Odaily talks to GSR: We only make the money we deserve

Original | Odaily Planet Daily

Author | How is the husband

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In the cryptocurrency market, market makers have always been mysterious and curious. They are known as "big houses" and play the role of providing liquidity and maintaining the balance of trading. But how exactly do they work? How do they influence and help the cryptocurrency market? To answer these questions, Odaily had the opportunity to interview GSR COO Xin Song.

Born in Xi'an, Xin Song moved to live in the UK at the age of 4 and graduated from the London School of Economics and London Business School. After graduating, Xin worked as an investment manager at BlackRock, then returned to China to start a business, with experience in Internet finance, decentralized asset management platform and other projects, and is currently working as COO at GSR.

In this interview, Xin explains how market makers work and what they do. The main task of a market maker is to provide liquidity services that allow market participants to trade at rational prices, while ensuring that trading has as little impact on market prices as possible. Their goal is to ensure that the trading depth is good enough for traders to be able to trade at any time and provide rational trading prices.

We also discuss GSR's competitive advantages as a market maker and future development goals. They focus on long-term stable development and trust with partners, and are committed to providing full life cycle services for institutional customers such as project parties and exchanges. They will increase their presence and investment in the Asia-Pacific market, and focus on research and investment in the field of Web 3 and DeFi.

Through this interview, Odaily hopes to help you have a clearer understanding of the role and impact of market makers. As an important part of the cryptocurrency market, market makers make important contributions to the stability and liquidity of the market. They are not only intermediaries for transactions, but also provide important infrastructure and services for the market.

The following is a condensed Q&A:

**Odaily Planet Daily: Market makers are a relatively mysterious existence in the eyes of most people in the currency circle, some people call you "Dazhuang", can you describe in simpler words how market makers operate, help cryptocurrencies, etc. **

Xin: Our main mission is to provide liquidity services, which is to enable market participants to trade their holdings at reasonable prices at any time and time zone. Both retail and institutional investors should be able to trade on our platform, and we want to ensure that their trading behavior does not have much impact on the market price, so as to achieve average transactions and transactions close to the current market price.

I think market makers should do the following three things:

● **Ensure that the transaction depth is good enough. **Regardless of whether the volume is large or small, the behavior of the trader will not have much impact on the market price. This allows traders to trade at more rational prices without worrying about hidden costs.

● ** Guarantee that the platform can allow customers to trade around the clock. **We have access to about 60 exchanges, no matter what region customers are in, they can trade on compliant exchanges, while our programmatic trading strategy will be quoted around the clock, so that customers can trade at any time.

● ** Guarantee that the price of the transaction is rational. **This involves the issue of spreads. If the spread is large, the trader will have to pay additional hidden costs in addition to the exchange fees. Therefore, we need to ensure that the spread is small and the depth is better, so that traders can come up with a more rational price.

To put it another way, we are a bit like drivers on the Didi taxi platform. We are a provider of liquidity services to the market. Just like a driver waits for a passenger to wait, we wait for a trader's order and make sure they can find the right counterparty in a short period of time and trade at a lower price. This process is similar to trading on the Internet platform, and our income comes from subsidies from the exchange or project party to provide a good trading experience.

I don't think what market makers should do is actively intervene in the market, manipulate prices or volumes, we only do what we have to do.

Finally, liquidity is very important for the cryptocurrency industry. Unlike the stock market, if cryptocurrencies don't have enough liquidity, the entire ecosystem collapses. Therefore, we believe that liquidity is an infrastructure, and we have an important role to play as part of that infrastructure. **

**Odaily: The top market makers on the market are DWF, Wintermute and others. Are there any core competitive advantages or off-market business models behind GSR's increasing market share compared to these two? **

Xin: I don't think DWF is a direct competitor to us. In terms of values, company culture, target customer groups, trading strategies and behaviors, there are clients who operate on a different level than we do. Their main target customers (but not all of their clients) are projects that are currently hot or have low market capitalization. Some of the methods DWF takes, such as creating volume and activity, or packaging OTC deals as investments, sending some ostensibly positive false signals to the market for these projects may attract some investors' attention, but we think this approach could be harmful to the industry as a whole.

Our company's view is, We want to build a healthy ecosystem in the industry. We attach great importance to long-term development and strengthen trust with partners such as exchanges. We've seen a lot of market makers eliminated by the market over the past decade, with only a few surviving. We do not want to make non-compliant behavior for the sake of temporary profit, we are more concerned about long-term stability and sustainable development of the industry.

