What is a market maker token loan?

In a token loan, a project lends its own tokens to a market maker for a fixed term (public examples run 12 to 24 months) so the firm has inventory to quote the sell side, while the firm usually funds the buy side. Instead of a cash fee, the market maker typically receives the right, but not the obligation, to buy some or all of the loaned tokens at preset prices (a call option); otherwise it returns the tokens at the end. The project pays little cash up front but gives away upside if the token rises above the strikes.

How a token loan works

1. Loan: the project transfers tokens, e.g. 500,000 CTX (Cryptex, 2021) or 25,000 OHM (Olympus, 2021).
2. Quoting: the firm uses the tokens for the ask side and usually its own capital for the bid side.
3. Option: at set dates the firm may buy tokens at fixed prices. Olympus’ GSR proposal: 12,500 OHM at 6 months for USD 15.625M and 12,500 at 12 months for USD 18.75M.
4. Settlement: the firm returns unexercised tokens, or pays cash for exercised ones.

Cost and risk

• If the price ends above the strikes, the firm exercises and keeps the difference. That gain is your cost.
• If the price ends below, tokens come back and the cash cost was near zero.
• Ask what the firm may do with the tokens (hedging, DEX use, lending) and what collateral it posts. Yearn rejected a 350 YFI uncollateralised loan in 2023.

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Compare it with a retainer

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