The Logic Behind Algorithmic Market Making: How to Use Your Token to Create Liquidity and Stability

In the current market environment where liquidity of altcoins is scarce, market makers using a call option model often choose to sell the project's tokens immediately after receiving them. This practice may seem counterintuitive, but it is actually based on a rigorous risk management strategy.

Market makers adhere to the delta-neutral principle, aiming for stable profits rather than bearing the risk of price fluctuations. The call option model itself imposes restrictions on the highest price, defining the maximum risk exposure for market makers. Considering that most projects struggle to maintain high prices over the long term, coupled with contract durations typically ranging from 12 to 24 months, selling tokens in advance may actually be a better choice. Even if individual projects experience significant appreciation after 1-2 years, the profits accumulated during the market-making process are often sufficient to offset the losses from "selling high."

Generally speaking, there are three main cooperation models between market makers and project parties:

1. Rent a market-making robot, the project party provides funds, and the market maker provides technical support.
2. Actively market-making, the project party provides tokens, and the market maker is responsible for selling and sharing revenue.
3. Bull Call Option Model, the project party provides Tokens, and the market maker provides funds and obtains the right to buy at a low price.

Taking the call option model as an example, typical market-making terms may include:

• Provide a certain depth of buy and sell orders on mainstream exchanges.
• Provide liquidity pool on DEX
• The project party provides a certain proportion of tokens as market-making resources.
• Set multiple strike prices and quantities for call options

As a market maker that strictly implements a delta-neutral strategy, the following steps will be taken after obtaining the project's Token:

1. Asset Inventory and Initial Hedging

   • Calculate the funding gap required for market making obligations
   • Immediately sell part of the Token to exchange for the necessary funds
   • Sell the remaining unhedged Token positions

2. Dynamic Hedging

   • Continuously monitor the position changes of CEX market making and DEX LP.
   • Hedge exposure in a timely manner through perpetual contracts

3. Options Strategy

   • Calculate the delta value of the options portfolio
   • Hedge options delta with perpetual contracts
   • Continuously profit from gamma scalping
   • Dynamically adjust the hedge position when the options are close to being in-the-money.

4. Exercise operation

   • Execute risk-free arbitrage when the price exceeds the strike price.
   • Buy Token by exercising and immediately sell it on the market
   • Close the hedged short position at the same time

Through this series of precise calculations and operations, market makers can maximize their risk-free returns while providing liquidity. This strategy does not rely on predicting market trends but is based on strict risk control and efficient technical execution.

For project parties, understanding the operational logic of market makers helps to formulate more reasonable cooperation terms. At the same time, it should also be recognized that seemingly favorable terms may hide carefully designed arbitrage mechanisms. In the cryptocurrency market, maintaining a sense of awe and rational thinking is crucial.