We have respect for Wintermute because we believe they are in some way close to our values. However, there are some differences, the core of which is trust. Our team is primarily service-oriented, and we are positioned to provide value-added services throughout the life cycle to our clients, and we are willing to support them throughout their development. Other teams may focus more on proprietary quantitative trading. Short-term profits are more concerned than long-term close relationships and service quality.

We will continue to layout and adjust according to customer needs and market conditions. We are willing to invest in early stages of the projects and provide them with financial services as they mature. Our goal is to build long-term relationships with our customers and accompany them to grow together.

**Odaily: On August 15, The Block said GSR was currently operating in a downsizing scale, and GSR responded by saying: "GSR is doing well, successfully weathering the last three bear markets and not seeking outside capital." What are the key factors that make GSR stable and profitable in the face of market adversity? **

Xin: I think it's normal for internal company adjustments and personnel changes to be a normal phenomenon, especially in a fast-moving field like the crypto industry. Our company also has some turnover of people, but we have maintained a relatively stable market share. Our focus on talent and risk control allows us to stay ahead of the curve.

From an overall volume perspective, our absolute volume may indeed have decreased in a bear market. But from a market share perspective, we're still in the lead. We adopt a conservative risk management strategy and remain cautious in our new line of business. We take risk management very seriously and our relatively conservative strategy has proven to be correct in the past. We avoided some of the problems faced by other competitors in the industry, including high leverage and technical vulnerabilities.

The long-term vision of our company is also our strength. We always look far and focus on solid growth and adjustment. Our relatively low turnover rate also reflects our stability. We have been able to remain profitable every year for the past decade, which is relatively rare in the crypto industry. **

**Odaily Planet Daily: The income from market volatility is also part of the income of market makers, the recent ARK related report said that "Bitcoin volatility fell to a historical low", Ethereum volatility also broke below 20% a few days ago, market volatility is so low, how does it affect you? **

Xin: Changes in volatility do affect our earnings. As a compliant market maker, we are very neutral, do not bet on direction, and do not manipulate price or market direction. Our profit model is primarily to make profits by constantly hedging risks. We can only make money when the market has real trading volume and volatility. Therefore, when we screen customers, we also want to select only projects that have real application scenarios and active users, and are really creating value.

Our role is like when the trader is buying, we are selling; When a trader is selling, we are buying. We constantly buy and sell, but we do not actively choose the direction of the market. Therefore, we have to rely on real trading volume and volatility to make profits.

Volatility is positively correlated with trading volume, and when volatility is low, trading volume is usually lower. In this market environment, it becomes more difficult to make money, so we will go for some additional services. In this case, our criteria for selecting clients become even more important, and we want to work with only the best quality project parties. They need to have real application scenarios and active users, and really create value projects to have two-way buying and selling needs. The trading demand of the market cannot always be biased towards selling, and there is no support for buying, because we cannot always play the role of receiver. Therefore, the real buying and selling demand is very important to us, and although it has a certain impact on our profit model, it is not very large.

In a bear market, we offer some additional services to supplement the earnings of our main business. In addition to providing liquidity services, we also provide structured products and wealth management products that allow our clients to enhance the yield on their inventory assets. In a low-volatility environment, people often want to earn some low-risk benefits, such as capital protected financial products. It is relatively cheap to buy these options when volatility is low, and if the market picks up, the gains are amplified by leverage. As a result, this product is quite popular among high-net-worth clients, miners and project parties, which has become another source of income for us.

**Odaily: From the perspective of market makers, what kind of events or indicators do you think are the key inflection points in the current market from a bear market to a bull market? **

Xin: The market is really at a low point right now, and I was in such a market environment when I first entered the industry. During this period in 2018 and 2019, the market was in a downturn. Then there will be some factors to pay attention to about the market recovery, mainly including technical and fundamental.

From a technical perspective, institutional engagement can be an important consideration. After the FTX-related incident, many people were frightened, there was a counterparty risk with funds placed on the exchange, and there was a fear that the exchange would go bankrupt. But there could be some breakthroughs next year, with some large asset managers, such as BlackRock, already applying for licenses for ETF products, with results expected in the first half of next year. In addition to them, several other well-known asset managers are actively preparing for the creditworthiness and safety of funds. As a result, institutional engagement is likely to increase in the first half of next year, which could be beneficial to the market recovery.

Another factor is the halving of Bitcoin, which, in general, triggers a wave of markets.

From a fundamental point of view, I'm optimistic about some projects, especially Layer 2, such as Ethereum's ZK Rollup and Optimistic Rollup. Many of these projects will be launched in the first half of next year, which will increase transaction throughput and bring new use cases, including order-book-style decentralized derivatives exchanges and social networks. From a fundamental point of view, these new use cases are likely to attract more users.

