Thank you TomyLBT for putting this forward. I know various DAO members have been working hard to get the best proposals from different market makers so the DAO can review different options and make the best decision. I wanted to share some thoughts broadly about market making agreements, and this specific proposal.
Amber Market Making
For some context, the DAO previously had a market making arrangement with Amber before the Foundation was fully set up and able to execute on transactions. In that market making arrangement, Amber took a loan of 3M SYN; when they repaid the loan, they only returned 2.53M SYN, claiming the rest of the SYN was stuck on FTX. The DAO has still yet to receive the rest of this SYN (about 500k SYN). Amber has promised to send it when FTX claims are settled.
This raises a few issues, firstly, when the FTX claim is settled, is the DAO to receive the remaining SYN or is the DAO in effect taking the risk that if SYN appreciates significantly, it will only receive the SYN at the price when FTX went under?
All told, this is a pretty bad deal since the DAO is taking CEX counterparty risk on behalf of market makers. In general, the DAO cannot verify how much of market makers’ holdings are on a certain exchange at any point in time.
Counterparty Risk
In this light, the DAO should see these specific details in new market making agreements to make sure the DAO is protected. Additionally, covering exchanges such as Phemex, MEXC, etc that are not considered "tier 1" actually opens the DAO to much more risk.
What is the recourse if any of the CEXs gets hacked/becomes insolvent, and the market making firm claims all the SYN was held there? In effect, it feels like the DAO is taking the compounded counterparty risk on a dozen CEXs for 12 mos with no upside.
Economic Terms
Additionally, I had previously never seen an MM proposal where the loan of assets to the MM is in stables instead of the governance token. I went through some historical governance proposals and wasn’t able to find any other examples.
Currently, many OTC desks are paying upwards of 30% yield to lockup stables for a year - why would the DAO offer stables to a market maker for free? This feels like a very bad deal for the DAO, stripping it of treasury assets, with very little in return. From what information this snapshot proposal makes available, it’s not entirely clear how the structure improves the market makers’ ability to provide liquidity, as it does not directly assist the market makers in obtaining inventory the way a typical governance token loan does.
Regarding the call option or loan repayment, some assumptions are required as the one line in the proposal makes the terms quite unclear. “At the end of the term the market makers can exercise a call option on the loan at 110% of the first 7-day TWAP price and repay the loan in stables or in $SYN;”. This can be interpreted to mean the DAO is writing an option with a strike price 110% of the 7 day TWAP price that expires in 12 months.
Some immediate questions:
- How big is this call option?
- Is it the same size as the loan, if so, denominated in what asset?
Separately, this is one of the unfavourable terms I’ve ever seen from market making desks, particularly with USDC being lent.
I’d urge the DAO to take a look at other historical market making proposals to other DAOs. One that comes to mind is the Wintermute proposal to the Maker DAO. They agreed to either pay back the full loan in MKR or pay 4x that amount in USDC (https://forum.makerdao.com/t/proposal-market-making-proposal-from-wintermute-trading/10629).
As an example scenario, in this current proposal, if SYN is trading at $4 in 12 months, and the 7-day TWAP price is $1.1 (today’s price): The market making firms have the option to buy roughly 1.13M SYN at $1.1 and immediately sell it for $4.5M, profiting more than $3M for taking no risk along the way and receiving an interest-free loan in stables from the DAO.
This agreement requires clarification of economic terms discussed above. What’s the size of the option? Is there a cap on the market makers’ potential profitability with respect to the option? Why would the DAO let these firms repay in either SYN or stables, as this just gives them the choice of whatever is cheapest at expiry.
Procedural Points for Synapse Foundation Implementation
Outside of these points, there are also a number of procedural points I wanted to receive clarification on.
To implement this proposal and ratify the legal agreement, the Synapse Foundation would need to sign off on the proposal as it would be expected that the Foundation would be the counterparty to these agreements.
In that light, the firms should put forth the legal documents of the market making agreements in question so that the Foundation can review them and speak to counsel at the market making firms. Specifically, Virtual Asset Service Provider and economic substance issues in the Cayman Islands could restrict the Foundation’s ability to enter into these agreements, and additional legal work (and potentially structuring) on the Foundation side may be required to make this feasible in the first instance.
As a result, prior to any DAO vote to approve these arrangements, the legal documents of the market making agreements should be made public so that the Foundation can review the relevant legal implementation details. To the extent necessary, those DAO members facilitating discussions with market making firms would need to assist with putting Foundation legal counsel in contact with the market making firms for discussions regarding those documents and any structuring required.
Some more questions around regarding procedure:
With the proposal put forward, implementation is not clear in terms of how the DAO plans on implementation. For example, while it’s indicated the loan is structured as $1.25M in stables, it's unclear who the funds are going to and in what proportion. Is it divided up evenly between Selini and DWF? Is there a separate breakdown, and did both firms agree to the same exact terms? The DAO should be able to understand this, and each of the respective firms should individually come to the DAO on their own.
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Overall, this is a solid first pass at the DAO attempting to reach consensus on a market making agreement. It would be preferable for the DAO to have additional colour on some of the procedural points noted above so that it is implementable.
Additionally, it’d be encouraging to see the firms themselves providing some more thoughts on the economic terms, and the DAO should discuss how to make them most favourable. In the meantime, the DAO should also protect against downside by looking at the legal proposal and reducing the number of CEXs the DAO is exposed to or shifting that risk to the market makers in a mutually agreeable way.
