Market-making on-chain trades is a realm shrouded in mystery, yet it plays a crucial role in the cryptocurrency ecosystem. The significance of effective market-making cannot be understated, as it not only provides liquidity but also offers lucrative opportunities for those who can navigate its complexities. Recently, the pseudonymous trader known as Grug has raised concerns that many crypto protocols with valuable order flow are inadvertently leaving money on the table.
In response to this market inefficiency, Grug’s company, Warlock Labs, has secured $8 million in venture funding aimed at developing a proprietary trading firm. Their innovative approach employs on-chain data to demonstrate responsible processing of order flow, a necessity in a space rife with risk and opportunity.
Warlock Labs, founded just two years ago, is poised to enter the intricate blockchain infrastructure that underpins trading on Ethereum. This landscape is populated by a myriad of operators who often negotiate kickbacks from protocols, granting them the lucrative opportunity to process order flow. These players can leverage this order flow, reaping tens of millions of dollars annually. However, Grug warns that this system lacks transparency, and there exists no assurance that these market participants are offering a fair deal to the protocols.
The concept of maximal extractable value (MEV) compounds these risks, as it presents numerous opportunities for players to manipulate trades that have yet to be settled, potentially harming both the protocol and its traders. “We’re building out order flow tooling and a builder with some zero-knowledge guarantees where we can essentially prove after the fact that none of the order flow that gets submitted to us, whether it’s via users or searchers, has ever been tampered with,” Grug explains.
While the initial focus of Warlock Labs is on on-chain activity, Grug envisions expanding their services to include market-making for centralized exchanges (CEXes) as well. A concerning example he highlighted was the recent controversy surrounding Binance, where a market maker allegedly profited from MOVE tokens at the expense of traders.
Grug believes that the future will see a paradigm shift where the authenticity of order flow becomes essential: “We’re going to live in a future where order flow is alpha, and proving you didn’t abuse it is as valuable as actually receiving it. If you can prove that you will never tamper with order flow, it’s more and more likely that more and more people will submit their order flow to you.”
Warlock Labs is positioned as a “venture scale business,” with Wintermute as its primary competitor in the market-making domain. The recent funding round was led by Polychain Capital and saw participation from notable firms including Greenfield Capital, Reciprocal Ventures, Symbolic Capital, Ambush Capital, and TRGC.
Through their innovative solutions and commitment to integrity, Warlock Labs aims to transform the landscape of market-making, ensuring that protocols and traders alike can navigate on-chain trades with confidence and transparency.
