Author: Techub Selected Compilation
Written by: Michael Oved
Compiled by: Tia, Techub News
Earlier this year, as a major market maker was preparing for the inevitable expansion into the crypto market, I put together a roadmap for them. The opportunities here are vast and still evolving. This list is not intended to be exhaustive, but rather serves as a practical reference for trading firms seriously considering establishing or expanding their crypto business.
This is also an update to an article I wrote in 2018, as many of the protocols and conclusions mentioned back then are now outdated.
Classic Strategies: Spot vs ETF and Exchange Arbitrage
The most basic strategy in the crypto market almost entirely replicates the traditional market making model: connecting to multiple exchanges (such as Coinbase, Binance, etc.) and executing arbitrage between different trading venues. The goal is to align prices across different markets by executing arbitrage trades and efficiently allocating funds between exchanges. Prime brokerage infrastructure plays a supporting role, providing intraday loans and facilitating fast settlement. The execution layer relies on existing infrastructure optimized for low latency, but needs to be adapted to the APIs of crypto exchanges and the custody layer.
In spot vs ETF arbitrage opportunities, market makers typically participate as Authorized Participants (APs) for the primary product (e.g., iShares ETF). This role grants them "create/redeem" functionality, allowing APs to settle in cash or, under newer mechanisms, in-kind. Market makers hedge the ETF through crypto exchanges and related tools, executing trades simultaneously across multiple venues, products, currencies, and jurisdictions—areas where they already possess deep operational expertise.
RFQ Access to Web3 Products
Request for Quote (RFQ) systems are gradually becoming the mainstream model for market makers to interact directly with retail users in Web3. RFQ access takes various forms, including through Decentralized Exchanges (DEXs), Web3 product frontends, aggregators, or directly embedded in wallet interfaces. The access requirements are relatively low, primarily involving Fireblocks infrastructure for moving assets to and from counterparties, and usually permissioned API access.
DEXs designed around RFQ, such as AirSwap and 0x Matcha, are early, representative cases. In these systems, counterparties negotiate prices off-chain, while settlement is completed on-chain via smart contracts. This model retains the characteristics of traditional OTC bilateral trading while eliminating counterparty risk through atomic settlement. Market makers respond to quote requests in real-time, using signed messages and off-chain communication channels, ensuring gas efficiency, privacy, and flexibility for institutional-sized orders.
Compared to the Automated Market Maker (AMM) model, the RFQ model eliminates inherent price inefficiencies. Consequently, many AMMs have integrated RFQ quotes into their native frontends, allowing users to compare on-chain liquidity pool prices with direct quotes from market makers. Platforms like UniswapX and Jupiter aggregate liquidity from both their internal AMMs and RFQs, presenting users with a combined result when they request a quote. In practice, RFQ often wins out, so connecting and providing quotes through these interfaces is also a significant opportunity for market makers.
Aggregators like 1inch, acting as a "meta-layer" on top of existing DEXs and RFQ infrastructure, also connect directly with market makers. They send quote requests to all DEXs and market makers simultaneously and present the best option to the user. Aggregators are often directly integrated into wallets, gaining broad distribution from the start.
Wallets are evolving into complete DeFi execution gateways. Products like Metamask, Phantom, and Exodus have built-in Swap functions that aggregate quotes from both aggregators and direct market makers, effectively acting as "aggregators of aggregators." The core issue here is cost. Since wallets control user traffic, they aim to internalize as much of the spread as possible, as this is the core of their business model.
Going Multi-Chain: From Wrapped Assets to Intent Protocols, to Harbor
It's necessary to emphasize the evolution of multi-chain infrastructure, as market makers can also provide liquidity and/or execute arbitrage around these solutions. Including BTC in this should be considered the biggest opportunity in terms of trading volume and profit. Initially, "cross-chain" meant wrapping or bridging, i.e., locking assets in a smart contract on one chain and minting a representation on another. This method saw limited adoption, as users preferred holding native assets over wrapped tokens.
Intent-based protocols are a relatively new concept in the Web3 execution layer. Users submit their intent or generalized transaction goals, and market makers, known as "solvers," compete to execute these intents by finding the optimal path and/or price. Essentially, these solvers play the role of RFQ responders, with final settlement occurring on-chain, often involving multiple chains. In many ways, AirSwap can be seen as the earliest intent protocol, and we have very deep practical knowledge of its advantages and limitations.
THORChain is a significant protocol that introduces native BTC into the cross-chain system by combining an AMM model with threshold signatures and a multi-party validator set. The protocol enables direct swaps between BTC and EVM-based assets without relying on wrapped tokens or bridges. This design provides a scalable framework for native asset trading between heterogeneous chains.
Finally, @Harbor_DEX integrates and optimizes the above concepts, ultimately providing a way for market makers to directly quote for any asset (native or wrapped) on any chain within Web3 wallets. Harbor launched as a cross-chain CLOB, offering familiar APIs, deterministic price control, and native cross-chain settlement capabilities. It operates entirely as backend infrastructure, integrating directly with wallets without maintaining its own frontend or interacting directly with retail users. Once scaled, Harbor could provide market makers with a unified interface to seamlessly quote across all Web3 wallets and ecosystems.
