Blockstack, one of the first blockchain startups to have raised money in a Reg A+ offering, has hired GSR Markets to trade its “stacks” (STX) token.
According to an Oct. 24 filing with the U.S. Securities and Exchange Commission (SEC), the blockchain startup will pay GSR for providing liquidity in markets outside of the U.S.
Such arrangements between token issuers and trading firms have long been whispered about, but Blockstack is one of the few to publicly disclose doing so.
These deals can be controversial due to potential conflicts of interest, but Blockstack CEO Muneeb Ali told CoinDesk this one was structured to avoid such issues.
“We want the market maker to be an independent player,” Ali said. “GSR has full discretion on how they operate and Blockstack PBC has no profit-sharing with them. We decided to work with GSR because their focus on compliance and ensuring high quality aligns well with us.”
Blockstack raised $23 million in its registered token offering in September, including $7.6 million from investors in Asia.
For a one-time setup fee of $100,000 and a monthly payment of $20,000 for six months, GSR agreed to “provide services related to increasing the liquidity” of STX, as well as to analyze market conditions. Blockstack will also lend $1 million-worth of bitcoin and ether with zero interest to fund the trading.
If the agreement should be terminated at a later date, GSR will return the bitcoin and ether, with half being calculated using the value of the cryptocurrencies against the value of STX.
According to a separate agreement, GSR will trade STX using its proprietary trading bot, provide Blockstack with daily reports on the STX market activity, analyze the market conditions and seek new exchanges Blockstack could approach for listings. All these activities should happen outside of the U.S., the document reads.
Hiring a professional market maker to provide liquidity is a common practice on the legacy markets and has become one for the crypto markets, too, says Eric Wall, a former blockchain lead at trading tech company Cinnober.
“Market makers serve a crucial role in thinly traded markets and are common everywhere where there’s trading, be it NASDAQ or Bittrex,” Wall said, adding:
“They provide a base-line of liquidity where there otherwise would be none. It’s essential in order to give investors the opportunity to enter and exit an asset without being too dependent on being matched with a seller or a buyer at that exact time same time.”
Without such market participants, the volatility of crypto tokens can soar when there are too few actual orders. That can turn people away from trading a token and “create bad publicity for the issuer,” Wall explained.
The company’s CEO, Muneeb Ali, told The Block that it was a “long-term payment” meant to incentivize Binance to keep STX listed “over many years.”
The token is currently trading at $0.20 per token on Binance, 30 percent down from its initial price of $0.30.
Muneeb Ali (right) image by Brady Dale for CoinDesk