Crypto Market Makers: How Liquidity Providers Keep Trading Smooth

Every time you buy or sell crypto on an exchange, somebody is on the other side of that trade. That somebody is almost never another retail investor — not in real time, anyway. More often, it is a market maker: a firm or protocol whose entire job is to be ready to buy when you want to sell, and sell when you want to buy. Without them, crypto markets would grind to a halt. The bid-ask spread you see on Binance, Coinbase, or Kraken? That gap exists because of market makers. Understanding how they work explains a lot about why liquid markets behave the way they do.

UK traders ask about this more than you might expect. When I looked into how British retail crypto investors approach exchange selection, the implicit question under almost every discussion was: “Why is the spread so wide here?” The answer traces straight back to market maker behaviour. Here is how it all fits together.

What Is Market Making?

A market maker is any entity that continuously quotes both a buy price and a sell price for an asset. They stand ready to transact at those prices, profiting from the spread — the small difference between what they buy at and what they sell at. On a centralised exchange, this looks like an order book filled with limit orders at prices slightly above and below the current mid-price.

The classic example: BTC is trading at £40,000. A market maker places a buy order at £39,995 and a sell order at £40,005. If you buy at £40,005 and another trader sells at £39,995, the market maker earns £10 on the round trip. Multiply that by thousands of trades per minute across dozens of pairs and the economics become clear.

Traditional finance has had professional market makers for decades. Nasdaq designated them explicitly — firms like Virtu and Citadel Securities quote prices in return for regulatory obligations to maintain continuous liquidity. Crypto adopted the same concept informally, with large trading firms running bots that provide constant two-sided quotes across every major exchange.

Why Liquidity Matters More Than You Think

Liquidity is not just a technical term. It determines whether your trade executes at the price you expected. Low liquidity means wide spreads and high slippage — the difference between the price you saw and the price you actually got. High liquidity means tight spreads and execution close to the mid-price.

During the crypto crashes of 2022, several exchanges saw liquidity evaporate in minutes. Spreads that normally sat at 0.01% ballooned to several percent as market makers pulled their orders to avoid getting stuck holding assets in freefall. This is rational behaviour for a market maker but catastrophic for a trader trying to exit quickly. One study by Kaiko estimated that liquidity on major crypto exchanges dropped by over 50% during the Terra/Luna collapse in May 2022.

For UK investors trading on regulated venues, this matters practically. Thin liquidity means your £5,000 sell order can move the market against you before it fills. Professional traders account for this with slippage estimates. Retail traders usually do not, and they pay for it.

Centralised Exchange Market Making: How It Works in Practice

On Binance, Coinbase Advanced, or Kraken Pro, market making happens through the limit order book. Professional firms run algorithms that update thousands of orders per second, constantly adjusting to new price information, volatility signals, and inventory levels. The goal is to stay delta neutral — holding as little directional exposure as possible while collecting the spread.

Exchanges incentivise this activity with tiered fee structures. Market makers who add liquidity to the book typically pay zero fees or receive rebates. Market takers — traders who place orders that execute immediately against existing liquidity — pay a small percentage. On Binance, standard maker fees start at 0.1% but drop to 0.02% or lower for high-volume providers. This fee structure is how exchanges encourage professional firms to maintain deep books.

Larger exchanges attract better market makers, which creates tighter spreads, which attracts more traders. It is a self-reinforcing cycle. This is one reason why the top three or four exchanges by volume command such a dominant share of the market — and why trading on smaller or newer exchanges often comes with noticeably worse execution quality.

Automated Market Makers: DeFi Reinvents the Model

Centralised market making requires a trusted intermediary and professional operators. DeFi took a different approach. Automated market makers — AMMs — replace the order book entirely with a smart contract and a mathematical formula.

Uniswap, launched in 2018 and now one of the most used DeFi protocols globally, popularised the constant product model. The formula is deceptively simple: x × y = k. Two token reserves multiply to a constant. When someone buys token A, the supply of A falls and the price rises automatically. No order book, no market maker firm, no human intervention. The contract sets the price based on supply and demand within its pool.

By mid-2026, Uniswap alone has processed over $2 trillion in cumulative trading volume. Curve Finance, Balancer, and dozens of other AMMs have extended the model for different asset types — stablecoins, yield-bearing assets, and more. The AMM model moved market making from a professional activity requiring capital and infrastructure to something anyone with tokens can participate in.