Crypto Market Makers Accused of Profiting from Token Dumps

Market makers play a crucial role in the cryptocurrency ecosystem, providing liquidity and facilitating trading. However, the "loan option model," where projects lend tokens to market makers in exchange for listings and liquidity, has become a contentious issue. This model often leads to market makers dumping the loaned tokens, causing a price crash, and then buying them back at a lower price, thereby profiting at the expense of the project.

According to Ariel Givner, founder of Givner Law, market makers often promise to list tokens on major exchanges in return for loaned tokens. If they fail to deliver, they repay the tokens at a higher price within a year. However, the reality is that market makers frequently sell the loaned tokens, causing an initial price drop. They then repurchase the tokens at a discounted rate, keeping the profit for themselves. This practice has been detrimental to many young cryptocurrency projects, leaving them struggling to recover.

Firms like DWF Labs and Wintermute are among the well-known market makers in the industry. DWF Labs has stated that it does not rely on selling loaned assets to fund positions, emphasizing its commitment to ecosystem growth. However, concerns have been raised about its trading practices. Wintermute, on the other hand, has openly stated that it is in the business of making money through trading, rather than acting as a charity.

Jelle Buth, co-founder of market maker Enflux, highlights that the loan option model is not unique to major firms and that other parties offer similar "predatory deals." He advises projects to carefully measure the quality of liquidity provided by market makers before committing to such deals. Many projects do not fully understand the downsides of loan option deals and often learn the hard way that these agreements are not in their favor.

The loan option model is not inherently harmful and can benefit larger projects if structured properly. However, poor structuring can quickly turn it predatory. A listings adviser emphasized that outcomes depend on how well a project manages its liquidity relationships. Some projects have successfully managed multiple market makers, avoiding price dumps by balancing risk across partners. However, the problem runs deeper, with some accusing centralized exchanges of turning a blind eye to artificial pricing fueled by token projects and market makers working in lockstep.

There is a growing call for a shift toward the "retainer model," where projects pay a flat monthly fee to market makers in exchange for clearly defined services. This model is less risky, though more expensive in the short term. It incentivizes market makers to work with projects long-term, rather than engaging in short-term profit-seeking behavior. While the loan option model appears predatory, both parties involved agree to a secure contract, and the legality of these agreements remains in a gray area within the crypto space.

The industry is becoming more aware of the risks tied to loan option models, especially as sudden token collapses raise red flags. The loan option model has become a convenient scapegoat for token collapses, often with good reason. In a space where deal terms are hidden behind NDAs and roles are fluid, it is no surprise that the public assumes the worst. Until transparency and accountability improve, the loan option model will remain one of crypto’s most misunderstood and abused deals.