Original Title: Crypto Pump & Dumps Have Become the Ugly Norm. Can They Be Stopped?
Original Source: Unchained
Original Compilation: lenaxin, ChainCatcher
This article is compiled from an interview on the Unchained blog, featuring guests José Macedo, founder of Delphi Labs, Omar Shakeeb, co-founder of SecondLane, and Taran Sabharwal, CEO of STIX. They discussed topics such as liquidity shortages, market manipulation, inflated valuations, opaque lock-up mechanisms, and how the industry can self-regulate. ChainCatcher has organized and compiled the content.
TL;DR
The core function of market makers is to provide liquidity and reduce trading slippage for tokens.
The incentive structures in the crypto market may induce "pump and dump" behavior.
It is recommended to adopt a fixed fee model to reduce manipulation risks.
The crypto market can reference traditional financial regulatory rules but must adapt to decentralized characteristics.
Exchange regulation and industry self-discipline are key entry points for promoting transparency.
Project teams manipulate the market through means such as inflating trading volumes and transferring selling pressure through OTC trades.
Lower project financing valuations to avoid retail investors taking on high bubble assets.
The lock-up mechanism is opaque, forcing early investors to liquidate informally, leading to a crash: dYdX plummeted.
VC and founder interest misalignment, with token unlocks disconnected from ecosystem development.
Disclose real trading volumes, lock-up terms, and market maker dynamics on-chain.
Allow reasonable liquidity release and tiered capital collaboration.
Refinance after validating product demand to avoid VC hype misguidance.
(1) The Role of Market Makers and Manipulation Risks
Laura Shin: Let's delve into the role of market makers in the crypto market. What core issues do they solve for project teams and the market? At the same time, what potential manipulation risks exist in the current market mechanisms?
José Macedo: The core function of market makers is to provide liquidity across multiple trading venues to ensure the market has sufficient buy and sell depth. Their profit model mainly relies on the bid-ask spread. Unlike traditional financial markets, in the cryptocurrency market, market makers often acquire large amounts of tokens through option agreements, which allows them to hold a significant proportion of the trading volume, giving them the potential to manipulate prices.
Such option agreements typically include the following elements:
The strike price is usually based on the previous round of financing price or a 25%-50% premium on the weighted average price (TWAP) over the first seven days post-issuance.
When the market price reaches the strike price, market makers have the right to exercise the option and profit.
This structure can incentivize market makers to artificially inflate prices. Although mainstream market makers are usually cautious, non-standard option agreements do pose potential risks. We recommend that project teams adopt a fixed fee model, paying a fixed monthly fee to hire market makers and requiring them to maintain reasonable bid-ask spreads and continuous market depth, rather than pushing prices through complex incentive structures. In short, fees should be unrelated to token price performance; collaboration should be service-oriented; and avoid distorting objectives due to incentive mechanisms.
Taran Sabharwal: The core value of market makers lies in reducing trading slippage. For example, I once executed a seven-figure trade on Solana that resulted in a 22% on-chain slippage, while professional market makers can significantly optimize this metric. Given that their services save costs for all traders, market makers should be compensated accordingly. When project teams choose market makers, they need to clarify incentive goals. Under the basic service model, market makers primarily provide liquidity and lending services; while under the short-term consulting model, short-term incentives are set around key milestones like mainnet launches, such as stabilizing prices through TWAP-triggered mechanisms.
However, if the strike price is set too high, once the price far exceeds expectations, market makers may execute option arbitrage and sell tokens in large quantities, exacerbating market volatility. Lessons learned indicate that we should avoid setting excessively high strike prices and prioritize the basic service model to control the uncertainties brought by complex agreements.
Omar Shakeeb: Currently, there are two core issues with the market-making mechanism.
First, the incentive mechanisms are misaligned. Market makers often focus more on the arbitrage opportunities from price increases rather than fulfilling their basic duty of providing liquidity. They should attract retail trading by continuously providing liquidity, rather than merely betting on price fluctuations for arbitrage profits. Second, there is a severe lack of transparency. Project teams often hire multiple market makers simultaneously, but these entities operate independently and lack a collaborative mechanism. Currently, only project foundations and exchanges have access to specific lists of market maker collaborations, while secondary market participants are completely unaware of the trading execution parties. This lack of transparency makes it difficult to hold relevant parties accountable when abnormal situations arise in the market.
