Understanding the Importance of On-Chain Trading
Market-making in on-chain trading is a crucial yet often enigmatic aspect of the cryptocurrency landscape. According to the pseudonymous trader Grug, a significant issue lies in the fact that crypto protocols with valuable order flow are not fully capitalizing on their potential earnings.
Funding for a New Approach
In a bid to address this challenge, Grug’s venture, Warlock Labs, has successfully raised $8 million in venture funding. This capital will be utilized to develop a proprietary trading firm that leverages on-chain data to demonstrate responsible processing of order flow.
Entering the Complex Ethereum Trading Ecosystem
Founded two years ago, Warlock Labs is poised to navigate the intricate blockchain infrastructure that facilitates trading on Ethereum. In this environment, numerous savvy operators often provide kickbacks to protocols in exchange for the privilege of processing their order flow. This practice can yield massive profits, sometimes totaling in the tens of millions annually.
The Risks of Maximal Extractable Value (MEV)
However, there is no assurance that these operators are acting in the best interest of the protocols. The concept of maximal extractable value (MEV) introduces numerous opportunities for manipulation of pending trades, which can negatively impact both the protocols and their traders.
Innovative Solutions for Order Flow Integrity
Grug emphasizes the importance of transparency and integrity in order flow management. “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,” he explained. This innovative approach aims to ensure that the order flow remains untouched and genuine.
Future Expansion and Broader Market Implications
While Warlock Labs will initially focus on on-chain activities, Grug envisions scaling the business to include market-making for centralized exchanges (CEXes) as well. He referenced the recent controversy involving Binance, where a market maker allegedly profited illicitly from MOVE tokens at the expense of traders, highlighting the need for more ethical practices in the industry.
The Future of Order Flow
Grug believes that the future will see order flow becoming a critical asset. “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,” he stated. He asserts that the ability to demonstrate integrity in order flow processing will encourage more entities to submit their order flow to responsible players in the market.
Positioning Against Competitors
Grug describes Warlock Labs as a “venture scale business,” with Wintermute identified as its main competitor in the market-making sector. The recent funding round was led by Polychain Capital, with additional participation from Greenfield Capital, Reciprocal Ventures, Symbolic Capital, Ambush Capital, and TRGC, indicative of strong investor interest in Warlock Labs’ innovative approach to on-chain order flow management.
