Exploring the Dynamic Approaches of a Leading Crypto Market Maker

In this interview, Mathias Beke , Partner & Co-Founder at Kairon Labs Beke recounts his transition from conventional finance to the sphere of crypto market making. With over a decade of experience and a sharp awareness of market inefficiencies, he sheds light on the hurdles and prospects within the fast-paced world of cryptocurrency. From upholding ethical standards to implementing tech advancements, he offers a thorough insight into the complexities of liquidity provision amid both bull and bear market phases.

Can you share your journey into the Web3 space? 

I began my career in traditional finance 12 years ago, working as an engineer at a bank in Belgium. By 2016, I had already dipped my toes into crypto investments as a retail investor. In 2017, I took a leap of faith, leaving my job in traditional finance to immerse myself fully in the world of Web3, fueled by my enthusiasm for trading and recognizing numerous inefficiencies in the market.

Together with my co-founder and a mutual acquaintance, we started investing in and advising various projects. We continually identified a significant need for market making within crypto, which led us to dedicate ourselves fully to this niche starting in 2019.

Towards the end of 2019, the market truly began to take form. It was a challenging journey for us; however, we remained focused on developing Kairon Labs, concentrating on market making, and aiding token projects in launching effectively and establishing their presence in the market. We've grown our team to around 50 individuals, with our core mission still revolving around liquidity provision and supporting token projects throughout their launch processes across diverse exchanges.

What methods do you employ to maintain ethical market-making practices while addressing the liquidity demands of new crypto initiatives?

Initially, we must establish what constitutes ethical market making. To me, it involves offering orders that can be executed by others while steering clear of unethical strategies. For instance, practices like wash trading are illegal in traditional finance, and we adhere to the same ethical standards in crypto. We also reject any involvement in spoofing or unauthorized order-taking.

Upholding ethical standards in market making is essential. Regardless of the market situation, providing liquidity is a must. Whether dealing with high-volume tokens such as Bitcoin and Ethereum or lesser-known coins, our approach remains consistent. While more widely traded assets have greater market players, making trading easier yet more competitive, lower-volume coins present their own complexities and less competition.

Maintaining ethical practices across the board is imperative, ensuring these principles are upheld throughout the entire liquidity provision cycle.

Do your market-making strategies differ between bull and bear markets?

While the essence of our strategies stays relatively constant, bear markets present unique challenges. In such times, inefficiencies are often less visible and harder to capitalize on. Consequently, it can become difficult to seize trading opportunities as overall volume decreases.

During bear markets, we seize the opportunity to refine and enhance our strategies, conducting thorough research and improvements. These moments are less feasible during bull markets where numerous inefficiencies abound. Although bullish conditions draw in a larger number of players, leading to heightened competition.

Our core strategies stay intact, emphasizing the importance of market comprehension to calibrate our algorithms accurately for effective liquidity provision. In times of extreme market fluctuations, it's vital for our algorithms to operate in circuit breaker mode and manage portfolio risks diligently. Therefore, we approach these conditions with extra caution, bolstering them in our systems.

Do you tailor your approach according to various cryptocurrencies?

Yes, our approach certainly varies. For instance, stablecoins require a distinct form of liquidity provision where maintaining the peg is critical. This isn't a major focus for us unless we spot inefficiencies.

With DeFi tokens, liquidity usually resides on decentralized exchanges, necessitating a different approach to identify opportunities and counterparties on-chain rather than off-chain. Your algorithms must be adept at sourcing this liquidity at a different level.

For layer-one tokens, liquidity often needs to be sourced from their native chains, which means technology-wise, we must integrate with those systems and be ready to find counterparties in that environment. It's more about the technology stack and the exact protocols you're working with.

How do market makers confront the challenges of providing liquidity for cross-chain assets and interoperability protocols?

This is undoubtedly one of our significant hurdles. In the realm of on-chain liquidity provision, especially within established protocols and blockchains, the inherent vulnerabilities of these structures or smart contracts consistently pose risks. Providing liquidity on a centralized exchange means our counterparty risk lies with the exchange itself. However, when operating on decentralized exchanges, we are collaborating with smart contracts, where the identity of the developers or their legal standings is often unclear.

Counterparty risk is a substantial concern for us, and we are exceedingly cautious in this regard. We seek to find the right balance; in situations where we know a project or blockchain well, it could justify capital deployment based on our due diligence regarding the operational team behind it. Nevertheless, the element of risk remains—after all, humans are behind the development of smart contracts, and mistakes can happen.

How has the burgeoning institutional adoption of cryptocurrencies impacted market-making practices and liquidity levels?

