How Coinwatch Is Exposing Market Maker Manipulation | Co-Founders Matt Jobbe & Brian Tubergen

Matt:
[0:00] Market makers are hedge funds in crypto. You know, there is, of course, a concept of a franchise business and they have sales team,

Matt:
[0:06] but ultimately they're profit driven. They're here to make money. I'm not saying that they don't care about clients. I'm not saying that they don't care about their responsibility as of providing markets, but they are not regulated like a market maker, like a Citadel is in TradFi, right? Technically, when you look at the paperwork, they're pure hedge funds.

David:
[0:24] Bankless Nation, I'm here with Brian and Matt from CoinWatch. Brian, Matt, welcome to the show.

Matt:
[0:29] Thanks for having us, David. Thanks to us for having us.

David:
[0:30] CoinWatch is probably not a name that the average listener is familiar with, but by the end of the episode, we're going to illuminate exactly what you guys are doing, because what you guys are doing are illuminating a part of the market that is very important for informed investors to be aware of. This has been a topic, market making has been a topic with a potentially or a particularly large limelight in the first half of 2025, downstream from a bunch of just controversies, debacles, drama, as it relates to toxic market making deals. With liquid tokens that have generated a bunch of hype. And so this is definitely a part of crypto's overall market structure that needs to get repaired, needs to get fixed, needs to be a little bit more orderly. And something that you guys are announcing today is definitely going to help with that. Now, I don't want to get to that part of this conversation too fast, too soon. I want to slow roll our way there to really be able to land the importance of what you guys are doing. and then we'll get to the exact product release that you guys are bringing to the table. Before we go there, I want to just educate listeners on exactly the part of the market that we are talking about. So we'll just quickly do kind of like a one-on-one on market making and how deals get inked and who is at the table when deals get inked and how deals end up looking like the way that they look so that when we talk about what you guys

David:
[1:50] are releasing today, we can talk about how that's impacted. So let's start there.

David:
[1:53] Market makers, what do they do? Why do we need them? How do they operate? How do they make money? And then why are they so ripe for toxic behavior? All of these questions are very big, but Matt, I'll throw it to you first to try and tackle this pretty big subject all in one.

Matt:
[2:07] Great questions and important to lay out the ground foundation for this conversation. So market makers, I think there was a lot of It's a caricature going around in crypto Twitter about the bad market maker who's responsible for, you know, price going down and all of the ills of any token, really price direction is always the fault of the market maker, that shadowy entity that operates in the shadows. And, you know, it's a hedge fund, it's an investment firm, it's what exactly do they do? So at the core of the definition of a market maker is really the job of providing bits and offers in an order book. That's it. That's market making. Literally putting a lot of bits, ideally as close to the made as possible and a lot of offers. And with these orders being made available in the book, now if you or me or our friends want to trade, buy or sell this token, they will meet these orders when they try to buy and sell. And that is going to give us ideally a better buying price or selling price. Without market makers, potentially these orders would not be available in the book. And as a result, we would only be facing what we call natural buyers and sellers. And guess what? natural buyers and sellers are not there every day. You know, sometimes they only trade on weekends, sometimes they only trade when the token is interesting, when the token is being talked about. But really, if you want to be able to trade whenever, in the Asian and European and American time zone, you need to have market makers in the book to provide that constant 24-7 liquidity. That's at the heart of the job of the market maker.

David:
[3:32] So going on to an exchange and I'm buying and selling a token, typically the base case is my counterparties, probably a market maker somewhere. And usually that works out for both parties because me as the buyer or seller, I'm usually getting a better deal. And then the market maker is able to equilibrate, is able to arbitrage across different venues so that they can also gain a profit by matching an order that's on one side, like on Coinbase with matching an order that is somewhere else, Binance or Hyperliquid or on chain somewhere. So usually both parties are pretty happy and that's kind of like the happy case, right?

Matt:
[4:06] That's the happy case. And also the classic image says that, well, the market maker is putting an offer that's typically above mid-price and a bid that's below mid-price. So if they do this a lot and they sell to you slightly above and they buy back from Ryan or Brian slightly below mid-price and they do that a lot, well, they make money, right? They sell high, buy low and they do that many, many times per day and that makes money.

David:
[4:26] And then the arbitrage,

Matt:
[4:26] Of course, that you just mentioned, that makes money. Everybody should be happy. Market makers are making money. Client is buying or selling at a better price than otherwise and happy days everywhere.

David:
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Matt:
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David:
[7:18] CoinGecko API, crypto's most trusted and reliable data source. And so why are market making, why is market making so ripe for toxic behavior? Because like downstream of the first half of this year, I think the term, the idea of market making has kind of become like a bad word. It's like market making, oh, you're doing something bad is like people's connotation. Really? You can get into that,

Matt:
[7:39] David, because I don't really have that connotation, but I just missed like three months in crypto. So maybe it happened while I was out.

David:
[7:44] You actually skipped this phase of the crypto market.

Matt:
[7:47] When I left, market making was neutral. There were players like Jump Capital who had bad reputations. But what happened? Maybe people don't know that story like me.

David:
[7:57] Maybe to kind of be reductive about it. The idea of market making has not not completely, but has been connotated with toxic behavior, market manipulation, extraction, down only charts and pumping pumping prices to have like insider cabal deals between founders, market makers and VCs. And so while like there's the idea of market making, which is neutral, I think specifically market making in crypto has been too closely associated with like toxic behavior. But isn't this

Matt:
[8:32] More of a symptom of the high FDB, low float types of tokens, you know, kind of like the VC type tokens? Yeah. Isn't it more that? And market makers are just kind of fulfilling the liquidity of maybe a bad deal to begin with? Or am I missing something?

David:
[8:48] I don't know. So maybe Matt, Brian, you can kind of chime in here with your guys' perspectives as to like if how like on target we are here.

