✏️Market-Making Example

You've heard you can make some juicy %APY on TensorSwap by market-making. But what does it mean and how does it work?

When a trader agrees to both buy and sell up to a certain number of NFTs, they're doing what's known as "market-making".

Market-makers are important because they make markets more liquid, meaning they let other traders enter/exit the market at a more favorable price.

If someone is always willing to buy NFT X at 10 SOL and sell it at 12 SOL, then any trader holding that NFT know for a fact that they can always leave the market for 10 and enter back at 12. This gives traders more confidence and they're more willing to buy the NFT.

Market makers don't work for free. That's the entire point of this article. If you're market-making - we're gonna get you paid.

Paid how much? It's entirely up to you! TensorSwap lets you configure your own market-making fee in the range of 0-25%. 💸

Below is a detailed example that steps through everything you might want to know about market-making:

  • How does it work on TensorSwap?

  • What happens as the NFT price falls/rises/stays flat?

  • What APY can you expect?

  • What are some risks involved?

Lessdo an example ✏️

The below example really zooms in on the risks/benefits of market-making.

For a detailed, step-by-step walkthrough of how to set up a market-making order check out our Market-Make tutorial.

You already know that a market-maker is someone who is offering to both buy and sell a certain number of NFTs. Sounds cool, so you decide to set up a market-making order to sell up to 10 NFTs and buy up to 10 NFTs.

You pick a linear curve with a 0.1 step, meaning:

  • each consecutive purchase your order makes will be 0.1 lower

  • each consecutive sale your order makes will be 0.1 higher

You choose a 5% fee.

You plug all those settings into TensorSwap's UI and it looks something like this:

Let's understand a bit more about what's going on here. Visually, we could represent your order as follows:

We start off in the middle (10 NFTs and 4.28 SOL).

I guess the first question you might have is - why 4.28? Seems a weird (non-round) number?

Here's the calculation:

  • You picked a starting price of 1 SOL.

  • That's your starting SALE price. Starting PURCHASE price is always one notch down, which in this case is 1 - 0.1 = 0.9 SOL.

  • But then you also picked a 5% market-making fee. That effectively means that you're going to pay 5% less for any NFTs you buy, which means your true starting purchase price is 0.9 * (1-0.05) = 0.86 SOL (you might notice the summary text below the widget conveniently points that out!)

  • Ok so now you're saying you want to buy 10 NFTs, each 0.1 lower than the previous. The total is thus:

    • (0.9 + 0.8 + 0.7 + 0.6 + 0.5 + 0.4 + 0.3 + 0.2 + 0.1 + 0) * 0.95 = 4.275 or rounded to 4.28.

The math for 18.78 looks similarish, just in the reverse direction. Will leave it as an exercise for the reader 😉

So back to the middle ("starting point" in the picture above).

  • If we move left 👈 on the chart, it means the price is decreasing. This means our order is scooping up NFTs. That's why the bottom half of the chart is green = you're buying.

  • If we move right 👉 on the chart, it means the price is increasing. This means our order is selling off NFTs. That's why the top half of the chart is red = you're selling.

At the two extremes:

  • On the very left 👈 your order has bought the 10 NFTs it wanted to buy. Add the 10 new ones to the 10 you originally had in the order, and you're now 20-NFT rich! 🎁

  • On the very right 👉 your order has sold the 10 NFTs it had for SOL. Since the price kept increasing your total is now a whopping 18.78, way more than the original 4.28. 🤑

Keep this visual representation in mind as you go through the rest of the page.

What happens as the NFT price changes?

Case 1: NFT price ranges/stays flat 〰

The price ranges from 0.9 SOL to 1.1 SOL. Let's say you're lucky, and while there's volatility other traders execute 5 buy and 5 sell trades against your order.

The result:

  • ✅ Your order is exactly where it started. It bought 5 NFTs and sold 5 NFTs. You still have 10.

  • ✅ You've made some fees 💸 in the process! For each round trip (purchase + sale) your order collected a 5% fee, meaning you made 0.25 SOL (5 round trips * 5% * 1 SOL)!

  • ✅ And don't forget you also earned some juicy reward points in the process! ⭐️

Takeaway: when the market ranges/stays flat, you make money from fees. 💸

Case 2: NFT price falls 📉

The price falls from 1 SOL to 0.5 SOL. Other traders sell into your order as the price keeps falling.

Your order now has more NFTs than before. Specifically, the following purchases occurred:

  • Your order bought its 1st NFT at 0.9

  • Your order bought its 2nd NFT at 0.8

  • Your order bought its 3rd NFT at 0.7

  • Your order bought its 4th NFT at 0.6

  • Your order bought its 5th NFT at 0.5

The result:

  • ✅ Total spent: 3.5 SOL. Your order state: 15 NFTs + 0.78 SOL. You're NFT-rich! 🎁

  • ✅ As the price fell you bought some NFTs on the cheap, precisely when you should be buying

  • ✅ You made some fees! 💸 ~0.125 to be precise (1/2 of what you'd make on 5 round trips)

  • ✅ You earned some reward points! ⭐️

Takeaway: when the market falls, you buy NFTs on the cheap. 🎁

Case 3: NFT price rises 📈

The price rises from 1 SOL to 1.5 SOL. Other traders buy from your order as the price keeps rising.

Your order now has fewer NFTs than before, but more SOL. Specifically, the following sales occurred:

  • Your order sold its 1st NFT at 1

  • Your order sold its 2nd NFT at 1.1

  • Your order sold its 3rd NFT at 1.2

  • Your order sold its 4th NFT at 1.3

  • Your order sold its 5th NFT at 1.4

The result:

  • ✅ Total earned: 6 SOL. Your order state: 5 NFTs + 10.28 SOL. You're SOL-rich! 🤑

  • ✅ As the price rose you sold some NFTs at great prices, precisely when you should be selling

  • ✅ You made some fees! 💸 ~0.125 to be precise (1/2 of what you'd make on 5 round trips)

  • ✅ You earned some reward points! ⭐️

Takeaway: when the market rises, you sell NFTs at great prices. 🤑

You see how no matter what the market does, market-makers on TensorSwap win & get paid.

What APY can you expect? 🤑

APY can be misleading so be careful when reasoning about it. If someone is promising you a huge APY, chances are they're not telling you something.

To help you think through what APY looks like on TensorSwap, we explore a real-world example in: What APY can you expect?

What are the risks involved? 🤔

That's a really important question to ask - glad you did it.

Check out What are the Risks? for a detailed rundown.

Ready to get started? 🚀

Head on over to https://www.tensor.trade/ and setup your first order!

Want guidance on HOW to set up your order?

Check out Setting up your Market-Making Order.

There you'll find a detailed overview of each of the config params & 3 simple templates for an MM pool (low risk 🟩, medium risk 🟨, and high risk 🟥).

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