Market Making on Perp DEXes

What Market Makers Do

Market makers provide liquidity by continuously quoting buy and sell prices. On a perp DEX, this means placing bid orders below the current price and ask orders above it. When both sides fill, the market maker captures the spread.

Example: A market maker quotes SOL at $145.00 bid and $145.08 ask. A trader buys at $145.08, and shortly after another trader sells at $145.00. The market maker earned $0.08 per SOL on the round trip. Multiply this across hundreds or thousands of trades per day, and the small edges compound.

Bid-Ask Spread Capture

The spread is your gross margin. Wider spreads mean more profit per trade but fewer fills. Narrower spreads attract more volume but razor-thin margins. The optimal spread depends on:

• Volatility: Higher volatility requires wider spreads to compensate for price risk between fills
• Competition: More market makers on the venue compress spreads
• Asset liquidity: Major pairs (BTC, ETH) have tighter spreads; altcoins allow wider quotes

A typical spread for ETH perps on a DEX might be 0.03-0.08%. On $10 million daily volume, capturing even 0.02% average spread yields $2,000/day.

Inventory Risk: The Core Challenge

Market making is not risk-free. If the market trends in one direction, you accumulate inventory on the wrong side.

Example: ETH is rising. Buyers keep hitting your ask, and no one fills your bid. You end up net short 50 ETH. If ETH rallies $100, you face a $5,000 unrealized loss — potentially wiping out days of spread income.

Managing inventory is what separates profitable market makers from unprofitable ones.

Delta Hedging Your Inventory

When inventory accumulates beyond a threshold, hedge it:

1. Set inventory limits. For example, no more than 10 ETH net long or short.
2. Hedge on another venue. If you are net short 10 ETH from market making, buy 10 ETH perp on a different exchange.
3. Skew your quotes. If you are net short, make your bid more aggressive (tighter) to attract sellers and widen your ask to discourage buyers. This naturally rebalances inventory.
4. Use time-based resets. At fixed intervals (every 4-8 hours), flatten inventory by taking a market order to close.

LP-Based vs Active Market Making

Perp DEXes offer two paths to provide liquidity:

LP-based (passive): Deposit assets into a protocol pool (like GMX's GLP or Jupiter's JLP). The protocol uses your capital as counterparty to traders. You earn fees proportional to your share. Simple to execute, but you have no control over pricing or risk. When traders win, the pool loses.

Active MM (algorithmic): Run your own bot on order-book DEXes (like dYdX, Drift, or Vertex). You control spread width, order sizes, inventory limits, and hedging logic. Higher returns potential, but requires infrastructure, latency optimization, and constant monitoring.

| Factor | LP-Based | Active MM |

|---|---|---|

| Capital required | $1,000+ | $50,000+ |

| Technical skill | Low | High |

| Control over risk | None | Full |

| Typical APY | 10-30% | 20-100%+ |

| Time commitment | Set and forget | Continuous |

Platforms for Market Making

• Order-book DEXes (dYdX, Drift, Vertex, Hyperliquid): Suitable for active MM with maker fee rebates
• Pool-based DEXes (GMX, Jupiter, Gains Network): Suitable for LP-based participation
• Most order-book DEXes offer maker rebates of 0.01-0.02%, meaning you get paid to place limit orders

Key Takeaways

Market making profits from volume, not direction. Success requires tight risk management, fast execution, and disciplined inventory control. Start with LP-based pools to understand the dynamics, then graduate to active strategies as your skills and capital grow.