SIP#25 - Stargate MM (Revised Proposal)

Background Stargate’s token, STG, is traded both on decentralized exchanges (DEXs) and centralized exchanges (CEXs). STG is listed on centralized exchanges such as Coinbase, Binance, Kraken, Huobi and Kucoin among others.

Proposal Market makers provide a key service within centralized exchanges, by offering deep liquidity on both sides of a market (on both the bid and ask side). This results in deep liquidity being available on both sides of the book allowing market participants to interact with the token freely (buy and sell amounts without moving the price dramatically).

Without a market maker a exchanges orderbook tends to become illiquid, which could in turn lead to a poor user experience when interacting with the asset on that exchange. This can lead to an exchange deprioritizing or delisting that asset. Many of the largest centralized exchanges actually encourage an active market maker as a point of reference.

Market makers typically adhere to certain service level agreements (SLAs) covering a range of obligations such as spread, quote depth, uptime and other metrics to continually ensure a smooth functioning market. In exchange for these services, market makers are usually either paid a fee for services rendered or compensated by a structured 'call' option that keeps them aligned with the asset they're market making for.

An example of an agreement is that the market maker may ensure $X depth within Y percent slippage for the asset and ensure they are available and servicing the market at least 99% of the time. After a fixed term they then will either return the asset borrowed for market making or a cash equivalent at a predetermined strike price.

Market makers typically require a loan of assets. Assets being loaned are important to a market maker because it allows them to service both sides of the market. An active market maker needs to be able to both buy an asset around its current price but also sell an asset around that same price to ensure market participants have enough liquidity to suit their desires around accumulating or divesting an asset.

Numerous market makers have submitted proposals with loan requests ranging from 5,000,000 to 50,000,000 tokens and varying strike prices, some of which were below the actual current spot price. A competitive offer from a high reputable firm is key to successful market making in this environment. Combining a reputable custodian of the loan who has a track record of safeguarding client funds with a smaller loan size and a strike price that is significantly higher than the current market price ensures the party selected is vetted and aligned towards the long term success of Stargate.

Execution STG would be made available to a suitable and qualified market maker for STG under terms that do not exceed a loan of 8,000,000 STG for a 24 month period.

The up to 8,000,000 STG are loaned to a market maker who will then use them to support free flowing liquidity of STG across multiple venues. The market maker will take no fees for this service but will be given an option to buy the STG after the term expires at predetermined prices. This helps align their upside for services rendered with Stargates. They will help support a free flowing and robust market and any upside of token appreciation during that tenure is their reward for doing so.

After the term, STG would be returned to The Foundation or an equivalent amount of USDC at a price of $0.80 or above per STG. The exact amount per STG will be equal to or higher than $0.80 but a floor is set to provide confidence in the number while also not revealing any data that would compromise market integrity.

Success If successful, A qualified market maker will be chosen with a strike price on the option granted of at least $0.80 (with goals of significantly higher) after a 24 month term. This will enable liquidity to be deeper across all centralized exchanges allowing for market participants to buy and/or sell STG more easily.

Summary The Stargate DAO shall loan up to 8,000,000 STG for a term of not more than 24 months to a qualified market maker to maintain liquidity for STG token. This will create more robust centralized exchange liquidity and allow for a better functioning STG market both on and off chain. Stargate Foundation shall secure the aforementioned requirements on behalf of Stargate DAO.