The EF Market Maker WorkLock — a new generation of fundraising for crypto
A New Approach to Crypto Funding that Meets the Market Where it’s At.
“Mann Tracht, Un Gott Lacht — Man makes plans and G-d laughs” — an old Yiddish saying
As entrepreneurs we make the biggest plans. The best plans. The winds of change, hand of fate and the market however, often has very different ideas which aren’t quite aligned to our lofty aspirations.
Here are a few such situations, which almost every crypto entrepreneur is all too familiar with:
- The market direction changes, and you need extra capital to launch your token and make a market
- An unscrupulous bad actor abuses your project’s treasury and liquidity, and you urgently need to recapitalize, and live to fight another day
- The market perceives (correctly or incorrectly) that you have a high-risk token that investors are scared to back (even a memecoin!) and risk their capital
- A bad “market maker” (actually just an inept asset trader) drains your liquidity/ treasury with brash, ill-considered, non-strategic moves and you need to recapitalize the stables and tokens in the market maker pool
- The investors in a project that got rugged by an unscrupulous dev, and want to salvage the project and bring it back to life. They need liquidity and backing that is well managed for the project to live yet another day
- A memecoin that has challenges post-launch and needs liquidity to make the market, popularize the project and so on. OTC is an option, but that bill, always comes due one day on the back of a red candle that may cause liquidation cascades and break charts
Sounds familiar?
It most certainly does to us all. We’ve ALL been there.
Historical Reference and Inspiration
A couple of weeks ago one of my dear friends and backer at EnigmaFund reached out to me. He loves to take punts from time-to-time and often degens his way into some serious x’s.
He was really impressed with the team at the memecoin Toshi on Coinbase’s Layer2 Network BASE.
Unfortunately they had suffered the fate many memecoins and microcaps suffer: a rogue founder. Nonetheless community memebers stepped up to take the reins, and won the confidence of the community, and many KOLs.
Facing the challenge of entering a multi-million dollar market cap token without any token treasury or stable liquidity (the liquidity was taken by a rogue actor), the team had to make a tough decision.
They received offers of $50k or more from investors who had great faith in the new team and project. However, the team were hesitant to provide cash due to concerns about the high level of risk.
They racked their brains day-and-night, searching for an alternative solution rather than just blindly taking money from investors and filling them with false hope(which is quite unusual in the crypto world especially when dealing with meme coins).
Kudos to Team Toshi for their thoughtful approach.
Rock, meet hard place.
So I got to thinking: what if there was another way. And in fact, a way presented itself. The door of memory creaked open, letting the light of remembrance shine through.
If you were around in the bear market of 2018 and 2019, you might look back fondly at some of the ICOs everyone was too scared to support on sites like CoinList. Some of us were different. We did not turn away. We leaned in.
One of the new opportunities that presented itself was pretty radical. A startup called NuCypher asked for bipartisan outcomes.
Enter the $ETH WorkLock:
In exchange for locking our ETH in a WorkLock for six months, investors were issued $NU to run nodes, and returned our ETH at the end of the WorkLock.
The NuCypher team designed the WorkLock to onboard nodes to the live NuCypher network. The goals of the WorkLock are to:
- Stake NU for network participants that intend to provide threshold cryptography services on the network
- Disincentivize use of NU outside of the NuCypher network
- Provide an efficient way to onboard threshold cryptography nodes onto a distributed network
- Be permissionless and decentralized
We have seen this being carried forth in the Polkadot and Kusama ecosystem with parachain WorkLocks.
Looking to Sharks for further inspiration
We have all watched Shark Tank, and often been dismayed by this guy more than most other Sharks:
Mr. Wonderful (aka Kevin O’Leary) is often the Shark people love to hate. Mostly because the average person doesn’t fully understand the world of finance, lines of credit, distressed business recovery/ turnarounds etc.
We’ve all heard the offer from him before:
- I give you money
- You pay it back over time (sometimes with a little interest)
- I get a percentage of your revenues and you keep the equity!
For someone like Mr Wonderful, who wants to put his cash to work into a business that is on a clear track to earn revenues that will pay back his loan, this is a no-brainer.
He issues a loan/ line of credit, after analyzing the books closely and feels confident he will get his money back within a certain time horizon. He gets his money back, usually with a lien on the business as collateral, plus interest, AND he gets to be the first person to be paid out a percentage of ongoing revenues, often in perpetuity.
