[UPDATED] Proposal: Market Making Proposal from Wintermute Trading

Governance Proposal
1

Summary/Abstract:

This proposal is published for presenting the terms of $INDEX market-making services to the Indexcoop community and approving it:

Authorize Wintermute Trading as an official $INDEX market-maker

Lend 1% of $INDEX supply (100,000 $INDEX) for market-making purposes as a loan to Wintermute Trading. Wintermute Trading will have to return in 1 year

  • The the full loan amount in INDEX; or
  • $5 million (USDC/DAI/ETH or mutually agreed upon currency) if any Index product or INDEX itself is listed on a Tier 1 CeFi exchange (defined below) with the aid of Wintermute’s efforts; or
  • $7.5 million (USDC/DAI/ETH or mutually agreed upon currency)

In return, Wintermute will commit to maintain inventory in Indices upon them being listed on any Tier 1 Cefi exchange. The amount invested will be 10% of AuM up to a total of $20 mln. In addition, Wintermute will and continue market-making on KuCoin and across DeFi aggregators.

Wintermute basic background

Wintermute was founded in July 2017 by three Optiver veterans. Evgeny Gaevoy, founder and CEO, was previously head of ETFs (screen and OTC) at Optiver Europe, one of the largest ETF market making desks.

Wintermute’s trading volume in 2H 2020 surpassed $70B and their average daily trading volumes in 2021 are over $2B

Wintermute is backed by Lightspeed Venture Partners, Pantera, Blockchain.com Ventures and others.

Wintermute Trading is registered with FCA for our OTC business.

Wintermute Index Coop specific background

Wintermute believes index products will be one of the key themes in 2021 and as a result is looking to back several teams in the space with an ultimate goal of:

Listing the index products on key cefi exchanges and facilitating liquid markets on these products and their derivatives (starting with perpetuals, following with options)

Combined total AuM of index products exceeding $25B by end of 2021

Wintermute believes the key issue with these products not being adopted outside of defi is lack of market making support as market makers and exchanges are not looking to support/list them because of low AuM, while the AuM stays low because there is not enough adoption/interest outside of defi. Wintermute wants to lead that adoption by committing a significant part of it’s resources and at the same time getting exposure to leading teams by becoming the official MM in protocol tokens and direct investment. Wintermute expects to be active in governance matters.

Wintermute is already a supporter of the Coop:

Makes markets for DPI on KuCoin and across DeFi aggregators

Go-to provider for OTC institutional flow in coordination with IC Institutional Business team

Invested directly in the Coop in the recent OTC sale

Specifically for Indexcoop community Wintermute commits to:

Provide liquid markets across all tier 1 cefi exchanges* (and a handful of 2nd tier as well). We already make markets across aggregators on defi (1inch, paraswap, matcha etc) and on KuCoin

Proactively support listing of $INDEX on key western exchanges in coordination with BD Index Coop members

Support new Index Coop product launches towards cefi and defi listings

In particular, once Indices are launched on tier 1 exchange*, Wintermute commits to hold 10% of the AuM for market making purposes with a minimum of $0.5 mln per INDEX, up to $20 mln in total for all listed Indices

Wintermute also commits to be the go-to Market Maker for any OTC institutional flow, providing competitive prices for tickets starting from 100K USD and beyond

*Tier 1 comprising of: Binance, Huobi, OKEX, Coinbase, Kraken and Gemini

Should it be determined that Wintermute is not expending efforts towards the above commitments, Index Coop may recall the loan.

Ask :

We would like to request the Index Coop community to pass a proposal to approve the transfer of up to 1% of the total token supply of $INDEX for Market Making services of $INDEX on key centralized exchanges.

We propose to Index Coop Community appointing a third party agent (Wintermute Trading) to act as the Index Coop Community Agent to market-make $INDEX across cefi, defi and OTC

To facilitate the work of the Community Agent on the community’s behalf, we propose to authorize operational actions required to effectuate the market making, including release of up to 100K $INDEX to the Community Agent from the Indexcoop Token Supply for liquidity provisioning.

