Investing in Wintermute

by Franklin Bi and Kristie Huang, January 2021

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Crypto’s market maker shortage

Market efficiency requires liquidity. As digital asset trading volumes grow, liquidity providers need to evolve in tandem to maintain market efficiency. For smaller crypto token projects who are still early, liquidity is especially vital. Without enough trading volume and liquidity, investors are subjected to wider bid-ask spreads, higher price volatility, and higher risk. For larger institutional investors, liquidity is critical to ensure that sophisticated trading strategies can be deployed effectively.

In traditional U.S. equity markets, these liquidity issues are typically solved by high-frequency market makers, such as Virtu or Citadel Securities, who together comprise 50–60% of market share. Market makers transact on both sides of the market at millions of trades per second. By doing so, they provide necessary liquidity for investors to execute trades at any time seamlessly. In return, market makers capture profit on the bid-ask spread. As more liquidity becomes available in the market, this spread becomes tighter, creating lower price volatility, fairer price quotes, lower transaction costs, and faster trade fulfillment.

Today, crypto suffers from a market maker shortage, leaving cryptoasset markets lacking in efficiency compared to traditional finance markets. Automated market makers (AMMs) in DeFi like Balancer or Uniswap address part of this issue, but rely on incoming trades to reduce spreads and are unable to deploy capital where it’s needed to resolve market gaps (also known as arbitrage opportunities). Sophisticated, agile market makers are crucial for DeFi markets to progress and eventually outcompete traditional market structures on efficiency — which we fully believe is possible.

A crypto-native market maker

We’re proud to share our investment in Wintermute — a crypto-native market maker focused on creating efficient, liquid, transparent markets for tomorrow’s financial system. Founded in 2017, Wintermute has deployed hundreds of successful proprietary trading algorithms across DeFi, CeFi, and OTC markets. The company provides liquidity for hundreds of traded pairs across dozens of exchange partners and offers market-making services to early-stage projects and exchanges.

We envision a future where liquidity across hundreds of decentralized exchanges is consolidated and easily accessed through aggregators like 1inch or Matcha. Market makers like Wintermute can plug liquidity directly into these aggregators and eventually make DEX markets as efficient as their centralized counterparts. This combination — user-focused DEX aggregators on the front end and hyper-efficient, sophisticated algorithms on the back end — has the potential to accelerate adoption of DeFi and even disintermediate centralized exchanges. In this future, centralized exchanges like Coinbase will serve as front ends for decentralized exchange infrastructure.

When we first met the Wintermute team, they were focused solely on DeFi and doing well — the issue was that the entire DeFi market was much smaller and simpler than it is today. Since then, Wintermute has exceeded expectations and risen rapidly to be one of the largest liquidity providers in DeFi, CeFi, and OTC spot markets.

In December 2020, Wintermute handled $30 billion in monthly trading volume. Wintermute holds the #1 place on the global Bitfinex leaderboard for volumes. The business itself is highly profitable, with 60% monthly revenue growth through 2020. They support liquidity for a broad range of products, from dYdX perpetual swaps and crypto exchange-traded products to long-tail assets on decentralized exchanges.

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Wintermute’s average daily trading volume has grown exponentially over the past year
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Wintermute has continually added new traded pairs across dozens of exchanges

The Wintermute team collectively brings decades of high-frequency trading and derivatives experience. For example, CEO Evgeny Gaevoy has previously built two successful trading businesses, from scratch to #1 in Europe. The entire team is execution-oriented and well-equipped to bring the best practices of algorithmic and high-frequency trading into digital asset markets.

What’s next for Wintermute

We’re excited to partner with Wintermute to unlock liquid and efficient markets for crypto, alongside fellow investors Lightspeed Venture Partners, Sino Global Capital, Kenetic Capital, Rockaway Blockchain, Hack VC, DeFi Alliance, and Avon Ventures.

The company’s 2021 plans include the launch of an RFQ platform for institutional counterparties to offer OTC trades at scale and aggressive scaling of their derivatives business. Wintermute is also expanding its presence to Asia with a new regional office in Singapore covering OTC and derivatives.

Wintermute is hiring for roles across multiple continents. Explore job openings at Wintermute here, and explore opportunities across the Pantera portfolio network here.

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