PEP-67: Providing the POKT liquidity needed to become a Tier 1 project

Proposals Ecosystem
1

Attributes:

Author(s): PNF, on behalf of the POKT Network community

Recipient(s): The market makers that PNF will appoint to manage POKT’s liquidity on Centralised Exchanges (CEXs) on behalf of the DAO

Asking Amount: $3m in POKT at the time the proposal is passed (to be capped at 12.5m POKT in the event that the POKT/USD price is lower than expected)

Summary:

From speaking to tier 1 exchanges and investors, deeper liquidity is one of the most significant barriers to POKT becoming a tier 1 project. If POKT wants to be listed on any Tier 1 CEX, deeper liquidity is required on all major Centralised Exchanges (CEXs) where POKT is listed.

This proposal seeks $3m in POKT to target a 2% depth of $50K+ across all current CEXs as well as the tier 1 CEXs we hope to be listed on in the future.

Motivation & Rationale

wPOKT and the accompanying Uniswap liquidity pool have been a major boon to the POKT ecosystem in terms of lowering the barrier to entry for newcomers to the ecosystem, connecting POKT to the broader Ethereum ecosystem, as well as providing another liquidity pool to tap into. However, it’s not sufficient by itself. Deep liquidity on CEXs is also necessary to support POKT’s ambition of having the institutional financial rails of a blue-chip token.

POKT’s liquidity on Centralized Exchanges (CEXs) has languished around $5k for the 2% depth metric—how much you buy/sell within 2% of the mid-market price—for far too long for a project of POKT’s stature and ambition. For reference, tokens such as Ankr (ANKR), Akash (AKT), and The Graph (GRT) have a 2% liquidity depth range of between $50-$450k+.

Deeper liquidity is a money game. The good news is that this is a problem wihin our control to fix. The more capital we can add to the books of CEXs, the deeper the liquidity, which has a recursive effect as more liquidity typically drives more volume due to tighter spreads and deeper order books, and more volume attracts more liquidity due to a greater pool of fees and arbitrage opportunities.

We have received advice from professional market makers (MMs), institutional investors, and advisers that we need to target a minimum of $50k+ for the 2% depth metric to be obtain any tier 1 listings on CEXs. $3-4m in POKT is the expected loan size to achieve this liquidity metric. However, we feel confident that we will end up lending the “fair” amount of POKT to the winning MMs - which we hope to be slightly lower than $3-4m, or at least at the very bottom end of this range - because the loan size will be determined by having the top MMs compete for the POKT liquidity deal, as explained in more detail in the Implementation section below.

Note that we will need to lower the liquidity target and/or reduce the number of exchanges the MMs can cover if we provide less than necessary.

Background

Any liquidity placed on the books of CEXs needs to be managed by professionals to ensure that it is used effectively. This is the role of market makers on behalf of projects. See here for a high-level overview of what MMs do.

PNF currently has a monthly retainer agreement with its MM to manage liquidity for POKT. PNF has to deposit the liquidity on each exchange and then gives API keys for the market maker to trade such liquidity to achieve the agreed liquidity metrics. PNF’s current MM is managing c.$350k in liquidity (split 70:30 in POKT/USDT) across Bitget, Gate and Kucoin.

Managed retainer deals like PNF’s current one are only really appropriate when you 1) are not listed on many exchanges that you want to support and 2) you cannot afford a loan.

A loan is viewed as much more efficient as the MM is essentially putting its own capital at risk, so it has greater skin in the game in the outcome. Using their own balance sheet also means that MMs can spin up support for new exchanges more quickly and scale up/down on existing exchanges more quickly too.

In a typical MM loan deal, the issuer (the project with a token) lends a predetermined amount of their token to one or several MMs. After one year, the MM has the option to buy the lent tokens at a predetermined strike price. The trading fees and potential upside from the option is the total compensation that each MM receives for their work.

