Interview, Editor: Jack, BlockBeats, Vision, Metastone

Organized by: Sharon, kaori, BlockBeats

Market Maker, or Liquidity Provider (LP, Liquidity Provider), focuses on providing liquidity to the market to ensure the healthy development and stable operation of the project. In the traditional financial field, market makers are subject to strict supervision; but in the encryption industry, the development of market makers appears to be very barbaric, which has also led to this segmented industry being criticized for participating in the collapse of many projects. Middlemen earn the price difference and let the industry show false prosperity.

Once FTX exploded, a series of leading platforms suffered heavy losses, and market makers and lending became the hardest hit areas. For public investors, talking about market makers is always like playing a game of blind men and elephants. Behind all the controversies, what are market makers thinking about regulation, liquidity, and competition? At the TOKEN 2049 conference, BlockBeats had an exclusive interview with Yoann Turpin, co-founder of Wintermute, a well-known encryption industry market maker.

Wintermute is one of the most well-known market makers in the current cryptocurrency field. It has participated in the market making of dYdX, OP, BLUR, ARB, APE and other projects. Its co-founder Yoann Turpin graduated from EDHEC Business School and was the co-founder of Innovify. People, CFO, founder of Kaifuku capital and other positions.

Maintain market neutrality

How big is the current Wintermute? According to information on Wintermutes official website, as of press time, its cumulative transaction volume has exceeded US$2 trillion. According to watchers data, Wintermute’s current largest trading assets come from Ethereum, but this only accounts for less than 1% of its trading Token portfolio.

Source: watchers

BlockBeats: Please introduce yourself and Wintermute.

Yoann：We co-founded Wintermute in 2017 and now have a team of less than 100 people. Compared with 20 people in 2021, our scale has grown considerably, and this also reflects that Wintermutes form is undergoing some changes. We are working hard to become an increasingly diversified platform, we focus more on the trading market, and in 2021 we entered the derivatives market in Singapore.

We are increasingly doing OTC trading, so we have more clients, but we are really counterparty oriented and we trade on proprietary accounts. Wintermute has now developed into the worlds largest spot market maker, with our trading volume accounting for 16% to 20% of the total trading volume. In the derivatives market, we rank around the top 5 in options. We are very active in investing, and we have about 100 investment projects, which means we have about $100 million on our balance sheet in various venture capital investments.

We have also done some incubation of projects, such as Bebop. In addition, we are increasingly investing in public investments. Wintermute wants to keep the company small so it can focus on one goal. Once you have two or three businesses within the same business, things can get a little confusing, so we think the best thing to do is spin things out or have other people support the execution of the ideas. You will see some results in the next few weeks, and you will see more frameworks for incubation and mining.

As a founder, Im now focused on venture capital deals and business development deals, particularly in Asia, which means Ill be doing a lot of exploring in Korea. I’ve been to Japan, Peru earlier this year and will be going to New York next year. We will be traveling back and forth to Hong Kong and trying to explore Southeast Asian markets including Indonesia over the next few years.

avoid overexpansion

BlockBeats: How did you survive the bear market? What strategy will Wintermute adopt during the DeFi stampede liquidation process? What impact will DeFi on-chain derivatives have on the subsequent market?

Yoann：Basically when the market goes down, we start buying first because people are also actively pushing us into a position and were basically forced to go long and then buy and sell. The idea is that even though we might lose money on a long position, through the spread between the buy and sell prices, we can make enough money to cover that loss. This is how we get through bear markets.

Regarding DeFi, this is an interesting question because sometimes people misunderstand that we sell on DeFi protocols. What they see online is actually more of buying in CeFi and then putting it into DeFi, because DeFi has more liquidity. Maybe we just bought a lot of tokens on Binance or other exchanges, and then we have to sell them somewhere, and DeFi also comes out in this regard through P2P and so on. But overall we remain very market neutral. The so-called market neutrality means that we do not make money by going long or short, but by making millions of transactions every day to earn the price difference.

BlockBeats: Actually a follow-up question to this, I remember there was a huge crash in the market a few months ago and there were rumors that maybe clearing providers or market makers were leaving the market, and one of them might have been Wintermute. What do you think for this?

Yoann：As the largest liquidity provider in spot, thats what people think of us [when the big crash happens], but were actually doing pretty well. Market trends will have ups and downs, and there will be a wealth effect on the entire market. Imagine that we function very well with a team of less than 100 people. Our competitors have 200-500 employees. I think their market opportunity is probably the same or even lower. Thats because we do a good job of cash management and we dont want to overextend. While we may not have performed as well as other companies during the crypto summer, we did not overextend ourselves in 2021 and our business model survived the winter well (compared to other competitors).