In general, the market bull and bear factor mainly involves the technical and fundamental aspects. On the technical side, institutional engagement and the Bitcoin halving will have an impact on the market. In terms of fundamentals, the launch of some new Layer 2 projects will bring new application scenarios to the market. **In addition, macroeconomic factors can also have an impact on the digital currency market, especially interest rate hikes and rate cuts in the United States, as well as election and regulatory changes. On the whole, there are some breakthrough points in the first half of next year, which may prompt the market to pick up.

**Odaily: What is GSR's overall strategic plan? Can you reveal some priorities or goals for future development? **

Xin: Before answering this question, let's review some of the salient features of this cycle compared to the previous one:

The first significant feature, in my opinion, is that the development of the entire industry will be more stable, and the trend of refined division of labor will become increasingly obvious, even if we are now in the bear market stage, the whole market still maintains enthusiasm.

In terms of division of labor, GSR, as a global organization, we have seen the rise of star project parties from the Western world on Layer 1 and Layer 2, but the cryptocurrency market has entered a very mature stage, and the development of Layer 1 and Layer 2 requires the support of the entire ecosystem, especially the need to attract many developers to participate in the development of the application layer.

The outbreak of the Internet era has brought about the prosperity of the developer ecology in the Asian market, and a large number of excellent developers have emerged in the Greater China and Southeast Asian markets. ETHcc 2024 has been decided to be held in Southeast Asia, which also shows that Ethereum is very optimistic about the development environment in Southeast Asia.

The second notable feature, in addition to the innate developer resource advantage, the Asian market is increasingly positive towards cryptocurrencies. Both the Singapore and Hong Kong markets have embraced cryptocurrencies with aggressive introduction of compliance policies.

As far as the Singapore government is concerned, even after the FTX crash, the Singapore government's determination to embrace cryptocurrencies remains steadfast. Ravi, director of the Monetary Authority of Singapore, said in his speech last year: "Singapore wants to be a hub for digital assets, but it doesn't want to be a hub for speculative cryptocurrencies. "Meanwhile, the Monetary Authority released the final regulatory framework for stablecoins on August 15 this year, which means that Singapore became one of the first jurisdictions in the world to incorporate stablecoins into the regulatory system. It can be seen that Singapore's regulatory focus has begun to shift to the protection of retail investors.

Hong Kong's policy has also shown a trend of latecomers, and the issuance of VASP licenses has led to the emergence of a number of compliant exchanges. As the largest market maker, GSR is also actively involved in the liquidity services of these exchanges.

Based on these two significant changes that we have captured, we have also realigned our strategy. **We will provide more in-depth services for our project parties, exchanges and other institutional customers, from the original listing service to the entire project life cycle service. **

In response to the trend of vertical refinement of the industry, we expanded from the original MM and OTC business lines to Ventures investment. Over the past year and a half, we have been very active in the primary market, investing around 150 m, investing in more than 200 projects and primary market funds to provide financial support for early-stage projects. This year, our investment strategy will also be more inclined to participate in some large-scale ecological early-stage projects to support ecological development, but also support blockchain technology incubators and accelerators, help developers connect Layer 1 and Layer 2, and provide legal, marketing and other consulting services. Leverage our network of resources for a decade in the industry to help developers and build ecosystems for our Layer 1 and Layer 2 project parties.

When it comes to compliance, we have reflected and iterated ourselves. Based on the expectation of a positive regulatory attitude from the US SEC, we believe that the cryptocurrency market will quickly enter the mainstream. While continuing to expand our business, we have established a strong self-regulatory system. Based on this view, we have obtained the Monetary Authority of Singapore (MAS) approval in principle for the Major Payments Institution license this year. The license represents a milestone in the Group's regulatory journey and enables GSR to better serve the entire cryptocurrency ecosystem. It can also make industry participants clearer about which are the high-quality, legal and compliant market makers in the industry. GSR is proud to be able to meet the stringent entry requirements set by MAS and will continue to work to ensure the long-term health of the industry. GSR is poised to continue to take root in the Asia-Pacific region, investing in local entrepreneurs and encouraging users to adopt Web 3.0 technologies. We are also a founding member of the Hong Kong Licensed Virtual Assets Association.

In such a macro environment, we need to adjust our overall strategy. Regionally, we want to see more balanced global development in the industry; In the line of business, we regard DeFi as an important strategic area and continue to work on spot and derivative DEX research and investment.