Matt:
[8:55] So there's a lot to unpack here. And first, let me go back to why are market makers involved here in the first place? And then, Brian, please jump in to describe a bit more the shadier side of market making. So going back to the market maker, right? The market maker, you might think, oh, great, you know, market maker gets to buy cheap and sell high. So they make money. So everything's fine. Well, actually, it's not exactly working like that. When you look at the stock that's in the S&P 500 that trades a ton, you have basically 50-50 chance of buying and selling. So the market maker will naturally equilibrium himself. However, in crypto, that's not really the case. As you know, when something's hot, everybody wants to buy. When something's going down, everybody wants to sell. And so that means that the market maker is usually the one left holding the bag, right? Imagine being the market maker for Solana at launch six or seven years ago, and you start making markets, literally showing offers at $0.90, then $1.10, all the way to $200 a year later. You've been selling, selling, selling. Well, you're going to be losing a lot of money there, right? And so to compensate for that potential loss, the market making industry in crypto has found this structure that now makes probably 90 to 95% of the large market making deals, which is essentially the following. The client, the token, the foundation will extend to the market maker a loan of token, right? Here you go, market maker, GSR, flow traders, winter mute, you name it, right? You receive a loan of token. And the loan says at maturity, either you return to me the tokens in full, exactly the amount that I lent to you, or you return to me dollar amount.

Matt:
[10:21] That is essentially giving a call option to the market maker. And from that call option comes value, mark to market, as we call it. If you were to price that call option in a Black-Scholes model, typically they're worth between half a million dollar and many, many millions of dollars.

Matt:
[10:36] And through the option now, the market maker has a lot of power for a simple reason. If they want to sell the loan that they received, they can do so very safely. Because if the price was to keep on rallying, so they sell and the price keeps on going up and up and up, it's okay because they have a strike. They have the call option that protects them. And this is where the misbehavior come from. The very large loan means that the market maker on day one or day two or day seven are one of the only counterparty in the market that can sell in size because their job recipients are, of course, very, you know, heterogeneous. Investors are not liquid. Team is not liquid. Foundation is usually even not liquid. So only the market maker and a bunch of retail have tokens. And the call means that they can sell in size without any repercussion, without any risk to them. And this has given rise to a number of behaviors that are not directly related to providing liquidity and more so to maximizing their profit.

Matt:
[11:31] And this is where, of course, some bad things can increase in size and take an absurd proportion. And Brian, you can talk about this a little more, but about six months ago, we started to see a rise in the number of projects that were interested in looking at parallel structures to not so much provide liquidity, but really help them manage the price of their token.

Brian:
[11:53] Yeah, I mean, to provide a little bit more color, Ryan, I think your understanding is consistent with the way market making, you know, used to work this time about a year ago. But I would say, you know, a lot of projects looking at a lot of the 2024 launches, seeing sort of the down-only price action of a lot of these launches, started looking for alternatives, ways that they could sort of financially engineer price. And you're right to spot the connection between sort of low flow, high FDV, and some of the more toxic behaviors that I think David is mentioning, because they are related. You know, what projects basically started to do, in some cases, not all projects, is sort of a multi-step process that would probably be illegal in TradFi. You know, it would be considered market manipulation. And so what they would do is first they would make the float of their token really low. There would be misrepresentations about the float, of course, because, you know, crypto Twitter would be very upset if you advertise that your true float is actually 1%. So projects would start by sort of misrepresenting their float, saying that, you know, my float is 20%, when in reality, you know, it's closer to 1%.

Brian:
[13:00] Then projects would accumulate cash somehow. There's different ways that you can do this. You can sell locked tokens to liquid funds. You can get a loan, or you can partner with a shady market maker who has a balance sheet. Projects would then use the cash to sort of pump the price of their token, generating a chart that goes up and to the right with the hope that this entices retail to buy their token. Then once the project's token has reached a sufficient price, the market maker or the project itself might start dumping tokens out of their foundation to generate cash. Now, if the project is able to sell enough tokens at the top, then when the price starts dumping, which it inevitably will in one of these structures, and we can talk about why, well, they give them ammunition to buy back the float of their token. What the overall structure allows is basically projects to paint a chart. Now, during the Gensler era, this was super uncommon. No good lawyer would sign off on these types of structures. But I think during the Trump era, because people, for whatever reason, perceive that the SEC will be a lot more lax and sort of pursuing enforcement cases against projects, they're a lot more open to some of these shadier structures. Does that make sense?

Matt:
[14:14] Yeah, it totally makes sense. I guess I have one follow-up, which is like, how does this work in non-crypto markets? The function of a market maker is much different, it sounds like they're not fulfilling this sort of role. Almost how should it work? I'll jump in because I was a market maker myself in Shrad 5 for about 10 years. The way it works is that you have the volume, the trading volume is order of magnitude larger than what you would see on Qcoin or Coinbase or BitGets when you look at equity market making. And so in that case, really, the market maker makes money just by having inventory. They don't need a call option. They're not paid a call option. They're usually paid by the exchange and have very strong KPIs with the exchange, NYSE, NASDAQ, to hit those liquidity metrics, hey, you need to be,

Matt:
[14:59] Up in the, you know, in the order book, 99.99% of the time, your bid offer spread needs to be 0.01% all the time, right?

