Makers Program

In this blog post, we explore a cornerstone of trading: liquidity. Market makers, as the primary providers of liquidity on exchanges, play a crucial role in their success. For this reason, we will share our approach to attracting and retaining market makers.

Observations

When preparing for the Mainnet Launch, we engaged with close to 100 market makers and benchmarked various makers' programs from leading centralized exchanges and relevant competitors in DeFi. Here are our insights:

There are many market making firms, and the market is thriving. Makers clearly understand their importance to the exchanges, and majority of these firms have at least one of the following requests:

• An investment in an exchange;
• A credit line, meaning the exchange provides the maker with capital for trading;
• A deal to market make for the future token of the exchange;
• Fixed retainers (some have requested unreasonably high incentives; the highest ask we encountered was $150,000 per month).

Market makers often justify their requests by claiming market dominance, noting that if we summed up the individual market shares they claim, the total would range between 200% and 300%. They also cite a congested integration pipeline, which is likely valid, and high integration costs, which are often exaggerated. For example, the highest integration cost we have encountered was reported to be $100,000, a figure that is clearly overstated. Realistically, integrating a new venue should require no more than 2-3 weeks for a single senior engineer, with costs ranging from $5,000 to $7,000. 

Our overall impression is that, despite the abundance of market makers, the industry is dominated by a few big players. These market leaders boast the strongest brands, largest capital reserves, best infrastructure and most extensive teams. Often, these players secure exclusive market-making deals with exchanges, ensuring substantial returns on their capital while leaving smaller firms at a disadvantage.

The current system of side market maker deals inherently favors a limited set of players and leads to an asymmetry of information in the market. This disruption of the natural economic balance between demand and supply ultimately results in worse conditions for traders. The abnormal returns earned by selected players are effectively subsidized by others, reflecting a redistribution that may not align with the broader market efficiency. It is interesting to note that such a construct has emerged at the heart of a market that was originally founded on the principles of transparency and decentralization.

Extended’s Approach

At Extended, we have decided not to engage in side deals with any market makers. Instead, we offer a transparent and fair program that is open to everyone, requiring no screening process or additional integration. Extended will ensure that all market making activity is openly tracked. Through this approach, we aim to create a competitive and inclusive trading environment for all participants.

Beyond offering Maker Rebates, which automatically accrue to all participants whose maker's share in total volume is at least 0.1%, we are launching a Makers Program that is open to everyone. As part of this program, makers have the choice between receiving a USDC retainer or rewards in Xpoints. Here's how it works:

Every weekly epoch, the following reward pools will be distributed among eligible makers: the Xpoints Rewards Pool and the USDC Rewards Pool. The sizes of both pools will vary on a weekly basis.

To qualify for rewards in a given market, a market maker's volume must exceed 0.5% of the total makers' volume in that market for the epoch. At the time of rewards distribution, participating makers must decide how they wish to claim their share of the rewards — either in Xpoints or in USDC. If a maker opts for USDC, their allocation of Xpoints will be burned.

The share of the pool each Maker receives is based on their Q score. Although detailed formulas are available in the Docs, in brief, the Q score is determined by the maker’s availability, the liquidity they provide within the set spread, and their traded volume. Once the UI and API endpoint for the Maker Rewards Program are launched, users will be able to view their Q scores and those of other makers live, with updates occurring every hour. Until these features are available, we will openly share weekly Q score ranking reports across markets.

The only requirement to participate in the makers' program is to inform the team of your interest, allowing us to flag your account as a maker's. This is done to limit the calculation of the Q score to interested parties only.

We believe that our newly introduced approach represents a win-win-win for the exchange, makers, and takers, as it fosters transparency, enhances liquidity, and creates a balanced and fair market.

We have already received positive feedback from a number of market makers. If you want to learn more or participate in the program, feel free to reach out to us on Discord or email us at makers@extended.exchange.