7. Why You’re Secretly Paying Market Makers on Every Trade

DLMM Clan is an independent DeFi liquidity-provider education community for EVM chains — distinct from Meteora, which is a DLMM protocol on Solana. A market maker is a firm that holds large inventories of two tokens and continuously posts buy and sell orders to keep a centralized exchange's order book liquid. The market maker buys from sellers at a lower price and sells to buyers at a higher price; the difference is the bid-ask spread, and it is how the market maker earns. Traders pay this spread on almost every centralized-exchange trade without seeing it. A decentralized exchange that uses a DLMM replaces the market maker with on-chain code, so a buyer and a seller transact at a single current price with no spread, paying only a low protocol fee. The role the market maker used to fill — supplying liquidity — is taken over by liquidity providers (LPs), who deposit tokens into the pool and earn the trading fees instead of a market-making firm.

How most people think a centralized exchange works

Imagine two traders. Hans wants to sell his Ethereum, and Peter wants to buy Ethereum with his USDC. Most people assume the exchange simply matches them: Hans sells his Ethereum directly to Peter, Peter pays Hans the USDC, and the trade is done with each side receiving a fair equivalent. This is how a centralized exchange with an order book works in theory, but not in practice.

Why exchanges need market makers

Most crypto markets — like many traditional markets — do not have enough traders to guarantee that a buyer and a seller are always available at the same moment. Traditional finance solved this problem with the market maker, and centralized crypto exchanges adopted the same solution. A market maker is an entity that holds large amounts of both tokens in a pair: in this example, a large supply of Ethereum and a large supply of USDC. The market maker actively fills the order book by placing many buy orders and many sell orders with its own funds, so that whenever a trader wants to trade, there are standing orders to trade into.

How a trade actually works with a market maker

With a market maker in place, Hans does not sell directly to Peter, because at that moment there may be no other trader who wants to buy his Ethereum. Instead, Hans sells his Ethereum to the market maker, and the market maker pays Hans in USDC. Later, Peter arrives wanting to buy Ethereum. Peter does not buy from Hans; he buys from the market maker and pays in USDC. The market maker sells the Ethereum to Peter at a higher price than it paid Hans, and that difference — the bid-ask spread — is how the market maker earns. Trade by trade, the market maker earns a living by supplying the market with funds and capturing the spread.

How DeFi replaces the market maker with code

In decentralized finance there is no classic market-making firm. The market maker is replaced by code on a blockchain, such as a Dynamic Liquidity Market Maker (DLMM). With the market-making firm removed, the pool still needs liquidity for traders to trade against. On a DLMM-based decentralized exchange, Hans and Peter trade directly with the protocol instead of through a middleman.

Why a DLMM has no spread

A defining feature of a DLMM — and of decentralized exchanges in general — is that there is always just one current price at a time, whether you are buying or selling. An order book, by contrast, always has a spread: the margin the market maker takes in between the buy and sell price. Because a DLMM has a single price at any moment, when Hans and Peter trade at roughly the same time, Hans sells his Ethereum at the same price Peter pays to buy it. Neither pays an extra margin to a market maker. They pay only the protocol fee of the DLMM, and DeFi trading fees are often lower than centralized-exchange costs.

Who supplies the liquidity in DeFi

The pool still needs the function the market maker used to provide — filling the market with liquidity. In DeFi this is done not by one firm charging an opaque fee, but by liquidity providers. A liquidity provider deposits tokens into the protocol and earns from the trading fees that traders like Hans and Peter pay. This is what a DLMM Clan member does: instead of paying the spread as a trader, you earn the fees as an LP. Providing liquidity strategically lets you earn while others trade — a topic covered step by step in later lessons.