Chia Network on the road to IPO - Strategic Reserve in use

What's the issue?

Quite recently, we published an article on our website detailing an interview with Gene Hoffman, the CEO of Chia Network. He addressed the situation related to the delay in the IPO process. The root cause was the loss of their banking partner, Credit Suisse, which ceased operations. This also had a direct impact on downsizing the Chia team. From Hoffman's statement, we learned that out of 70 employees, 26 will be laid off. This move aimed to reduce company expenses. Meanwhile, the company began seeking additional sources of financing, one of which was its own creation, the prefarm.

Strategic Reserve

Chia Network owns what's called the Strategic Reserve, or prefarm. These are assets consisting of the cryptocurrency XCH, which the company can utilize. The Strategic Reserve is divided into two parts: 7/8 of the prefarm has a time lock, preventing the transfer of stored XCH faster than in 90 days. The remaining part doesn't have such a long time lock, allowing Chia Network to use it much more freely. Everything happens on the blockchain, so Chia community has full insight into all events related to the prefarm. Given the current events, these resources can be seen as the company's backup plan. Quoting one of our previous articles: "Gene Hoffman emphasized that he doesn't know whether these funds will be used, and if so, when and in what quantity." It turns out that Chia Network accessed these resources sooner than expected.

Prefarm in use

On October 13, 2023, on the official Chia Network Discord server, one of the employees announced that the company had used part of the Strategic Reserve. The funds went to what's called a market maker in the form of a loan. We're talking about 200,000 XCH coins. For transferring resources to another wallet, the Clawback mechanism developed by Chia Network with a 24-hour lock period was used. It served as security in case of an error in the destination address or a fraud attempt. For 24 hours, Chia Network's finance department had the opportunity to withdraw the transaction and recover their funds. However, the transaction was successful, and 20 minutes after the Clawback lock expired, the funds went to the market maker's wallet. The loan was granted for 90 days and should be repaid in XCH. If any interest is accrued, it will be paid in fiat currency, the one we use daily. Part of the loan constitutes a commission for the market maker. Chia Network also has the option of a roll forward. In the context of loans, a "roll forward" refers to a procedure where the borrower extends the repayment time of their loan for another period, usually for an additional fee. That's all about the terms of granting a loan in XCH. The question is, who is this "market maker"?

Who is the market maker?

A market maker is a person or institution that actively buys and sells cryptocurrencies to ensure liquidity and price stabilization in the market. Thanks to them, investors can more easily make transactions at predictable prices. Many cryptocurrency exchanges collaborate with market makers, offering them benefits in exchange for providing liquidity. Their role is especially important for new cryptocurrencies that are just beginning their market presence.

Currently, it's unknown which specific market maker is collaborating with Chia Network. According to the CEO of Chia Network, it's not one of the biggest ones, but it emphasizes legal regulations. However, we know that they will mainly stimulate movement on the exchanges in the context of buying and selling the Chia cryptocurrency. A significant increase in XCH transactions can already be observed, presumably due to the market maker. This is particularly noticeable on the HTX exchange (not to be confused with FTX), which accounts for about 76% of the daily volume on the Chia cryptocurrency.

Summary

Currently, the community is speculating on how the presence of a market maker will affect the price of XCH. They will undoubtedly generate market movement, liquidating 200,000 Chia coins that were previously "frozen" as part of the prefarm. For many community members, the mere existence of the Strategic Reserve, let alone reaching for it, is controversial. However, it should be noted that the creation of the prefarm was well thought out by the Chia Network team, and the role of the prefarm was precisely described in the Chia whitepaper. One of the functions it was supposed to serve was to provide liquidity to the market and lend XCH to market makers, which is currently taking place.