Matt:
[15:07] You need to have at least $10,000 up, you know, this far away from it. And the market maker is going to make a lot of money just trading around that flow, right? Because you're going to get a lot of buy orders and a lot of sell orders. That's not the case in crypto. Of course, people think about hype, think about big tokens, BTC and Solana and Ethereum. But very quickly, you go into the long tail, which actually doesn't trade that much. When you trade just a few million dollars per day, you're going to be bleeding money market making. And that's why market makers have typically required an incentive, an extra payment in the form of either a call option or retainer deals, which are the two main, let's say, types of deals that we see in crypto market making today. Is there regulatory reasons as well, Matt? So in addition to making it up on volume, let's say making a profitable business because equities are such higher volume, is there any regulation that basically prohibits market makers from getting into this call option type territory that's a very good question honestly like for penny stocks for example certainly you still need a market maker and yet you don't trade like like tesla stock or anything like that so right is there an extra incentive that comes in is there large retainer payments i i don't know because i wasn't i wasn't trading small cap equities but probably there is there is yeah extra extra fees coming to the market maker so that they can kind of make it make themselves whole so

David:
[16:21] You talked about one of the reasons why this dynamic exists is because tokens in crypto tend to have crazy price action. And when a market maker is market making for like Sol at 50 cents, for example, and then Sol goes up to $200 and they were selling Sol all on the way up, they're missing out on that potential gain. Why is that bad? Because they shouldn't, if they're Delta neutral and they're just selling Sol on the way up, sure, they're missing out on the price appreciation of Sol as it goes from 50 cents to $200, but... But they're not, they're market makers. They're not hedge funds. They should be missing out on the price appreciation of tokens because they get their revenue from arbitraging across exchanges. So like, why can't, why is missing out on the price increase actually all that bad if their business model is more aligned with just volume arbitrage across different venues?

Matt:
[17:15] That's a very good question. I'm smiling because all these things we hear a lot from market makers. We're not a hedge fund and, you know, we're here at Delta Neutral and we make money on arbitrage. These things are not true. Each of them. Market makers are hedge funds in crypto. You know, there is, of course, a concept of a franchise business and they have sales team, but ultimately they're profit driven. They're here to make money. I'm not saying that they don't care about clients. I'm not saying that they don't care about their responsibility as of providing markets, but they are not regulated like a market maker, like a Citadel is in Trat side, right? Technically, when you look at the paperwork, they're pure hedge fund. Making money on arbitrage, that just is not really available anymore. Sure, arbitrage is certainly available at launch and a few days post-launch and we track a lot of launch action for our clients. So we're front row looking at price differences. Really, you have the kimchi premium that pretty much happens every single time a bit and BitThumb is going to go live with the token. Apart from that, here and there, sporadically, you know, a couple of projects maybe in Q4 had like three, four, five, 10% at most arbitrage between OKEx and Bybit because of some idiosyncratic reasons that we can get into. But these things don't really happen. And then the arbitrage is tiny. So there's a very, very small amount of money to be made. And the arbitrage ban that you see, a basis point or two basis points, is hard to capture simply because everything runs in AWS.

Matt:
[18:31] This is not a co-location and you can immediately capture the price difference. No, there's a lot of risk and settlement risk and exchange custody risk. So this is actually fair value. You cannot capture that last basis point. Market makers make money if they are in the option market making business by either trading around the option, meaning when the price goes above the strike, they start to sell more, Delta hedging more. And when it goes back down below the strike of the option, they buy back whatever they sold. If you do that a lot, you're going to make money on, that's called gamma trading.

Matt:
[19:00] And or you make the right trading call and you say, actually, this is Solana, this is going to rip. So I'm not going to Delta hedge anything. I'm not going to sell any of the tokens that I have to hedge my option. I'm going to let it run. And then you don't sell at $1, you don't sell at $2, you don't sell at $50, you don't sell at $100, you sell it only all the way at the top, you make the most amount of money here. But you can make money both ways. And you can also make money on the way down simply by selling everything, by overselling, over hedging your delta, right? So then you sell the entirety of your token notional.

Matt:
[19:29] And now you have no more tokens. So you have a lot of dollars with which you can still market make, bit side, right? You don't show anything on the offer side anymore, but bit side, you can still meet your KPIs. The token goes back down because get what? But all of these tokens that have been sold, they kind of wait on the token supply, especially if you signed a very large deal, a very large token notional to your market maker. And then they wait for zero and buy back. So I'm not saying that this is very common, but certainly there is ways to make money on the way up, on the way down and on the way around the option strike. And I was an option trader for 10 years. So I've done these things at length and professionally. So yeah, it's not all arbitrage. Market makers would like to you to think that they only make money by doing something very useful for the community, which is aligning prices. That's just not true. So I think my answer to the question that I was asking

Matt:
[20:14] earlier, which is why do market makers have a bad rap right now? It's because of these charts that are being painted through this type of activity. Because they're not just market making. They're actually like playing with options, essentially. And they're painting these charts that go up quite a lot in a very short amount of time. Retail buys kind of the top or starts ticking along the top of these charts. And then price comes crashing down. and a lot of retail is left with bank holders. And over and over, we go again and again and again. Feels like a short-termism. Is this a summary of why retail investors in crypto are just so jaded and pissed off at market-making type activity?

Brian:
[20:53] Yeah, I think so. One thing I want to disambiguate between, though, is sort of the toxic market manipulation and then the normal job of liquidity provisioning, which does, in crypto, at least often require, projects to extend market makers a call option. Because these firms, Wintermute, GSR, FlowTraders, they're not in the business of manipulating markets. Matt, can you maybe explain the positive case for why market makers need a call option just to do their job?

Matt:
[21:25] I think the Solana example is just the right one. And it happens more often than not. Thankfully, you are the contracted market maker for Solana at launch back in 2019. And you start the launch, It launches on Binance at 90 cents. A year and a half later, it's at $200.

