Loan Plus Options vs Retainer Market Making: Which Deal Structure Is Better?

What actually happens inside a loan plus option market making deal?

Inside a loan plus option deal, the option is the real trade and the quoting is the wrapper around it. The project lends tokens and grants call options on that inventory, so the market maker ends up holding a long call and the project holds the short side. The spread commitments, uptime targets and venue lists sit on top of a position whose payoff is set by the option terms rather than by the quality of the quoting.

That is why our read is that the economics of one of these agreements live in four lines: the strike relative to last price, when exercise becomes available, whether exercised tokens carry any lockup, and how large the loan is against circulating float. A strike at or near last price that is exercisable early is the version we treat with most caution, because the project has written a short call on its own float with no cushion between the strike and the price its own book is already supporting. Nothing about that requires bad faith from the counterparty. It is what the contract says.

The second-order effect we watch for is what the option does to the order book it was written against. Inventory that moves through an exercise has to clear somewhere, and in our experience the demand it clears against is the organic demand the project spent months building. Our read is that thin volume reported after an exercise is often the visible part of that, and that it is also the moment a switch to a monthly retainer gets proposed, which would have the project paying cash for liquidity it has already handed over in token form.

We would rather see the option terms negotiated before the quoting terms are discussed at all, since a strike well above last price with a meaningful delay before exercise changes the market maker's incentive from harvesting the book to supporting it. The red flags in market maker proposals worth pricing first are the ones buried in the option schedule, not the headline spread. Once those are fixed, the quoting obligations become the thing the relationship is actually measured on, and a dashboard showing fill quality and venue coverage starts to mean something.

Not investment advice.

What is a retainer-only market making deal?

A retainer-only deal is one where the market maker is paid a fee to trade and nothing else: the project keeps its tokens and its cash, and the maker gets execution access rather than assets. Our mandates work this way. The client retains all capital and all PnL, and we trade through exchange API keys with no custody, no token loan, and no options.

The practical difference sits in where the inventory lives. In a loan structure the tokens leave the treasury and sit on the maker's balance sheet, which is what creates the call option and the incentive questions that follow it. Under a retainer, the inventory never moves. Quotes are posted from the project's own exchange subaccounts, fills settle into those accounts, and any gain or loss from the quoting sits with the project rather than being split or kept by the maker.

Our read is that this is the main reason to prefer it: there is structurally nothing to rug. A maker holding no tokens cannot sell tokens it was lent, cannot exercise into a price it helped set, and cannot walk away holding treasury assets. If the relationship ends, the API keys are revoked and the balances are already where they were. The worst outcome is a project that has paid a fee for execution it did not like, which is a commercial problem rather than a balance sheet one.

The trade-off is that the project carries the quoting risk it would otherwise have transferred. A retainer buys execution, not a counterparty willing to absorb losses on inventory, so the spread performance and the fill quality show up directly in the project's own accounts. That makes reporting load-bearing, because the only way to judge the mandate is to see what was quoted, where, and for how long. How we think about that reporting is here.

Not investment advice.

When is a token loan actually acceptable?

A token loan is acceptable when a project already has real, demonstrated demand, and even then our view is that a retainer is the better structure. Demand that exists before the loan is what makes the inventory useful: the market maker is filling orders that would otherwise go unfilled, not manufacturing the appearance of a market. Without that demand, the loaned tokens are simply supply that has been moved from the treasury to a counterparty with no obligation to keep it in the book.

Our read is that the loan structure itself is not the problem. The imbalance inside it is. A small launch has nothing to gain from handing out inventory it cannot absorb, and runs better on a retainer alone. A larger launch, with volume across enough venues that inventory has somewhere to go, can support a retainer plus a loan without the loan becoming the whole relationship.

Where a loan is used, we think it has to be transparent, with a cliff and a vesting schedule attached to it, and with price and volume conditions written into the terms. That combination is what lets holders see for themselves that there is no early selling pressure sitting behind the quote. A loan disclosed after the fact, or disclosed without the conditions that govern when the tokens can move, gives holders nothing to check. The red flags in market maker proposals tend to show up precisely at this point, in what the term sheet declines to specify.

The practical test we apply is whether the project could explain the loan publicly on the day it is signed. If the terms only work while they are private, the conditions attached to them are not doing their job, and the next question is what reporting the market maker will provide once the tokens are out of the treasury.

Not investment advice.

What red flags in a loan structure should a project watch for?

The clearest red flag is a contract with no KPIs in it. Every market making agreement should specify depth, spread and uptime as numbers in writing, and an agreement that leaves those to "best efforts" gives the project nothing to enforce when the book thins out. Alongside that, we treat three other terms as warning signs: terms the counterparty says cannot be disclosed to advisors or to the exchange, a loan that is a large share of float, and MM inventory being counted inside circulating supply.

The structural red flag inside the option itself is a strike set at or near last price combined with early exercisability. That combination pays the market maker for something other than making a market. Our read on how it plays out is this: the MM exercises, sells the inventory into the project's own organic bids, buys back lower, returns the loan and keeps the difference. The book looks the same on a screenshot. The demand that was there has been consumed.

