TL;DR
A market maker provides liquidity by continuously placing buy and sell orders around the current price, profiting from the bid-ask spread while enabling other traders to execute trades.
A market maker quotes both a buy price (bid) and sell price (ask) for a token. The difference is the spread — their profit margin. If SOL is $150, a market maker might bid $149.90 and ask $150.10. When someone sells to them at $149.90 and another buys at $150.10, they profit $0.20. The more trades that flow through their quotes, the more spread they capture. They take on inventory risk (holding tokens whose price might drop).
On AMMs, liquidity providers ARE market makers — the AMM formula continuously quotes prices. On order book DEXs (Phoenix, OpenBook), professional market makers place and update limit orders. Some projects hire market making firms to ensure their token has sufficient liquidity and tight spreads on both DEXs and CEXs. Without market makers, tokens would have wide spreads and high price impact on trades.
Better market making means tighter spreads and less slippage on your trades. Tokens with poor market making have wide spreads and high price impact, costing you more per trade. When evaluating a token, check its order book depth and spread. A token with deep liquidity and tight spreads is safer to trade in larger sizes. Tokens on only Pump.fun’s bonding curve have minimal market making and extreme price impact.