Implementation

To ensure that we have the best MMs working on behalf of the DAO, PNF will run an auction process with the world’s top MMs to choose the top two in both the terms - for example, smaller loans for the targeted liquidity, higher strike prices, better remedies in case of breach of KPIs, commitments to adding specific amounts of liquidity on specific exchanges / asset pairs at specific price points, etc - and reputation. PNF is being supported in this process by Matthieu Jobbé-Duval from Coinwatch. Coinwatch has negotiated the liquidity deals of some of the largest crypto projects out there, such as APT, BLUR, DYM and many more. Matthieu’s previous roles include Head of Financial Products at Dapper Labs, Former Group PM at Coinbase, Head of Financial Products at CoinList, and Head of Commodities Derivatives Trading at Barclays. Needless to say, he is an expert in this field.

After choosing the two best MMs, PNF will provide each of the MMs with POKT as a loan that they will be required to return in 12 months at the same USD value as such POKT is worth on the day the contract with each MM is signed.

Throughout the course of the MM agreement, PNF will work with Coinwatch to monitor each MM’s performance and ensure that they hit the agreed liquidity KPIs—e.g., $50k+ for 2% depth—for all high-priority exchanges (this is usually up to 6 exchanges in total, which provides scope to add more exchanges as new listings occur). In the event of a continued breach, the arrangement will end early, requiring the MM to return the loan to PNF to reallocate to another MM (or the other MM, as the case may be).

PNF will pay the advisory and monitoring fees to Coinwatch for their services. (This amount is subject to confidentiality provisions in PNF’s contract with Coinwatch).

PNF will also provide an update on the terms agreed with each MM and monthly summaries of the liquidity performance to the DAO.

Deliverables and Budget

  • DAO to approve $3m in POKT at the time the proposal is approved (to be capped at 12.5m POKT in the event that the POKT/USD price is lower than expected) to fund the loan to each MM, which will be returned at the end of the 12 months contract - TO BE DONE
  • PNF to run an auction process (with support from Matthieu) to choose the two best MMs for the job - IN PROGRESS
  • PNF to work with Coinwatch to monitor each MM’s performance and to hold them accountable for the agreed liquidity KPIs - TO BE DONE
  • PNF to update the DAO on a monthly basis about the performance of each MM against the agreed liquidity KPIs - TO BE DONE

Dissenting Opinions

PNF should use its own budget

PNF’s treasury has a total of c.16m POKT, meaning that it doesn’t have enough POKT to fund this loan, its planned 2024 initiatives, and its 2025 runway.

We should spend less POKT

Deploying less POKT means lower liquidity on the books of each CEX, which may result in not getting the tier 1 listings we want, as every tier 1 CEX we speak to wants to see higher liquidity and volume for POKT.

We should focus on DEX liquidity only

Not everyone uses DEXs yet. CEXs are much more widely used across the space.

You should only use one market maker

While this isn’t recommended as the ideal option, it is an option that we are considering. Whether or not we have one or two market makers, the amount of POKT needed doesn’t change. Splitting the POKT across two market makers is simply a mechanism to get better results with the same amount of POKT. For further context, the thinking would be to give c.70% of the POKT loan to one market maker and the rest to the other. Each market maker having slightly different strategies and approaches should lead to better overall coverage and results for the same amount of liquidity.

The DAO is losing too much upside if it grants this loan

It is true that if the token goes up considerably, the MM gets the difference between what the token was worth at the time the contract was entered into (in USD terms) and its value 12 months later. However, without sufficient liquidity it’s very unlikely that POKT will be listed on any tier 1 exchanges or achieve significant further price appreciation in any case.

Next steps / Implementation

While we would like to move forward with this proposal as soon as possible, we welcome questions, feedback and discussion on the proposal from the whole community. It’s a significant portion of the current DAO Treasury, and we don’t take this responsibility lightly.

Once we have received sufficient feedback from the community on this proposal over the next 7 days (or more if needed) and ironed out any material issues that may arise, we will put it up for a vote.

We plan to discuss this proposal in more detail next Thursday’s community call.

Thank you

PNF

Copyright

Copyright and related rights waived via CC0.