What follows is the part that is easy to miss. The same counterparty then reports that the token has no volume and proposes switching to a retainer, and the missing volume is the organic demand the exercise absorbed. A project reading that conversation cold has no way to tell the two apart without its own trade-level data, which is why we push for the depth, spread and uptime numbers to be agreed before the loan is sized rather than after the first month of prints. More on the proposal stage is in our notes on red flags in market maker proposals.

The practical check on inventory accounting is whether the loaned tokens appear in the circulating supply figure the project publishes. If they do, the market cap shown to the market includes tokens the project does not control and cannot recall on demand, and every dilution calculation downstream of that number inherits the error until the loan is returned.

Not investment advice.

Does project size or demand change which structure fits?

Yes. Our read is that size and demonstrated demand are the two variables that decide which structure fits, and the answer is fairly blunt: small launches should run on a retainer alone, while larger launches can support a retainer plus a loan.

The reason is not that loans are inherently bad. The loan structure itself is not the problem, the imbalance inside it is. A small project handing out an inventory loan with call options attached is transferring a large share of its float to a counterparty whose upside does not depend on the project surviving the year. At that size, a retainer keeps the relationship simple: the project pays for the work, the market maker does the work, and no token leaves the treasury.

Demand is the second filter, and we treat it as a hard one. A token loan is only acceptable for a project with real, demonstrated demand, meaning there is a market that already wants the asset and the loaned inventory is being used to make that market tighter rather than to manufacture the appearance of one. Even in that case our preference is still the retainer. Where a loan is used, it has to be transparent, with cliff and vesting, and with price and volume conditions attached, so holders can see for themselves that there is no early selling pressure sitting inside the arrangement.

What this means in practice is that the structure question resolves before the term sheet arrives. A project that cannot yet point to organic demand has one option worth negotiating, and the negotiation is about retainer size, venue coverage and reporting, not about how many tokens to lend. A project that can point to demand still has to write the cliff, the vesting schedule and the conditions into the loan agreement itself, and publish enough of it that holders can check the terms against what they see on the order book. Anyone weighing the two structures against each other will find our checklist for reading proposals useful.

Not investment advice.

What should be written into any market making contract, regardless of structure?

Depth, spread and uptime numbers, written into the contract as figures rather than intentions, are the part that has to be there whatever the structure. A retainer deal and a loan plus options deal both describe a service, and the service is only defined once the agreement says how tight the quote is, how much size sits on each side of it, and what share of the month the quotes are actually live. Our read is that a contract with no KPIs is the clearest red flag in the whole category, because it converts a paid engagement into a discretionary one and leaves the project with no basis to object to anything.

Three other terms are worth reading with the same care. Terms a counterparty says cannot be disclosed, to an exchange, to an auditor, or to a token's own governance, are terms that will be discovered later by someone else. A loan that is a large share of float hands one desk enough inventory to set the price rather than support it, and that is a structural problem no KPI table fixes. Market maker inventory counted inside circulating supply overstates what is genuinely in the market, which distorts every metric built on that number.

What we watch for is whether the KPIs are measurable by the project without asking permission. Numbers that only the desk can see are numbers the desk grades itself on, so reporting access and the method of measurement belong in the same clause as the targets. The same applies to venue scope: depth and uptime mean different things on a deep spot pair and on a thin secondary listing, and a single blended figure hides which one is being met.

More detail on how these terms go wrong in practice sits in what your market maker dashboard should show you. Once the KPIs, the disclosure position, the loan size relative to float and the supply treatment are all settled on paper, the choice between retainer and loan plus options becomes a pricing question rather than a governance one.

Not investment advice.

So which structure is better for a token project?

For most token projects, the retainer is the better structure, and the loan plus option deal only earns its place once a launch is large enough to carry the short side it creates. Our own mandates are retainer-only: the client retains all capital and all PnL, we trade through API keys, and there is no custody, no token loan and no options attached. The reason we run it that way is simple enough to state in one line: there is structurally nothing to rug.

The case against loan plus options is not that a loan is inherently predatory. Our read is that the loan structure itself is not the problem, the imbalance in it is. In the standard version of the deal the option is the real trade and the quoting is the wrapper around it. The market maker holds a long call, the project holds the short side, and the spread quality a project thought it was buying is a by-product of a position someone else is running. A project that signs that without pricing the short side has sold an option for free and called it a liquidity budget.

Where size changes the answer, it changes it in one direction. A small launch should be running on a retainer alone, because the float and the treasury are not deep enough to absorb the exercise of a call written against them. A larger launch with real depth and a wider distribution can support a retainer plus a loan, because the loan is then genuinely funding inventory rather than manufacturing a directional bet, and the project has the balance sheet to sit on the other side of it.

The practical consequence is that the structure question resolves into a pricing question. A retainer prices the service directly and leaves the token economics untouched. A loan plus option prices the service indirectly, through strikes, sizes and terms that most teams do not model before signing. Anyone weighing the two is better served working through what a proposal is actually asking for, which is the ground covered in how to choose a crypto market maker and in red flags in market maker proposals.

If this is work you need done rather than done yourself, this is how our retainer-only mandates work.

Not investment advice.