Source: Cointelegraph.com NewsThe right market maker can be a launchpad for a cryptocurrency project, opening the door to major exchanges and providing valuable liquidity to ensure a token is tradeable \u2014 but when the wrong incentives are baked into the deal, that market maker can become a wrecking ball.
\nOne of the most popular and misunderstood offerings in the market-making world is the \u201cloan option model.\u201d This is when a project lends tokens to a market maker, who then uses them to create liquidity, improve price stability, and help secure listings at a cryptocurrency exchange. In reality, it has been a death sentence for many young projects.
\nBut behind the scenes, a number of market makers is using the controversial token loan structure to enrich themselves at the expense of the very projects they\u2019re meant to support. These deals, often framed as low-risk and high-reward, can crater token prices and leave fledgling crypto teams scrambling to recover.
\n\u201cHow it works is that market makers essentially loan tokens from a project at a certain price. In exchange for those tokens, they essentially promise to get them on big exchanges,\u201d Ariel Givner, founder of Givner Law, told Cointelegraph. \u201cIf they don\u2019t, then within a year, they repay them back at a higher price.\u201d
\nWhat often happens is that market makers dump the loaned tokens. The initial sell-off tanks the price. Once the price has cratered, they buy the tokens back at a discount while keeping the profit.
\nSource: Ariel Givner
\n\u201cI haven\u2019t seen any token really benefit from these market makers,\u201d Givner said. \u201cI\u2019m sure there are ethical ones, but the bigger ones I\u2019ve seen just destroy charts.\u201d
\nThe market maker playbook
\nFirms like DWF Labs and Wintermute are some of the best-known market makers in the industry. Past governance proposals and contracts reviewed by Cointelegraph suggest that both firms proposed loan option models as part of their services \u2014 though Wintermute\u2019s proposals call them \u201cliquidity provision\u201d services.
\nDWF Labs told Cointelegraph that it doesn\u2019t rely on selling loaned assets to fund positions, as its balance sheet sufficiently supports its operations across exchanges without relying on liquidation risk.\u00a0
\n\u201cSelling loaned tokens upfront can damage a project\u2019s liquidity \u2014 especially for small- to mid-cap tokens \u2014 and we\u2019re not in the business of weakening ecosystems we invest in,\u201d Andrei Grachev, managing partner of DWF Labs, said in a written response to Cointelegraph\u2019s inquiry.
\nRelated: Who\u2019s really getting rich from the crypto bull run?
\nWhile DWF Labs emphasizes its commitment to ecosystem growth, some onchain analysts and industry observers have raised concerns about its trading practices.
\nWintermute did not respond to Cointelegraph\u2019s request for comment. But in a February X post, Wintermute CEO Evgeny Gaevoy published a series of posts to share some of the company\u2019s operations with the community. He bluntly stated that Wintermute is not a charity but in the \u201cbusiness of making money by trading.\u201d\u00a0<\/p>\n
Source: Evgeny Gaevoy<\/p>\n
What happens after the market maker gets the tokens?
\nJelle Buth, co-founder of market maker Enflux, told Cointelegraph that the loan option model is not unique to the well-known market makers like DWF and Wintermute and that there are other parties offering such \u201cpredatory deals.\u201d
\n\u201cI call it information arbitrage, where the market maker very clearly understands the pros and cons of the deals but is able to put it such that it\u2019s a benefit. What they say is, \u2018It\u2019s a free market maker; you don\u2019t have to put up the capital as a project; we provide the capital; we provide the market-making services,\u2019\u201d Buth said.
\nOn the other end, many projects don\u2019t fully understand the downsides of loan option deals and often learn the hard way that they weren\u2019t built in their favor. Buth advises projects to measure whether loaning out their tokens would result in quality liquidity, which is measured by orders on the book and clearly outlined in the key performance indicators (KPIs) before committing to such deals. In many loan option deals, KPIs are often missing or vague when mentioned.
\nCointelegraph reviewed the token performance of several projects that signed loan option deals with market makers, including some that worked with multiple firms at once. The outcome was the same in those examples: The projects were left worse off than when they started.<\/p>\n
Six projects that worked with market makers under the loan option agreement tanked in price. Source: CoinGecko Source: Cointelegraph.com NewsThe right market maker can be a launchpad for a cryptocurrency project, opening the door to major exchanges and providing valuable liquidity to ensure a token is tradeable… <\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5],"tags":[],"_links":{"self":[{"href":"http:\/\/cryptospotters.net\/index.php?rest_route=\/wp\/v2\/posts\/127310"}],"collection":[{"href":"http:\/\/cryptospotters.net\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/cryptospotters.net\/index.php?rest_route=\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"http:\/\/cryptospotters.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=127310"}],"version-history":[{"count":0,"href":"http:\/\/cryptospotters.net\/index.php?rest_route=\/wp\/v2\/posts\/127310\/revisions"}],"wp:attachment":[{"href":"http:\/\/cryptospotters.net\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=127310"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/cryptospotters.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=127310"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/cryptospotters.net\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=127310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\n\u201cWe\u2019ve worked with projects that were screwed over after the loan model,\u201d Kristiyan Slavev, co-founder of Web3 accelerator Delta3, told Cointelegraph.