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This is indeed a complex matter, we all think that POKT is low and that it will increase its value in the following months, giving 3M POKT in loan at current prices is indeed a great deal for MM. However, as you say, getting POKT :rocket: :full_moon: will require more exchanges and higher liquidity. I cannot say if the MM mechanism is the correct one, you sure present it well.

If I think in the worst case, MM take the 3M loan and POKT price falls, then they will be forced to pay us 3M? even if the coins we gave them are worth 1M or less? Is this strictly like this or they can jump ship at any moment using some bizarre mechanism?

If and only if the MM skin is really on the game I think this is ok, they need to suffer if the token price goes down with this new liquidity, because we will suffer for sure.
I don’t want the DAO to lose the upside on their tokens, but I would love to see POKT being sold on T1 exchanges and be there when the bull starts pumping us.

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There are a few things to unpack here, so I appreciate you asking all these questions, as the role of MMs, and particularly these agreements, are rather esoteric.

The impact of deeper liquidity on price

If the price goes down, it may be due to entirely normal market dynamics after POKT perhaps being overbought for a period. With deeper liquidity in the books, the price usually goes down less than would be the case when the books are thinner. Moving the price down when the books are deeper takes more capital. This is precisely what the 2% depth metric measures. Right now, it takes less than $5k to move the POKT/USD price by more than 2%.

On the flip side, deeper liquidity in the books encourages more trading as there is less slippage for buyers. This can be helpful for positive price action in a bullish period for POKT. And there is a strong argument that POKT’s price would have gone higher in the recent positive run if there was deeper liquidity on the books of each CEX.

What skin in the game do MMs have in a loan model?

In a retainer model, MMs get paid every month irrespective of how well/poorly they manage a project’s capital.

The primary way that MMs in a loan arrangement receive upside is if the value of the POKT loan they receive is substantially higher than when the contract is signed. This is because the loan will include an option agreement granting each MM the “option” to purchase such POKT at a “strike price” at the end of the 12 month loan period. The strike price is usually a material percentage higher (most likely 20-40%+, but subject to the negotiations) than the market price when the MM agreement is signed.

So, first of all, MMs in a loan model are aligned in wanting the price to go up.

Secondly, they will be on the hook under the MM agreement for ensuring sufficient liquidity is on the books of each CEX during all market scenarios - good and bad - which could cause them to lose on some trades. We will have software from Coinwatch to provide real-time monitoring of how well each MM is performing, and we can terminate the contract early and require them to return the loan early if they are not performing. In such a scenario, it may cost them some capital to return the loan if they lose some POKT in trades. Either way, they will have received zero upside for deploying a lot of human and technical capital to support POKT’s liquidity. This is a genuine cost for any business.

How do we plan to protect the DAO’s assets when negotiating with these MMs?

We are running an auction process with 6+ of the most highly regarded MMs in the space to ensure that we get the best terms on the loan.

With better terms, we should be able to ensure the following:

  1. The strike price is as high as possible so in the case of a bullish scenario, not all of the upside is with the MM.
  2. The loan size is as small as possible to achieve our core liquidity metric of $50k for 2% depth (there are additional liquidity metrics, which I will ask Matt to expand on), meaning that we need to spend less POKT to get to the same end result
  3. Strong remedies in the case of breaches to the agreed liquidity metrics, meaning that we can end the contract early and get the POKT back as soon as possible once we realise that the MM isn’t performing, instead of having to way until the end of the 12 month period and risk the MM benefiting from the loan option by sheer luck or perseverance.