This makes a ton of sense for Kevin, because he doesn’t want more equity with a “hopeful” exit day. He wants several streams of cold, hard cash… which leaves him with liquidity. Liquidity is optionality.
This is actually quite common for when startups get into trouble: Investor who believe in the founders will loan them money and get their money back plus equity/ tokens and other considerations.
Learning lessons from the best, helps one to unlock the innovations of the future.
Introducing the EF Market Maker WorkLock:
Let’s start with the basics.
What is a Market Maker? What is their role?
Investopia defines the market maker as:
The term market maker refers to a firm or individual who actively quotes two-sided markets in a particular security by providing bids and offers (known as asks) along with the market size of each. Market makers provide liquidity and depth to markets and profit from the difference in the bid-ask spread. They may also make trades for their own accounts, which are known as principal trades.
Market makers are not asset traders. They make markets. This means that it’s not just about buying low and selling high. It’s about treasury management, and making a deep and sustainable market in which the company’s virtuous actions in can find support.
Launching a token without phenomenal market maker partners is pure suicide. You will be eaten alive by traders, pecked at and washed clear to the shores of perdition, to be flayed and tortured by the damned souls of investors with forlorn dreams and heavy basic bags.
(Launching with terrible market makers is just as bad, when they drain your pools of stables, leaving you holding piles of fool’s gold. When you see charts that have what I call: “The Burj Khalifa” effect, and see the depth of the chart is a tiny fraction of the trading volume, it’s a clear sign of the MM wash-trading and blowing the startup’s treasury stack.)
Case study: Toshi gots needs. BIG FACTS:
I put forth an innovative solution to solve the dilemma of Toshi, its community and investors, with bipartisan outcomes, and reduced risks.
For Toshi to enter this new era, they require:
- Excellent market makers which the community can trust, who can make the market for a Toshi across centralized and decentralized exchanges. They will generate profits, recapitalize the token treasury, and ensure that all marketing efforts find an orderly and deep market. Those fees should be covered for at least 6 months so that there is clear continuity
- Capital to expand to a serious new exchange and build a foundation of support on the chart to catapult from
- Marketing capital
- Some guidance and assistance
- Liquidity for the MM
- The investors will also consider the funding of certain technological plans (in Toshi’s case: release a decentralized exchange that revolutionizes taxes for memecoins)
- Incentivized team members
- Smart contract audit and redeployment
- (In this case) Assistance from Enigmafund to innovate, expand discussion and awareness of Base and the the project, and assist with oversight of the market maker
How it works: The Market Maker. Custodian. Rainmaker.
TRUST is a HUGE factor.
There is no reason that the startup needs access to all the capital.
I suggest that the market maker takes custody of all capital not immediately required and that the startup requests the release of capital as it needs it. I further recommend that only absolutely trustworthy market makers are used with a strong track history and preferably ones that are regulated and externally audited.
This means that the startup will have all the money they need and no money stays dormant gathering dust. Instead the market maker can put this liquidity to use to generate profits!
Why let that capital gather dust? Treasury management is a superpower most crypto startups ignore. In other cases they try play the market and lose horribly most of the time. Founders should be building the business, not trying to time the market with investor capital. A market maker however, could be doing that for them professionally.
Market maker duties:
- Manage the treasury, generating profits and giving investors a sense of security
- Make the market
- Help negotiate the best rate for new CEX (Centralized Exchange Listings)
- Devise strategies to make the market
- Deliver clear accounting of the profits generated so WorkLock investors are paid out transparently
- Guidance: it’s best that the investors are paid in stables so that there is reduced sell pressure and increased buy pressure. It also makes accounting easier in the path of repaying the loans
- Guidance: It is recommended that as profits are being generated, they will be split 50–50: half stays in the treasury deepening market support while half is paid to the investors of the Market Maker WorkLock
This activity will continue until the investors are made whole at which stage or profits go to the project.
What’s in it for the investors:
The investors get to back a team they love, reduce risk and be invested in a goose that lays golden eggs, of which they get some of the upside in perpetuity, with very little risk and their initial capital returned + some token exposure on vesting. They also get to be part of the governance moving forward.
They will be first-in-line to draw-down on the funds generated by the Market Maker WorkLock, till the loan is paid off.
Guidance: In consideration for the risk taken and other forms of support, 15% of ongoing taxes and revenue related to Toshi will be shared with the investors.
