This makes Flowdesk an infrastructure provider first rather than a financial service company.

Flowdesk leverages cloud computing together with open-source solutions like NATS, Kubernetes, and Terraform.

Our partner, Google Cloud ensures that all services run without compromises, completely securely, and smoothly. Thanks to this, Flowdesk has not experienced any network downtime in two years. Working with an established partner legally guarantees the stability of services as our Service Level Agreement makes our partners accountable, too.

This also safeguards Flowdesk’s network infrastructure from hackers and attackers. Securing a proprietary network is a very challenging task. Contrastingly, partnering with a global leader in network security lets Flowdesk focus its efforts on developing its platform and trading algorithms.

The multi-cluster infrastructure splits user connections to exchanges into geographical hubs. This network distribution speeds up the service by routing transactions through the quickest paths.

To further improve network performance, we are building our own, exclusive private backbone to connect all the geographical hubs. This flexible combination of cloud technology and proprietary network connections gives us the option to continuously evaluate our performance needs and stay highly competitive. This way, Flowdesk combines the best aspects of a cloud service, flexibility and security, with the high speed of an immediate, private connection.

Our open-source code is designed to be flexible and autonomous. While Google Cloud serves as the foundation of Flowdesk’s unique infrastructure, the code could be redeployed essentially anytime.

Flowdesk’s trading activities generate more than five billion data points each day. The company has a hundreds of terabytes database of price and order book history, transaction data. Google’s BigQuery helps the collection and storage of this big data — a unique feature in crypto market making.

Thus, through strategic partnerships with trusted services as well as thanks to our continuous internal development efforts, Flowdesk provides a uniquely reliable technological service for digital asset issuers.

Despite its inherent risks and potentially much higher costs, the proprietary model has valid use cases.

Choosing between Market Making as a Service (MMaaS) and proprietary trading is about resource optimization.

The central dilemma: capital efficiency vs. cash flow

Besides their incentive structures, the key difference between the two models is the working capital requirements, the funds needed to start market making. 

The proprietary market making model has lower working capital requirements: a crypto project only has to lend their tokens to the market maker. The market maker, in turn, takes care of providing the collateral for the market pairs. 

The project or community does not receive any interest on this token loan. Most of the time, the service contract allows market makers to sell the tokens at a predetermined price. This is where the conflict of interest might arise between the client and the service provider.

This arrangement makes the proprietary model potentially highly inefficient financially.

Contrastingly, the MMaaS model requires

• paying a fixed, regular service fee, and

• the token project adding its own collateral.

This can turn out to be a much better value in most of the cases. 

MMaaS does not only give token projects full control over market making strategy. They get to keep the ownership of their tokens and the collateral — as well as all the profits and losses (P&L) of market making. The MMaaS provider gives operational and trading support to its clients. They choose, shape, and implement the right market-making strategy together, in constant consultation.

Who chooses proprietary trading over MMaaS?

Projects with low capital

Because of the high working capital requirements of MMaaS, projects whose capital is scarce may have a hard time affording it.

But as proprietary market makers are taking the risk of providing the collateral they prefer tokens whose price could quickly increase. If they see no such potential, proprietary traders can ask for an even heftier “price”: larger, riskier token loans or not provide market making services at all.

However, early-stage projects and communities with low capital that still want to use MMaaS can find ways of funding (like selling their tokens to obtain collateral).

Well-funded projects

Why do larger projects sometimes choose proprietary trading over MMaaS?

They usually have no problem with fulfilling the working capital requirements. Yet, they may optimize differently. It may be easier for them not to get involved in selecting and setting market making strategies.  They might prefer using another precious resource, time, for other purposes.

For tokens with higher market capitalization, the risk calculus may also look different.

High market capitalization usually means higher market liquidity for the token. Hence a single market maker alone is much less likely to impact the token’s price alone. So to minimize operational risks and diversify their liquidity sources, projects with ample capital might choose to work together with multiple market makers.

Why MMaaS comes out on top for the overwhelming majority of crypto and web3 projects

Aside from the marginal cases of projects with “scarce” and “abundant” capital, the majority of crypto projects and communities are better served by MMaaS.

Ultimately, their choice is all about capital efficiency. The increased transparency and control over market making strategy and activities further add to the advantage of MMaaS. These help token issuers grow faster, with lower risks in the long run.

In this sense, the investment MMaaS requires is essentially an insurance policy.

