Liquidity Begets Liquidity

A truer statement may not exist, especially in the crypto markets. When considering the liquidity differential between a high market capitalization token and a low market capitalization token look no further than the graph below:

There is a massive difference in the liquidity of Bitcoin and Ethereum; and the entire alt universe. The difference is noticeable when comparing the liquidity drop-off of crypto versus top U.S. stocks:

Why?

Bitcoin and Ethereum have a unique feature about them that almost no other token has: dozens of market makers. This is because of how Easy To Borrow (ETB), BTC, and ETH are. Every single high-frequency trading firm can call up an institutional lender, deposit collateral, and borrow BTC and ETH instantly. At the end of the loan’s term (generally 30, 60, or 90 days), the market maker simply has to return the same number of tokens plus interest.

Alt coins on the other hand, are incredibly Hard To Borrow (HTB).

Alt-coin Market Making Today:

Alt-coin market making is more an art than a science. Market makers that specialize in alt-coin market-making typically get a referral to a token issuer and sign a deal to receive either: (i) a free call option on the token or (ii) a fixed fee retainer per month and 0% interest loan on trading capital in the token. A major hurdle for each market maker is simply to keep up with these deals. This requires having to build out a large business development team dedicated to searching for token issuers.

Stock loan desks solved this issue decades ago in traditional finance by offering direct stock loans to market participants, specifically allowing market makers and other institutional investors the ability to go short. As we know, interest rates in stock lending are determined by whether a stock is ETB or HTB. dAMM.finance takes this a step further, bringing this access and the ability to borrow into the crypto space.

How dAMM improves the institutional lending market:

Our goal at dAMM is to allow market makers and institutional borrowers access to any token, bridging the liquidity gap between ETH, BTC, and all other tokens. Now, instead of an issuer having an arrangement with a single market maker (and being limited in the potential liquidity available), a dAMM pool enables a token issuer access to potentially a number of market makers — providing liquidity to your token; AND earning interest.

Another major benefit to using dAMM is the transparency provided by building on-chain. Token lenders have been surprised recently by the lack of transparency during times of turmoil from several major institutional lending desks. By having all loan data stored on-chain, token lenders can see exactly who is borrowing their tokens, and where they are being deposited. In the future, we plan on implementing additional features to increase transparency into token activities and the liquidity provided by market makers that use dAMM (e.g. volume tracking, +2%/-2% depths on CEX’s, and additional metrics for lenders).

If you’re a token issuer looking to boost your token’s liquidity, launch a dAMM pool.

Email us at team@damm.finance to learn more.