An optimal set of steps that an asset issuer needs to go through from asset issuance to asset proliferation.
An asset issuer’s key goal is to grow and keep as much AUM as possible. Even then, redemptions are an everyday occurrence and assets need deeply liquid redemption markets.
Having liquidity for redemptions is a key requirement for servicing smaller redemptions as well as broad-market de-risking events. In all circumstances, the asset issuer wants secondary markets to offer an aggregated quote that is as close to (or even better) than primary markets. So, price of the asset relative to its underlying (if any) is crucial for facilitating redemptions.
If there are lending integrations in place, secondary markets also need to have sufficient depth to absorb liquidations and facilitate oracles.
Redemption markets here are either markets that facilitate primary or secondary redemptions, primary redemptions being direct at the asset issuer’s venue (e.g. logging onto tether.to and redeeming fiat during banking hours), or secondary markets such as DEX, CEX and OTC markets.
Primary and secondary redemption markets, as seen on Lido’s stETH withdrawal dapp. Primary redemption market is via Lido, where the stETH is queued for withdrawal and can take up to 7 days to convert it to the underlying (ETH). The advantage is that the user get’s it at 1:1 for very very large redemptions: the example in this case is about USD 243 million worth of stETH that is being redeemed. If the user chooses a faster approach for this size, the secondary markets are only able to absorb a significantly lower size.
Assets also require distribution strategies that proliferate the asset and earn the asset issuer profits. Reliable oracles help with distribution as they unlock integrations such as lending, perp trading, options, and so on. Integration into popular tools such as Fireblocks unlocks institutional liquidity as well, and is a key part of OTC trades and strategies.
The journey of an asset starts at issuance and ends in a feedback loop at asset-proliferation, a state where the distribution of the asset is vast and ubiquitous but not necessarily a-cyclical to the market. It is a constant effort of monitoring and liquidity management that leads to proliferated assets across geography, demography, generations, markets and market cycles.
graph TD
A[Issuer Issues Asset] --> B[Create Primary Redemption Market]
B --> C{Primary Market Efficient?}
C -->|Yes| D[Integrate into Aggregators]
C -->|No| E[Establish Secondary Markets]
E --> F{Choose Secondary Market Type}
F -->|DEX| G[Deploy on DEX]
F -->|CEX| H[List on CEX]
F -->|OTC| I[Set Up OTC Channels]
G & H --> J[Integrate Oracle Services]
J --> K[Create Lending Integration]
K --> L[Monitor Market Depth & Price Stability]
L --> M{Is Market Health Good?}
M -->|No| N[Incentivize More Liquidity]
N --> L
M -->|Yes| O[Assess Risk Premia]
O --> P{Is Risk Premia Low?}
P -->|No| Q[Seek Risk Coverage]
Q --> O
P -->|Yes| R[Evaluate Distribution & Use Cases]
R --> S{Good Distribution?}
S -->|No| T[Strengthen Distribution Partnerships]
T --> R
S -->|Yes| U[Asset Proliferates]
U --> V[Assess Strategy Sustainability]
V --> W{Is Strategy Sustainable?}
W -->|No| X[Optimize Strategy]
W -->|Yes| Y[Continue Proliferation]
X --> Z[Improve Distribution & Reduce Costs]
Z --> V
Liquidity strategy involves the creation of primary and secondary markets. Primary markets are venues where redemptions happen first. Secondary markets are where redemptions happen when primary markets are throttled.
If primary redemption markets have shortcomings like off-banking hours, withdrawal queues, insufficient primary redemption market liquidity, the need for secondary markets is greater: it’s hard to scale an asset which is not very redeemable, even harder to scale when it isn’t redeemable in size. If there are no bottlenecks whatsoever, there is no need for a secondary redemption market.
For assets that need it, secondary markets power three primary purposes.