Market Makers & Market Takers Explained

5 min readJul 12, 2023

Every crypto exchange operates within the market making. On centralized exchanges, it occurs thanks to 2 core types of parties: market makers and takers. Both are essential but totally different in their functions and impact on the trading process. At the same time, DEX uses Automated Market Maker that substitutes order books.

In this article, we’ll define market makers and market takers on CEX. We’ll discuss and compare each group. Also, we’ll talk about the market-making process on DEX and the benefits for its users. Dive into reading!

Concept of Exchange | CEX Order Book

The maker places an order to buy or sell crypto at a specific price, while a taker accepts and executes that placed order. Thus the basic market concept occurs: someone offers, and someone else takes it.

On CEXs all these orders are recorded in the 1 database called order book. Thanks to this requests list, CEX regulates transactions by matching buyers and sellers. All orders for a certain amount of tokens set at a specified price are recorded and analyzed via special software to be automatically matched and executed.

Liquidity Importance | Bid — Ask Spread

Regarding the interaction between makers and takers, it is important to talk about liquidity first. Liquid or illiquid characteristics tell us if easy or not is to exchange assets for another one. Thus the liquid market is a space where you can easily trade for fair prices. It is possible if there is enough supply of currency and high demand for it.

In the usual market conditions, buyers and sellers tend to meet in the middle: the lowest price sell order will be around the same as the highest price buy order or with a small difference. This difference is called the bid-ask spread. The higher the number of takers and makers in a market, the stronger the competition and the narrower the spreads. A narrow bid-ask spread is considered favorable.

Conversely, the illiquid market is characterized by trouble selling or buying crypto at a fair price because there isn’t as much demand or insufficient supply. It leads to wide spreads, which greatly diminishes the chances of successful transactions.

Why is the spread important?

The bid-ask spread illustrates the difference between the offered buyer price and the offered seller price. The higher the number of Traders and market makers in a market, the stronger the competition and the more narrow the spreads. A narrow bid-ask spread is favorable because if spreads are too high, the chances of successful transactions are greatly diminished. This can happen, for example, if demand in the market is much higher than supply.

Market Makers vs. Market Takers on CEX

Market makers provide liquidity to markets to profit from predicted price entries during market volatility. Market takers need this liquidity to enter or exit positions. Once liquidity is provided, there is someone who uses — here come the takers. Takers remove a part of liquidity, immediately buying or selling at the current market price.

Makers and takers have different motivations. Makers seek profits from volatility or bid/ask spread differences and are ready for time-consuming investments. At the same time, takers require instant exits or entries to profit immediately.

Exchange on DEX | Automated Market Maker

DEX has the opposite of the CEX approach to exchange operation. There is no central database to manage the deals, like an order book. So how does the market occur on DEX? One of the key characteristics that define decentralized exchange is the automated market maker (AMM).

AMM Concept

An automated market maker is a technology based on an algorithm that automatically determines the price of crypto and allows fast exchange. It gives flexibility in trading and does not require matching orders to execute the transaction, thanks to liquidity pools.

Learn more about AMM:
https://biswap.cc/3XDp1U0

AMM V3 on Biswap

Biswap, as a decentralized exchange, operates on AMM V3, the newest version of the protocol. That’s why there are two core types of users on the platform: Traders and Liquidity Providers.

Using Biswap, you can profit from both protocols simultaneously, but take a look at the core benefits that the new AMM protocol offers.

Liquidity provision

Thanks to concentrated liquidity, the newest AMM version will enrich you with up to 4000x higher capital efficiency than the previous one.

Why is V3 beneficial?

80% LP rewards from fees for regular swaps and limit orders
Automatic participation in active V3 Farms with high returns and low fees
Multiple fee-tiers to implement risk management

Turn on your profit from liquidity!
https://biswap.org/pool

Trading

On Biswap DEX, users can immediately exchange top cryptocurrency with the most lucrative conditions. Moreover, with the V3 AMM release, the exchange process on Biswap became much more convenient. The new feature, Auto Router, serves as a smart tool that offers the best routes for Traders.

Why swap on Biswap

Fast transactions
Secure operation
Low slippage

Enjoy flexible trading now:
https://biswap.org/swap

Liquidity Providers vs. Market Makers | What’s the difference?

Both of these types of users provide liquidity to the exchange platform. The difference lies in further functions.

While swaps on CEXs are regulated by order book, liquidity providers play the role of market makers that create orders to sell a particular amount for a determinate price.

On DEX, once liquidity is supplied in the pair of tokens, there is no need for price determination from the user, as Automated Market Maker executes this task.

Closing Words

Exchange on CEX is made up of 2 core players: makers and takers. The makers create orders to sell or buy that aren’t executed immediately but once the market price reaches the limit. Such an approach creates liquidity, allowing it easier for others to buy or sell crypto immediately. The users that buy or sell instantly are famous as takers, as they fill the orders created by the makers.

DEX offers an alternative to the matching orders in the form of Automated Market Maker that does not require two corresponding parties. Users provide liquidity pools, thus creating an opportunity to trade within this pool immediately. But the price is determined by the amount in the pool and the mathematical formula, not by users’ “orders.”

Follow the Biswap Social Media:

Local TG Communities: