Market Making Agreement
A market making agreement is the contract between a token issuer and a market making firm that defines what the firm must quote, on which venues, for how long, and on what commercial terms. It is the document that turns a verbal promise of liquidity into an obligation you can measure and enforce.
TradFi parallel: Like a designated market maker agreement on a traditional exchange, where a firm accepts a formal quoting obligation in return for fee rebates or an inventory facility.
Key Takeaways
- 01Scope, obligations, commercial terms and termination are the four sections that decide whether an agreement is enforceable
- 02Obligations must be numeric to be enforceable: maximum spread, minimum size on each side, and required uptime percentage
- 03A measurement clause naming the data source, sampling frequency and dispute process matters as much as the targets themselves
- 04Remedies for sustained underperformance give the targets teeth, without them the KPIs are aspirational
- 05Termination terms should state what happens to any borrowed token inventory and over what period it is returned
How It Works
Most market making agreements have four moving parts: scope, obligations, commercial terms and termination. Scope names the venues and trading pairs the firm will quote on. Obligations set the measurable commitments: maximum bid and ask spread, minimum order size on each side of the book, and the percentage of time those quotes must be live. Commercial terms set how the firm is paid, whether through a monthly retainer, a token loan with a call option, or some combination. Termination sets notice periods and what happens to any borrowed inventory.
The obligations section is where most agreements are weakest. A clause promising to provide liquidity on major exchanges is unenforceable because nothing in it is measurable. A clause promising a maximum 50 basis point spread with at least 25,000 US dollars on each side of the book, live 95 percent of each calendar month across a named venue list, is enforceable because every term can be observed and disputed against evidence.
The second common weakness is the absence of a measurement clause. If the agreement does not say who measures performance, at what sampling frequency, from which data source, and what happens when a target is missed, then the KPIs are aspirational. Sophisticated agreements name the measurement method, give the issuer a right to independent verification, and tie a remedy to sustained underperformance: a fee reduction, a shortened notice period, or a right to terminate without penalty.
Real World Examples
Spread obligation with no measurement clause
An agreement commits the firm to a 50 basis point maximum spread but never says who samples the book or how often. Six months later the issuer suspects the target was missed and has no agreed evidence base to argue from. The obligation existed on paper and was unenforceable in practice.
Venue list that drifts after signing
An agreement names three exchanges at signing. The token later lists on two more, and the issuer assumes coverage extends automatically. It does not. Venue lists should either enumerate current venues with an amendment process, or define coverage by a rule such as every venue above a stated share of the token's volume.
Uptime measured monthly instead of continuously
A 95 percent uptime target measured as a monthly average can be met while the book is empty for a continuous 36 hour window, which is exactly when a token most needs quotes. Measuring uptime in shorter windows, and capping the longest permitted single outage, closes that gap.
Frequently Asked Questions
How long should a market making agreement run?
Initial terms of six to twelve months are common, with a shorter notice period for the issuer than the firm. A long lock-in with a long notice period removes the only real leverage an issuer has, which is the ability to leave. Pair the term with a measurable review point so renewal is a decision informed by evidence rather than a default.
What is the single most important clause for a founder?
The measurement and remedy clause. Numeric KPIs are worth little if the agreement does not say who measures them, from what data, how often, and what the issuer can do when they are missed. That clause converts every other obligation from a statement of intent into something enforceable.
Should the agreement name specific exchanges?
Yes, or it should define venue coverage by an objective rule. An open ended commitment to major exchanges creates a dispute the moment a token lists somewhere new. Naming venues, with a written process for adding them, avoids arguing about scope later.
Can an issuer verify performance independently?
Order book data is observable, so yes in principle. Build the right into the agreement explicitly, including the issuer's ability to use a third party measurement source. Without that right, the firm's own reporting becomes the only record of whether the firm met its own targets.
Related Terms
market maker kpiloan and call option market makingretainer model market makingmarket maker uptimetop of book spread
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Supply-side analysis for educational purposes. Not financial advice. Verify assumption and precision labels on the relevant token page.
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