The impact of the Wintermute hack could have been worse than that of 3AC, Voyager and Celsius, we explain why

Most crypto investors have probably never heard of Wintermute Trading before the $160 million hack on September 20, but that does not reduce its importance within the cryptocurrency ecosystem. The London-based algorithmic trading and crypto lending firm also provides liquidity to some of the largest exchanges and blockchain projects.

As a cryptocurrency trading company, meaning digital assets have been at its core since its inception in July 2017, Wintermute’s industry expertise is attested to by $25 million in funding from global venture capitalists such as Fidelity Investments, Pantera Capital, and Ventures.

Lending and venture capital firms have limited impact on day-to-day operations

An important distinction distinguishes a market maker from bankrupt cryptocurrency venture capital firmssuch as 3 Arrows Capital, or from insolvent lending and yield platforms such as Voyager Digital and Celsius Network. The $160 million Wintermute hack could have a much deeper impact on the cryptocurrency industry, considering how essential liquidity is.

The very nature of these businesses is very different. For example, a venture capitalist it usually invests in pre-seed or seed capital by financing projects before they are launched. There is a need for early-stage funding for tokens, non-fungible tokens (NFTs), decentralized applications (DApps), and infrastructure projects, but the money will come when a good team, a good idea, and a good community come together.

In addition, the failure of a particular venture capitalist, whether or not it is relevant to the sector, does not damage the reputation of its competitors. In fact, the opposite sentiment arises because it shows that choosing the right projects pays off, if the company has correctly managed its risk exposure. The same can be said for yield and loan platforms, which basically compete for customer deposits and fight to offer the best benefits.

When market makers fail, liquidity dries up and there is nothing worse for tradable assets than rising spreads. Most DApp and exchange users are not aware of these brokers because their work is hidden in order books and price arbitrage between brokers, centralized or not. The real secret lies in algorithmic trading.

By applying sophisticated modeling and trading software, algorithm companies like Wintermute resort to various strategies to find a competitive advantage over regular traders, such as arbitrage, derivatives, and placement servers for trading. high frequency market access.

In addition to traditional proprietary trading, Wintermute offers market making services by facilitating trades for brokers with their own resources. These services can be contracted by exchanges, brokers, token issuers or third party entities such as foundations and support companies.

Specialized trading companies usually take care of this process, but the activity can also be carried out independently. Today, Wintermute, Alameda Research, DRW, Jump Trading and Cumberland are some of the leading accessory trading companies providing liquidity to centralized exchanges and trading platforms. decentralized finance (DeFi).

This week’s hack wasn’t Wintermute’s first million-dollar blunder

Wintermute was hired by the Optimism Foundation to provide liquidity for their token listing in June 2022, but completely screwed it up by losing 20 million OP tokens. ANDThe Wintermute team communicated the incident to the Optimism community and posted 50 million USD Coin (USDC) as collateral to ensure full repayment of the protocol.

Think about this for a moment. Exchanges, blockchain projects, venture capitalists, and DApps all need some form of liquidity to ensure that the secondary market runs smoothly for end users. Without slim margins and some depth in the order book, there is little chance of a project succeeding.

Whether liquidity providers are viewed as villains or heroes, their importance to the cryptocurrency industry cannot be underestimated. The current hack could have been due to bugs unique to Wintermute, and for this reason, they have not manifested as an additional risk to other market makers.

Traders should not compare the failure of 3AC, Voyager and Celsus with the threat of a liquidity vacuum fueled by the abandonment of the remaining arbitrage desks. At the moment there is no indication that widespread risk has emerged, but until a detailed autopsy is released and similar risks are ruled out, traders should keep a close eye on the markets.

The views and opinions expressed herein are solely those of the Author and do not necessarily reflect the views of Cointelegraph. All investment and commercial movement involves risk. You should do your own research when making a decision.

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