I’m thrilled to announce a significant development in the quest to enhance Onomy’s market dynamics: we have successfully secured a relationship with a top-tier market maker for the Onomy DAO. This pivotal move is set to bolster Onomy’s market liquidity and overall ecosystem health, aligning perfectly with Onomy’s strategic growth objectives alongside upcoming product releases by contributors.
Our objective is clear and focused: Enhance market efficiency, reduce slippage, and foster sustainable movements in NOM’s value. This will be achieved through the strategic liquidity management offered by the market maker. Their role will encompass providing depth at +/- 2% from the mid-market price across all platforms where NOM is currently traded, and potentially in future markets.
It’s essential to understand the nature of the market maker’s contribution. They provide passive liquidity, meaning their role is to support the overall health and stability of the market through a neutral stance. Importantly, this involves a non-directional approach to trading, ensuring their activities are aligned with maintaining a balanced and healthy trading environment for NOM.
We have identified and secured a partnership with a Tier 1 Market Maker, ranking among the top 5 in terms of market share across centralized exchanges (CEXs). This entity is not just any market maker but a highly selective and influential player that will add immense value to Onomy’s rapidly evolving ecosystem. Their role will extend beyond market making and liquidity provisioning, potentially contributing to Onomy through business development within their extensive network. The chosen market maker is also crypto-native, proficient in DeFi, poised to provide valuable feedback on protocol design, and actively engage in the creation and maintenance of relevant liquidity pools.
- Loan Model: Here, we loan NOM tokens to the market maker for liquidity provision on exchanges. They contribute bid-side liquidity, typically in USDT, from their own reserves.
- Retainer-Based Model: In this arrangement, the market maker receives both tokens and USDT from us. They then operate under our guidance regarding liquidity levels, depth, and other parameters, essentially offering market making as a service. This model also entails a monthly service fee, typically ranging between $5K and $20K.
Based on my experience with market makers, I’ve observed that the retainer model is more effective in bear markets, while the loan model shines in bull markets. The rationale hinges on the concept of ‘number go up.’ To elaborate, in the loan model, market makers agree on a ‘strike price’—essentially an option, but not an obligation, to buy the tokens at this price at the loan’s end. This setup motivates them to excel in market efficiency during bullish times, as they stand to gain from an ‘in the money’ strike price. Conversely, in bear markets, the token value often dips below the strike price, leading to reduced liquidity provision. The further away from strike the price drifts, the less and less liquidity they offer which further exacerbates the problem and creates misalignment of interests.
Case in Point: NOM’s listing occurred post-FTX collapse, kicking off a prolonged bear market. The behavior of previous market makers during this period, driven by profit motives, underscores the importance of choosing a partner aligned with Onomy’s values and growth vision. Choosing the correct Tier 1 partner is vital as a long-term partner, especially at the beginning of what is proving to be a new bull cycle wherein a loan model may be more effective.
A retainer model, while sidestepping the downsides of the loan model, necessitates additional funding and may lead to selling NOM to cover the USDT side - whereas partnering with a market maker on a loan option model that can already scale USDT side with Onomy’s growth, seems more pragmatic. Moreover, engaging an independent third party in market decisions aligns better with our ethos since mainnet launch, fostering autonomous contributing units within the Onomy ecosystem that I do not have influence over nor any founding team member.
I wrote some more thoughts about market making in this thread on Twitter: https://x.com/LaloKnows/status/1701263411470807187
Your thoughts and feedback on these models are most welcome!
Market making loans typically involve substantial amounts, reflecting their crucial role in liquidity provision. Historically, the loan sizes in the proposals I’ve encountered range between $1M to $3M in notional value, underscoring the scale of these operations.
For Onomy’s engagement with a Tier 1 market maker, the proposed terms are both prudent and aligned with industry standards:
- Term Length: We are looking at a 12-month period. This duration is standard practice and defines the term of active liquidity provision by the market maker.
- Loan Amount: The request for Onomy’s DAO is to fund 5 Million NOM tokens. This amount is well within the typical range of $1M to $3M and is reflective of our current market position and strategic objectives. The proposed loan size is a testament to Onomy’s robust growth trajectory and recent price appreciation, which has favorably influenced our bargaining power.
It’s important to note the contrast with previous market conditions. For example, in September, we were looking at proposals demanding as much as 17.5M NOM tokens at around $0.08 per token. The current proposal’s significantly lower token requirement illustrates the remarkable progress and development within the Onomy ecosystem.
Loan Contingency Measures:
- Option Exercise Clause: In the event that the market maker decides against exercising the call option at the end of the loan term, all remaining tokens will be reassigned back to the DAO Treasury. If the call option is exercised, the proceeds will go toward funding further development of Onomy’s ecosystem.
DAO Approval for Market Making Loan:
The decision to proceed with this loan rests with the DAO. Approval from the DAO for this funding would not only align with standard DAO practices but also position Onomy advantageously for future expansion and potential new listings due to increased market health. The proposal of 5 Million NOM tokens represents a balanced and strategic approach, ensuring Onomy is adequately equipped for market making without overextending the DAO’s resources.
In conclusion, this proposal isn’t merely about improving liquidity; it’s a strategic step towards transforming how Onomy interacts with the market. Partnering with a Tier 1 market maker offers Onomy transformative advantages. Their involvement not only ensures scalability and sophistication in market making but also elevates exchange and community confidence. Major exchanges are likely to take note of Onomy’s enhanced market robustness, potentially leading to more favorable considerations and listings. In turn, the flywheel effect may be amplified as Onomy’s Ecosystem expands with new products and features to attract substantially more users and community members.