Proposal: Market Making Entity

Background

Perp V2 has been starting to see some decent volumes and has caught up with V1 from a volume perspective whilst having less markets. To continue our push into decentralisation as well as prepare ourselves to scale even more markets we need to look at separating the foundation team.

Currently the foundation team consists of both engineers who build on the core platform as well as traders who market make on V2. This proposal aims to separate the two into distinct groups and segregate any potential risk.

Proposal

tl;dr

We propose spinning up a new entity that is separate from the foundation team: a market making entity and unlocking 20M PERP to be utilised by this entity.

Rationale

There are a number of reasons why we believe this should be done:

  • Currently the foundation team both develops and market makes. To ensure better separation of risk we believe it makes sense to separate this into two different entities that have their own separate teams, budgets and mandates. This also paves the way for further decentralisation.
  • Perp V2 is a new and novel innovation which means that it will take time for other market makers to port strategies over. Whilst we see external parties market make the majority of ETH and BTC markets, the foundation team currently actively market making most other markets. We expect this to continue in the short to medium term until market makers have developed their own strategies and are comfortable market making on V2
  • The foundation team has started exploring borrowing stable-coins to assist in increasing liquidity on the platform (and thus trading volumes). Unlocking a large amount of PERP will give other lenders confidence in the entity’s ability to repay

Mandate

We propose that the Foundation team will take this role and allocate specific resources solely dedicated to market making. Additionally this new entity will look to hire and grow the market making team.

One important point is that we are proposing that this entity ensures a minimum amount of liquidity for each market at all points in time. This will ensure that traders and partners still have a good experience trading on Perp even if other liquidity providers were to pull liquidity out. It’s important that this means we are not optimising for profitability and may see losses from a market making perspective.

At a high level we propose the following:

  • Maintain a minimum of $5M liquidity for each market (note that if a market has enough liquidity through external parties we can remove liquidity and add this to other markets)
  • Coordinate with the token listing DAO and foundation team to ensure all new markets have liquidity from deployment
  • Aim to not sell any PERP. In the first instance it’s to borrow stable-coins and manage the treasury in such a way that there is no need to sell. In the case of a significant draw down the entity may need to sell PERP to cover losses

Future

Given this is a short to medium term plan, as soon as we start seeing enough saturation of market makers we will propose to transition this entity into a market making DAO that does the following:

  • Procures stable-coins
  • Lends stable-coins out to market makers at an attractive rate so that they can market make on Perp

If however we find as we transition away from this short to medium term plan that the above future strategy does not work and there is no longer a need for the market making entity, then it would make sense to return all funds back to the DAO treasury and dissolve this entity

Edit 1

Just for transparency we also propose to have a monthly report published to the community outlining:

  • All wallet addresses
  • Any large financial transactions that have occurred and terms (e.g. borrowing, lending etc)
  • Any other comments regarding the entity
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Who will be the lender of stablecoins in this scenario and what is the borrow interest like? Is it fixed or variable? How many % APY per year the entity will have to pay?

Also, where will be the revenue derived from these market making activities go? Is there a revenue share between the DAO and the new entity, or is it entirely revenue for the new entity?

Last, if there is no revenue share, will the DAO get an interest on the PERP that was lent out to the entity?

We’re in discussion with a couple. There are some like stablecoin providers (e.g. we borrowed 10M FRAX here: Frax x Perpetual Protocol - Governance Proposals - Frax Finance Governance). We can also explore alternatives

As noted above we’re not really optimising for profitability. Given the market making entity is purely there to provide significantly deeper liquidity to drive further volume would suspect we’d just reinvest profits (if any) into market making

No plans for this given the main mandate is to increase the liquidity and trading volume which benefits all PERP holders. Noted in last paragraph that were the DAO agree to dissolve this entity in the future as we no longer needed it, then we would return all treasury to the DAO

I support the proposal, it is very important to have liquid markets to reduce trading slippage and this proposal sets a minimum liquidity threshold per market.

Few comments regarding stablecoin borrows: Not a current issue as we are swapping to USDC, but I do not like borrowing algo stablecoins as I think there is strong depeg risk. You can only do so much to support something backed 80 cents to the dollar when it comes to frax. Other coins have other issues but gist is the same. Would much rather the protocol go borrow USDC from circle.

It is very hard to model tail risk and a lot worse when it can create cascading liquidations in a levered trading environment. I do not think the traders would be very happy if they got liquidated due to a FRAX depeg as all the liquidity was in FRAX. This is less of a concern on L1 because of the extensive L1 liquidity, but how much frax is on optimism? I do not see any FRAX in the curve pool.

EDIT:
Disclaimer, I am not bearish Algostables in general, just in the leveraged trading framework and doubly so if there is no good liquidity on the chain.

Understand the concern here. We’re working through a risk framework that takes into account the on chain liquidity which hopefully we’ll release in the not too distant future that should mitigate this risk

Is the new market making entity raising capital to fund operations?

Is the 20M PERP to pay salaries etc or solely for collateral for borrow?

The initial idea is yes to fund operations given we’d like it to be a completely separate entity. That said, we expect this amount should be relatively small so if it’s of concern to community then we can look at a way where the current foundation team funds this

And is the entity doing an equity fundraiser?

No plans for fundraise.

Hi all, the snapshot vote is live here: Snapshot

I presume the PERP it is coming from the Ecosystem allocation.

There is a lot of trust here regarding both this transaction and the operating activity.

