Sometimes a company can give away their technology and still turn a strong profit.
Red Hat became a large company helping businesses use Linux, the classic open source project. It sold in 2018 for $34B to IBM.
CoinAlpha is a company that runs on software it created called Hummingbot, a software client that automates market making. It has already made Hummingbot open source, but today it’s taking that one step further: turning the software over to a foundation to manage its ongoing development. CoinAlpha is even giving it a revenue stream to make it sustainable from day one.
Open source projects historically have a problem updating their code. Often maintained by volunteers, it can be hard to maintain key code changes despite the fact that the software gets used by thousands or even millions of people. Cryptocurrency has been somewhat better at sustaining contributions most likely because its whole purpose is deploying real world value digitally. With the foundation, CoinAlpha believes it will set an example for others to follow.
“What we’re trying to prove is: Hummingbot is sustainable on its own,” Michael Feng, CEO of CoinAlpha told The Defiant in an interview. “Because it’s open source, it’s a true foundation, we think we’ll see even more contributions from our community than we have so far.”
Several well known projects are supporting the effort. Avalanche, Terra, Polygon, Harmony, and Kava have committed to fund contributions to Hummingbot as it evolves. Harmony committed $2M to fund a Liquidity DAO.
“We think this is a more effective approach to building a sustainable, organic community of DeFi traders and developers – a complement to market makers or running liquidity mining campaigns,” Harmony CEO Stephen Tse told The Defiant via text message. Harmony announced a $300M fund in September to fund all kinds of projects on its fast, sharded blockchain.
“A lot of these protocols in the past have spent money on liquidity mining where they threw a lot of money at traders to do more volume,” Feng said, but now these teams want to try “throwing money at developers to build trading infrastructure.”
After it goes live, the foundation’s main task will be maintaining the code base and deciding which pull requests to review and merge.
According to the announcement shared with The Defiant, Hummingbot is connected to 33 exchanges with 10 strategies built for market makers already. It has more than 16,000 members in its Discord and has managed $2.5B in trading volume over the last year.
Flattening the market
Hummingbot democratizes market making. It’s up to market makers to find the assets to deploy and decide how risky they want to make their strategy. Hummingbot makes it easy for them to do so and plug directly into various exchanges using their APIs. This democratization has been especially good for newer, smaller token projects looking to amp up liquidity across the market.
The new foundation will have two sources of revenue. The first is that CoinAlpha has already negotiated deals with a number of exchanges who want Hummingbot users to make markets. These exchanges pay CoinAlpha between 20 and 40% of their trading fees for volume powered by Hummingbot users. That revenue will now be redirected to the foundation.
The Hummingbot Foundation will also help crypto projects coordinate bounties, such as creating connections to centralized and decentralized exchanges, or creating strategies that benefit a startup’s token. When those bounties are paid to the developers who complete them, the foundation will keep 20% of the reward.
Feng said there is no token for Hummingbot now. “If the foundation chooses to launch a token, that’s its decision,” Feng said.
Leadership of the Foundation will start off with CoinAlpha staff but it will soon hold an election to enlist a majority of community members on the board.
What is CoinAlpha and Hummingbot
CoinAlpha functions as a platform to help projects that need liquidity to find market makers.
So a token startup could post that it will distribute $1,000 worth of its token every week to market makers. Hummingbot users can accept that deal and deploy their capital on exchanges with that token. They will then make money on the spread as market makers always do, and earn a portion of the reward commensurate with the volume they drove.
CoinAlpha will continue to do this. The difference is that a separate non-profit will decide how the software that enables those market makers evolves.
Making this easy for people at a smaller scale has been good for smaller crypto projects that could never afford to pay giants like Wintermute or GSR to make markets for them. By allowing people with much less resources to make markets, it deepens liquidity for projects at every stage.
“There’s a long tail of indvidual market makers out there,” Feng said, explaining that market making is still largely art as much as it is science, with approaches reflecting traders’ risk tolerance and particular interests.
Indeed, because Hummingbot is open source, some token projects have chosen to run it themselves and make their own markets.
“It’s not just running the bots. It’s also making your own market making strategy,” Feng said. “Our users put in a lot of work into making our bots work.”
The main area for development is connecting Hummingbot to exchanges, and protocols, plus creating strategies. The main tacks it takes now are arbitrage and classic market making. It can also manage liquidations and pools on decentralized exchanges.
Some traders are working on even more advanced strategies.
As CoinAlpha managed development, it focused on the classic roles of market makers. Feng suggested that a Hummingbot could even make markets in NFTs. It’s pretty far afield from what his team has focused on, but there’s nothing stopping a community member from building strategies for digital collectibles.
“No one is doing it but we have had a number of VCs ask us about it,” Feng said. “I would not be surprised if some people try o get together and build NFT bots.”