You can see how this could play out in the following worked example:

  • size of loan = 10m POKT

  • POKT/USD price at time of loan = $0.30

  • strike price = $0.60

  • price at end of 12 month loan period = $0.9

The MM would need to pay the DAO $6m for the 10m POKT tokens, providing them with a paper profit of $3m at that latest price. This is a lot of money, but they arguably deserve it if they have done a fantastic job. At the same time, we want to do everything we can to protect the DAO’s capital, and one option that Coinwatch suggested to us is that we try to negotiate a “Dynamic Loan” model", which would look something like this:

With a Dynamic Loan, the MM’s token active inventory is monitored and adjusted to match the current liquidity requirement of the token based on current market conditions. Any excess tokens from the loan not needed for liquidity are deposited on-chain where they can be tracked and used to increase TVL / liquidity in the ecosystem.
This helps ensure that the MM can only use their tokens to provide liquidity, and nothing else. This largely eliminates the risk that the MM is working against you / hurting your project / shorting your tokens / front-running token unlocks etc.

We can discuss more of the potential options we have in this regard on the call next week.

This is the crux of the dilemma. Spending when times are tougher hits harder even though it’s likely more necessary. T1 CEXs won’t list POKT until liquidity improves, and T1 CEXs also demand that you hit certain liquidity metrics once you are listed, so a loan like this will be necessary at some point prior to listing on a T1 either way. So, while we could wait for the price to increase, with shallower liquidity, it’s not clear that the price will run as high as we would like in any case. And the opportunity cost is not putting POKT on track to be a T1 project sooner.

My main ask is for the DAO to get comfortable with how much POKT they are willing to invest in liquidity, as it’s impossible to perfectly time the market. As many opinions as possible would be helpful so we can have a good discussion. I’ll do my best to facilitate this next Thursday.

For example, maybe the argument is that spending a maximum of 10m POKT on liquidity is more reasonable. The trade-off is that this may mean we don’t get all of the liquidity benefits in terms of both depth and breadth of exchange coverage, but maybe this is ok to most. And maybe we get lucky and the price has risen by the time the contracts with each MM is signed. (It will likely take another 3-4 weeks at least until we are ready to sign with anyone).

Please keep the comments coming :slight_smile:

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I believe this spend is necessary considering you really can’t time the market,the earlier we get to tier 1 listing the better for everyone…

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In general, I support this proposal. The market conditions are ripe, and as the saying goes: who dares, wins.

Two questions:

  1. Assuming the full amount – 12.5M POKT – is used. What percentage of total DAO funds is that?

  2. What is the expected turnaround between passing the proposal and seeing a listing on a T1 exchange?

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38.8% of the unallocated treasury [1]

[1] The size of the current DAO treasury is 44.2m POKT, but this includes 12m POKT allocated to the ERA budget but not yet drawn down.

We can’t guarantee when T1 listings will happen, although the target is still the end of Q2 for at least one. However, we can guarantee that T1 liquidity will be available within 2-3 weeks of the proposal passing and the new MMs getting to work. This will remove a major obstacle to those kinds of listings.

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Yes do this.

They can profit 3M or whatever, DAO treasury and individual ecosystem net worth will be so much more in bull scenerio which is what is whats actually good for sustainable ecosystem development.

POKT should also be constantly adding liquidity to wPOKT pool too.

You guys are right. Do not try to wait for price to increase more, you will be trading a 10x for a 2x thinking you did something clever.

If pokt doesn’t have deep liquidity before this year/bull market is out, there is real max cope risk of whales rage quitting and nuke price to 0.

Whales are already marking down targets fyi and its literally in the start of a hot hot bull market lul

build confidence back and get liquidity

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Agreed on all points, and in support of this proposal.

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@Jinx I’d love to discuss in your wednesday call if anyone has any hot takes, we should move this to a vote ASAP.

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Good with me. You can lead in with that when we get to community.

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I support this. It’s a lot of money, but that’s the price we need to pay to fix the long standing issue of having sufficient liquidity. I see no way round this other than to loan the POKT.

I think @Dermot has a good plan in place to create some competition between MMs and with an experienced MM advisor working with this, I don’t see any issues with the proposal’s execution.

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I’m in favor of this. But something to consider…

Liquidity can increase while the token price drops. So, the MMs could create the ability to sell more but at a lower token price. I didn’t see this mentioned (or I missed it). I’m bringing this up because it’s a likely scenario. Unless the MMs are also creating speculator demand. Prices won’t go up without demand going up. An increase in sell-side supply (which will happen when the MMs have a bunch of POKT to sell) without an increase in demand will bring the price down.

