by Carlo P. Las Marias
We are thrilled to announce that Hummingbot, an open-source, crypto trading bot platform, has raised $8 million in a Series A round led by venture capital firm Initialized Capital. Other traditional VCs participated, including Slow Ventures, Arrington XRP Capital, as did strategic partners from across the cryptocurrency industry: Borderless Capital, DeFiance Capital, Terraform Labs (Luna), AscendEX (BitMax), Ava Labs, NEM Trading, and Altonomy.
Since open-sourcing crypto trading bot Hummingbot in April 2019, we have introduced thousands of users to the world of automated trading. Hummingbot democratizes high-frequency trading for the cryptocurrency market, empowering the individual with same automated trading capabilities (e.g., market-making and arbitrage) previously only available to Wall Street hedge funds.
We also introduced Hummingbot Miner to complement the Hummingbot mission. While Hummingbot delivers value to traders, Hummingbot Miner delivers value to token issuers by providing low-cost, flexible market-making via an army of decentralized traders called “miners”. Due to this low cost and flexibility, Hummingbot Miner makes market-making services accessible to all token issuers, not just the largest with the deepest pockets.
Since we launched Hummingbot Miner in March 2020, we have helped 23 issuers, with market caps ranging from single-digit millions to multi-billions, tap into our trader community to market-make for their tokens. To date, 2,589 individual traders (“miners”) have participated in creating order book depth, providing diversified sources of market-making which have resulted in over $1.9bn of trading activity.
We’re very proud of what we’ve been able to achieve so far, which demonstrates the progress we’ve made in tackling the biggest problem in the cryptocurrency market: liquidity.
Solving the cryptocurrency market liquidity problem
Michael, Martin, and I founded Hummingbot in 2017 on the belief that blockchain technology and cryptocurrencies had the potential to revolutionize the financial markets. Mike and I spent a collective 22 years trading and structuring financial products on Wall Street working for JP Morgan and Goldman Sachs. As we got into crypto, we marveled at the potential that blockchain technology had for our age-old industry. Structuring and trading investment products requires large, highly paid teams of bankers and legal counsels, not to mention back-office and middle-office staff. We realized this could be done vastly more efficiently (and cheaply) through the use of smart contracts. We joined forces with Martin, then a senior Apple engineer but already an experienced crypto trader with a side gig of building crypto trading bots. With that, the three of us formed Hummingbot.
We started out as a novel hedge fund built on the blockchain which deployed our Fund Protocol, our first smart contract-based asset management product. Returns were good and business was “humming” along. However, our focus shifted as we encountered the biggest problem in the crypto industry on a daily basis: severe lack of liquidity. An inefficient market with excessive volatility was a big deterrent for would-be adopters of the technology. It was obvious to us what was missing: market makers.
The role of the market maker is fundamental for any tradable market. Market makers set the prices of assets by creating orders to buy and sell those assets. As their orders are accumulated on exchanges into “order books”, they facilitate and enable trading for the rest of the market. To put it simply: market makers don’t just populate the marketplace, they are the marketplace.
The crypto market presents added complexity: they are open 24/7, highly volatile, and extremely fragmented. In 2017, while there were a few sophisticated hedge funds acting as market makers for some exchanges for some markets, they were greatly outnumbered by the exponential growth of exchanges and new tokens being issued. This resulted in a huge supply and demand imbalance for market-making services. While large mainstream tokens such as Bitcoin and Ethereum were actively traded and broadly supported, the “long-tail” of innumerable cryptocurrencies and fast-appearing crypto exchanges was left far underserved.
The trading client is born (or rather, hatched?)
While we could have continued to operate our hedge fund and trade cryptocurrencies ourselves for our own book, we alone couldn’t really make much of a dent in solving the crypto market liquidity problem. We realized that the only way to make a widespread impact was by employing the blockchain’s own credo and enlisting the general public in an effort to decentralize.
What began as our quant hedge fund tech stack evolved into Hummingbot, our open-sourced trading bot. This gave the general public the capabilities to trade cryptocurrencies and deploy automated strategies, including market-making. These were the very same, highly-guarded strategies used by professional market makers and billion-dollar hedge funds now made accessible to any trader. Our community quickly grew; we had novice traders, professional traders, token issuers, exchanges, market makers, and even professional funds using Hummingbot.
