Token loans, call options or a fixed fee: how market-making agreements are structured

Structure 1: token loan plus call options

In this arrangement the project lends a block of its tokens to a trading firm for a fixed term. The firm combines them with its own stablecoins to quote the market from its own account. At the end of the term the firm returns the tokens, unless it exercises options that let it buy some of them instead.

The options give the firm the right, but not the obligation, to buy a set number of tokens at an agreed strike price. Strikes are often set above the price at signing, sometimes in several tranches with different prices.

• The project lends 2,000,000 tokens. The token trades at $0.10 when the agreement is signed.
• The firm holds options on 1,000,000 of those tokens at a strike of $0.15.
• If the token trades at $0.25 at exercise, the firm pays $150,000 and keeps 1,000,000 tokens worth $250,000 instead of returning them. It returns the other 1,000,000.
• If the token trades at $0.08, the firm does not exercise and returns all 2,000,000 tokens.

Why projects choose it

It needs little cash up front, and the firm brings the stablecoin side of the book. That matters for a new token whose treasury is mostly its own token. It is also often presented as aligning the firm with the project, since the options are worth more if the price rises.

What to weigh

• What the reward is tied to. An option pays off when the price is above the strike on the exercise date. That rewards a price level at a moment in time. It does not reward tight spreads or steady depth over the term.
• Hedging. A firm holding call options may hedge that position, which can involve selling some of the token as the price rises. Ask how the position is managed.
• How the strike and exercise are defined. Check whether the strike or the exercise price refers to an average over a window. If so, check which venues that average uses, and whether the firm's own trading on those venues can move it.
• Counterparty risk. Loaned tokens sit in the firm's account. If the firm fails or disputes the contract, getting them back can be slow or uncertain, depending on the contract terms and the jurisdiction.
• Visibility. You see the public order book, not the firm's balances, and not whether the tokens are also used on other venues.
• Supply and disclosure. Loaned tokens and option grants affect circulating supply and may need to be disclosed to holders or exchanges. Take advice for your situation.

Structure 2: a fixed fee, with the project's capital

Here the project pays a service fee for a defined scope. The capital — tokens and stablecoins — comes from the project, often in an exchange account in the project's own name. This is how Lyqui works: a fixed service fee for the agreed scope, in your account, with the funds and tokens you allocate. There is no token loan and no option.

Why projects choose it

The provider's pay does not depend on the token price, so there is no reason for it to favour a price level on a particular date. When the account is yours, the tokens stay in it, and you can see the orders and balances yourself.

What to weigh

• Cash cost. The fee is paid in cash, whatever the token does.
• Capital on both sides. You need to allocate stablecoins as well as tokens. If you cannot, a loan-based arrangement may suit you better, with the trade-offs described above.
• Inventory risk stays with you. The funds and tokens you allocate are exposed to price moves while they quote.
• "Good work" has to be written down. With no price-linked reward, the contract should say what is being worked on — spread, depth, presence — how it is measured, and how you will see it.
• Access. Ask how access to your account is set up, what permissions it needs, and how it is removed.

Hybrids

Many agreements mix the two: a smaller fee plus options, a loan plus a fee, or a fee plus a bonus tied to targets. Read bonus terms carefully. A bonus tied to trading volume rewards activity rather than market quality, and volume is the metric most easily faked. In October 2024 the U.S. SEC charged three self-described market makers, alleging that they generated artificial trading volume for their clients' tokens.

Side by side

Questions to ask before you sign

These apply whatever the structure:

1. Capital. Whose account is used, and exactly where will our tokens and funds be?
2. Pay. How is the provider paid, and what does that reward?
3. Metrics. Which metrics are in scope — spread, depth within a stated distance of the mid price, two-sided presence? How are they defined and sampled, and from which data source?
4. Reporting. What do we receive, how often, and can we check it against exchange data?
5. Promises. What does the provider say it will not promise? No legitimate provider can promise price levels, trading volume or exchange rankings. Treat a promise of any of them as a warning sign.
6. Incidents. What happens during exchange maintenance, API outages or abnormal markets, and how are alerts handled?
7. Exit. What is the notice period? What happens to open orders, loaned tokens and account access, and is there a final report?
8. Counterparty. Which legal entity signs, and under which jurisdiction?
9. Confidentiality. What is covered, and is an NDA needed before sharing detailed information?

A good provider will answer these in writing before you commit anything. If you would like us to look at your market, you can request an assessment.