I think it’s still worth it to get listed on any Tier 1 CEX because that’s the best way to get speculator demand. But it’s still worth considering that liquidity /= price increases.

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Correction on my previous post, I did find a mention of the fact that the price can drop even if liquidity increases.

I agree that the price usually goes down less with more liquidity. But, will the price point be .02, .20, or 2.00 when we have decent liquidity? That part we don’t know. Ultimately it’s up to supply and demand. So, I would anticipate a price decline when an additional 12.5M POKT goes into play. Unless the MMs spark more interest in the token and demand increases. But without an increase in demand. The MMs will introduce more supply which will naturally bring down the price.

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That’s my read as well. I’m hoping that the timing of this coincides with the additional marketing efforts planned by PNF and the gateways.

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Thanks for bringing this up @steve

You are right that this liquidity won’t just make the number go up. However, I disagree that having more liquidity by itself will make the price go down.

MMs aren’t directional traders. They deploy liquidity within different bands above and below the mid-market price and 2% depth to ensure that there is always a healthy functioning market for POKT. Not all of the POKT will be deployed when there is times of low volume and/or volatility. So it isn’t true that all of that POKT will just hit the market. The POKT will manifest as a deeper order book above and below the mid-market price. And the amount of POKT in the books will increase as volume increases.

Better liquidity achieves two things:

  1. It enables more volume. This could be downwards - as you point out - as well as upwards. Speaking purely anecdotally, PNF gets a huge amount of OTC inbound from existing and prospective investors that we turn away as we simply do not have the POKT to sell and/or do not want to sell at current prices. Most of these investors are coming to us as they simply cannot justify buying on CEXs with such high levels of slippage.

People will always sell, and that’s isn’t a bad thing. In a healthy market, nobody selling less than $50k should ever move the market by much. But today, selling $50k on a CEX could move the POKT/USD price down by over 10% (it could actually be more than this as I need to check the latest numbers). Which simply isn’t good enough for a project with T1 aspirations.

Separately but on a related note, I would hope that anyone looking to sell in large volume would have the knowledge that they can achieve this most effectively via OTC deals or through MMs who can sell into the market in times with increased buy demand. More liquidity will help smooth out the effects of large sells too.

  1. More volume should help bring the exchange listings everyone is getting excited about. This should improve access to POKT and expand the pool of buyers and sellers for POKT.

Lastly, I think we are aligned that this proposal isn’t a panacea for positive price action. We all still need to do our work as a community to ensure our technology and roadmap, demand and narrative, culture as well as marketing and awareness, etc are all Tier 1.

People still need to know about POKT and believe that investing in it - with their time and/or money - is worth it.

Let me know if anything is still unclear or if you disagree with anything I have said

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You are correct. More liquidity will not by itself make the price go down. My point was that they are independent of one another.

Again, I’m in favor of this proposal and will vote for it. But, for the record, I also expect the price action will go down as a result - unless demand increases - which is a separate topic.

My main point is that MMs won’t make prices go up. I understand how the technical mechanics work and the general maker/taker algorithms their bots will use. But that doesn’t matter in the long run. The only way to increase the token price is by increasing demand. Trading strategies and bots don’t do that.

This we are 100% aligned on. In my opinion, Pocket is better positioned to create demand than ever before - thanks to AI. But, that’s a different thread.

In summary, the combination of more demand and more liquidity is what we all want. They are equally important - but one does not ensure the other.

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I am completely aligned!

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My perspective, from an investing standpoint, is that increasing liquidity reduces risk and volatility for investors.

With higher liquidity, we can attract investors who invest in more stable markets or algorithmic traders. This can improve daily trading volume, further reducing risk and making it easier for even more conservative investors to enter the market.

tl;dr numba go up

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This proposal is now up for voting on Snapshot

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