If you're a token issuer or protocol looking for a market maker, you'll run into two models pretty quickly: the token loan model and the retainer model. Most firms push the loan. We think that's worth questioning.
How the token loan model works
The market maker asks for a large allocation of your token upfront, usually for free. They use those tokens as inventory to provide liquidity on exchanges. In theory, they return the tokens at the end of the engagement (often 12-24 months), sometimes with an option to buy at a pre-agreed price.
On paper, it sounds fine. In practice, it introduces some problems that aren't obvious until you're in the middle of them.
The problem with handing over your tokens
When a market maker holds a large loan of your token, their incentives get complicated. They have inventory they didn't pay for, and they need to manage that risk. That can mean hedging against your token (effectively shorting it), selling into rallies to lock in profit on the option, or prioritizing their own P&L over your market quality.
You also lose visibility. Most loan-based agreements don't come with real transparency into what the market maker is actually doing with your supply. You handed over tokens and you get a monthly report. Maybe. What happened in between is a black box.
Then there's dilution pressure. A large token loan floating around in a market maker's hands creates sell-side overhang that the market can feel, even if it's not being actively dumped. Smart traders know it's out there.
How the retainer model works
With a retainer, you pay a fixed fee for the market making service. You provide the liquidity, and the market maker deploys and manages it on your behalf. There's no loan, no option, no free tokens changing hands. The key difference: full visibility into every position and trade, in real time.
The relationship is simpler. You're paying for a service, not giving away an asset and hoping it comes back in good shape. The market maker's job is to deliver tight spreads, deep books, and stable markets. Full stop.
Side-by-side comparison
| Token loan | Retainer | |
|---|---|---|
| Upfront cost | Token allocation (large) | Fixed monthly fee |
| Token custody | Given for free, used at MM's discretion | You provide them, MM manages with full transparency |
| Incentive alignment | MM profits from option/inventory | MM paid for market quality |
| Transparency | Usually limited | Full dashboard access |
| Sell pressure | Possible (hedging, option exercise) | None from MM |
| Typical term | 12-24 months locked | Monthly, flexible |
Why we chose the retainer model
We want to be in a position where the only way we succeed is by making your markets better. No option upside, no inventory to manage on the side, no conflicting incentives. We get paid to deliver results, and you get full visibility into everything we do through a real-time dashboard.
That's it. We think the best market making relationships are the ones where both sides know exactly what's happening and why.
When does the loan model make sense?
To be fair, there are situations where a token loan can work. If you're very early, have no budget for fees, and need someone to bootstrap initial liquidity, a loan might be your only option. Just go in with your eyes open about what you're trading off.
For projects with revenue, treasury, or funding, the retainer model gives you more control, more transparency, and better alignment. We think it's the better deal for most teams past the seed stage.
Want to talk about what model fits your project? Get in touch.