Flowdesk and proprietary market making: raising the standard of transparency in crypto

Flowdesk believes that MMaaS is superior to proprietary trading in the vast majority of cases. It delivers better outcomes by design.

Proprietary market making may still make sense in a few qualified cases. This is why Flowdesk also provides proprietary market making solutions upon request.

As a compliant Digital Asset Service Provider registered with the financial market regulator of France (Autorité des Marchés Financiers, AMF), Flowdesk conducts proprietary market making as transparently as MMaaS. It is Flowdesk’s guiding principle and legal duty to never trade against our clients.

We are committed to raising standards in crypto. Flowdesk’s mission is to “transform the crypto financial industry by bringing more transparency and control to token issuers over their financial needs”. Because a better economy is possible only if the fundamental values of blockchain technology and laws are respected.

Crypto is currently facing a particularly acute reckoning due to its reputation for facilitating crimes such as money laundering, terrorism financing, and fraud.

Complying with laws that already exist can be difficult. Failure to do so has cost legitimate crypto innovators dearly. Ripple is still facing a lawsuit from the SEC, Binance was fined by the UK's FCA, and BitMEX had to settle a CFTC lawsuit for $100 million.

Legal woes are not limited to exchanges only. People participating in projects like BitInstant and My Big Coin received heavy penalties — years in prison and fines worth millions of US dollars.

Compliance means following the rules and laws to prevent crimes and harms, protect customers and investors, and maintain fair markets. The fundamental principles of blockchain technology, transparency, trustlessness, and decentralization are not at odds with this. Quite the contrary: compliance is essential for mass adoption of blockchain technology and tokenization. Crypto cannot attract more users and innovators if it doesn't provide safe, open, and trustworthy services for legitimate purposes and ordinary users.

This is why Flowdesk strives for a cultural change within the industry that puts compliance first. Leading by example, setting a new standard not only for market making, but for all of crypto is a core mission of ours.

Such a change requires more, clearer regulation from legislators and fair enforcement from authorities.

But the blockchain community and crypto industry cannot sit back waiting for new rules to be set.

To build sustainable markets and business models driving mass adoption, projects, organizations, and companies need to comply proactively. They must start implementing the best practices of traditional sectors. This can marry the best in blockchain technology, transparency and access, with the institutional guarantees that exist in traditional industries, services, and finance. Only this way can crypto overcome the actual shortcomings of TradFi, its centralization, high fees, sluggishness, non-transparent relationships, and excessive control — as well as its own flaws.

To achieve this, there are several essential steps to take.

1. Determine the applicable regulations in the jurisdictions where the business or community operates This includes local financial and business regulations, taxation laws, as well as international agreements. Licenses and regulations for money transmission, securities trading, and other activities (in the US, these may bear different names in different states and entail different permissions) need to be carefully considered. Anti-money laundering (AML), Counter-Terrorism Financing (CTF), Politically Exposed Persons (PEPs) and sanctions list checks, as well as Know-Your-Customer (KYC), Know-Your-Business (KYB), and Know-Your-Transaction (KYT) verifications. Legal experts and specialized companies such as Elliptic, Merkle Science, Chainalysis, and many more can provide help.

2. Establish compliance policies and proceduresThese policies must include processes for collecting and verifying customer information, monitoring transactions for suspicious activity, analyzing data, and reporting suspicious activity to the relevant authorities.

3. Obtain mandatory registrations, licenses, and approvals required by the government and regulatory authorities Authorities’ approval is not only a “badge of honor”. It is about clients’ and partners’ privacy and safety: reassuring them that their assets and sensitive data are secure at all times.

4. Maintain processes and records Companies and organizations should keep detailed records of transactions, customer information, and compliance activities. They must be prepared to provide these to regulatory authorities upon request.

5. Partner with compliant services and organizations Compliant projects and communities must collaborate only with partners, service providers, and clients who are themselves compliant. This does not only help avoid reputational damage. Like-minded partners and customers also incentivize resource and knowledge sharing, making a crypto project’s business and communities more resilient and future-ready.

By taking these steps, companies and communities can ensure that they comply with regulations, maintain users' privacy and safety, and establish trust with their clients. Embracing this attitude is crucial to remake crypto so that it can make good on the original promises of blockchain technology.