Choose a Token based on its scale and long-term nature

BlockBeats: What criteria do you consider when choosing a trading token? For us, do we need to borrow from the foundation to start trading? For example, which Tokens do you like? Any preferences? What are the assets for which you have decided to become a market maker and provide liquidity?

Yoann：Obviously, this is more akin to a partnership where we borrow assets from the foundation and we hope that the interests of all parties will be aligned and we dont want to take too high a percentage of the fully diluted value. So we need to borrow at least $2 to $3 million in some kind of token to have an impact on a business level. But we also dont want to borrow more than 2 to 3% of FDV, so when we choose, the size of the project must be large enough. Basically, the FDV of the projects we choose needs to be more than US$100 million. If they are already listed, they need to have a strong presence on the exchange. Often people come to us because they need a reputable market maker to help them list on other exchanges.

Our trading volume on some exchanges can reach 10%, 20%, 30% or even 60%. This is a close partnership with the exchange. The standard is that most T 1 teams will provide liquidity. We just need to make sure the team is up to good standards and that theyre committed to building for the long term. At the same time, there are also commercial considerations, which require sufficient transaction potential or sufficient existing transactions.

BlockBeats: Can you still make money in extreme situations? For example, in the event of a sharp price drop?

Yoann：In the event of a sharp price drop, we usually have enough structure to be able to profit from it, but a sharp price drop is basically bad for everyone. Because the sharp price drop meant some people were liquidated, these funds were essentially lost. But you see this happening even in traditional finance. (In bad times) we see government balance sheets growing just like they did then. So basically the better we do, the less impact liquidations have on the market, I mean its a balance, but also the better prices that come into the market.

Moral self-discipline realizes self-regulation

The feud with DWF Labs

In the market maker segment, in addition to Wintermute, we have to mention one of its competitors, DWF Labs. The two companies also staged a mutual exchange of words in March this year. DWF Labs accused Wintermute of instigating the blockchain media The Block discredited himself, and Wintermute questioned DWF Labs’ bad intentions and potential safety hazards. Yoann also responded to this, believing that DWF Labs treats over-the-counter transactions as investments, which is inherently problematic.

Related ReadingDWF Labs and Wintermute are fighting each other over the air? List of market making projects of the two major market makers》

BlockBeats: What are your thoughts on DWF Labs? Because I know you guys have a lot of issues with their methods. Do you think this is market manipulation? Do you think they are market makers?

Yoann：They are not market makers in our terminology, but where they confuse a lot of people is that they declare what are essentially over-the-counter transactions as investments. People often think that investing is always about the long term, whereas simply trading is more about the short term. But if you announce an investment and then sell it immediately after the announcement, its difficult to (consider it an investment). In many ways, this is the nature of the open and nearly permissionless system we live in. There are also more obvious cases involving various injunctions and fundraising. Like, you see people randomly sending cryptocurrencies to effect something (bad), and for no good reason.

I think its better to keep the system open and then people should become more and more aware of where to send their funds. I think (the industry) needs some light regulation because you definitely don’t want bad actors. In reality, this just repeats some of the mistakes of traditional finance, such as excluding many people from banking. So the crypto industry needs to strike a balance, and this balance will eventually be reached over time. Thats why we set out. Self-regulation through moral self-discipline?

The biggest criticism of market makers in the market is that there are a large number of people in this industry who manipulate the market instead of providing liquidity to guide the development of a conscientious market. Wintermute prefers to position itself as a liquidity provider rather than a market maker. At the same time, Wintermute currently implements self-regulation through company-wide ethical self-discipline.

Stay away from the U.S. market and avoid regulatory issues

BlockBeats: The next question is about regulation. If the SEC tightens regulation and starts to focus on tokens or NFTs, will this fundamentally change Web3? Id like to know your thoughts on this.

Yoann：In 2021, we didnt deal with the SEC at all, so we made a conscious decision to register as a spot trade in the UK; and in the UK, they made it clear that they didnt want to offer derivatives to retailers, so we did that completely by locating our derivatives business in Singapore. Avoid this risk. But on the U.S. side, we have almost no business because essentially all business activity happens outside the U.S. So we in many ways intentionally avoided that (SEC regulation) issue, and were actually more focused on Asia now, hence the move to Singapore.

