation is a smaller aspect of that. Where it can have where manipulation can happen, and it does happen a lot, is on lower liquidity tokens, where the supply and demand you can really influence that by uh by relatively small amounts of money. If you're trying to do the same thing in Bitcoin or let's say NASDAQ or something huge, you would it wouldn't be practical because you need a huge amount of capital distributed across many places to be able to create that effect. So does it happen? Yes. Probably not a big effect as people think. If it does happen, it's typically happening on smaller tokens, which are more susceptible to that because they're generally less liquid.

SPEAKER_02 45:45

Yeah, I I what's what I struggle with is drawing the line between volatility and and manipulation, right? If somebody is selling or buying a lot of, I don't know, Bitcoin or or you know ADA, uh the price is gonna change, right? But what is the the the difference is maybe intent, you know, I just want to change the price and take advantage of it in other venues. Maybe there's actual manipulation, but if I'm just interested in selling or buying, this is just volatility. So it's it's uh it's a bit of a difficult question.

SPEAKER_03 46:16

I think one type technique that you can use to actually distinguish is is volume. So over time you we build a picture, everyone built a picture that's transparent on what you expect the average daily volume to be. And when the volumes change or deviate from that average daily volume, you know that there's an extra player or players involved on that and and and and and so on. And typically you can look at that not just on a daily basis, but within the day as well. Is there extraordinary volume in, let's say, an awkward time of the day? The handover between the US and Asia, for example, that tends to be a low liquidity time. So if you see a spike of volume in that low liquidity period, you're you're more likely to say this is a bit of a manipulation attempt. If you see high volumes during a liquid period, like during what uh is the most liquid part of the day, the European and US time zone, you're less likely to think that's manipulation and just a general functioning of the market.

SPEAKER_02 47:15

One of the most sketchy thing now, Tonx, is the insider trading with prediction markets, right? Is with uh you know, right before Donald Trump announces tariffs or somebody plays a big bet on poly market or on a short on hyperliquid. Yeah. Are you is G20 monitoring like those whales bet on hyperliquid or or or on poly market to see if some black swan event is coming and some insider has information? I would I would guess this would be very interesting uh information to have.

SPEAKER_03 47:48

Sure. I think trying to be like I said, one of the things that market makers generally do is try and work out what the next price is. And anything that can help us determine what's going to happen next is useful for us. So we are we are monitoring as much of things as as as we can to try and determine if there's any useful information out there.

SPEAKER_02 48:09

Have you been approached by any prediction market or market maker or prediction markets to do market making there already or not yet?

SPEAKER_03 48:17

Yeah, there are there are lots of interesting things in prediction markets, and then we also believe here strongly that it's gonna be a large part of the market uh going forward as well. Uh it's grown significantly in the last year, and it gives a new way of thinking about pricing that hasn't been so prevalent before. And I I think it's it's we're actively involved at the moment and we're looking to grow that area as well within the firm. So yeah, I think it's gonna it's here to stay. Uh I think like with just like with crypto when it started, just like with traditional finance when it started, there's a there's a period where things aren't overseen very well, and insider trading and things like this can happen. Over time, as as as uh prediction markets become more used with higher volumes and more prevalent, ways of regulating and ways of of of stopping these sort of these events happening will also take place. It happened in crypto. Five, six years ago, crypto was a wild west in a similar way to prediction markets are now. And there's there's a nest there's a necessary evolution of that into a functioning market where you know people aren't getting hurt by uh insider information.

SPEAKER_02 49:24

Looking ahead, what do you think is uh needed for crypto markets to become uh more mature and and kind of replacing the the the C Fi the C Fi world?

SPEAKER_03 49:37

I think if we look at just going a little bit back to my journey within traditional finance as well. So when I started in in traditional finance a long time ago now, it we they were very much less efficient. I was in the FX world, and in FX there was many different currencies. This was just pre-the euro or just around the same time as the euro coming in in board. So there were lots of different FX markets within even within Europe. So and there was arbitrage that was manually tradable, if you're quick enough, between these different places, right? And so if you fast forward from that period in the early 2000s to the the time of of crypto, um where when crypto started really becoming an asset class in 2016 to 17 and so on, the the FX markets in that 10-year period developed a lot. They'd gone through the GFC, they'd gone through various different regulations, scandals, the volumes had exploded to what today is like a seven trillion dollars of volume a day in in FX. The arbitrages have been taken out pretty much completely in a in a traditional sense by extremely fast technology which enables ultra high liquidity and and so on. And you know, apart from that explosion of volume, there's also been an explosion of of participants and lots of different very big players. So in in in FX, for example, you have 30 maybe or 40 different investment banks of different sizes who are generally able to do the same thing, able to quote a price in euro dollar or dollar yen and so on, and provide access to the market for their for their clients across the board, right? And then on top of that, you have different liquidity providers who are not banks, non-bank uh liquidity, who also provide access to the market. And you have lots of different brokers who provide liquidity to retail customers and institutional customers uh into the market as well. So what I what you can see about traditional finance is that there's very high volume, the spreads are very compressed, and there are lots of participants. And that's a that's a good thing, it's a healthy thing for the market when there are many participants who are doing different things. In crypto, what tends to happen is that there's either a lot of people interested or no one interested. And one of the signs of maturity for crypto will be that there are more people on average interested in crypto, all parts of the cycle. I think we're gonna we're gonna get there over time. It's a new asset class, it's it's it's still relatively new. If you compare it to traditional finance, it's very new. So it will take time. And I think adoption in very many states like stable coins and RWA and payments, for example, as well, you'll see that crypto will become part of the everyday, which will mean that more participants are involved, more actual users using crypto for, let's say, to make a payment. Or there'll be uh more institutions who are looking to hold crypto as part of their balance sheet and or looking to invest in crypto and so on. And there'll be more participants like ourselves, like market makers or liquidity providers, who are active to provide that liquidity to the people, different participants as well. I think there are only very few actually in comparison to traditional finance.

