The Role of Market Making in Keeping Stablecoins Stable

Key Highlights:

• Market makers help stablecoins like XSGD and XUSD stay anchored to real-world FX rates rather than volatile speculation.
• They bridge the gap created by thin crypto liquidity to prevent prices from drifting away from their fair value.
• StraitsX uses automated bids and asks to provide deep liquidity so users can trade near parity with minimal slippage.
• Arbitrage incentives naturally rebalance the supply by encouraging participants to mint or redeem tokens when prices deviate.
• Active market making builds ecosystem trust by keeping stablecoin order books predictable and reliable for all users.

Stablecoins are designed to represent real-world currencies on-chain. For XSGD, that reference is the Singapore dollar. For XUSD, it is the US dollar. In markets where these tokens trade against each other, the “right” price is not subjective or speculative. It is anchored to the observable SGD/USD foreign exchange rate, adjusted modestly for fees, settlement frictions, and on-chain liquidity.

However, crypto markets do not operate like traditional FX markets. Liquidity is fragmented across venues, order books are thinner, and participants often transact for immediacy rather than precision. As a result, stablecoin pairs can temporarily drift away from their real-world reference prices, even when there has been no change in underlying economic conditions.

Market making exists to bridge that gap.

How Market Making Works in Stablecoin Markets

The goal of market making in stablecoin such as XSGD/XUSD is straightforward: provide passive liquidity so users can buy or sell at prices that closely reflect the real SGD/USD exchange rate, with minimal slippage and sufficient depth on both sides of the order book.

To achieve this, StraitsX automates the placement of bids and asks around the prevailing FX reference rate (e.g. 0.7920), slightly below and above parity (e.g. 0.7910, 0.7915, 0.7925, 0.793) and replenishes these orders if they are executed and whenever the underlying FX reference rate changes. 

This two-sided liquidity allows participants to transact efficiently without needing to wait for a perfectly matched counterparty. When a user trades against the order book, the market maker absorbs the imbalance and then restores inventory through real-world settlement flows.

How Rebalancing Happens

Consider a scenario where XSGD/USDC trades above SGD/USD in the secondary market. Arbitrage opportunities encourage participants to acquire XSGD through the primary market and sell it on the secondary market, increasing supply and bringing the price back toward parity.

Conversely, when XSGD/USDC trades below SGD/USD, participants can buy it on the secondary market and redeem it in the primary market, reducing supply and pushing the price toward parity. This process is supported by StraitsX’s automated market-making, which continuously maintains balance without actively chasing market moves.

Why Prices Move and Why They Converge

In traditional FX markets, large trades rarely move prices significantly because liquidity is deep and continuous. In crypto markets, a single large trade can temporarily shift the on-chain price away from its off-chain reference, even when nothing has changed economically.

When a market maker steps in during these moments, they are not introducing new information. They are responding to a short-term imbalance between supply and demand on the exchange and aligning prices back toward a publicly observable benchmark.

The incentive structure reflects this. Market makers benefit when prices converge toward reference rates and volatility decreases. Tight spreads, predictable pricing, and reduced spikes are signs of a healthy market, while persistent divergence or exaggerated moves creates excess exposure for the market maker.

Transparency and public reference points

Stablecoin markets are uniquely transparent. Each XSGD token is redeemable for 1 SGD fiat, and the SGD/USD exchange rate is widely available from public sources. Market activity in XSGD/XUSD is therefore anchored to information that all participants can independently verify.

This transparency allows users to understand how prices are formed and why they behave the way they do. On-chain prices mirror the underlying value of the currency, with variations arising from the current supply and demand on the exchange.

Why this matters for users and exchanges

Without active market making, stablecoin order books would be more fragile. Prices would swing sharply with each large trade, liquidity would thin out during periods of stress, and stablecoins would become less reliable as representations of real-world currencies.

By providing consistent two-sided liquidity and maintaining close alignment with off-chain reference rates, market making supports market integrity, improves user experience, and strengthens trust in the stablecoin ecosystem as a whole.

For StraitsX, the primary objective is to ensure that market participants can exit trades efficiently, while prices remain close to parity. Market making serves as a central part of the deliberate design that regulates stablecoin economics through transparent mechanisms and real economic settlement with each trade.