This is a proposal to allocate 7 million OSMO tokens from the community pool to the Osmosis Grants Program Multisig wallet (osmo1vpmwzt4mt6cfnnwtrpv79tn09yx2r3s56chpln
). The funds will be used to retain two market makers with the goal of market making for the OSMO token on multiple centralized exchanges.
Per community feedback, this proposal has been separated from the OGPv3 renewal proposal, which will be going on chain concurrently with this proposal. If this proposal passes and the renewal proposal does not, this proposal will be considered failed and the funds will be promptly returned to the community pool.
How Can Market Makers Help Osmosis?
A market maker deploys capital across exchanges with the goal of tightening up the spread (the difference between the best bid and ask prices) and adding liquidity to the orderbook (or depth). Market makers don’t have any impact on volume or price. Instead, we can look at orderbook spreads and depths to determine whether a market maker would be helpful. At the time of writing, we see the following spreads and ±2% depth respectively from Coingecko:
OSMO-USDT 3 (Binance): 4 bps and $168k
OSMO-USD (Coinbase): 6 bps and $19k
OSMO-USDT 1 (MEXC): 1 bps and $93k
By working with a market maker, Osmosis can improve these stats to increase orderbook depth and provide consistently tighter spreads. We expect this to reduce volatility in the market as orders are more easily absorbed into market maker liquidity. It also improves execution for any market participants.
Given the role of OSMO as a value of liquidity for pools, security for the protocol, and resource for community members, the protocol would benefit from lowering volatility and improving the overall health of OSMO orderbooks.
One question folks may have is - why does it make sense for the OGP to work with market-makers, as opposed to market-makers interacting directly with the DAO? The reason is - market makers are contracted through agreements that clearly define the loan structure, and hold them accountable to performance. The OGP is well suited to take on that counterparty role for the community, and can also hold any market maker accountable more efficiently.
Historically, Osmosis has not actively worked with market-makers. But with the growth of Cosmos in recent months, we think it’s an advantageous time for Osmosis to bring on additional partners with different value adds.
So how will this work?
Broadly speaking, market-makers require an inventory of tokens to make markets with. Of the 7M OSMO allocated to market-maker initiative, we anticipate much of it would be used as inventory for the market-makers, with a small amount bucketed as potential compensation for their services. Importantly, the OSMO used as inventory by market-makers is structured as a loan - after the agreement terminates, the OGP would receive either the original OSMO amount loaned, or USDC proceeds from the sale of OSMO at the agreed option price. Thus, only a portion of the 7M OSMO will actually be spent as compensation to market-makers.
Market-makers also receive compensation, typically in the form of a retainer or options. Under the retainer model, market-makers are paid depending on how many pairs they’re active in. Under the option model, market-makers may receive an option to purchase the OSMO at an agreed price.
The Grants Program plans to conduct an analysis into which market-makers to work with. Discussions are ongoing, and we will update the Osmosis community with details once ready. We plan to share the market-makers’ identities and the size of the inventory involved.
As a reminder, OGP v3’s Reviewer Committee will include:
- Figment Capital
- Brandon Curtis
- Juri Maibaum
- Andrew Allen