Institutional engagement is significant, particularly concerning higher market cap assets like Bitcoin, Ethereum, Solana, and Ripple. This influx leads to greater liquidity, an increase in counterparties, and heightened trading volumes. Generally, this influx contributes to a reduction in volatility, despite some notable spikes, like the volatile day we experienced recently.

On the downside, this decrease in volatility translates to fewer opportunities for market makers, placing an emphasis on creativity in discovering potential trades across different markets and products. Institutional interest predominately affects the top 20 crypto assets, influencing their volatility, liquidity, and necessitating an inventive approach to uncover trading advantages or alpha.

How do you navigate the need for liquidity provision alongside the risks of market manipulation?

Currently, there isn't a concrete framework to delineate market manipulation in the cryptocurrency space. Fortunately, traditional finance offers existing guidelines that we aim to replicate and adhere to. We are in the process of implementing a comprehensive trade surveillance system across all our trades to ensure our algorithms don’t inadvertently manipulate market dynamics.

Trade surveillance has proved invaluable. Even a slight adjustment in our configuration can alter trading behavior, making monitoring essential to remain within the accepted parameters established in traditional finance.

Ultimately, liquidity provision means that we are not taking over the market; we are facilitating it by providing liquidity for others to execute orders. However, we also need to place orders occasionally to hedge against risks and manage our portfolio, ensuring that we carry this out with care.

What strategies do you have in place to mitigate or alleviate the effects of flash crashes or sudden market disruptions?

Experience plays a crucial role in guiding our decisions. Our algorithms are equipped with numerous systems capable of identifying various risks, including inventory and portfolio skews, significant profit and loss drawdowns, alongside liquidations and margin thresholds, plus counterparty risks. We even actively monitor exchange outflows and trader behaviors.

For instance, if we observe substantial outflows, it prompts alerts for our traders. Events like the Jump offloading that recently occurred serve as critical triggers for us. Our algorithms come with a plethora of fail-safes and mitigations built in based on past experiences, all aimed at safeguarding our algorithms and overall portfolio.

Are you utilizing ZK proofs, or do you have alternative methods for ensuring transaction security and confidentiality?

Currently, Kairon Labs does not utilize ZK proofs for on-chain transactions. Instead, we rely on proxy blockchain distribution networks, which we leverage to safeguard our more significant transactions and execute them swiftly.

Depending on the trade specifics, we may opt to send transactions directly to miners or through distribution networks to shield them from entering the mempool. These precautions primarily focus on maintaining privacy and ensuring rapid execution.

What innovative approaches is Kairon Labs exploring to enhance its market-making capabilities?

While it might be enticing to declare that we incorporate AI, the reality is that we currently do not. We leverage AI within our development processes to enhance our operations, but we don’t employ it to refine our algorithms directly. What we do extensively use is machine learning, which enables us to conduct near real-time assessments of ongoing market conditions while ensuring our inventory skews are balanced effectively.

Bulls and Bears: Exploring Adaptive Techniques from a Leading Crypto Market Maker - Metaverse Post

Mathias Beke, Co-Founder and Partner at Kairon Labs, shares invaluable insights gained from his journey through the crypto market, emphasizing ethical conduct and cutting-edge technology in liquidity supply.

Bulls and Bears: Exploring Adaptive Techniques from a Leading Crypto Market Maker

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Mathias shares how he transitioned from conventional finance to making a mark in the crypto landscape. With a wealth of experience spanning over a decade and a sharp ability to spot market inefficiencies, he provides an insightful overview of the challenges and opportunities inherent in the rapidly changing cryptocurrency environment. His discussion covers ethical practices and technological advancements, peeling back the layers of how liquidity is supplied in both bullish and bearish markets.

Could you shed some light on your path to Web3? 

I embarked on my career in traditional finance about 12 years ago, starting as an engineer in a banking institution in Belgium. By 2016, I had begun dipping my toes into cryptocurrency investments as a retail investor. In 2017, I made the significant decision to leave my position in traditional finance and dedicate myself entirely to Web3. My motivation stemmed from a growing interest in trading and a recognition of various market inefficiencies.

Along with my current co-founder and an associate, we began investing in and consulting for different projects. We consistently observed a pressing need for market-making services in the crypto realm, prompting us to concentrate our efforts fully on this area starting in 2019.

The latter part of 2019 marked the actual beginning of our market journey. Although the road was challenging, we persevered in building Kairon Labs while honing our focus on market-making and assisting token projects in launching into the marketplace. Our team has expanded to around 50 individuals, and we remain dedicated to facilitating liquidity and supporting token projects by ensuring their successful launch across various exchanges.

How do you maintain ethical practices in market-making while fulfilling the liquidity demands of up-and-coming crypto projects?