Arbitrage Between CeFi and DeFi
Compared to traditional order books, AMMs are structurally a less price-efficient model. This inefficiency gives rise to MEV extraction and competition among bots attempting to capture arbitrage opportunities between liquidity pools and centralized markets, or to arbitrage the AMM itself in the case of sufficiently large orders.
Price discrepancies between AMMs and centralized exchanges are often significant, presenting highly attractive opportunities for many current participants. AMM pool prices frequently deviate, and market makers pull them back to reasonable levels, immediately profiting from the spread.
However, executing such strategies requires both a different way of interpreting prices compared to CLOBs and node-level infrastructure support. AMM quotes are not discrete order book levels but curves related to trade size, so market makers must dynamically calculate executable size and actual execution price before analyzing the trade. Furthermore, successful on-chain arbitrage relies on efficient blockchain infrastructure, including direct node access, optimized transaction propagation, and reliable block inclusion strategies to reduce the risk of front-running or failed transactions.
In practice, the biggest challenge is "winning the block," as multiple arbitrageurs have often identified the same opportunity. Transactions must be not only fast but also stealthy, typically broadcast through private relays or dedicated builders to avoid exposure in the public mempool and being front-run. With the right infrastructure and blockchain systems, arbitrage between CeFi and DeFi can be a substantial profit-making business.
Derivatives, Perpetuals, and Options
The decentralized derivatives market is rapidly evolving, represented by perpetual contracts (perps) and options protocols that replicate leverage and hedging tools from traditional markets. Among these protocols, Hyperliquid stands out, with its perpetual contract design balancing the supply and demand of long and short positions through a market-determined funding rate mechanism.
Hyperliquid also pioneered HLP, introducing a vault-style pool that allows users to passively participate in the profit and loss sharing of active market makers while reducing the capital requirements for market makers. Essentially, the exchange's margin system is funded by deposit vaults, allowing users to share both funding rate income and trading profits and losses. This design aligns incentives between liquidity providers, market makers, and the exchange, representing a significant innovation in decentralized leverage mechanisms.
Another important development is Ethena, which generates synthetic dollars through derivatives. Ethena's model maintains a stable asset and issues a stablecoin by simultaneously establishing a hedged position of a spot long and a perpetual short. Each user's minting or redemption action requires market makers to complete the hedge in real-time, creating continuous trading volume and arbitrage opportunities.
Expanding into the futures and options space is a natural extension of market makers' existing capabilities. Core skills such as basis management, funding rate arbitrage, inventory hedging, and capital efficiency optimization can be directly transferred to this new environment. With suitable custody and execution infrastructure, market makers can operate in these venues just as they do in traditional derivatives markets, capturing structural inefficiencies and emerging trade flows.
Token Market Making
When a new protocol token launches, it typically requires immediate liquidity provision on centralized exchanges. Market makers often enter into structured agreements with the protocol foundation or treasury. These arrangements usually take the form of "loan + options," where the market maker receives a loan of a certain amount of tokens and simultaneously receives call options allowing them to purchase tokens at a fixed strike price. For example, if the token's price doubles after launch, the market maker can exercise the option to purchase some of the borrowed tokens at the pre-agreed strike price, realizing substantial profits.
Over time, this practice may evolve or fade away due to its lack of transparency, benefiting market makers at the expense of retail investors and protocol foundations. Regardless, newly launched tokens will continue to need liquidity support, so variants of this structure are expected to persist in some form.
At Harbor, we are exploring a model that is more conducive to aligned incentives, pairing market makers directly with token teams and having them distribute liquidity through Web3 wallets rather than centralized exchanges. This approach keeps settlement on-chain, increases transparency, and allows users to trade directly with professional liquidity counterparts without relying on intermediated venues.
Regardless of the approach, there remains a huge opportunity for institutional participants to collaborate with token issuers in designing structured liquidity solutions, bringing professional market making discipline and greater transparency to this evolving segment of the crypto market.
Venture Capital and New Market Entry
In the crypto space, new markets and structural opportunities emerge approximately every 6 to 12 months, such as mining, exchanges, OTC, smart contract chains, ICOs, DEXs, yield farming, stablecoins, RFQ, perpetuals, and recently ETFs / DATs. This cycle of constant invention and reinvention has existed since Bitcoin's inception and is likely to continue as the ecosystem matures. The first movers into these new areas often capture the vast majority of the benefits, due to lower initial competition and information asymmetry.
Many crypto market makers have dedicated venture capital teams, whose purpose is not only investment itself but also to gain early insight into upcoming market structures and liquidity needs. These investments create aligned exposure to the upside of equity or tokens, as the institution can leverage its own infrastructure to drive usage and key metrics. I believe that for firms like Jump, Flow, and Wintermute, VC investment itself constitutes a significant source of their returns. In my view, establishing a strategically positioned VC fund and providing capital market capabilities, including but not limited to liquidity support, will help early teams grow, thereby enhancing the value of the VC investment. Taking Harbor as an example, our cap table includes four market makers; we brought them in at the seed stage for early alignment, and we expect them to be long-term and important partners for our protocol.
