Market basics
The words used to describe how well a token trades.
- Market maker
- A firm that continuously posts buy and sell orders for an asset, holding inventory on both sides so others can trade at a visible price.
- Liquidity
- How easily an asset can be traded in size without moving its price. Measured by spread, depth and slippage.
- Liquidity provider
- Anyone who supplies capital to a market, often to a DEX pool. Unlike a contracted market maker, it has no obligation to stay.
- Bid-ask spread
- The gap between the best buy price and the best sell price, usually quoted in basis points.
- Basis point
- One hundredth of one percent. 100 basis points equal 1%.
- Order book
- The list of resting buy and sell orders for a trading pair on an exchange.
- Market depth
- The value of resting orders within a set distance of the mid price, such as 0.5%, 1% or 2%.
- Mid price
- The midpoint between the best bid and the best ask.
- Slippage
- The difference between the expected price of a trade and the price actually paid, caused by limited depth.
- Thin book
- An order book with little depth near the price. TDMM's benchmark uses under $10,000 within 2% on one side.
- Maker and taker
- A maker places an order that rests on the book. A taker trades against a resting order. Exchanges usually charge takers more.
- Uptime
- The share of time a market maker's quotes meet the agreed spread and depth.
Deals and contracts
The terms in a market making agreement.
- Retainer
- A deal in which the project pays a fixed fee and lends tokens and stablecoins for quoting, keeping control of the assets.
- Token loan
- Tokens lent to a market maker to quote with, usually returned or bought at the end of the term.
- Call option
- The right to buy an asset at a set price. In a token loan it is how the market maker is paid.
- Strike price
- The price at which a call option lets its holder buy.
- Black-Scholes model
- A standard formula for valuing options from price, strike, time and volatility.
- KPI
- Key performance indicator. In a market making contract: maximum spread, minimum depth and uptime per venue.
- Tranche
- A portion of a loan or allocation released in stages, often against delivered targets.
- Inventory
- The tokens and stablecoins a market maker holds to quote both sides.
- Adverse selection
- Losses a market maker takes when trading against better-informed counterparties.
- Wash trading
- Trading with oneself or by arrangement to create the appearance of volume. Illegal in many jurisdictions.
- OTC trade
- A trade negotiated directly between two parties instead of on an exchange order book.
DEX liquidity
How on-chain pools work and what they cost.
- AMM
- Automated market maker. A smart contract that prices trades from a formula and a pool of assets instead of an order book.
- Liquidity pool
- The assets deposited in an AMM that traders swap against.
- Constant-product pool
- An AMM, as in Uniswap v2, that spreads liquidity across every price using x times y equals k.
- Concentrated liquidity
- An AMM design, as in Uniswap v3, where liquidity sits only inside a chosen price range.
- Price range
- The band of prices in which a concentrated liquidity position is active. Outside it, the position quotes nothing.
- Impermanent loss
- The shortfall a liquidity provider has against simply holding the assets, caused by price movement.
- Loss-versus-rebalancing
- The cost a pool pays to arbitrage traders who trade against its stale price. It grows with the square of volatility.
- Fee tier
- The swap fee level of a pool, such as 0.05%, 0.3% or 1%.
- Sandwich trade
- A pair of trades placed before and after a user's swap to profit from the price move it causes.
- Just-in-time liquidity
- Liquidity added immediately before a large swap and removed immediately after, to capture its fee.
- Bonding curve
- A formula that sets a token's price by how much has been sold, used by launchpads before a token moves to a DEX.
- Aggregator
- A service that routes a trade across several DEXs to find the best price.
Token lifecycle
From launch to listing, unlocks and treasury.
- TGE
- Token generation event. The moment a token is created and usually first becomes tradable.
- FDV
- Fully diluted valuation. Token price multiplied by total supply, including tokens not yet circulating.
- Circulating supply
- The tokens that are free to trade now.
- Float
- The share of total supply that is circulating. Low float means few tokens trade against a high FDV.
- Vesting
- A schedule that releases tokens to holders over time.
- Unlock
- A scheduled release of previously locked tokens to team members, investors or ecosystem funds.
- Cliff
- A date on which a large block of vested tokens unlocks at once.
- Airdrop
- A distribution of tokens to users, often at launch.
- Listing
- The admission of a token to trading on an exchange.
- Monitoring Tag
- A Binance label for tokens under review for volatility or risk, which can precede delisting.
- Delisting
- The removal of a token from an exchange.
- TWAP
- Time-weighted average price. A way to execute a large order in small pieces over time.
- Treasury
- The assets a project or DAO holds to fund its operations.
- Exit management
- The planned sale of a large token position without breaking the market it is sold into.
- MiCA
- The EU's Markets in Crypto-Assets Regulation, which sets rules for crypto-asset service providers and market abuse.
Which terms are most often confused?
| Pair | Difference |
|---|---|
| Volume vs liquidity | Volume is what traded. Liquidity is what could trade now, and at what cost. |
| Market maker vs liquidity provider | A contracted market maker has obligations on spread, depth and uptime. A liquidity provider can leave at any time. |
| Spread vs depth | Spread is the cost of a small trade. Depth decides the cost of a large one. |
| Impermanent loss vs loss-versus-rebalancing | Impermanent loss compares a pool position with holding. Loss-versus-rebalancing measures what arbitrage takes from the pool. |
| Market cap vs FDV | Market cap counts circulating tokens. FDV counts the full supply. |
| Retainer vs token loan | A retainer is paid in cash. A token loan is paid in options. |
Frequently asked questions
What is a market maker in crypto?
A market maker is a firm that continuously posts buy and sell orders for a token, holding inventory on both sides so others can trade at a visible price. For a token project it means a tighter spread and more depth.
What is the difference between spread and depth?
The spread is the gap between the best buy and sell prices and sets the cost of a small trade. Depth is the value of orders near the price and sets how much a large trade moves it.
What does TGE mean?
TGE stands for token generation event: the moment a token is created and usually first becomes tradable.
What is a token loan in market making?
A token loan is an arrangement in which a project lends tokens to a market maker to quote with. The market maker is usually paid through call options to buy the tokens at agreed strike prices.
What is impermanent loss?
Impermanent loss is the shortfall a liquidity provider in a pool has compared with simply holding the two assets. It arises when their relative price moves.
Related TDMM offerings and guides
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TDMM publishes this glossary for general education. Definitions are simplified and are not legal definitions. This is not investment, legal or tax advice.