Managed liquidity, market-making bots and principal market makers: what is the difference?
When a token trades on a centralized exchange, someone has to keep buy and sell orders on the book. Projects usually get that done in one of three ways. The software behind them is often similar. What differs is whose capital sits on the book and who is responsible for running it.
The job all three are doing
A healthy market for a token needs resting orders on both sides of the book, priced close to the market, deep enough that ordinary trades do not move the price much, and refreshed as the market moves. Many exchanges also expect listed projects to keep a minimum level of order-book quality. The exact requirements vary by exchange and are usually set out in the listing terms.
Keeping that book in shape is continuous work: quoting, replacing stale orders, watching balances, handling API errors and exchange maintenance, and adjusting when conditions change. The three arrangements below split that work, and the capital behind it, in different ways.
1. Self-run market-making bots
A bot is software, hosted or self-hosted, commercial or open source, that places and replaces orders according to rules you configure. It connects to your exchange account through API keys that you create.
- Control. You hold the account, the keys and the capital on both sides of the book.
- Work. Your team chooses strategies and parameters, watches for failed orders and API errors, notices when a balance runs low, and decides what to do when something breaks outside office hours.
- Cost. A licence or subscription, plus your team's time, plus the cost of mistakes made while learning.
- What to watch. A bot does exactly what it is configured to do, including the wrong thing. Changing a parameter without understanding inventory risk can drain one side of the book quickly.
This model suits teams that already have trading and engineering people and want direct, hands-on control.
2. Principal market makers
A principal market maker is a trading firm that quotes your market from its own exchange account, trading as principal. In a common arrangement, the project lends the firm a block of tokens for a fixed term and the firm supplies the stablecoin side. The firm is often paid through options on those tokens rather than a cash fee. We look at those terms in detail in how market-making agreements are structured.
- Control. The loaned tokens leave your wallet for the term. You can see the public order book, but not the firm's account or what else it does with the tokens.
- Work. Little on your side beyond watching the market and managing the contract.
- Cost. Often little or no cash. The economic cost sits in the loan and option terms.
- What to watch. Counterparty risk on the loaned tokens, the incentives the option creates, and how you will check what the firm actually does in your market.
This model suits projects that cannot fund both sides of the book themselves and are able to assess a trading counterparty and its contract.
3. Managed liquidity services
In a managed service, a team runs the liquidity operation for you in an exchange account in your name, using the funds and tokens you allocate, for a service fee. This is the model Lyqui works in.
- Control. The account, the funds and the tokens stay yours. The provider's access is set up through a controlled process once you agree to work together, and it can be removed when the service ends.
- Work. The provider configures, monitors, adjusts and reports within the agreed scope. You decide how much to allocate and what the scope covers.
- Cost. A service fee — at Lyqui, a fixed fee for the agreed scope — plus the capital you allocate. That capital remains yours, but it is exposed to market moves while it is quoting.
- What to watch. You still carry the inventory risk of what you allocate. Read how access is set up, how alerts are handled, what the reporting contains, and how the service ends. Our FAQ sets out how we handle the last point.
Side by side
| Self-run bot | Principal market maker | Managed service | |
|---|---|---|---|
| Whose exchange account | Yours | The firm's | Yours |
| Whose capital is on the book | Yours | Your loaned tokens and the firm's stablecoins | Yours, as allocated |
| Who runs it day to day | Your team | The firm | The provider's team |
| How the provider is paid | Software licence | Often options on your tokens | Service fee |
| What you can see | Everything | The public order book | Your account, plus agreed reports |
| Main thing to check | Your team's capacity | Counterparty and option terms | Scope, access and exit steps |
Inventory risk does not go away
Whenever funds and tokens are quoting, they are exposed to price changes. If the price falls, your bids fill and you end up holding more tokens. If it rises, your asks fill and you end up holding more stablecoins. Good operation limits that exposure within agreed boundaries. It cannot remove it.
In a principal arrangement, the firm carries that exposure on the capital it trades with, and prices it into the deal. In the other two, it stays with you. Be wary of anyone who says liquidity can be provided without it.
A line that applies to all three
Wash trading — trading with yourself to make a market look active — is market manipulation. In October 2024 the U.S. Securities and Exchange Commission charged three firms that presented themselves as market makers, alleging they generated artificial trading volume for clients' tokens. One of the tokens involved had been created by the FBI as part of a parallel investigation.
Whichever model you choose, a provider that sells trading volume as the product is a warning sign. Liquidity shows up in spread and depth, which you can measure yourself. We explain how in how to measure liquidity.
Questions that decide it
- Do we want our tokens and funds to stay in an account we control?
- Can we fund both sides of the book, or do we need someone else's capital?
- Do we have people who can run a trading system and handle incidents?
- Can we assess a counterparty's contract, including loan and option terms?
- After three months, what will we be able to verify, and from what data?
- How does it end: what happens to open orders, loaned tokens and access?
None of the three is right for every project. The useful step is to be clear about which trade-offs you are accepting before you sign.
General information only — not investment, legal or tax advice. Arrangements differ by project, exchange and jurisdiction; get professional advice for your situation.
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