However, it does entail three types of indirect costs:

• the interest-free loan provided by the token project to the proprietary trader;

• the call option’s primary impact on the token issuer; as well as

• the call option’s secondary impact on all token holders, affecting the token’s price.

  Token loan without interest

  The proprietary market making firm first takes a token loan from the project.

  This loan can represent a sizable share, ranging between 2% and 4% of the total token supply. Sometimes even higher portions might be required from crypto projects.

  The market maker does not pay interest on this loan. Hence a project essentially gives away a large share of its tokens without compensation which it could otherwise use. This opportunity cost is an indirect cost of proprietary trading.

  The level of transparency a market maker provides is of utmost importance.

  If the proprietary trader’s activities happen in a black box, without sufficient oversight from a token project, the risk of conflict of interest becomes apparent. Because the trader is in control of the tokens, it may use the assets to benefit itself, and not the client.

  The call option’s primary impact

  The call option is a contractual right of the market maker to purchase the tokens in its possession. Its primary impact is that it allows the trading firm to buy all the tokens at a price negotiated before the start of its market-making activities. It obligates the token project to sell the tokens it had lent to the proprietary trader. Exercising the call option also terminates the contract, causing uncertainty.

  Trading firms usually request long-term contracts. While 6-month contracts may be offered to larger token projects, it is usually one or even multiple years that trading firms set as contractual terms.

  The call option’s price level may increase overtime as a positive incentive for the market maker. This can help reduce the primary impact of the call option in the long run.

  The call option’s secondary impact

  Theoretically, a non-transparent proprietary trader may decide to sell the tokens it had acquired all at once to instantly profit from the difference between the token’s call option price and the market price. 

  While such market-making conduct may be rare, if it happens, this secondary impact of the call option can affect the token price very negatively. All tokens in circulation lose their value — impacting both the project as well as the community and investors who own them.

Why proprietary market making?

Taken together, the outcomes and the impact of proprietary market making vary widely. Its cost structure is difficult to calculate.

Using it may not cost extra to token projects — but that is almost only true if the token’s price is falling. Nevertheless, the worst case scenario may turn out to be very expensive: giving up a significant portion of the digital asset’s supply may cost a crypto issuer millions of dollars worth of value.

Hence this traditional approach is most likely not optimal for most projects. Usually, either new, smaller projects or well-established, bigger ones that choose proprietary market making consciously. The vast majority of crypto projects might find the Market Making as a Service (MMaaS) model more beneficial.

MMaaS is a more capital efficient, calculable solution to provide reliable liquidity that can outperform the proprietary model in the long run. Coupled with the right transparency and compliance solutions, MMaaS has the potential to steady the digital asset ecosystem. Ultimately, it is the new standard of market making that can help mainstream crypto and bring about a tokenized global economy.

The concept of market making is deceptively simple — and often misunderstood.

Being an essential part of any financial market, the definitions, explanations, and examples of market making are ubiquitous, see for example Investopedia, Wikipedia, The Tokenist, or The Balance.

Essentially, market makers are actors who commit to stand on both the selling side as well as the buying side of the market. Too often, there are not enough buy (bid) and sell (offer or ask) — i.e. market liquidity is low. Market makers provide liquidity to make it easier and cost-effective for everyone to buy and sell an asset at any time.

Digital asset market making is even more complex than in traditional finance due to the nature of the underlyings and the market structures.

Gas fees and transaction costs, decentralization and market fragmentation make it difficult to track prices and make informed decisions: hundreds of disparate centralized and decentralized exchanges alongside incompatible blockchains need to be bridged. Underdeveloped regulation and business practices contribute to crypto’s volatility on top of the lack of readability of the assets themselves. Unlike listed companies, crypto assets have more complex business models and do not provide audited quarterly results.

On this ocean of uncertainty, more than in any other markets, tokens need liquidity support from market making.

Liquidity is always difficult to come by. If an asset’s market remains illiquid for too long, the token’s value will suffer, also making it susceptible to market manipulations.  Such an asset is unlikely to be listed (or stay listed) on high-tier centralized exchanges leading to a self-fulfilling prophecy of price deterioration over time. Ultimately, an entire project can go under with the price drop of its token.

This is why exchanges — including traditional stock exchanges — rely on market makers. In crypto, centralized exchanges usually obligate token issuers to contract one.

First-generation market making: proprietary trading in brief

Most market makers are proprietary traders, often trading firms.