Matt:
[21:40] You need a call option to protect you because everybody's going to be buying from you. Everybody. Unlike Tesla stock, where they're buying and selling. No, everybody's going to be buying. So you're going to be selling and selling and selling. So imagine being Solana. Here you go, Amber. Here is 2 million Solana tokens for you. In one year's time, you got to give them to me. Okay, sure. Oh, but I sold them today. Oh, and I sold the token tomorrow and the day after that. So, and all the way up to $200, I showed bid prices, but nobody traded on my bid. Everybody took me on my offers. So the call option protects you in case of this giant runner up. And exactly as Brian says, it's important to really differentiate between the market makers who specialize in painting charts and what they call active market making. You always have to take this qualifier with a pinch of salt because there's no such thing as active and passive market making intratify. It's a thing made up in crypto to really say, well, these people are going to try and manage the price, which is not the point of market making. And then the very serious established market makers, still profit driven, but they're here to provide liquidity. The Wintermute, the Ember, the Oros, Keyrock, et cetera, et cetera, names I'm sure that you're very familiar with, which are never going to do that simply because, I mean, not only it's extremely unethical, but also if they get found and dragged into a lawsuit, that's it for their business, Because this is extremely bad for any investor, any potential future plans to raise money, to even IPO. I mean, this would be a huge black mark for the shop. So they want to make money, but while staying on the right side of the law or the ethics, at least, that are pretty clear.

David:
[23:03] So what I'm hearing is that this call option part of market making can be good. It can be a very strong component of creating a necessary deal between a market maker and a token. and it's also ripe for, it creates the surface area for toxic behavior. And so this same deal could be inked between a token and a market maker. And if the market maker is good, then there's positive outcomes where spot market token buyers are also happy. Or with a different market maker, it could be toxic where the outcome is that spot market token buyers are actually very unhappy because of the nature of the market maker. So there's some trust involved with the market maker in question to actually be a good actor.

David:
[23:50] And I guess you don't really know ahead of time when these deals are inked. And so there's a gray line here between market makers are supposed to be unopinionated. They're supposed to just dance around the spot. They're not supposed to have opinions about whether the market is going to go up or down. But because of crypto, because it is what it is, there needs to be this extra thing, which is the call option,

David:
[24:15] that brings on aligned market makers to do their job inside of crypto specific context. But then that also does open up the door for the barbarians at the gate to get through and then also become toxic market makers. And we don't really know until after the fact. And also it just so happens that toxic market makers have quite a lot of optionality to extract quite a lot of money. And there's this one more component that market makers might be able to

David:
[24:44] Coordinate with a founder or also perhaps with VCs and everyone can be in on it. And really just everyone is winning and retail is just the exclusive loser here. I think this is really the narrative that happened in the first half of this year. I don't know how much insight or clarity you have as to how rampant that kind of behavior was, or even maybe that's actually just a boogeyman story that retail loves to tell. Maybe you could provide some clarity, Matt. Is the whole cabal between market makers, VCs, and founders sitting down at a table to negotiate the right deal so that they can get paid from a retail buying spot? Is that a real thing? Is that a real story? Or is that mostly a boogeyman? Maybe you could tell us some examples of what's real and what's fake.

Matt:
[25:31] Sure. So first of all, we have some selection bias at CoinWatch simply because what we do is really about bringing transparency. About, you know, breaking that dynamic that is long established in crypto, which is clients lend a giant amount of tokens to market makers and market makers for a year have complete freedom as to how they're going to use these tokens. Our whole mission is to stop that, to bring accountability and transparency throughout that relationship so that market makers are actually held accountable with what they do with the tokens. That's a little aside. So because that's our job, protocols are going to try and do these deals, you know, these mercury deals to do things that are unethical and to, let's say, accelerate their price chart, they don't want third-party professional coming in and bringing transparency. On the contrary, they want as much opacity as possible. They don't want anybody to know about it except the people around the table. So we've never been invited at one of these tables. And thankfully, because quite frankly, I don't know what I would have to do with this information. But certainly what we've seen in Q1 and Q2, as Brian said earlier, was a broad repricing of the regulatory risk that you take on by exploring, let's say, more creative structures, to put it mildly. Ultimately, these structures, as far as we can see, it is really about, as Brian said, getting cash today.

Matt:
[26:49] Whatever tomorrow, or let's just sell a bunch of tokens in six months. Nobody cares because in six months, poof, that's many years from now in crypto time, right? So let's just get the cash now. And with the cash, we buy tokens and poof, token price goes up because circulating supply is small, so nobody can sell. And it's great. Are VCs happy about it? Well, I mean, sure, they can, you know, mark to market their position higher, but VCs by and large don't really have any liquid tokens to sell into that rally. What they can do is sell perps, but from our experience, and of course, we work closely with big name VCs, but these guys are not really trading perps. You know, maybe they have one guy doing the liquid fund on the side, but, and this person, they buy a LOG token. It's probably because they think it's a good discount. It's interesting.

Matt:
[27:30] But by and large, VCs are not going to try and do these things because these structures are, by design, very short term. And the more they get done, the more short term they become. You know, before you had six months before the unlock. Now you have three weeks before the perp market catches on and the price crashes. So the VC is like, wait a minute, I'm investing in one year. I don't care about the price now. I care about the price in one year. So let's not do that. Certainly market makers, market makers, let's call them active market makers because they love to give them some disc titles. So let's leave them with that. Active market makers go around all conferences and go and talk to every founder and says, look, we did active market making on this token price. It's the only token that's up in this category, right? Don't you want your token price to go up? Work with us. And so founders really, for them, you can kind of see because they don't come from finance. They're not market experts. A lot of them see price as a problem that you can engineer yourself out of, just like a bug on your landing page. And so they're like, oh, yeah, I'd rather have a higher price. I can actually get my price go higher. Let's do it. And it's really toxic, right? And generally in finance, you have two rules. The first one is the Wall Street Journal rule. If whatever you do, you're not comfortable having it on the front page of the Wall Street Journal, don't do it. And the market is always right.

Matt:
[28:42] So you can do, you can get the price in a certain direction for a certain amount of time. At the end of the day, the market will go where it wants to go. Full stop. And usually, of course, these things are not zero sum, right? A lot of people lose a lot of money there. So yeah, that's kind of where we are today. And in my opinion, this whole change of, call it vibe, comes from the fact that people are like, oh, we're never going to get sued. So let's just try new things.

