A market-maker token loan agreement sets how many tokens are lent, for how long, at which strike prices the market maker may buy them, how and when options can be exercised, where the tokens are held, what the market maker must report, and how unexercised tokens are returned. The clauses that most protect a project are reasonable loan size relative to circulating supply, strikes set with reference to a fair price, named custody accounts, regular balance reporting, KPIs, an explicit ban on manipulation, and clear return and default terms.
Key takeaways
- Loan size relative to circulating supply determines potential sell pressure.
- Strikes are often set in tranches; check how each strike is calculated.
- Name the accounts where loaned tokens are held, and require balance reporting.
- Include KPIs, an anti-manipulation clause, and return timelines.
The clauses, one by one
| Clause | What it says | What to look for |
|---|---|---|
| Loan amount | Tokens (and any stablecoins) lent | Proportionate to circulating supply and target depth |
| Term | Length of the loan | Long enough for the work; not open-ended |
| Strike prices | Price(s) at which the MM may buy | Formula, reference period, tranches |
| Exercise | When and how options can be exercised | Windows, notice, partial exercise |
| Return | When unexercised tokens come back | Deadline, address, penalties for delay |
| Custody | Where tokens sit | Named exchange sub-accounts or wallets |
| Reporting | Balances, trades, KPIs | Frequency and data source |
| KPIs | Spread, depth, uptime | See KPIs |
| Conduct | Ban on wash trading and manipulation | Explicit, with termination right |
| Termination | Early exit for either side | What happens to options and tokens |
| Default | Insolvency, breach | Security, priority, governing law |
A worked example (illustrative only)
Suppose a project lends a fixed number of tokens for 12 months with three equal tranches at different strikes. At the end:
- If the market price is below all strikes, the market maker returns all tokens.
- If the price is between strikes, it exercises the lower-strike tranches and returns the rest.
- If the price is above all strikes, it buys all tokens at the strikes.
The project’s outcome depends on where the strikes sit relative to the eventual price. The numbers here are deliberately left out; your counsel and the market maker should model your actual terms.
Protections worth asking for
- Named custody and the right to request balance proof.
- Two-sided KPIs, so the loan is used to provide depth on both sides.
- Anti-manipulation clause with immediate termination.
- Return within a fixed number of days after term or termination.
- Information rights about how much of the loan has been sold at any time.
Frequently asked questions
How are strike prices usually set?
Commonly as fixed prices or as multiples of a reference price such as an average price over a period around listing. Low strikes relative to fair value favour the market maker. Have the formula and reference period written explicitly.
Can a market maker sell the tokens we lend?
Yes; quoting means selling as well as buying. That is why loan size, KPIs (two-sided depth), and reporting matter. A loan used mainly to sell is not market making.
What happens if the market maker goes bankrupt?
Loaned tokens may be at risk, depending on custody and legal structure. Ask counsel about security, segregation, and where assets are held, and keep loan sizes proportionate.
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