Our mission to turn anyone into a market maker was being realized. So then we had our next challenge: how could we harness this massive potential? Enter liquidity mining.
The origin of “liquidity mining”
In our October 2019 Liquidity Mining whitepaper, we coined the term “liquidity mining”: a way of allowing a decentralized group of actors to collectively provide liquidity and serve the role of the market maker. In the same way that block miners are rewarded for collectively mining blocks to advance and secure blockchains, liquidity miners are rewarded for collectively contributing to the liquidity of tokens.
In community-based market-making, you have many different traders placing orders and trading, all simultaneously and all in a different manner. Among this chaos, we needed to find some order. The fundamental pillar of liquidity mining, therefore, is creating a framework to measure and quantify each actor’s individual contribution to liquidity. In turn, this measure of liquidity contribution can be used as the basis for token issuers and exchanges to fairly reward each individual market maker.
Of note, the term “liquidity mining” was subsequently adopted and popularized in DeFi by automated market makers (“AMMs”) such as Curve.Fi, Balancer, and Uniswap, who applied the same broad concept but implemented liquidity mining by embedding it into their AMM smart contracts (thanks for helping us to bring “liquidity mining” into the mainstream, guys!).
Hummingbot Miner emerges
From here, we expanded Hummingbot to create Hummingbot Miner, our implementation of liquidity mining. The main difference is that Hummingbot Miner is liquidity mining for centralized exchanges, rather than AMMs/smart contracts. Despite the exponential growth of decentralized exchanges and AMMs, the majority of trading still occurs on centralized exchanges, which continue to be the primary trading venues for the majority of tokens.
Hummingbot Miner works by collecting and analyzing participant order data. Here’s how we measure liquidity: (1) the more consistently a miner places orders with (2) better prices and (3) larger sizes, the larger the amount of rewards that miner can earn for the higher quality of liquidity they are providing.
The larger amount of rewards earned also compensates miners for the additional risk they are assuming by placing orders at better prices and sizes that benefit other market participants. In effect, Hummingbot Miner liquidity mining aligns the opposing objectives of “liquidity buyers”, exchanges and token issuers who want to incentivize for better liquidity, and “liquidity sellers”, the traders who participate in market-making but prefer to minimize their risk.
Hummingbot Miner vs. traditional market makers
As mentioned previously and even persisting to this day, there is still a relatively small number of capable market makers that provide market-making services. Due to the limited number of service providers, market makers usually have the leverage and, consequently, structure market-making contracts that are economically disadvantageous to token issuers and exchanges.
Hummingbot Miner offers exchanges and token issuers economic, community, and informational advantages over hiring traditional market makers:
- Lower cost, pay-as-you-go market-making: token issuers decide what amount of reward pool they want to offer, and can launch campaigns any time.
- Miners use their own assets for trading, whereas traditional market makers typically require large amounts of token and quote assets in inventory for trading. Any new miners will have to purchase the issuer’s tokens to participate, while existing token holders now have a new way of deploying their tokens to earn rewards.
- Native token payments: token issuers can deploy their own tokens for reward pools, and, in doing so, also promote use and adoption from a diverse group of traders.
- Marketing and trader outreach: issuers can tap into Hummingbot’s community of traders and the general public to increase project awareness. Whereas traditional market makers are “behind the curtain”, a liquidity mining campaign publicly engages the trading community and signals to the market the issuer’s support of trading efficiency.
- Data-driven market making: issuers can track daily stats on participation for their campaigns, giving them visibility into market-making and allowing them to make informed decisions on setting campaign terms and evaluating the effectiveness of their campaign.
With Hummingbot Miner, our long-term goal is to fundamentally change how issuers and exchanges support liquidity for their tokens and platforms. By decentralizing market-making, we hope to make liquidity more efficient, sustainable, and accessible to more token issuers and exchanges.
Hummingbot Miner adoption
Since we launched Hummingbot Miner in March 2020, we have managed liquidity mining campaigns on Binance.com and KuCoin.com for 23 token issuers, including Algorand, Avalanche, NEM, Solana, Harmony, iExec, and Zilliqa.