David:
[29:06] Okay. So in this example, VCs can actually get kind of like the short end of the stick as well because they're locked up. So it actually can just be a coordinated deal between, this is in the unhappy case. This is in the nefarious case. It's not all cases, but in the nefarious case, it can be a coordinated deal between founding team members, people with very large token supplies on the team side of things and the market maker. And these two parties can come together, create a deal where they all kind of understand, wink, wink, that this token is not going to be valuable in 12 plus months. But in the short term, they can just do negotiated extraction where the team is still vested, but the market maker is this imbued entity that gets this supply of tokens, according to the foundation. They can market make with those tokens, extract many dollars by controlling the price. Because when you have so much control of the total float, then you get to basically pick what the price is. You get to pick the price that spot market buyers buy in at, and that money turns into reserves that the foundation has, that the market has, that these two entities can split and then go their happy ways with mansions and Lambos. And then VCs actually don't get anything, and retail investors also don't get anything.

Matt:
[30:19] Certainly.

David:
[30:20] And so this is the unhappy case. Ryan, this is what we were talking about, the negative connotation that market makers have been given in the first half of this year.

Matt:
[30:29] And to be fair, I want to believe that founders have no, you know, they're not thinking, oh, in one year's time, it's worth zero, so I'm going to sell everything. I want to believe that Rushi was actually doing this because he thought genuinely it was good for his price. I don't know, but I really hope so. You know, I kind of want to give the benefit of the doubt to the guy. But certainly the end result is extremely bad because once the shape, you know, once the chart looks like one of these now pretty famous, you know, lock token deal charts, there are quite a few around in Q1 and Q2, that's it. Credibility is gone. Your ability to close any new of these deals is gone. Fundraise. Let's not even talk about it. Your community is going to be like, wait a minute, we were up 150%. Now we're down 10 on the year.

Matt:
[31:05] Nothing has changed. What exactly happened? So it is quite regrettable. The good news is that I think the tide is shifting. The pendulum is swinging back and people now realize that, okay, this is actually extremely short term and I'm going to completely destroy the future of the project because yeah, I'm going to make a few people happy for a few weeks, but that's just what I'm getting while burning millions of dollars in cash.

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David:
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Matt:
[33:39] All right. So let's rewind a little bit, right? We're back in 2018. So I was 10 years a market maker in traditional finance and trading options. So the oil book at Barclays and pretty, pretty tired of that. And I was looking for something else to do. It was 2018. And guess what? Bitcoin was up a lot. And I start to look at it and like, well, this is brilliant, right? And so I started, I wanted to stop trading and to do something else with my life. And I'm like, okay, I made a bit of money so I can take my time and explore and maybe do like everybody else, do an MBA or just explore this thing that's called crypto. There was this company named CoinList in New York also who was hiring. And I was like, hey guys, like I'm this trader guy and I'm interested in Bitcoin. And like, how about we, you know, just let me interview. And so CoinList was super nice and they hired me as a PM. I had no idea what a product was, right? All my life I'd been on a trading floor, buying and selling. It's the only thing I knew how to do.

Matt:
[34:31] And so, you know, Brian, one of the co-founders of CoinList, quickly, you know, we started to get along. We're about 20 in the surface. And one thing that CoinList was doing really well, back then was token sales. Still today, token sales. So Filecoin and Solana and Flow and Salo and all these projects who do token sales on CoinList. And so I was kind of the trader guy sitting in the corner looking for something to do and, you know, what was my job exactly? And so one day, you know, a few of these token sales projects came to me and said, hey, look, we are about to launch on exchange. We're being told we need a market making deal. Back then it was basically jump and GSR. That was it, right? And so we have a term sheet for a market making deal. Do you mind looking at it? And so I'm like, okay, sure. And so that's what got me started. So I negotiated the first Solana market making deal and then Flow and then Filecoin and Selo, et cetera, et cetera. The idea back then, the end goal was, hey, I'm going to negotiate your market making deal and help you get a better option because, oh my God, what I was seeing in those term sheets was just a fell of my chair. But in exchange for that, you are going to ask your market makers to also provide liquidity to CoinList Exchange, not just to Binance and Kraken and Coinbase. So that was, of course, very, that was a lot of value for CoinList because liquidity is expensive and they were not paying for it.

Matt:
[35:37] And so then I left CoinList and Brian also left CoinList and we kind of went our own ways. I went to Coinbase and Dapper. Brian worked on a number of on-chain protocols as an engineer. And one day I get hit up by Andreessen and Andreessen tells me, hey, we heard about what you were doing at CoinList, you know, helping projects not get completely freezed by the market makers. Would you mind helping some of our protocols who have this problem very much now? That's three years later, three years after I quit CoinList. And I'm like, well, yeah, sure. I can do it on the weekend, you know, because I have a full-time job now. And so I start to do it on weekends and WorldCoin was the client that they were talking about. And so I start to advise WorldCoin and then more and more and more projects came. I'm like, okay, I should really stop doing whatever I'm doing at Tapper Labs back then. And of course, the NFT wave had by then crested. And I hit up Brian. I'm like, Brian, let's build this. You know, I can do the advisory, but I need to be able to track market makers to see what they're doing because I can negotiate the best deal in the world, have a really good option with really great liquidity. If we don't make sure that market makers deliver what they promised, this time is wasted, right? What is the point? And so that was a split of responsibility. I was advising and Brian was building the product. And so that's the genesis story of CoinWatch. That's three years ago now. Now we're 10 people, about four engineers. The rest is your product and operations and myself still doing very much the account management.

Matt:
[36:54] And the place of CoinWatch in the market today is really, we help some of the biggest projects negotiate better market making deals with their market makers. Deal that makes sense, deal that are appropriately sized for the liquidity that they get and deals that our clients can get out of if something goes wrong. You'd be pretty shocked to read term sheets where essentially the market maker is like, yeah, yeah, yeah. So if we, you know, if we don't do things right, well, you know, you're just going to have to wait a year to get back your loan. And we still keep the options. Like, what kind of remedy is that?

