Maker vs. Taker in Cryptocurrency

The maker vs taker model has become incredibly popular in the world of cryptocurrency, having underpinned the stock market for years to date. Thanks to its core attributes, it is perfectly suited to the cryptocurrency space as well. 

However, the maker versus taker model can impact your ability to build your portfolio, as it goes a long way to dictating the fees you’ll pay to trade. As a result, it’s prudent to understand how the model works and why crypto exchanges gravitate toward this fee framework. 

What Are Market Makers in Cryptocurrency?

Broadly speaking, a market maker is an individual or entity that makes a market by creating a limit order. The limit order describes the action you want to take (buy or sell), what asset you want to trade, the volume of the transaction, and what price you want to receive or pay. 

For example, you could put in a limit order to sell 500 units of a particular cryptocurrency at a unit price of $1,000. In this case, let’s say the current price is $750, when the price of the coin hits $1,000 the order will automatically execute.

By placing the target order you’re announcing your selling intention to the market. Practically speaking, this order’s listed in an exchange’s order book, so you have made a market by providing liquidity at that price point

What Are Market Takers in Cryptocurrency?

Market takers are the exact opposite of makers. While makers add inventory and liquidity to the exchange, takers purchase that inventory of crypto assets. 

Taker requests are called market orders. This is because they want to execute the transaction immediately based on the current market price. They do not want to set a value limit on the transaction but instead are willing to make the purchase at the prevailing price. 

Maker and Taker Fees

Both makers and takers are charged fees for their trade orders. The following is an example of each:

Maker Fee Example

To be classified as a maker order, buy requests have to be placed at a price lower than any existing sell orders;  by the same token, maker sell orders must be priced higher than any existing buy orders. 

Say you file a limit order to sell 100 coins of an asset at a value of $500 each. If the highest buy order on the exchange’s order book has a strike price of $450 (for the same coin) your order would be a maker order. 

The exchange would add it to the order book for processing if the price hits. You would be charged a discounted fee (versus takers - see below) for the transaction when it is processed, or no fee at all depending on the exchange’s fee framework. 

Taker Fee Example

Taker fees are charged when you place a market order. Say that you want to purchase 1,000 units of a coin for $100 each. One month prior to submitting your order, a maker created a limit order to sell precisely 1,000 units of the same coin at that purchase price. 

In this scenario, the exchange would be able to immediately match these orders and process your order request. Given your order would remove a limit order from the order book and reduce market liquidity, you would be charged a taker fee, which is normally higher than a maker fee.

Why Do Crypto Exchanges Use a Maker-Taker Model?

Exchanges serve to match orders between sellers and buyers. For exchanges to perform efficient order matching, they must create and maintain a highly liquid state. Liquidity refers to the ease with which you can buy, sell or trade assets at a given price point. In an illiquid market, it is difficult to conduct transactions, especially if a large volume of assets are involved. As a result, trading in illiquid markets can see the realized price of a trade move against you in a way that wouldn’t be the case in a liquid market.

The maker-taker model incentivizes makers to create market liquidity by charging them lower fees than takers are subject to. In turn, this allows exchanges to match orders more efficiently and keep trade volume high. 

In terms of trading fees, makers are rewarded for contributing liquidity, while takers are penalized for depleting it. The difference in the fees is coined the maker-taker spread and it contributes to additional profits collected by exchanges beyond their base fees.

Advantages of Market Makers and Takers

The biggest advantage and key characteristic of the maker-taker model is that it promotes market liquidity. If you want to act as a taker, this liquidity enables you to purchase the type and volume of crypto assets that you want when you want to. 

From the maker’s perspective, the market gives you an opportunity to create custom limit orders and buy low or sell high. Limit orders also enable you to create market liquidity and thereby avoid incurring larger transaction fees charged to takers.

To recap, the maker-taker model offers takers convenience and makers better value in respect to fees. 

Avoiding Direct Maker Taker Fees 

The maker versus taker model might not seem advantageous for investors, but it provides favorable trading conditions for big makers. Regardless of how you feel about the model, it is here to stay.

Several years ago, the Securities and Exchange Commission (SEC) attempted to combat maker-taker rebates by launching a pilot program. The program focused on getting rid of maker-taker fees among a limited selection of stocks so that the SEC could analyze how the fee model impacted trading. Before the program made any real impacts on the market, the U.S. Court of Appeals killed it via a 2020 ruling. 

If you want to avoid maker-taker fees, directly, you should partner with an experienced crypto brokerage like Caleb & Brown. Caleb & Brown’s flat rate fee model avoids maker-taker fees altogether, leaving you with one less thing to consider when making a trade. As a result, you can focus on the merits of the investment itself, rather than admin associated with it. Connect with the company to learn more about its suite of services. 

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