They essentially take an interest-free “loan” from the token issuer to get the tokens to be traded. Then, the proprietary market maker adds its own funds (usually in stablecoins or ETH) to market make — to be on both bid and ask sides of the token market.

Most proprietary traders offer their services for free — or so it seems. They make profits in three ways:

• on the bid–ask spread — by quoting prices that are higher on the sell side than the buy side, the market-maker can generate income, often called “Profits and Losses” (P&L or PnL) just by buying and selling the asset throughout the day;

• on arbitrage — the occasional price differences among different exchanges; and

• exercising their call option — the contractual right to buy the borrowed tokens at a predetermined price at basically any time — and selling the tokens.

The problems of proprietary market making

Agreements between token issuers and proprietary traders include these call options which constitute a severe risk of conflict of interest.

The call option incentivizes token price increase — so that the proprietary trader can exercise its call option when the token’s market price rises above the predetermined contractual price. This way, it can make sizable profits on the tokens by selling them on the market.

After riding the wave higher and higher, the token’s market price might nosedive, and the token project loses many tokens and value. This destroys the trust and confidence that the project and the community has worked so hard to build.

In the proprietary market-making framework, issuers are at risk of losing control over a significant portion of their token’s supply. This is because proprietary traders’ activities are often a black box. Token issuers need to give them the benefit of the doubt, trust them to make the right calls and resist these bad instincts.

This is exactly the risk that blockchain was meant to eliminate. It was supposed to be a trustless technology.

These massive issues in market-making today do not even include “gray areas” and illicit practices like insider trading or wash trading, creating fake trading volumes.

Market makers are not supposed to “trade with themselves” or falsify transactions — but carry out actual buy and sell orders, help investors and the community exchange assets at fair prices.

In addition, being driven by their own P&L, market-makers have a tendency to be highly risk-averse during extreme volatility events. This means that they reduce or remove their liquidity at times when projects need liquidity the most.

Finally, proprietary trading as a business model is inherently unscalable. In crypto, a large portion of the profits of trading firms come from the exercise of the call options and the subsequent sale of the associated token. This means that market-makers assess projects on a case-by-case basis, betting on whether or not they could expect to call their option. In this sense, proprietary market-makers in crypto are more similar to venture capital than to quantitative trading firms. This incentive structure ultimately encourages pump and dumps — ultimately damaging the outlook of a token.

By being financially incentivized by their own P&L, proprietary traders often give preference to their own interests.

This is why we need to reinvent market-making. It must be transparent, scalable, and asset-agnostic — guaranteeing a full alignment of interests between token projects and the firm in charge of managing the liquidity.

The new standard for market making: Market Making as a Service (MMaaS) in brief

MMaaS was developed specifically to decrease the innate risks of the old, first-generation model of market-making, to make good on its original promise: ease token issuers’ burdens and build sustainable markets.

In contrast to proprietary trading, MMaaS does not involve a token loan. It is not even a financial service — rather, a technology service; similar to a “software as a service” solution. Strictly speaking, it does not provide liquidity, but a liquidity management solution.

Under this model, it is the token issuer who provides both the collateral as well as the tokens to market make for. The token project can choose and set the market-making strategy, too. Hence what token issuers get, is the service itself: access to the trading infrastructure as well as the support of the sales and trading teams of the MMaaS provider.

Flowdesk’s sustainable and compliant solution

Flowdesk has developed a fully compliant trading infrastructure and platform that allows token issuers to build and manage their liquidity. Its MMaaS platform is supported by a trading and sales team available to token projects 24/7 all around the globe.

The platform’s live dashboards allow clients to monitor their funds in Flowdesk’s custody or on exchanges, trades, orders, and everything related to their market-making operations in real time. This full transparency gives control back into the hands of blockchain projects, their communities, founders, and teams. It is always the token issuers who make the call, enabling them to adjust their trading strategy anytime.

Flowdesk’s strict compliance with legal regulations, its internal policies, due diligence processes, as well as its legal team are set up to enhance the safety of its clients. It prevents insider trading and other conflicts of interest. Hence Flowdesk’s MMaaS ensures that trading is operated in the token projects’ best interests. All their assets remain secure, and they are used solely for the purposes they choose.

This is how Flowdesk can provide non-directional, yet flexible market making: fair, genuine market prices to both investors and holders anytime they need it.