(2) The Movement Controversy: The Truth About Private Placements, Market Making, and Transparency
Laura Shin: Has your company been involved in any business related to Movement?
Omar Shakeeb: Our company has indeed participated in Movement-related business, but only in the private placement market. Our business processes are extremely rigorous, maintaining close communication with project founders, including Taran. We conduct strict investigations and audits on the background of every investor, advisor, and other participants. However, we are not privy to the pricing and specific operations involved in market making. Relevant documents are only held by the project foundation and internal market makers, and have not been disclosed to other parties.
Laura Shin: So, did your company act as a market maker during the token generation event (TGE) of the project? However, I assume the agreement between your company and the foundation must differ significantly from that of market makers?
Omar Shakeeb: No, we did not engage in market-making activities. What we are involved in is private placement market business, which is a completely different field. Private placements essentially involve over-the-counter (OTC) trades, which typically occur before and after the TGE.
José Macedo: Did Rushi sell tokens through OTC trades?
Omar Shakeeb: To my knowledge, Rushi did not sell tokens through OTC trades. The foundation has clearly stated that it will not engage in sales, but how to verify this commitment remains a challenge. Market maker trades also carry this risk. Even if market makers complete large trades, they may simply be selling tokens on behalf of the project team, and the outside world cannot know the specific details. This is precisely the problem caused by lack of transparency. I suggest that from the early stages of token distribution, wallets should be clearly labeled, such as marking "foundation wallet," "CEO wallet," "co-founder wallet," etc. This way, the source of each transaction can be traced, clarifying the actual selling situation of each party.
José Macedo: We have indeed considered labeling wallets, but this measure may lead to privacy breaches and increase the barriers to entrepreneurship.
(3) Exchanges and Industry Self-Regulation: The Feasibility of Regulatory Implementation
José Macedo: Hester Pierce emphasized in her recent safe harbor rule proposal that project teams should disclose their market-making arrangements. Currently, exchanges tend to maintain low trading volumes to achieve high valuations, while market makers rely on information asymmetry to obtain high fees. We can draw lessons from the regulatory experiences of traditional finance (TradFi). The Securities Exchange Act of the 1930s and the market manipulation tactics revealed by Edwin Lefebvre in "Reminiscences of a Stock Operator," such as inducing retail investors to take on inflated volumes, are reminiscent of certain phenomena in the current cryptocurrency market.
Therefore, we recommend introducing these mature regulatory systems into the cryptocurrency space to effectively curb price manipulation behaviors. Specific measures include:
Prohibiting market price manipulation through false orders, front-running, and priority execution.
Ensuring the transparency and fairness of the price discovery mechanism to prevent any actions that may distort price signals.
Laura Shin: Achieving transparency between issuers and market makers faces many challenges. As Evgeny Gavoy pointed out in "The Chop Block," the market-making mechanisms in Asian markets generally lack transparency, and achieving global unified regulation is nearly impossible. So how can these obstacles be overcome? Can industry self-regulation drive change? Is it possible to form a hybrid model of "global convention + regional implementation" in the short term?
Omar Shakeeb: The biggest problem is the extreme lack of transparency in the underlying market operations. If leading market makers can voluntarily establish an open-source information disclosure mechanism, it would significantly improve the current market situation.
Laura Shin: But wouldn't this approach lead to the phenomenon of "bad money driving out good"? Non-compliant entities might evade compliant institutions, so how can we truly curb such misconduct?
José Macedo: At the regulatory level, we can leverage exchange review mechanisms to promote transparency. Specific measures include requiring exchanges to publish lists of market makers and establishing a "compliance whitelist" system.