Matt:
[37:28] It's really quite crazy. I still, I still, yeah, sometimes have a heart attack like when I read some term sheets that clients sign before we get involved. So that's the story and the purpose that we felt, negotiating and tracking. We've done this for some of the largest projects out there from Morpho to Babylon and Eigenlayer. And I'm just being careful because I know some of them are very confidential.

Brian:
[37:53] Optimism, Aptos. Yeah. If I may correct the timeline a little bit, Matt, the first projects we worked with were like Optimism and Aptos. And at that point, what happened is all the other top PCs who I knew through my network as a founder, basically heard that we could provide this service. And so we started advising all of their portfolio companies. Yeah, that's kind of the genesis of Pornwatch. You know, I know the WorldCoin sale was really controversial. I mean, ironically, they didn't, not the WorldCoin sale, rather the WorldCoin token launch. You know, ironically, they didn't really follow a standard market maker structure, didn't really follow our structure. But yeah, Matt was advising them in the background here and there.

Matt:
[38:28] Yeah, and then tracking, of course, was always the big piece. And tracking was always extremely hard for a simple reason. Ryan, David, go on Binance right now and look at the price of Bitcoin. It's a beautiful thing. But tell me who's doing what in this order book. You don't know. Wintermute, GSR, Amber, Kirog, you have no idea. Same for us. We had the same access. And so because of that, we crafted the deal, but the deal was essentially, well, MarketMaker, as long as liquidity is good on Bybit, we're going to assume it's you. And congratulations. But hey, we had no idea. It could be Bybit being very liquid because Bybit has a lot of users. or it could be that market maker was working hard and vice versa. If liquidity was bad, well, was it the fault of GSR or flow traders or Oros? Whose fault was it? And so we were faced with that wall that prevented us from connecting the deal that was made to the work provided by the market maker. And this is kind of, of course, a segue to the product that we are now launching that solves this issue. That's a longstanding issue and that we're so happy that we finally managed to to bring to market. Yeah.

David:
[39:30] Yeah. We'll pause here for dramatic effect. Talk to us about the products that you guys are releasing. I'll prime the listener with the phrase, sunlight is the best disinfectant. I think the thing that you guys are really doing is you're bringing sunlight into a part of the market that the market has never had before. Investors who want to be informed just haven't had the information available to them, the tools available to them to really see what's going on and peer behind the curtain. So what is the sunlight? What's the mechanism that you guys are bringing to the table that is becoming a tool in the tool belt for informed investors to be more informed?

Matt:
[40:09] I'll let the architect of the product take over because it's always his build.

Brian:
[40:13] The high level pitch for the product is basically that CoinWatch Track, which is what this thing is called, allows projects to see what their market makers are doing in real time, 100% verified using market maker API keys. So this enables projects to basically hold their market makers accountable and ensure they get what they paid for.

David:
[40:34] How were they getting transparency before? Was it completely trust-based as you hand over the tokens and then you kind of vibe the volume on Binance or by bit exactly what Matt was just saying and like hope that it kind of checks out. And if it checks out close enough, then you're happy. And if it doesn't check out, not nearly close enough, than you, I don't know what you would do, but like, how would they verify that the market makers was actually following through on their obligations prior to this product?

Brian:
[41:00] Yeah, there wasn't a really good way. You know, often the obligations would be defined in terms of, you know, the aggregate sort of depth in the order book, for example. So you can see, you know, there's a million dollars in the order book on Binance, but there was really no good way to know how much of that is the market maker, right? You know, is 900K of that the market maker in which case they're doing an incredible job? or maybe it's only 25K and the market maker actually sold all their tokens at launch and now they're super short.

David:
[41:25] Right? You just don't know. You don't know.

Brian:
[41:27] You don't know. And these are the things going through a founder's head. And especially when price starts going down, they get really paranoid, et cetera, et cetera. There was kind of a bit of a historical solution to this, but it was a pretty bad solution, which was market makers would self-report their trading data, high level statistics on their trading information. This would be things like daily depth, daily average spread and daily average volume. This sucks, right? The information is totally unverified. So it's almost like having a student grade their own exam. It's only reported once a day. It's not real time. So it's not very useful. You know, if you're a founder, you want to be able to see, oh, my token price is going down. What is my market maker doing right this second? And often these reports would come in a non-standard format, making it really difficult to compare your different market makers. So, you know, that's some of the problem we're trying to solve with this new technology.

Matt:
[42:20] Brian, is this just for founders or is this also for like retail investors as well? Because that transparency as an investor in one of these tokens like would also be incredibly valuable to me.

Brian:
[42:32] Yeah, yeah. It's something we're exploring, right? So the information that we're starting to expose to projects and founders is very sensitive, right? So at least to start, we need to slow roll this, right? I don't know how market makers would feel about revealing this type of information to VCs or to the general public, but it seems like the kind of thing that is potentially worth doing in the long run. Does that make sense? We're basically asking market makers to change quite a lot about the transparency, that they offer to projects. And so we don't want to freak them out by asking them right off the bat, oh, you should expose this to a project's VCs or oh, you should expose this to the general public. We'll see how that goes. I don't want to overpromise, but I mean, certainly it's technically possible.

David:
[43:21] Let's talk about Illuminae for us a little bit more about what this project actually is. CoinWatch Track is the name. What does it do? How does it work?

Brian:
[43:30] Where to begin? So like I said, it allows projects to see exactly what their market makers are doing in real time using market maker API keys. Getting market maker API keys has always kind of been the holy grail of market maker tracking. Because if you have market maker API keys, you can see exactly what market makers are doing in real time across all the exchanges, et cetera, et cetera. But there's always been a problem, which is that market makers don't want to give their API keys out to any third party.

