Most crypto investors probably never heard of Wintermute Trading before the $160 million hack on September 20, but that doesn’t diminish their importance within the cryptocurrency ecosystem. The London-based algorithmic trading and crypto lending firm also provides liquidity to some of the biggest exchanges and blockchain projects.
As a crypto-native trading company, meaning digital assets have been at its core since its inception in July 2017, Wintermute’s industry expertise is evidenced by $25 million in funding from global investors. in venture capital such as Fidelity Investments, Pantera Capital and Blockchain.com Ventures. .
Lending and venture capital firms have limited impact on day-to-day operations
One important distinction distinguishes a market maker from bankrupt crypto venture capital firms like 3 Arrows Capital or insolvent lending and yield platforms like Voyager Digital and Celsius Network. The $160 million Wintermute hack could have a much deeper impact on the crypto industry, given the importance of liquidity.
The very nature of these companies is very different. For example, a venture capitalist typically invests in pre-seed or seed capital by financing projects before they are launched. There is a need for early-stage funding for tokens, non-fungible token projects (NFTs), decentralized applications (DApps), and infrastructure, but the money will eventually come when a good team, a good idea and a community will come together.
Moreover, the bankruptcy of a certain venture capitalist, whether or not he is relevant to the industry, does not damage the reputation of his competitors. In fact, the opposite sentiment emerges as it proves that choosing the right projects pays off if the company has properly managed its risk exposure. The same can be said for yield and lending platforms, which essentially compete for customer deposits and jostling to offer the best yields.
When market markers fail, liquidity dries up and there is nothing worse for tradable assets than widening spreads. Most DApps users and exchanges are unaware of these intermediaries as their work is hidden in order books and price arbitrage between intermediaries whether centralized or not. The real secret lies in algorithmic trading.
By applying sophisticated modeling and trading software, algorithmic firms like Wintermute employ a variety of strategies to find a competitive advantage over regular traders, including arbitrage, derivatives and colocation servers for high-end market access. frequency.
In addition to traditional proprietary desktop trading, Wintermute provides market making services by facilitating transactions on intermediaries using their own resources. These services can be hired by exchanges, brokers, token issuers or third-party entities such as foundations and support companies.
Specialized trading companies usually handle this process, but the business can also be carried out independently. Currently, Wintermute, Alameda Research, DRW, Jump Trading, and Cumberland are among the top prop trading firms that provide liquidity for centralized exchanges and decentralized finance (DeFi) platforms.
This Week’s Hack Wasn’t Wintermute’s First Million-Dollar Mistake
Wintermute was hired by the Optimism Foundation to provide liquidity for its token roster in June 2022, but completely screwed up losing 20 million OP tokens. The Wintermute Team disclosed the incident to the Optimism community and posted 50 million USD (USDC) coins as collateral to ensure the protocol was fully reimbursed.
Think about it for a moment. Exchanges, blockchain projects, venture capitalists, and DApps all need some form of liquidity to ensure the secondary market works seamlessly for end users. Without thin spreads and some depth in the order book, there is barely a chance for a project to succeed.
Whether one views liquidity providers as villains or heroes, their importance to the crypto industry cannot be understated. The current hack could have been due to errors exclusive to Wintermute, and for this reason, they did not manifest as an additional risk to other market makers.
Traders should not compare the failure of 3AC, Voyager and Celsus to the threat of a liquidity vacuum caused by the exodus of remaining arbitration offices. There is no indication that widespread risk has emerged at this time, but until a detailed post-mortem is released and similar risks are ruled out, traders should watch the markets closely.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.