Market Making Diaries: EP3 - Cryptoshark
Market Making Diaries: EP3 - Cryptoshark
Learn from the Trader Joe Market Makers Community
Sharks don’t swim backwards
Cryptoshark’s first encounter with DeFi was rather unorthodox. In his day time job as an M&A attorney, he was part of a merger negotiation that included a blockchain project related to DeFi. This encounter sparked his interest, despite the subsequent negotiations falling through. But by that time Cryptoshark was already halfway down the rabbit hole and we all know that sharks don’t swim backwards.
The underlying concept of DeFi intrigued him and just like any shark, he found himself swimming amongst liquidity in no time. It didn’t take Cryptoshark long before he moved between ecosystems, starting on Avalanche and venturing to Polygon, BNB, ETH and also Arbitrum. His first foray into market making was with Trader Joe by utilising the unique nature of Liquidity Book’s discretized bin architecture. He’s become a bit of a pro ever since.
Q: Talk me through your daily routine as a retail market maker?
My daily routine varies depending on the markets I am actively participating in. Let me walk you through a typical day, taking into account the different approaches I adopt for various market scenarios.
For markets where I have established liquidity with wider range, such as ETH-USDC, I tend to adopt a more hands-off approach. In these cases, I have strategically set my liquidity parameters and allow the market to naturally run its course. While I keep an eye on these markets, I generally don't need to pay excessive attention to them on a daily basis.
However, for markets that offer epoch rewards or require more active management, I follow a different routine. Typically, I start my day by checking the market and assessing the performance of my positions shortly after waking up. Then, a few times during the day, I will jump in to monitor these reward-driven markets, ensuring that my positions are optimally positioned and balancing the push for fees while managing the risks associated with volatility. Before going to bed, I make it a point to review and fine-tune my positions once again to ensure that I am well-positioned for my 6 hour reboot and any potential market movements that may occur while I'm away.
Q: How many positions do you like to manage at any one time and why?
My preference is to manage only a few positions on a day-to-day basis due to my limited time to actively and effectively manage those positions. However, if I am chasing rewards, then I will manage up to 4 positions.
Q: Can you describe an instance when a sudden market event (like a flash crash or sudden price surge) affected your market making activities? How did you manage it?
In the world of crypto, market flashes and crashes are the norm. Unless there is some catalyst that makes me believe that the market will be either all up or all down from there, the best bet for me has been to not panic, consider the cause for the crash and then do nothing and give the market a little time to settle down and come back. I will also try to take advantage of those crashes and flashes and move a fixed percentage of my liquidity around so that I gradually buy (or sell) over a wide range of liquidity. For example, after a flash ETH crash, I will be left with a portion (or all) of my liquidity in ETH. I take that ETH and set it up in a one sided Bid-Ask shape with a wide range so that when the market eventually trends upward, I am selling more ETH at higher prices. If structured properly and with a little cooperation from the market, the IL from the crash is mitigated or eliminated and the fees on the way up are the cherry on top.
Q: What is your approach towards managing impermanent loss?
My approach revolves around understanding the concept of IL and assessing the circumstances surrounding it, and includes the following:
I recognize that impermanent loss is only a loss if I had intended to hold those tokens and sell them at a higher predetermined price. I also think it is important to differentiate between impermanent loss and the potential gains or losses that can arise from actively trading or rebalancing positions within the pool.
I am relatively selective on the assets and liquidity pools I participate in, considering the volatility and market conditions. By focusing on assets that have at least one stable coin, there is generally a lower likelihood of significant price divergence and I can minimize the potential impact of impermanent loss.
I regularly monitor and analyze the performance of my liquidity pool positions. This includes assessing the market, market sentiment, trading volumes, liquidity and the overall health of the pool. By staying informed, I feel I can make informed decisions on whether to continue providing liquidity or to adjust my position to mitigate the effects of impermanent loss.
The potential benefits that come with providing liquidity, such as earning transaction fees and receiving epoch rewards and incentives can help offset any impermanent losses.
For the majority of my liquidity positions, I keep a mid to long-term perspective on my investment strategy which includes the potential fees and rewards earned over an extended timeframe. Having a broad outlook helps me assess whether impermanent loss is a significant concern or merely a temporary fluctuation within the context of my investment objectives.
After a market crash or flash that causes prices to increase or decrease drastically, I take a wait and see approach rather than panicking and making any rash actions that will cause the IL to become permanent. Then I employ the strategy described above to manage IL.
Q: Reflecting on your journey as a market maker, if you had the chance to travel back in time, what key piece of advice would you offer to your past self?
One key piece of advice I would emphasize is to maintain a long-ish term perspective and avoid being hyper focused on chasing fees by constantly rebalancing liquidity in response to short-term market movements. While it is tempting to earn the most fees by reacting to every market fluctuation, doing so can lead to diminishing capital in the long run.
Q: What has been your best win and your worst loss?
My most exciting win was the day of the ARB airdrop. I knew in advance that I would be taking that drop and popping it into the ARB-ETH liquidity book. My airdrop was the lowest level at 1,250 tokens. I paired that with an equal amount of ETH and immediately deposited into the pool (total deposit approx $2,500 USD). Immediately after the deposit, I had gained $40 in fees. Within an hour I had $400 in fees and by the end of the day, I had accumulated $1,000 in fees.
Another exciting win was getting in the LOTUS-USDC pool early after release. I deposited $8,000 USD value and within 11 hours I had gained $2,400 in fees. That same day, my ETH-USDC pool was a beneficiary of traders going in and out of ETH-USDC to get in the LOTUS pools resulting in 10% fees in 24 hours.
But my best wins are not always as exciting but highlight the potential value that can be obtained by providing TJ liquidity, even in a boring market. For example, on April 24 the price of ETH at the time of my initial deposit was around $1812 and then on May 24, the price closed around $1,805. During that entire 30 days, my liquidity was spread out between $1,750 and $1,850. Just by leaving it alone, letting it ride out in my zone and accumulating fees, my initial ETH-USDC deposit grew by 17% in those 30 days, despite ETH experiencing a slight decline during that same period. In my opinion, that scenario is the ideal win.
My most painful losses were losses not attributable to the crypto market. Intrigued by the high APR, I jumped into one of the JIMBO protocol pools. JIMBO was “experimental” so shortly after my deposit, I second guessed my decision and went to pull out my liquidity. However, the JIMBO token apparently had a coding error that prevented withdrawal of my (and many others) deposit. I still have that JIMBO position but it is stuck forever and a total loss. Then, not learning from my JiMBO v1 mistake, I was stung a second time by JIMBO v2 after the hack of JIMBO v2 caused the price to go to zero. I am still holding those worthless tokens. Needless to say, I am done with experimental tokens.
Q: Any last words of inspiration / advice / learnings?
My advice is to align your risk tolerance with liquidity pools where you are comfortable potentially holding either of the paired tokens. This approach ensures that, regardless of how the market behaves, you can mitigate some of the uncertainties and disappointment that result from owning a bag of tokens you never intended to buy in the first place.
Unlock the power of DeFi, with Trader Joe
It's natural to feel daunted when venturing into DeFi market making. Remember your early days in Web3? It felt complex, but look how far you've come! By making it to this article, you're proving your resilience. Cryptoshark's approach exemplifies that a pragmatic strategy towards market making can unlock the true potential of liquidity provision. Always remember to manage your risk responsibly. If you're uncertain, feel free to jump into Trader Joe's Discord and converse with one of our experienced moderators.
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