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
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