Reshaping Loan & Call Option Strategies for a Healthier Token Ecosystem

Is your market maker parasitic? Market makers play a critical role in ensuring liquidity is available on exchanges for token economies to operate effectively. Yet, the approach many principal market makers (PMMs) - operating under the loan+call option model - take often leaves a detrimental imprint on the token market, echoing a parasitic relationship rather than a symbiotic one. Acheron, stepping outside the traditional PMM tactics, paves the way for a new era of transparent market making, promoting a healthier interaction between issuers and market makers.

The Predatory Nature of Traditional PMMs

Market makers, dealing with a plethora of tokens and issuers, usually adopt a broad perspective, viewing tokens through a probabilistic lens. A recurring price pattern has been observed among a majority of tokens: an initial surge in demand coupled with low supply catapults prices to high multiples above the listing price. This euphoria, however, is short-lived. As the initial frenzy subsides, the vesting phase kicks in, augmenting supply while demand diminishes, thus precipitating a gradual decrease in token price, often plummeting below the listing price. Tokens that defy this pattern, maintaining their initial multiple for over a year, are deemed outliers.

Typically, PMM deals are engineered to exploit this prevalent price pattern, with a risk mitigation scheme for outliers. A long-term token loan is orchestrated to short sell the token at high initial multiples, with repayment set for a later stage when demand decreases and supply expands. To cushion the risk of short selling token outliers, options are provided 1-to-1 with the token loaned, creating a safety net against the peril of unlimited loss proportional to token price hikes.

The modus operandi of PMMs is rather self-centered, with little to no transparency in their reporting. They often dump tokens initially, banking on the expectation that prices will follow the customary pattern and nosedive over the term of the loan. Aggressive selling tactics are employed to suppress any optimism and upward momentum, ensuring prices do not escalate and negatively impact their profits from short selling. This strategy is parasitic, feeding off the initial token demand and benefiting from detrimental effects on the health of the token market.

Acheron’s Disruptive Approach to Market Making

Contrary to the conventional PMM narrative, Acheron's ethos is rooted in fostering symbiotic strategies and relationships with issuers. Initially, Acheron championed Designated Market Making (DMM) contracts, operating trading strategies beneficial to the issuers while ensuring transparency through reporting. Under the DMM model, issuers participate in both the upside and downside of providing liquidity. 

The appeal of financial arrangements where tokens are loaned without allocating any quote - cash equivalent - capital to market making still appeals to many issuers, allowing parasitic PMMs to retain a significant market share, much to the detriment of token performance. Acheron’s innovative response to this conundrum is introducing a transparent PMM business model, combining the favorable financial structure of traditional PMMs with the symbiotic strategy inherent to DMMs.

Acheron’s PMM strategy is based on purely systematic - fully automated - delta hedging of the implicit call options associated with the loan, without disruptive manual interference.

1. As we provide consistent and significant two-sided liquidity - that can be monitored by our clients -, thus tackling the slippage inefficiency, our actual delta naturally adjusts to the theoretical delta to remain neutral. Indeed, as price increases, delta increases, which is consistent with having limit sell orders filled, i.e. providing sell-side liquidity. Conversely, as prices go down, delta decreases, which again is consistent with having limit buy orders filled, i.e. providing sustained buy-side liquidity - unlike parasitic market makers.

2. In remaining delta neutral at all times, we are hedging ourselves against directional price moves, while being long gamma, thus profiting off of volatility - the spread. 
   

As a result, 1. clients benefit from tighter spreads and deeper order book depth - i.e. liquidity - at all times and regardless of price action, while 2. Acheron gets compensated naturally and fairly by the market.

We further arbitrage across markets to eliminate another market inefficiency: price dislocations. In addition, and when available, we provide an extra liquidity layer by harnessing other liquidity sources such as liquidity pools.

The full automation of this strategy allows for continuous operation, enabling gradual adjustment of positions, thus preventing disruptive price shocks. With variable loan contract terms and repayment rights, coupled with a client portal for issuer transparency, Acheron’s PMM model is highly scalable, allowing for profitability similar to that of the DMM model and precluding the need to act in a predatory manner just to remain profitable. 

Identify the features of a parasitic strategy compared with a symbiotic relationship:

Pioneering Transparency and Accountability

Acheron takes pride in differentiating itself from the black-box relationships endemic in the industry, choosing instead to provide clear transparency into liquidity for every issuer. From the begining, lenders are furnished with a login to access liquidity metrics in real time via our Command Station platform. This underpins accountability and equips teams with invaluable data to comprehend the evolution of their project’s liquidity throughout the adoption cycle.

Acheron's novel approach to market making sets a new standard for accountability and transparency, exterminating the reign of parasitic market makers. Through transparent, innovative, and symbiotic strategies, Acheron is redefining the ethos of market making and heralding a new era of symbiotic issuer-market maker relationships.