David:
[43:59] Because it's kind of like showing your cards, right? It's like if you're at the poker table and it's like, okay, please show me your cards. It doesn't exactly work.

Brian:
[44:07] Yeah. If a malicious third party got a hold of the market maker's API keys, they'd be able to pull down the market maker's trades, the market maker's open orders, and use that information to trade against the market maker and cause them to lose a lot of money. So we've kind of been in this dilemma for a long time in crypto, where basically the best way to verify market maker activity is to get their API keys, but market makers have really good reasons for not wanting to give out their API keys. Does that make sense?

David:
[44:35] Totally, but then it begs the question, why are they giving you their API keys? What did you guys do that changes the game here?

Brian:
[44:43] Right, right, and the truth is, they're not actually giving us their API keys. What they're going to do is they give their API keys to a trusted execution environment. And so the way this works is basically market makers put their API key into a trusted execution environment. The trusted execution environment, or T, is able to query exchanges, pull down the information necessary for computing statistics that will ultimately go to the project. So these statistics are things like market maker depth, market maker spread, and market maker trading volume. In order to compute these statistics, the, T needs to be able to pull down the market maker's trades, the market maker's open orders, all this very sensitive information. But this information never leaves the trusted execution environment. The only thing that's returned to projects is the depth, the spread, the volume, and a few other statistics. So what ends up happening is projects are able to get the information that they need to verify whether market makers are doing their job while preserving market makers' privacy and security. Does that make sense? Totally, yeah.

David:
[45:56] So TEEs are kind of like a ZK cryptography shortcut. They aren't exactly a ZK cryptography, but they give a lot of the same properties that ZK cryptography do. And so just like you said, Brian, it can show the output of something without actually showing the work of how it got there. And because it's inside of a TEE, you can verify that the specific code was ran in the correct way. And so there's a little bit of a black box, but you are okay with the contents of the black box because you can verify the code that's running. And then you can consume the outputs of said black box, which is like Brian said, the information that you need, which still allows the market maker to kind of like keep their cards hidden. But why would a market maker actually sign on to do this in the first place? What's the carrot for them? Why? Because this sounds like extra work so far without too much incentive. So what's the incentive?

Matt:
[46:47] That's a really great question. And it comes from three things. And you need those three things together to be able to ship T. The first thing is you need the technical know-how to actually build it, code it. And here, props to Brian and our excellent engineering team who kind of built it in three weeks. Crazy, but true. The second one is clients. Because if we go out of the blue to GSR and to Ember and Oros and others and say, hey, API keys, TE, they're gonna be like, dude, what, again? Like you're already pressuring our margins, negotiating all these deals, come on. So you need a critical mass of clients to go to the market maker and say, we want this, this is real. And if you don't do this, then bad things will happen. We'll terminate the deal. We'll just put our relationship to somewhere where it will be more transparent. And so this speaks to the work we've been doing for the last three years, working with the top projects out there who trust us, who use us to track their market makers and who kind of rely on CoinWatch to see the truth. And when we provided this temporary idea to them and hey, guys, would you be okay to help us push this idea? They were all like, yeah, sure. You know, like count us in. We want this to happen. So let's try and get it done. That's number two. And number three, we also need great relationship with market makers.

Matt:
[48:03] Because market makers, yes, they will probably all tell you that CoinWatch is an annoyance. CoinWatch has cost them a lot of money in the past because we have broad deals to a much, you know, fair value. And we track them and we keep them accountable. So we're not necessary.

David:
[48:18] You guys are market cops.

Matt:
[48:19] Very much. And so they don't love us, but also they know that we're fair. I don't know myself being a market maker for so long, I understand the P&L pressure and the balance that you need to strike as a market maker. And so in terms of the product specs, we could not design the product just by, you know, no, we need to know exactly, okay, what kind of depth is sensitive? 10 bips might be too sensitive. 50 bips sounds okay, right? And really feature by feature, looking at the pros and cons and the trade-offs of having the data and potentially angering market makers and having less market makers onboarding and not getting the data and having more people, et cetera, et cetera. So really coming up with the spec that makes sense to meet the target which you just described, David, which is getting the data that we need, but the stuff that we don't need, we're not going to look at it and it's okay and that's going to allow us to ship it. So about two months ago, T went live for Babylon

Matt:
[49:05] Who pushed extremely hard to get it for their token launch. Five market makers were on boarded. This is public. Babylon has five market makers signed and it was published by Binance on the day of launch. Today, two months later, we have 13 market makers on boarded and more in the wait list. And that's what's amazing, David. You were asking, why would market makers do this? Well, now market makers see this as a way to actually get deal flow because they know that through CoinWatch, a lot of deals are going to come, number one. And number two, if they can tell prospect clients of theirs, we are on boarded to this platform. So you should trust us when we say, that we mean it when we say we do the right thing, we're transparent, we're the good guys. We are on this platform. It's not just in a PowerPoint. It's not just pretending. We are so confident about the way we do things and the way we trade and our value as an ethical partner of projects that we onboarded to this platform. And so we're super happy to see that, yeah, some market makers are waiting for a spot, right, for us to just crank enough engineering, you know, man hours to onboard more market makers. And now it's really becoming a badge of honor for market makers. And hopefully these market makers will not only get more deal flow as a result. And what other market makers love is that now they can be compared to the big guys. The work matters. How much liquidity do you stream? How much trading volume do you generate, right? It's not about the marketing. It's not about how many hackathons you sponsored or the event or the dinners that you paid at the last conference. It's about the work that you provide. And our technology displays that trustlessly, establishes a standard for the entire industry.

Matt:
[50:25] And we're very excited to see that many, many, many market makers wanna be a part of this story.