\n\u201cIt\u2019s exactly the same pattern. They give tokens, then they\u2019re dumped. That\u2019s pretty much what happens,\u201d he said.
\nNot all market-maker deals end in disaster
\nThe loan option model isn\u2019t inherently harmful and can even benefit larger projects, but poor structuring can quickly turn it predatory, according to Buth.
\nA listings adviser who spoke to Cointelegraph on the condition of anonymity echoed the point, emphasizing that outcomes depend on how well a project manages its liquidity relationships. \u201cI\u2019ve seen a project with up to 11 market makers \u2014 about half using the loan model and the rest smaller firms,\u201d they said. \u201cThe token didn\u2019t dump because the team knew how to manage price and balance the risk across multiple partners.\u201d
\nThe adviser compared the model to borrowing from a bank: \u201cDifferent banks offer different rates. No one runs a money-losing business unless they expect a return,\u201d they said, adding that in crypto, the balance of power often favors those with more information. \u201cIt\u2019s survival of the fittest.\u201d
\nBut some say the problem runs deeper. In a recent X post, Arthur Cheong, founder of DeFiance Capital, accused centralized exchanges of feigning ignorance of artificial pricing fueled by token projects and market makers working in lockstep. \u201cConfidence in the altcoin market is eroding,\u201d he wrote. \u201cAbsolutely bizarre that CEXs are turning an absolute blind eye to this.\u201d
\nStill, the listings adviser maintained that not all exchanges are complicit: \u201cThe different tier exchanges are also taking really extreme actions against any predatory market makers, as well as projects that might look like they rugged. What exchanges do is they actually immediately lock up that account while they do their own investigation.\u201d
\n\u201cWhile there is a close working relationship, there is no influence between the market maker and the exchange of what gets listed. Every exchange would have their own due diligence processes. And to be frank, depending on the tier of the exchange, there is no way that there would be such an arrangement.\u201d
\nRelated: Crypto\u2019s debanking problem persists despite new regulations
\nRethinking market maker incentives
\nSome argue for a shift toward the \u201cretainer model,\u201d where a project pays a flat monthly fee to a market maker in exchange for clearly defined services rather than giving away tokens upfront. It\u2019s less risky, though more expensive in the short term.
\n\u201cThe retainer model is much better because that way, market makers have incentives to work with the projects long term. In a loan model, you get, like, a one-year contract; they give you the tokens, you dump the tokens, and then one year after that, you return the tokens. Completely worthless,\u201d Slavev said.
\nWhile the loan option model appears \u201cpredatory,\u201d as Buth put it, Givner pointed out that in all these agreements, both parties involved agree to a secure contract.
\n\u201cI don\u2019t see a way that, at this current time, this is illegal,\u201d Givner said. \u201cIf somebody wanted to look at manipulation, that\u2019s one thing, but we\u2019re not dealing with securities. So, that gray area is still there in crypto \u2014 [to] some extent the Wild West.\u201d
\nThe industry is becoming more aware of the risks tied to loan option models, especially as sudden token crashes increasingly raise red flags. In a now-deleted X post, onchain account Onchain Bureau claimed that a recent 90% drop in Mantra\u2019s OM token was due to an expiring loan option deal with FalconX. Mantra denied the claim, clarifying that FalconX is a trading partner, not its market maker.
\nEdited LinkedIn copy of Onchain Bureau\u2019s LinkedIn post. Source: Nahuel Angelone
\nBut the episode highlights a growing trend: The loan option model has become a convenient scapegoat for token collapses \u2014 often with good reason. In a space where deal terms are hidden behind NDAs and roles like \u201cmarket maker\u201d or \u201ctrading partner\u201d are fluid at best, it\u2019s no surprise the public assumes the worst.
\n\u201cWe\u2019re speaking up because we make money off the retainer model, but also, this [loan option model] is just killing projects too much,\u201d Buth said.
\nUntil transparency and accountability improve, the loan option model will remain one of crypto\u2019s most misunderstood and abused deals.
\nMagazine: What do crypto market makers actually do? Liquidity or manipulationRead More<\/a><\/p>","protected":false},"excerpt":{"rendered":"