This proposal has been discussed in the forums and on a community call and will move to IIP absent significant feedback.

8 Likes
2

Thank you, @wishful_cynic!

For the community’s benefit, this proposal took in feedback from the community over the last several weeks. The key modifications from the first iteration of the proposal:

  • Incorporating a success-based contingency. The primary motivation for the Index Cooperative entering into this construct with Wintermute is a Tier I centralized exchange listing. Wintermute’s ability to help make that listing a reality is now incorporated into the construct. If there is no Tier I listing in a year’s time, the effective strike price for the implied call option on INDEX becomes a price of $75 instead of $50. If Wintermute helps us to achieve a Tier I listing within a year, we are happy to leave the call option at the $50 INDEX level.

  • Loan cancellation. If Wintermute is not expending efforts towards its commitments, we may recall the loan.

4 Likes
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Fully supportive of this update. Great community call and edits @wishful_cynic. Will be voting FOR.

5 Likes
4

Love the iteration by @wishful_cynic @fallow8 and @Metfanmike. I agree with @oneski22 - in full support!

2 Likes
5

the costs in the proposal are a bit hard for coop members to understand because their is an embedded exotic option and exotic derivatives are not a common area of expertise.

would wintermute be willing to post a model of the estimated value of the embedded call with parameters that could be adjusted?

6

Scott, what kind of exotic option do you see this as? I have been viewing this as a call option where under the implied strike, the cost is $0. And then above the applicable strike, the cost = (INDEX MP - Strike) x 100,000.

There are two scenarios, based on the successful listing (or not) on a Tier I listing of any Index Cooperative product (including INDEX itself):

a) If there is a Tier I within the one-year term, Cost = (INDEX MP - $50) x 100,000.

b) If there is not a Tier I within the one-year term, Cost = (INDEX MP - $75) x 100,000.

How Wintermute is internally modelling out potential INDEX prices in the future seems less relevant to us if we are collectively comfortable with the costs above, given a Tier I listing, but curious to hear your thinking.

7

Hi, running some numbers about the proposal.

Index is worth $39,80 as of today CoinGecko quotation. If we make the loan today, the value loaned for 100k Index would be 3.98 million.

After a year and considereing that there is no cancellation due to Wintermute lack of efforts, we have two scenarios:

  • Index is listed on a top tier exchange. Then, Wintermute will pay us $50 per each Index we loaned for a total repayment value of 5 million. This makes a ROI for Idex Coop of 25.63% (in USD terms)

  • Index is not listed on a top tier exchange. Then, Then, Wintermute will pay us $75 per each Index we loaned for a total repayment value of 7.5 million. This makes a ROI for Idex Coop of 88.44% (in USD terms)

It is supposed that if Index in listed on a top tier exchange, its price will increase substantially. We need to contrast the following 2 options (considering listing the primary motivation):

  • Working with this loan, losing 100k Index but receiving 5 million
  • Paying ourselves for listing and for the services of market making. In this way we will have 100k Index (less Cost of listing & services) valued at post listing price. We should modell this post-listing price based on what other coins did after listing.

Then choose the best option between the two alternatives.

As a final remark, the 50k strike is just for listing on one top tier exchange? Why don’t we incentivate listing on more top tier exchange by alowwing several k? ie, 50k for listing on 1 exchange, 45k for linting on 2 exchanges and so on.

1 Like
8

The value of these options are huge - as I guide I sold 1mth Call Options with similar $40 ATM $50 Strike on Large Cap Altcoin at circa Premium 3% of notional (1 month option) . $Index will be more valuable.

  • 100k Index tokens * $41 = $4,100,000 Notional. The option easily values >$1m.

So my reservations are :

  • Strike - Given the Index token traded to $55 in the last 24 hours

  • Size - 100,000 tokens / $4m is to large a size option/loan.