Positioning as a liquidity provider rather than a market maker

BlockBeats: Another thing about regulation is that in traditional finance, the role of market makers is highly regulated; but in crypto, many market makers are somewhat unregulated, and they also work with exchanges. So can you talk about the regulation of market makers in the crypto industry?

Yoann：Generally speaking, those who are unethical, whether in terms of brand development or business expansion, will be exposed and will not end well. Generally speaking, our decision to run a very consciously ethical business, to do the most ethical thing we can, goes beyond what is legal and what is illegal. Everything we do is legal, but beyond that, just because something is not illegal does not mean it is correct, so we will pay more attention to the consistency of long-term interests and other aspects.

The reality is that theres a lot of education that needs to be done in the crypto space, which is very time-consuming and very difficult, and some of the work I do now is making sure were not misunderstood. We have largely stopped using the term “market maker” to describe ourselves, we only use “liquidity provider”, which is completely true in traditional finance as well.

There may be a point of confusion in the crypto space, because liquidity providers are sometimes viewed as “LPs in more passive DeFi AMM pools”, but in fact a lot of what we do is liquidity provision and help with price discovery. , that is, trying to find the true price of a certain Token at any time. Some people who claim to be market makers actually make no effort to help find the true pricing of tokens, which is completely opposite to the ecosystem. But I think these problems will be slowly resolved over time. (The opportunity for resolution) depends on its own hard-core competitiveness and the ability to run its business honestly and correctly.

Of course, you cant ask everyone to maintain high moral values ​​or make everyone follow the rules. We have this (ethical) requirement for our team. Internally, we obviously do that and hold people to pretty high standards. But what about the other participants? For competitors, we just have a rule that basically divides competitors into good and bad, and we dont judge people too quickly because reality is often more complicated and more nuanced than what people say. Gray attributes.

So we think that for good competitors, we co-invest with them. For example, if we borrow funds from a foundation and they need another liquidity provider to provide liquidity for their tokens, we will sometimes recommend other competitors to each other. So there is competition in that sense. But only those that we feel have been around long enough and can actually get the job done, and in most cases have synergies, will be included in what we consider to be good competitors. But even within the confines of good competitors, if you dig deeper, we actually offer quite a different service. Were very engineering-focused, build-first, which is why we only have about eight people on the business development side, nine if you include me.

Solana may take over Polkadot

Yoann also talked about the future of public chains in this interview. According to defiLlama information, the current number one in terms of lock-up volume is still Ethereum, and Yoann believes that Solana is expected to replace Polygon and become the most influential public chain second to Ethereum in the future.

Source: defiLlama

BlockBeats: The final question is, we know that Concensys launched Linea, Coinbase launched Base, and Layer 2 is emerging in the market. Modular blockchain has become an important way to scale Ethereum. What are your thoughts on this trend? Do you have other ways to lay out your strategy in Layer 2 or blockchain?

Yoann：Regarding Layer 2, the disclaimer has been very clear, we have invested in almost all projects except StarkWare. Its not that StarkWare is a bad solution, its just that when we learned about StarkWare, it was already valued at $20 billion, and we were more inclined to invest at an earlier stage. In addition, due to our choice in the DeFi field, we are often invited to integrate by various Layer 1 and Layer 2 projects, because a lot of value now largely comes from transactions.

As for Coinbase, I think Coinbase has actually been interested in supporting DeFi and strengthening development in this area for many years, so Im not surprised by their move. For us, there is always a dilemma of choosing which chain to integrate and transact with. While we are commercially successful, we also face the same problem as the entire industry, which is the difficulty of finding reliable smart contract developers.

BlockBeats: Weve seen some trends back to Ethereum, and it seems like EVM compatibility is actually very critical, just because Ethereum has the largest developer community. I remember Polkadot used to have the second largest developer community, but thats no longer the case. Which do you think the next influential chain might be?

Yoann：I would say, after Polkadot, probably Solana. But even with Solana, the numbers are hard to verify because if you think about the developers of Solana, there are a lot of teams that participate in hackathons, build their first app on Solana, and then move on to build others because they think that app is not specific enough. application.

Last year, we invested in three teams that participated in hackathons on Solana and ended up developing there. So you will see many situations where it is difficult to determine the authenticity of the data. But Ethereum is arguably the leading platform in terms of building applications, although there are other teams, such as many working hard to implement Bitcoin features. So thats another aspect. Were seeing some engineering progress, but not necessarily transactional progress.