Crypto Startups Face Financial Ruin as Market Makers Exploit Token Lending
1min read Some liquidity providers in the cryptocurrency market are exploiting token lending arrangements to generate profits, which is pushing many crypto startups into a financial death spiral. This practice, often disguised as a "low-risk, high-return" model, involves market makers borrowing tokens from projects with the promise of helping them list on major exchanges and providing liquidity. However, the reality is far more sinister.
In this model, known as the "loan option model," market makers agree to borrow tokens from a project at a set price, with the condition that they will assist in listing the tokens on major exchanges. If they fail to meet this commitment, they are obligated to repay the tokens at a higher price within a year. This arrangement is supposed to benefit both parties, but in practice, it often leads to the downfall of the crypto project.
Market makers frequently sell the borrowed tokens immediately after receiving them, causing an initial price crash. Once the token's value has been driven down, they can then repurchase the tokens at a significantly lower price, effectively profiting from the manipulation. This cycle leaves newly established crypto teams in disarray, struggling to recover from the sudden drop in token value.
According to Ariel Givner, founder of Givner Law, this practice is becoming increasingly common and is having a detrimental effect on the crypto ecosystem. "The way it works is: the market maker borrows tokens from the project at an agreed-upon price, under the condition that they will help these tokens list on major exchanges. If they fail to fulfill this commitment, they must repay these tokens at a higher price within a year," Givner explained. However, the reality is that market makers are often more interested in their own profits than in helping the project succeed.
This issue highlights the need for greater transparency and regulation within the cryptocurrency market. While market makers can play a crucial role in providing liquidity and ensuring tokens are tradable, their actions must be scrutinized to prevent such exploitative practices. Crypto startups must be cautious when entering into token lending arrangements and should seek legal advice to protect their interests.
