Reservoir is on a mission – to empower developers to build the next wave of NFT applications, marketplaces and automated trading agents with open, decentralized tooling. Developers can build using real-time and historical market data, display or trade using aggregated NFT liquidity – all from one platform. To more deeply understand what market makers need to thrive in the NFT market, the team at Reservoir decided to engage in the ultimate user research: becoming a market maker themselves.
“By essentially building against Reservoir we could better understand the needs of this group, to assess the risk, and understand what we need to do and watch out for,” said Jason Maier, Head of Research at Uneven Labs – the core team behind Reservoir.
The Reservoir team knew they wanted to explore a few practical and theoretical objectives to help them better understand market making:
- The limitations of using their own APIs for market making
- How to run tests and assess progress in a controlled environment
- How existing expertise about financial markets will apply to the NFT market
- How to use all of these insights to create more liquidity and support a thriving NFT ecosystem
“We needed to understand how to approach a trading system from a systematic development perspective,” said Jason. “And we had about 12 weeks to do it – it was now or never.”
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“We needed to understand how to approach a trading system from a systematic development perspective. And we had about 12 weeks to do it – it was now or never.”
Jason Maier, Head of Research at Uneven Labs
Finding the right team
The Reservoir team already had deep knowledge of NFTs, blockchain, and economics. What they needed was someone with applied experience in finance, building trading systems and software for analytical processes. This would allow them to build data pipelines they could use for scalable, long-term analysis of the market.
“Reservoir is a great example of startups who come to Tribe with a need for subject matter experts to plug holes for a lean team,” said Noah Gale, Tribe co-founder.
Tribe put together a team consisting of an advisory role with deep crypto experience combined with an engineer who has spent years building automated trading systems in finance:
- Erik G. – Engineer and former Harvard researcher with 13 years experience in machine learning and crypto. Founded an AI cancer screening startup and early employee at multi-billion dollar public and venture backed companies.
- Daniel V. – ML researcher, software engineer, and data scientist with broad experience in applying algorithms. Among his adventures in algorithmic trading, Daniel already had experience taking his prediction improvement ideas to deployment, with positive PnL implications to his team and others, made portfolio planning faster and more flexible, improved trading system safety and research tool accessibility.
“Reservoir is a great example of startups who come to Tribe with a need for subject matter experts to plug holes for a lean team.”
Noah Gale, Tribe Co-founder
The project
The most pressing challenge for the existing NFT market is the lack of liquidity, which is where the market maker comes in. The user can sell their Bored Ape for an immediate return and the market maker holds onto it until a buyer comes along. But becoming a market maker for NFTs is different than it is with other asset classes.
“Unlike a stock of IBM, every NFT is different,” said Daniel, the Tribe engineer on this project. “It’s part of what makes it interesting, but it introduces difficulty in trading because there’s much less history to base prices on. NFTs behave less like a stock and more like the housing market or an ebay auction for a rare item. So many finance concepts about volume, prices and volatility need rethinking.”
“People want the same experience they have on Robinhood where they have instant liquidity,” said Jason. “What we wanted to prove was that the opportunity is now there for market makers to come in and do this at scale.”
The Tribe team quickly sketched out two core activities for this project: Research to analyze and define Reservoir’s marketing aking (MM) strategy, and Infrastructure to support this as an ongoing activity:
Research
- Identify the markers of NFT collections that fit Reservoir’s market making goals. These include information about the current state of the market, and an understanding of the traits of the NFT collection, among other things.
- Develop market maker-focused infrastructure to support efficient and effective interaction with the Reservoir platform.
Infrastructure
- Architecture for safe operation, monitoring and stress testing of market strategies. A focus on infrastructure bringing a systematic approach to production, helping scale up the company's trading activities
- Develop reusable software infrastructure and software engineering practices to improve the performance and correctness of the MM bot
- Optimize the the use of Redshift for historical data analysis
For both the Tribe and Reservoir teams, the project was an ideal mix of subject matter and technical expertise.
"Collaborating closely with a team that has such a deep understanding of their market, its participants and their concerns was fascinating,” said Daniel, “and it provided a new context in which to apply tools of financial modeling, data analysis and software architecture."
"People want the same experience they have on Robinhood where they have instant liquidity. What we wanted to prove was that the opportunity is now there for market makers to come in and do this at scale.” "
Jason Maier, Head of Research at Uneven Labs
The future of the NFT market
Ultimately, Reservoir decided not to move forward with market making activities, but that was always the point. “We always knew if we did this project well, we wouldn’t be doing it in six months time,” said Jason. “What we want is to make it easy for market makers to come in and create liquidity. And our role is to keep building tools that will help unbundle the market and create more opportunities for innovation.”
“In crypto, people think retail can be the liquidity provider in all cases. But I think that’s a misinterpretation. I think this project really proved the need and opportunity for professional market makers as a backbone.”
Over the course of the project, Reservoir found their activities were generating more interest from market makers – something the company sees as a necessary step for the market to mature. So Reservoir decided their focus was better shifted back to their core activities – building better tools for the next wave of NFT market innovation.
“We see a future where the NFT marketplace is going to unbundle,” said Jason, “where retail users are the takers and liquidity ends up in NFT wallets. It’s an exciting space. I came away from this project thinking: If I wasn’t already working at a startup that I believe is amazing, market making is the thing I would work on.”
“Having an expert there to help guide us to understand if we were thinking about something the right way was hugely valuable,” said Jason. “And the onboarding and offboarding experience was really smooth. We would definitely work with Tribe again.”
“Having an expert there to help guide us to understand if we were thinking about something the right way was hugely valuable. And the onboarding and offboarding experience was really smooth. We would definitely work with Tribe again.”
Jason Maier, Head of Research at Uneven Labs
All images generated using Midjourney
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