- Jakob Brezigar
- Updated: August 28, 2025
- Reading time: 6 min
Crypto Loan Model – Definition and Insights for Market-Making Professionals
The loan model in crypto market making involves issuers lending tokens to market makers, often with call options tied to strike prices. It reduces upfront costs and aligns incentives if token prices rise, but carries risks of token dumping, opaque terms, and regulatory scrutiny.
Key KPIs include spreads, depth, uptime, and reporting transparency. In 2025, caution grows as misaligned contracts harm projects; by 2026, hybrid structures, standardized agreements, and regulatory clarity are expected to shape safer adoption.
Orcabay, an experienced market maker active on over 30 exchanges — including Binance, Bitstamp, and Coinbase — specializes in delivering tailored liquidity solutions. Contact us to learn more!
What Is the Loan Model in Crypto Market-Making?
The loan model (also known as loan/call option model) is a market‑making framework where the token issuer lends tokens to the market maker, typically expressed as a percentage of total supply. The issuer also grants a call option, enabling the market maker to retain the tokens should the market price exceed a predefined strike price.
The market maker manages liquidity, defining exchanges and trading strategy, and earns via exercising the option or trading the associated gamma. It’s usually more suitable for already established projects.
Why Would Projects Choose the Loan Model?
What Are the Incentive Dynamics?
- Alignment of Upside Risk: Both the market maker and the issuer share aligned incentives when the token price appreciates. It is equally important to consider structured call options with defined strike prices, which give the market maker the flexibility to sell more aggressively once certain price levels are reached.
- Lower Up‑Front Costs for Issuers: Issuers avoid fixed fees, leveraging the market maker’s balance sheet instead.
What Are the Risks and Downsides?
- Token Dumping Risk: If not properly structured, market makers may sell large token volumes after lending, potentially crashing prices.
- Opaque Terms: Optionality, strike price, loan size, and tranching often lack transparency, leading to potential misalignment or exploitation.
What Key Metrics, KPIs, and Frameworks Apply?
Which KPIs Are Essential?
- Bid–ask spreads and depth: Tight spreads with meaningful depth ensure effective liquidity—e.g., 5 bps spread with substantial depth is better than ultra‑tight but shallow liquidity.
- Uptime & Latency: Continuous quoting (ideally >95% uptime) and low latency are crucial for market confidence.
Performance - Transparency: Market makers must offer real‑time dashboards or regular reports showing PnL, volume, depth, and strike‑related performance.
What Compliance Considerations Matter?
- Regulatory Oversight: The call-option structure may raise regulatory scrutiny, especially if treated akin to derivative instruments under securities laws.
- Contract Clarity: Clearly defined terms (strike price, duration, KPIs, recycling, penalties) are essential to mitigate manipulation or poor outcomes.
Concrete Example Scenario
Hypothetical Scenario:
- A token issuer loans 3% of the circulating supply to a market maker.
- Strike price set 10% above current price, valid over a 12-month period.
- MM uses their own capital to provide tight, two‑sided liquidity across major exchanges.
- If market price surpasses strike, MM exercises option—potentially profiting from upside.
- KPIs include: bid–ask spread ≤10 bps, >$200k daily depth, ≥98% uptime, monthly performance report.
Outcome
Issuer benefits long-term if token appreciates; MM is motivated to manage liquidity responsibly. However, if price remains below strike, the issuer reclaims tokens, and MM earns only via trading.
What Are the 2025 Trends and 2026 Outlook?
What’s Happening in 2025?
- Caution Toward Loan Models: Increased scrutiny—Market observers note “loan model… killing projects” due to incentive misalignment and opaque terms.
- Transparency Demand: Projects favor clarity and alignment; some shift to retainer models or hybrid structures.
What Are 2026 Predictions?
- Hybrid Models Rise: Combining loan structure with fixed retainer or performance fees to balance risk and alignment.
- Standardized Contract Terms: Industry may adopt norms for strike levels, KPI formats, disclosures.
- Regulatory Guidance Emerges: Jurisdictions likely to issue clearer frameworks for token lending, optionality, and liquidity contracts to protect investors and markets.
| Criteria | Loan Model | Retainer Model |
|---|---|---|
| Structure | Issuer loans tokens to MM, often with a call option at a pre-agreed strike price | Issuer provides both token and quote capital; MM paid fixed monthly fee |
| Risk Allocation | MM bears some market risk but may liquidate inventory; issuer risks token price drop | Issuer bears full market risk; capital returned at contract end |
| Incentives | MM gains upside if token appreciates; risk of token dumping if misaligned | Focus on meeting execution KPIs; no upside linked to token price |
| Transparency | Often lower; terms like strike price and tranching may be private | High; real-time monitoring of liquidity performance possible |
| Cost | Variable; tied to option value or profit share | Predictable; fixed fee known in advance |
| Strategy Control | MM defines and executes strategy | Issuer defines or adjusts strategy |
Conclusion
The loan model in crypto market-making structures liquidity by allowing issuers to lend tokens and grant optional upside through call options. This creates potent alignment potential—but comes with significant risks, including token devaluation and poor transparency. Core KPIs such as spreads, depth, uptime, and reporting are essential for monitoring performance.
By 2025, caution around the loan model grows; in 2026, expect hybrid frameworks, best-practice standardization, and clearer regulation to emerge. As a seasoned liquidity provider, Orcabay brings deep expertise in designing compliant, well-structured market-making agreements—ensuring both issuer control and strategic liquidity management.
Orcabay, with deep expertise in algorithmic trading, liquidity management, and exchange partnerships, is well-positioned to navigate and support clients through these evolving dynamics, ensuring robust, compliant, and efficient liquidity solutions.
Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial, investment, or other professional advice. All opinions expressed herein are solely those of the author and do not represent the views or opinions of any entity with which the author may be associated. Investing in financial markets involves risk, including the potential loss of principal. Readers should perform their own research and consult with a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
Jakob Brezigar
Jakob, an experienced specialist in the field of cryptocurrency market making, boasts an extensive international presence. With Orcabay, he has skillfully managed major operations and deals for a wide array of global stakeholders.
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