David:
[50:29] You know, there's been a recent push for efforts like this in the crypto markets recently, just because I think a lot of liquid investors are just kind of fed up with the state of state of affairs as it is in the liquid markets. I know Felipe Montenegre from Thea Capital and also Blockworks have really been pushing their token transparency report, which is call it like another tool in the informed investors tool belt to be able to be an uninformed investor. One of the criteria in the token transparency report that if you are a token and you want to be reported on by the Blockworks token transparency report, one of them is you have to actually report your market making deals and then you'll get a grade as to how transparent your market making deal is.

David:
[51:13] It would be very nice as an informed investor to be able to go to the BlockWorks token transparency report and look at that market making deal and then go to the CoinWatch track product and see if the token is one of the tokens that is being traded on by the market makers on the CoinWatch track product. And so if I'm a liquid hedge fund, which crypto is missing a lot of liquid investors, by the way, because there's just been this toxic equilibrium that we haven't really been able to inform liquid funds about exactly the deals that are going on behind the scenes. If I'm a liquid fund, all of a sudden I'm seeing all the tools that are at my disposal, CoinWatchTrack being one of the big ones. And I just feel much more confident in deploying liquid funds into places that I can see and places that I have sunlight shining on that make me an informed investor. And so perhaps we can zoom forward into one, two, three years after this product really matures and it becomes more closer to industry standard.

David:
[52:12] The tokens and the market makers that are on CoinWatch track simply have more volume. They have this, like you said, Matt, a badge of honor of trust and credibility because hopefully the product is working as intended. It's aligning incentives between retail investors and spot founders and market makers. And we are in a self-regulated, healthier equilibrium because we've been able to use pretty cool technology, TEEs, to shine lights on parts of the market that we haven't shown light on before. And so the ultimate bull case for crypto is we can fix this like...

David:
[52:47] This bad equilibrium that we've put ourselves in because we were just kind of so offshore and so unregulated as an industry that we can't really provide investor confidence to more capital to come into the industry. So the bull case for this product is we actually open up the TAM for liquid funds to come in and deploy more capital and, you know, have a tide that raises all ships. That's kind of my bull case here.

Matt:
[53:10] I'd love to hear it. Obviously, you're preaching to the choir. I think at the very least, and, you know, kind of focusing where the no is very close to the road at CoinWatch, as you can imagine. But one thing that I absolutely love to see with this product, and I've been advising deals for many years, right? Probably north of 100 deals by now from the first Solana one to the latest, you know, whether that's Babylon or yeah. Anyway, just a lot of launches.

Matt:
[53:33] Having this transparency, you do not realize how much the pressure cooker that is a launch just goes down, right? Because now there is stressors. oh, I'm sure my market maker showed it. Actually, no, look, the tokens are in the autobook. I can show you real time how many offers are in the book right now. Why? Your market maker is 75% of Bybit today at your launch. You can thank them. Without them, Bybit would be 75% smaller. That's insane. Your market maker is actually working really hard here. Hey, look at the trading volume they did today. That's not them reporting. Oh yeah, we did a really good job. I'm going to shake my own hand. No, no, no, no, no. We have the exact data down to the trading pair to every exchange of what each market maker did. So go and say thank you because they actually did a terrific job. But you know what? There is so much mistrust and so much, you know, kind of bad blood in this protocol market maker relationship that by definition, whatever comes from the market makers has to be looked at with a very suspicious eye. This is no longer the case. Thanks to this product, it makes all life easier, but also just in general, the industry market maker protocol, just the trust can be rebuilt because there is data that you can trustlessly rely on and base business decision and yeah, your relationship on really. I know retail investors,

David:
[54:41] Crypto Twitter, they really tend to, when they hear one bad story, right? Like the movement story was really the boogeyman of the cycle. And maybe it was as bad as people interpreted it to be. And then like what the typical like crypto Twitter retail reaction is, is to extrapolate that so far to like blanket over the whole rest of the market and include, you know, otherwise good products in with the bad because they just don't know. They just don't have the information to say that that's actually not the case. And so one of the happy outcomes that I'm hoping for here is we can actually differentiate between the projects, the boogeyman's, and actually the true noble products that have done everything correctly, everything by the books, but they don't have the tools to differentiate for themselves from the truly insipidious cabal negotiating tables that come at the cost of retail investors.

Matt:
[55:31] 100%.

Brian:
[55:32] I think just one thing I want to mention is that we want to make this technology available to any crypto project, right? Not just crypto projects who use CoinWatch to negotiate their market making deal. So if you negotiate it on your own, totally fine. If you use another advisor, totally fine as long as the advisor agrees not to, you know, like knock off our product or something like that. We think that every crypto project should have the ability to see what their market makers are doing. It's just so important for the industry broadly.

Brian:
[56:02] And so we want everyone to use this. We want it to be a market standard.

David:
[56:06] What can people go do right now? You guys mentioned that you already have something like 13 market makers who have signed up. Are there token projects that have signed up? And then if there are interested market makers or interested founders or projects that want to get in touch with you guys to get on board here, what should they go do?

Matt:
[56:24] CoinWatch.co, our landing page. There is a link there to submit a form to onboard to get a demo, etc. Twitter account is at coinwatch.co, D-O-T-C-O. And market makers should not hesitate to use the same channels to reach out to us if we have not spoken with you yet and onboarded you yet. We'll do our best for a small team again. But yeah, we'll do our very best to onboard as many market makers as possible.

David:
[56:51] Matt, Brian, I think what you guys are doing there is very noble. And I hope the best for you because I think what's best for you is also best for my bags as an owner of tokens in this market. So I appreciate what you guys are doing.

Matt:
[57:04] Thanks a lot. Thanks, David. For giving us the chance to describe what we've been working on and tell our story.

David:
[57:10] Bankless Ancient, you guys know the deal. Crypto is risky. Hopefully a little bit less risky every single day as products like this come into the market. But nonetheless, you can lose what you put in. We're on the frontier. It's not for everyone, but we are glad you are with us on the Bankless Journey. Thanks a lot.

Music:
[57:33] Music