MMaaS is designed to be scalable, fair, and trustless — some of the best of the qualities that blockchain technology represents. At Flowdesk, the model’s strengths are combined with prudence:

• strict adherence to legal regulations,

• internal policies on conflict of interest,

• focus on IT security, and

• conservative risk management strategies.

Flowdesk’s full transparency provides a trustless service to clients. The aligned interests between the MMaaS provider and its clients ensure fairness — it does not take chances with clients’ assets, only support them in their journeys. And since Flowdesk does not use its own capital for trading, it has built a scalable business model. Flowdesk’s solution is designed to be sustainable, and contribute to the safety and health of the digital asset ecosystem and markets.

More than just a market maker: an all-in-one platform for all digital asset business needs

Flowdesk recognizes that web3 projects need reliable partners at every stage of their journeys — not only in market making.

Hence it does not only accompany blockchain projects on exchanges. Flowdesk has created a full-scale, all-in-one, globally compliant platform — a one-stop shop for all blockchain service needs. Flowdesk complements its market-making with brokerage services; secure custody; as well as treasury management solutions.

All these are designed to ease the burdens of web3 innovators. This is why Flowdesk is working together with trusted partners: infrastructure connecting centralized exchanges, blockchains, custodian and third-party service providers to suit token issuers’ needs.

Flowdesk delivers a comprehensive, overarching set of solutions to help builders and their communities focus on what they do best: creating a more efficient, equitable, and fairer tokenized economy for all.

But in our lifetimes, the exchange, flow, and spread of information have not only accelerated to previously unthinkable levels. They also enabled a vast range of new services and economies. Our societies have changed because of how data and information is created, shared and managed, and ultimately, consumed.

This revolution is far from being over. We are about to embark on the journey that leads to web3. Our conviction at Flowdesk is that its next phase is tokenization — made possible by blockchain technology.

Our vision is clear: the future of finance is tokenized.

In essence, tokenization is a new form of storing, handling, sharing, and exchanging all sorts of information. We see the tokenization of finance as a conduit to unlock previously untapped economic potential.

It will render fractionalized investments into, for example, tokenized real estate easier. No need for lawyers’, notaries’, or other intermediaries’ intervention at every step of the process. The same will be true to all shares, bonds, and any asset. Fractionalized investment is but one of the many use cases that will bring about a new era of wealth management and economic growth.

Tokenization could make transactions easier, more transparent, and trustworthy, as well as more efficient. We believe that — if it is used and governed correctly — tokenization can give way to new types of goods, services, and business models. It can create a fairer, more equitable, and sustainable economy globally.

Our mission is to bring this future closer by empowering blockchain innovators and communities.

Our long-term strategy starts with contributing to this defining change from the bottom up — first, by enabling those who are building and innovating in the blockchain space and are issuing tokens.

As a responsible technology provider, Flowdesk is already serving blockchain developers and the community. We provide an all-in-one algorithmic trading platform that is fast, reliable, secure, supported 24/7, yet easy to use, as well as transparent and globally compliant. To help token issuers, we provide a market-making solution that is neutral, responsible, and sustainable in the long-term — free of any conflict of interest. Flowdesk is only committed to the continuous success of its clients.

To achieve tokenization, we must be there for token issuers and web3 innovators every step along their journeys. This is why Flowdesk has also developed a full set of tools for token issuers to manage all their crypto-financial needs through an all-in-one platform. We provide, in addition to market-making, custody, over-the-counter trading and brokerage, as well as treasury management: all the tools and intelligence for token issuers and blockchain communities to be in full control. We empower web3 innovators to make decisions autonomously, independently from external interests and pressures so that they can focus on what they do best: building a tokenized, transparent, and efficient future.

Transparency and trust are the core values of blockchain as a technology. They are — as they must be — at the heart of everything we do. It is only through clear and fair regulation that blockchain technology can become mainstream and serve everyone. So we are not only advocating for overarching regulatory reforms, but are also proactively implementing them internally to be in the forefront of this defining transformation. There is no alternative to this prudence — only short-term profiteering that ultimately benefits only a few.

Flowdesk’s purpose is to create and provide the responsible, sustainable solutions that spur web3 innovation and lead to tokenization.

We aim to ensure that blockchain can reach its true potential and real utility: improving accountability in business and beyond and delivering on a more open, transparent, and efficient tokenized financial system. Our technology and core values position us as a leader of this transformation.