Market-making for on-chain transactions is an enigmatic yet crucial industry that can be quite profitable. According to an anonymous trader known as Grug, there’s a significant issue: crypto protocols housing valuable order flow are not maximizing their earnings.
Grug’s venture has successfully secured $8 million in funding for what he sees as a game-changing solution: a proprietary trading firm that leverages on-chain data to ensure it handles order flow ethically.
Established two years ago, his company is preparing to navigate the intricate blockchain frameworks that enable trading on Ethereum. Here, a multitude of skilled operators provide incentives to protocols in return for the ability to handle their order flow, which can lead to substantial annual profits in the tens of millions.
However, Grug warns that there’s no assurance that these entities are acting in the best interests of protocols. The realm of maximal extractable value (MEV) presents numerous risks for manipulating pending trades in ways that could harm both the protocol and its traders.
“We’re developing order flow tools along with a system that guarantees zero-knowledge proofs, so we can retroactively demonstrate that none of the order flow submitted to us, whether from users or searchers, has been modified in any way,” Grug explained.
While Warlock Labs will initially focus on on-chain activities, Grug envisions expanding the business to also serve centralized exchanges. He highlighted the recent issues surrounding Binance, where a market maker was found to have taken unauthorized profits from MOVE tokens, ultimately disadvantaging traders.
“We’re approaching a future where order flow itself is a competitive advantage, and proving that you have not exploited it holds as much value as simply acquiring it,” Grug stated. “If you can demonstrate that you will never manipulate order flow, it’s increasingly likely that more entities will entrust their order flow to you.”
Grug characterized Warlock Labs as a “venture-scale business,” indicating that its main competitor is Wintermute, the prominent market maker. Investors are taking note: the funding round was led by Polychain Capital, with participation from Greenfield Capital, Reciprocal Ventures, Symbolic Capital, Ambush Capital, and TRGC.