2,589 distinct miners have participated in liquidity mining and provided liquidity for tokens across our various campaigns:
Collectively, Hummingbot miners have contributed $1.87bn of trading volume across campaigns:
At times, Hummingbot miners have even accounted for over 70% of the trading volume for particular tokens on Binance.
We’re amazed at what our community has been able to achieve over the past year, to help us validate our concept and platform. We are also encouraged by the support and positive feedback from some of our early adopter customers:
“We have worked with traditional market makers and have evaluated their services versus Hummingbot Miner. The economics and benefits are a no-brainer. Hummingbot supported the launch of the XYM tokens for our Symbol platform and we were quite pleased with the quality of liquidity provided by community-based market making. We are planning to maintain liquidity mining campaigns for the foreseeable future, and view Hummingbot Miner as a sustainable way to promote liquidity as well as a great way to give back to the NEM community.”
- Iain Wilson, CFO of NEM
“Hummingbot Miner was a great way for us to encourage liquidity and trading activity in ALGO trading pairs as well as to promote the adoption of Algorand Standard Assets USDC and USDT.”
- Sean Lee, CEO of Algorand Foundation
“We’ve been running our liquidity mining campaign for almost a year and don’t have plans to stop. Hummingbot Miner is by far our preferred choice of market-maker.”
- Doug Leonard, CEO of Hifi Finance
So we’ve got a growing community of users and happy partners. That’s all great... but how does Hummingbot make money from open-source software?
The Hummingbot business model
We love being able to offer our Hummingbot software open-source and opening the world of automated trading and market-making to the general public. But this software is highly sophisticated and takes a world-class team of engineers to develop and maintain. So how do we manage to sustain our team? And a related question, why did our seed and Series A investors invest in us? : )
We currently have three sources of revenue:
- Share of exchange trading fees: we have partnered with several exchanges (including Binance, KuCoin, OKX, and AscendEX) that help support Hummingbot. For users trading with Hummingbot and incurring trading fees, our partner exchanges share with us a portion of those fees. The exchanges get new users from our community and increased liquidity/trading activity from Hummingbot users, our users get free access to powerful trading software and don’t have to pay anything extra, and the fee share helps sustain Hummingbot. It’s a win-win for all!
- Hummingbot Miner campaigns: token issuers running liquidity mining campaigns on Hummingbot Miner pay a platform fee for us to manage and host their campaigns.
- Custom exchange connectors: exchanges (both centralized and decentralized) provide Hummingbot development grants and maintenance payments for building out integrations to their exchanges.
Separately, we are also already working on other additional services that can help Hummingbot users improve and optimize their trading strategies. Stay tuned...
The post Series A future of Hummingbot
Our Series A investors serve a vital role in our next phase of growth. They're helping us to bring Hummingbot and Hummingbot Miner to even more exchanges, spanning a broader segment of the crypto market. This will allow us to serve more token issuers and provide them sustainable, decentralized, and community-based market-making.
We’re encouraged by the results we’ve seen on our platform so far and what we and our community have been able to achieve, particularly considering the results so far really just reflect a single exchange, Binance.com. We have already launched on KuCoin as well, but that was only recently, in February.
The Series A financing will allow us to scale and replicate the model we have created to more exchanges. We are growing our team and are furiously working to integrate Hummingbot and Humminbot Miner to more exchanges, with the goal of eventually covering most major exchanges.
In the near term, we are planning to launch Hummingbot Miner on AscendEX in June. As mentioned above, AscendEX participated in our Series A fundraising. AscendEX views Hummingbot Miner as a core offering and advantage for its listings and user base, and we have long-term, strategic plans for liquidity mining collaboration. Read more about our Q2 roadmap here.
Exciting times ahead, lots more to come from Team Hummingbot!
To learn more about Hummingbot and liquidity mining, see below:
🏛 Token issuers: contact the team at email@example.com to learn more about running liquidity mining campaigns on AscendEX, Binance.com, KuCoin, or to suggest the next exchange for us to integrate with!
🏦 Exchanges: contact firstname.lastname@example.org if you’d like to bring Hummingbot and liquidity mining to your exchange!