What’s in it for the CEX partners? (exchanges)
CEX partners will finally deal with well capitalized and supported projects that have thick liquidity, and dedicated incentivized investors, not just dumpoooors/ jeets.
They will also have the assurance of the presence of solid market makers who will be rated over time on performance of price, depth, making the market and investor’s being made whole.
This is a huge win for exchanges and I can even see a world where market makers, exchanges and funds start to formally fund the EF Market Maker Worklocks in scale.
Furthermore, the exchange and the investors know that the market maker is managing the liquidity, far reducing the chances of bad actors rugging investors by pulling liquidity.
What’s in it for the Projects?
Let’s face it: This is a better way for many projects who struggle to get funded to be funded, especially just before the launch or after a major negative event. In today’s world there are very few options.
It’s not just memecoins. When I stepped into my former role at ARC, they had a CTO that built an exploit into their smart contract and stole $1.7MM plus a launchpad that gave them only $250k of $1MM raised and stole tokens which they used to extort the project and rain pain on the investors when the token reached a $300MM FDV.
When that happens, what options are open for a promising company of a well intentioned and very creative team with a ton of grit? Investors are naturally wary. Now we did a great job turning $ARC around, and a solution like this would really have empowered us tremendously. This solution would have created a new paradigm. The team at ARC are absolutely tenacious and brilliant, but the fire burns so much brighter with the right fuel.
For Ratio Finance, where all the VCs dumped on retail, and destroyed the chart… Ratio could have found a way forward where investors had risk mitigation and major upside.
And of course for the stalwart team of Toshi, who stood by the project when a founder went rogue with the liquidity, the community, KOLS, and whales have a real possible future that is steeped in an innovative and risk-mitigated path forward. The community and investors can truly walk side-by-side with the project… probably a first for the world of memecoins.
We live in a world where memecoins struggle to find an ongoing narrative that is sustainable and relevant, creating actual token utility, and Toshi can stand out on Base significantly and find support from the wider, Base developers and community as well, as everyone at Base rallies behind the unofficial mascot of Base, Toshi: the representation of Brian Armstong’s beloved cat.
In Summary
In summary, this plan will deliver a unique outcome to the investors, and in this case, Toshi… especially for the investors we are risks are so greatly reduced, and better outcomes can be crafted in a way that benefits all investors.
Having a reputable CEX with a solid orderbook, and a great Silicon Valley VC-grade market maker partner to collaborate with, and support the project, compounded with new small contracts, revenue from taxes, and all the liquidity required, as well as funds for marketing as a game changer for Toshi.
On the other hand, the investors now rest assured that the markets can be made by the market maker, and tended to in a proper manner, while being made whole as a priority, and then being left, with a goose that continues to lay golden eggs of Toshi for the rest of time for the immense risk they take.
Of course, Toshi is the goose and the project retains 85% of all those eggs. As they say: Better to have 85% of the pie than no pie at all.
So anon… WYGD?
Stay tuned for part 2 of this article in the coming weeks where I will work on building a hypothetical financial model to show how this could all work out in hard numbers.
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(BTW: if you want to participate in the TOSHI Market Maker WorkLock, please fill this form: https://docs.google.com/forms/d/e/1FAIpQLSfkRBUFkQuysCxtwdMCz0FLi2u7rOrbv_zgfOj-fm0rWwwONA/viewform)
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If you really love this? Reach out to me and I will help you integrate and plan it… or drop me a few shekels / tokens if it works out well, or support us building $UNA ;)
🫡 0x0d28e3CA6B23641A803891301352C0e6Ab57e8f6
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About EnigmaFund:
EnigmaFund is a Web3-focused evergreen fund, venture studio and advisory practice.
Our advisory roles include: Entangle Protocol, ANote, Liquid Crypto, and others. EnigmaFund advises and leads the due dilligence practice and startup mentorship at Sphere, the official launchpad of Mantle Network.
Our founder EnigmaFund, is the founder of UNA, which is building the Web3 community recover OS and treasury for super-large crypto projects that collapsed. 50% of the $UNA supply is free to claim for anyone who held $UST or $LUNA on the days of the depeg 6/7 May 2022. Their mission and vision is to bring #USTogether and restore faith and trust in Web3 for all investors.
You can contact Enigmafund at:
Telegram: https://t.me/enigmafund
Twitter: https://www.twitter.com/enigmafund
LinkedIn: https://www.linkedin.com/in/enigma-fund/
