Two-Way Market Maker

A two-way market maker on TermMax is a user who places a single range order with two pricing curves: one for borrowing rates and the other for lending rates. This allows the two-way market maker to act as both a borrower and a lender simultaneously within the same market. By setting a lower rate on the borrowing curve and a higher rate on the lending curve, the two-way market maker earns the spread when borrowing market takers and lending market takers fill the order.

How It Works

A two-way market maker follows these steps to place a two-way range order:

  1. Choosing a Market: The two-way market maker selects a specific fixed-rate market, which includes the following predefined parameters:

    • Debt Token: The asset to borrow or lend (e.g., USDC).

    • Collateral Token: The asset to lock as collateral for borrowing (e.g., ETH).

    • Maturity Date: The time when loans mature, borrowers must repay, and lenders can redeem their yields.

    • Maximum Loan-to-Value (MLTV): The maximum LTV ratio for borrowing, ensuring loans are over-collateralized.

    • Liquidation Loan-to-Value (Liquidation LTV): The LTV threshold at which collateral will be liquidated to protect lenders.

  2. Specifying Two Pricing Curves: The two-way market maker sets two separate pricing curves for their range order:

    • Borrowing Curve: Specifies the rates the two-way market maker is willing to pay to borrow debt tokens, with lower rates to minimize borrowing costs. For example, 3–5%, with higher rates applying to the initial portion matched and lower rates applying to subsequent portions.

    • Lending Curve: Specifies the rates the two-way market maker is willing to offer to lend debt tokens, with higher rates to maximize returns. For example, 6–8%, with lower rates applying to the initial portion matched and higher rates applying to subsequent portions.

    By maintaining a spread between the borrowing and lending curves, the two-way market maker ensures a profit margin when both curves are taken by market takers.

  3. Placing the Order: The two-way range order is placed on the TermMax platform, where it remains active until fully matched or the maturity date is reached. Borrowing market takers fill the lending curve, and lending market takers fill the borrowing curve. The two-way market maker adjusts dynamically between borrowing and lending based on market activity.

Two-Way Mechanics

Once the two-way range order is placed, the process proceeds as follows:

  1. Order Matching for Borrowing (Borrowing Curve):

    • When a lending market taker fills the borrowing curve, the two-way market maker becomes a borrower. The process proceeds as follows:

      1. Minting FT and XT: The debt token provided by the lending market taker is used to mint an equivalent amount of FTs (representing the debt) and XTs.

      2. XT Exchange: The XT is sold to the two-way range order for exchanging additional FTs.

      3. FT Reserve Check:

        • If the two-way range order has sufficient FT reserves, the exchanged FT is transferred from the range order.

        • If the FT reserve is insufficient, the additional FTs are minted from the two-way market maker’s Gearing Token (GT). This increases the debt recorded in the GT, reflecting the additional borrowing by the two-way market maker.

    • The two-way market maker can use the borrowed debt tokens for further investment, trading, or other purposes.

  2. Order Matching for Lending (Lending Curve):

    • When a borrowing market taker fills the lending curve, the two-way market maker becomes a lender. The process mirrors the lending market maker mechanics:

      1. Borrowing market takers lock collateral in their GT and issue FTs to represent the debt.

      2. The interest part of FTs is sold to the two-way range order in exchange for XTs.

      3. The two-way market maker receives:

        • Interest FTs representing the fixed yield.

        • Principal FTs, which were minted into the lending curve when the two-way range order was placed, representing the loan principal.

  3. Dynamic Role Adjustment:

    • The two-way market maker’s role adjusts dynamically based on which curve is matched:

      • If the borrowing curve is filled, the two-way market maker becomes a borrower and accumulates debt in their GT.

      • If the lending curve is filled, the two-way market maker becomes a lender and accumulates FTs for yield.

  4. At Maturity:

    • As a Borrower: The two-way market maker must repay the debt recorded in their GT by either repaying debt tokens directly or purchasing FTs from the market and returning them.

    • As a Lender: The two-way market maker redeems their accumulated FTs for debt tokens at maturity.

Example: Alice as a Two-Way Market Maker

  1. Choosing a Market:

    • Debt Token: USDC

    • Collateral Token: ETH

    • Maturity Date: 1 year

    • Maximum LTV (MLTV): 80%

    • Liquidation LTV: 85%

  2. Specifying Two Pricing Curves: Alice places a two-way range order with the following parameters:

    • Borrowing Curve: 3–5%, with higher rates (5%) for the initial portion matched and lower rates (3%) for subsequent portions.

    • Lending Curve: 6–8%, with lower rates (6%) for the initial portion matched and higher rates (8%) for subsequent portions.

  3. Order Matching:

    • Borrowing:

      • A lending market taker lends 1,000 USDC to Alice’s borrowing curve.

      • Minting FT and XT: 1,000 USDC mints 1,000 FTs and 1,000 XTs.

      • XT Exchange: The 1,000 XTs are sold to Alice’s borrowing curve for additional FTs.

      • FT Reserve Check: If the FT reserve in Alice’s range order is insufficient, additional FTs are minted from Alice’s GT, increasing her debt recorded in the GT.

      • Result: Alice borrows 1,000 USDC and increases her GT debt accordingly.

    • Lending:

      • A borrowing market taker fills Alice’s lending curve and issues FTs.

      • Alice receives the interest FTs exchanged during the match and holds the principal FTs minted when the range order was placed.

  4. At Maturity:

    • Alice repays the debt recorded in her GT by either returning FTs or paying 1,000 USDC directly.

    • Alice redeems the FTs accumulated through lending (which may include the earning of spread between borrowing and lending rates).

Advantages

  1. Dynamic Role Flexibility: Two-way market makers can seamlessly adjust between borrowing and lending, optimizing their capital usage based on market demand.

  2. Earn the Spread: By setting a lower borrowing rate and a higher lending rate, two-way market makers earn the spread between the two, creating a predictable profit margin.

  3. Capital Efficiency: A single range order allows two-way market makers to leverage both borrowing and lending opportunities without maintaining separate orders.

  4. Risk Management: Over-collateralization and LTV constraints protect two-way market makers from excessive risk on the borrowing side, while secured loans ensure returns on the lending side.

Summary

The two-way market maker role is ideal for users seeking a dynamic, capital-efficient strategy that combines borrowing and lending in a single position. By placing a two-way range order with separate borrowing and lending curves, two-way market makers can optimize yields, control borrowing costs, and respond to market conditions without needing to manage multiple positions. This flexibility makes two-way market making a powerful tool for advanced users on TermMax.

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