SPEAKER_02 52:41

Yeah, I I see there's two two different drivers. One is the you know the Bitcoin and the store of value and and as a as an asset class crypto itself. The second is designing systems that are trustless and not needing to rely on on central player, right? And I think those two drivers will will work together to if if there's and so if there's any fix that you would want to apply to the crypto market today, would it be this access to liquidity or this accessibility through or exchanges, broker, banks, or maybe some more institutional adoption?

SPEAKER_03 53:20

Would this be the Yeah? I I think I think it's really institutional adoption, or or adopt I think maybe not institutional necessarily, but adoption in general. I I think what's happened is that in a way the the the one big difference between traditional finance and and crypto markets is that they kind of approach the problem from two different directions. In in traditional finance, you had people who are interested in making money, then creating markets and and technology to be able to facilitate that. Where and and being focused on technology as a secondary part of the idea of wanting to invest and make money. In the case of crypto, you've we started with technology. It was it was trustless blockchain technology or trustless distributed technology, which started off the crypto world, which then resulted in people wanting to express it, use it to express store of value and other things. And and I think what what that means is that while traditional finance started with adoption and moved to technology, crypto has started with technology and is trying to drive adoption. And that's hard, it takes a lot longer to get adoption.

SPEAKER_02 54:25

I see a bit of a of um a bit of hypocrisies in the, for example, in the digital asset treasury company or the ETF, right? The Bitcoin ETF kind of goes against the ethos of Bitcoin to begin with, right? You you would want this uh sensor-free and trustless piece of technology, and now you've wrapped it into a digital uh you know TradFi instrument. So it's it's it's it also creates some funny things. And the on the other the other way around is you are you are everybody's tokenizing everything, like market mak um money market funds or stocks, and so it's it's it's interesting to see now this this experimentation phase and see what's gonna stick or not.

SPEAKER_03 55:12

I think that's it, yeah. I think markets in both senses are traditional encryption. They're always they're always evolving, they're always changing. And I think we have to be ready to change with them as they evolve. Prediction markets weren't such a big deal a year ago. They are now. So you know things are changing and and uh adapting with them is is is really important.

SPEAKER_02 55:30

One last question. Do you think that that uh digital asset the treasury companies are gonna be again big in 2026 is gonna be a big part of the narrative, or the hype is gonna be a bit go down?

SPEAKER_03 55:44

I think that's uh that really depends on how the market evolves this year, just the the overall macro markets develop this year. Uh there I think there are there are the the outlook for the year is is is strong in the sense that the interest rate picture is rates are getting reduced and that there's more liquidity generally in the market. We should see higher asset prices. We're seeing large moves in places like gold and silver and and other things like this, which means that there should be demand for crypto at some point on rotation, even if at the worst case, uh into that. And and a lot of the ways in which that demand for crypto will be expressed is through institutional players using things like ETFs and DATs and so on. Because it's an easier way for them to manage their holdings of these places. So I I think that like with with all things, when something's new, it becomes very potentially overhyped to start with. But over some time it becomes an actual useful product that people can invest in when there's value. So uh I think maybe the hype is is going to be limited, but the the use case is still there, and it's a useful tool in which you can invest and get exposure to the market. Should the asset class gain traction and gain uh sort of cross-acts cross-asset support as well.

SPEAKER_02 56:58

Thank you so much, Jonathan. Do you have any last word of wisdom or something that we for we forgot to cover?

SPEAKER_03 57:04

Yeah, I I no, all good. It's been really good to speak with you, and uh hopefully that's clarified a little bit about what market makers do. Uh I think uh everyone should give market makers a bit of a break. I think they are they we we uh try our best to provide liquidity into the market and make things work well. And I think on Twitter and other places we get a bit of a bad rep for things which are not our fault.

SPEAKER_02 57:27

No, it's it was very, very insightful. And maybe we can talk again in a year's time and see, maybe go look more at the actual what's happening in the market now was more of a let's say a timeless, timeless uh episode. Thank you so much, Jonathan, again. Thanks so much. Thank you. Take care.

SPEAKER_00 57:44

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