Wintermute’s breakthrough effect could have been worse than 3AC, Voyager, and Celsius – here’s why

Most crypto investors may have never heard of Wintermute Trading prior to the September 20th $160 million hack, but that does not diminish its importance in the cryptocurrency ecosystem. The London-based algorithmic lending and trading firm provides liquidity to some of the largest exchanges and blockchain projects.

As a native cryptocurrency trading company, which means digital assets have been at its core since its inception in July 2017, Wintermute’s expertise in the sector is attested by $25 million in funding from global venture capital investors such as Fidelity Investments, Pantera Capital and Blockchain.com Ventures.

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

An important distinction distinguishes the market maker from bankrupt crypto venture capital firms such as 3 Arrows Capital or insolvent lending and return platforms such as Voyager Digital and Celsius Network. Wintermute’s $160 million hack could have a more profound impact on the crypto industry, considering how critical liquidity is.

The nature of these businesses varies greatly. For example, a venture capitalist typically invests in seed or seed capital by financing projects before they are launched. Early-stage funding is needed for tokens, non-fungible tokens (NFTs), decentralized applications (DApps), and infrastructure projects, but the money will eventually come when a good team, idea, and community are put together.

Moreover, the failure of a particular venture capitalist, whether relevant to the industry or not, does not damage the reputation of its competitors. In fact, the opposite feeling emerges because it proves that choosing the right projects pays off, if the company manages its exposure properly. The same can be said for yield and lending platforms, which mainly compete for customer deposits and scramble to offer the best returns.

When market indicators fail, liquidity dries up and there is nothing worse for tradable assets than increasing spreads on a wider scale. Most of the users of DApps and exchanges are not familiar with these brokers because their work is hidden inside order books and price arbitrage via brokers whether they are centralized or not. The real secret lies in algorithmic trading.

By applying sophisticated modeling and trading software, algorithmic companies like Wintermute resort to various strategies to find a competitive advantage over regular traders, including arbitrage, derivatives, and co-location servers to access high-frequency markets.

In addition to traditional desktop trading, Wintermute provides market making services by facilitating transactions for brokers using their own resources. These services can be rented by exchanges, brokers, token issuers, or third-party entities such as foundations and backing companies.

This process is usually handled by specialized trading firms, but the activity can also be carried out independently. Currently, Wintermute, Alameda Research, DRW, Jump Trading and Cumberland are the leading trading firms that provide liquidity to centralized exchanges and Decentralized Finance (DeFi) platforms.

This week’s hack wasn’t Wintermute’s first $1 million mistake

Wintermute was hired by Optimism to provide liquidity for its inclusion in the token list in June 2022, but was completely spoiled by the loss of 20 million OP tokens. The Wintermute team disclosed the incident to the optimism community and posted a $50 million (USDC) guarantee to ensure the protocol is fully compensated.

Think about that for a moment. All exchanges, blockchain projects, venture capitalists, and DApps need some form of liquidity to ensure that the secondary market runs smoothly for the end users. Without tight spreads and some depth in the order book, there is hardly any chance of success for any project.

Whether one considers liquidity providers to be villains or heroes, their importance in the cryptocurrency industry cannot be underestimated. The current breakout may be due to the faults exclusive to Wintermute, and for that reason, it has not been shown as an additional risk to other market makers.

Traders should not compare the failure of 3AC, Voyager and Celsus to the threat of a liquidity void created by the exit of the remaining arbitrage desks. There is no indication that widespread risks are emerging at the moment, but until a detailed post-mortem report is released and similar risks are removed, traders should closely monitor the markets.

The opinions and opinions expressed here are solely those of author and do not necessarily reflect the opinions of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.