There is no visibility on:

  • relationship between existing legal entity and this new legal entity? Is it a subsidiary of existing legal entity, who are the shareholders and directors of this new entity
  • what is the pre-existing pathway to DAO. For example, is the new entity established legally in a manner that facilitates transition to DAO, or will there need to be another transaction to migrate to DAO?
  • what share of the allocation is used for collateral and what share is used for operating expenses
  • how the entity is being managed and by whom

My suggestion is to:

  • establish a legal framework now that can transition to DAO, rather than have another transaction and a period with little/no visibility
  • appoint a community member of good standing to audit the transaction and report to community to ensure this transaction is happening at arms length and with appropriate consideration for the interests of the community (and this large allocation). I am happy to put myself forward for this audit role - I am supernoveau on the other platforms and a member of the Grants DAO.

Thanks for the feedback!

Current thinking is that this is a bit too hard to forecast how and when this will happen. The main goal of the foundation team is still to fully decentralise and hand off all functions to the community whilst ensuring we don’t lose our flexibility and speed that has killed other projects in the space - we’ve shown this with the Grants DAO and more recently the token listing DAO.

We may want to dissolve this entity in 12 months time or we may want to transition it away into a sub DAO that lends to other market makers - it’s simply too early to put something in place to force it to move to a DAO.

For simplicity we are planning on funding all operational costs from the foundation and to utilise all of this collateral for market making purposes only. For transparency this could be a deposit of stablecoins from the foundation wallet into a new market making multisig

As per my point above, would disagree on establishing a forced transition to a DAO.

For the second point, we are going to publish the wallets so everyone can actually see what is happening along with the transactions that are occurring. We are happy to answer questions about the nature of transactions during this migration. Additionally some points in which we will be seeking feedback from the community will include:

  • How the new entity purchases existing positions and assets tied up in Perp V2
  • How we migrate stablecoin borrowing (e.g. Frax and Solv) to the new entity, along with the actual stablecoins borrowed

On the conclusion of this vote, assuming it passes we will work on a migration proposal and seek community feedback

Hey Nick @tongnk

Super important proposal.

I had a question related to the ownership of the new entity and then a follow up related to tokenomics.

Al McCann was hinting at it in his questions as well.

1/ Who will own and control the new entity? Is it a subsidiary company, wholly owned by the Foundation?

2/ Who owns and controls the Foundation?

3/ What legal structure is being proposed in the short term for the new entity, while determining if it makes sense to establish it as a DAO?

4/ Also, I was wondering why the market making entity shouldn’t also have a profit motive? It seems like an interesting new revenue stream for the protocol that could be used to improve tokenomics through say (1) a PERP buy and burn function financed by market making or (2) to increase yield in the PERP staking contract by using the revenue from market making to buy PERP to distribute to stakers.

Super interested in your thoughts and feedback

Thanks!

Oscar

Proposal snapshot vote passed! https://vote.perp.fi/#/proposal/0x1f7d4f1e7ebe5cd039f127107d8bf5cc73a24803f9af75eb0d133d46d48d233f

Hey everyone,

Just wanted to update everyone about the current migration process so we stay as transparent as possible.

Migrating Existing Liabilities

The Foundation has borrowed 10M FRAX with the intention to market make with it. Given we have not used this yet as multi-collateral is so close (we were originally going to sell to USDC and then convert back to FRAX later one) we are simply going to transfer this to the new market making entity multisig

Migrating Existing Positions

Our methodology was as follows:

  1. We will migrate a list of wallets to the Market Making Entity
  2. We will then reimburse the Foundation through using PERP and a 7d TWAP price

This means that we don’t need to close any positions and reopen them.

Wallets

The full list of wallets is as follows:

  • 0x1F06556c88f66981AD77d89D8006c4E0F562619F
  • 0x030058aC851BA6F282eC0e717A7eD577d09dfF0B
  • 0xb3208f9F07B129B825f0d00d5BB79eEC69Db5126
  • 0x148824400a454DC00093E6604b6B9A6A208BF3cf
  • 0x6E7aa93AABE2d0019E2a096D227e56E3392b8ec5
  • 0x26cb31fde1015080ce5Cc9B0866219fD6153aCC7
  • 0x283c280EF8c42E2775D12aA804F5e053475D5397
  • 0x1CB769D547280Ddca69c932b1A822d51eca58B3d
  • 0x675e328b73e15CD41acD2828B83B417687C36BBA
  • 0x94934851b2C6a066f9E5aCb353Bce4bc7FcDCdbD
  • 0xe77dD81813Bd06d74a30d1B2c07418906456498E
  • 0x70332De459D5554a9A310a7c4F7C6069C73604f9
  • 0x3478d1Ba5BC6c0e662DEc109C70C0065dAd5f5Be
  • 0xD8bCd1E2f0E96A3402fD678B0B2eAceb80e1c226
  • 0x5366910021b3a66E84f9B974415Ce2C067729c04
  • 0x6fE5c2B4A4c9268d4e08510Fbfd042eBdf47fF81
  • 0xfF05618995E03dFfd32c6fF819D1C74b2fF04FA9

Additionally, we had a total of 862,383.33 in FTX

Raw Balances

After checking all the on chain balances we get the following.

USDC ETH oETH PERP sPERP
4,648,379.65 0.32 18.11 227,660.17 301,870.66

TWAP Prices

If you check CoinGecko you can then get the following TWAP prices:

  • ETH: 3051.15
  • PERP: 4.15

Final Amount

Finally, if we calculate the amount to send over it’s USDC value is 6,902,165.67, or a total of 1,663,172.45 PERP.

Transactions

To facilitate this we have done the following transactions:

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Impressive. Love the transperency.

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