A market maker posts both a bid and an ask, continuously, and earns the difference when both sides fill. Buy at $99.98, sell at $100.02, pocket four cents. Do it thousands of times a day.
Without market makers, every trader would have to wait for someone else who wanted the exact opposite trade at the same moment. Market makers are why you can trade instantly.
The two risks
Inventory risk. A market maker who fills more buys than sells ends up long. If price then falls, the accumulated inventory loses more than the spreads earned. Managing inventory is most of the job.
Adverse selection. The fills a market maker least wants are the ones they get most readily — when someone with better information wants the other side. The quote gets picked off just before price moves against it.
Why spreads are what they are
A spread is the market maker’s compensation for those two risks. Volatile, thin markets have wide spreads because inventory risk is high. Deep, calm markets have tight ones. The spread you pay is a price for immediacy set by whoever is taking the risk of providing it.
Market making on-chain
It requires posting and cancelling orders constantly, which is impossible on venues that charge gas per action. Gasless order books are what make on-chain market making viable, and their depth depends on it.