Additionally, industry self-regulation is equally important. For example, an auditing mechanism is a typical case. Although there is no legal requirement, projects that have not undergone audits are almost impossible to attract investment today. Similarly, market maker qualification reviews can establish similar standards. If a project is found to be using non-compliant market makers, its reputation will suffer. Just as there are varying qualities among auditing firms, a reputation system for market makers also needs to be established.
The implementation of regulation is feasible, and centralized exchanges are key entry points. These exchanges generally wish to serve U.S. users, and U.S. laws have broad jurisdiction over crypto businesses. Therefore, regardless of whether users are located in the U.S., as long as they use U.S. exchanges, they must comply with relevant regulations.
In summary, exchange regulation and industry self-discipline can both serve as important means to effectively regulate market behavior.
Laura Shin: You mentioned that market maker information should be disclosed and that compliant market makers should gain market recognition. However, if someone deliberately chooses non-compliant market makers, and these entities lack the motivation to publicly disclose their partnerships, the following situation may arise: project teams may appear to use compliant market makers to maintain their reputation, while actually entrusting opaque entities to operate. The key questions are:
How can we ensure that project teams fully disclose all collaborating market makers?
How can the outside world discover the misconduct of market makers that do not voluntarily disclose information?
José Macedo: If it is found that exchanges are using non-whitelisted entities, it is tantamount to fraud. Although project teams can theoretically collaborate with multiple market makers, in practice, due to the limited trading volume of most projects, there are usually only 1-2 core market makers, making it difficult to conceal the true collaboration partners.
Taran Sabharwal: This issue should be analyzed from the perspective of market makers. First, simply categorizing market makers as "compliant" and "non-compliant" is one-sided. How can we require non-regulated exchanges to ensure the compliance of their trading entities? The top three exchanges (Binance, OKEx, Bybit) are all offshore and unregulated, while Upbit focuses on spot trading in the Korean market. Regulation faces many challenges, including regional differences, monopolistic dominance, and excessively high entry barriers. In terms of accountability, project founders should bear primary responsibility for their manipulative actions. Although the review mechanisms of exchanges are already quite strict, it is still difficult to eliminate evasion operations.
Taking Movement as an example, its issues are essentially social failures, such as over-promising and improper control transfers, rather than technical defects. Although its token market cap dropped from 14 billion FTB to 2 billion, many new projects still emulate it. However, the structural errors of the team, especially the improper transfer of control, ultimately led to the project's demise.
Laura Shin: How should all parties collaborate to address the numerous issues currently exposed?
José Macedo: Disclosing real trading volumes is key.** Many projects inflate their valuations by misreporting trading volumes, while a large number of tokens remain locked. However, tokens held by foundations and labs are usually not subject to lock-up periods, meaning they can sell tokens through market makers on the launch day. This operation is essentially a form of "soft exit": the team cashes out when market enthusiasm is highest on launch day, then uses the funds to repurchase unlocked team tokens a year later or to temporarily boost the protocol's TVL before withdrawing.
In terms of token distribution mechanisms, a cost-based unlocking mechanism should be introduced, similar to the practices of platforms like Legion or Echo. Currently, channels like Binance Launchpool have obvious flaws, making it difficult to distinguish between real user funds and platform-held funds in pools worth billions of dollars. Therefore, establishing a more transparent public sale mechanism is urgent. The transparency of the market-making process and ensuring that retail investors can clearly understand the actual holdings of tokens is also crucial. Although most projects have made progress in transparency, further improvements are needed. To this end, it is essential to require the public disclosure of market makers' token lending agreement details, including the amount borrowed, option agreements, and their strike prices, to provide retail investors with more comprehensive market insights and help them make more informed investment decisions.
Overall, disclosing real trading volumes, standardizing the disclosure of market-making agreements, and improving token distribution mechanisms are the most urgent reform directions.
Omar Shakeeb: The primary issue is adjusting the financing valuation system. Current project valuations are inflated, generally ranging from 3 to 5 billion dollars, exceeding the capacity of retail investors. Taking Movement as an example, its token dropped from a valuation of 14 billion to 2 billion; such high initial valuations benefit no one. We should return to early valuation levels like those of Solana (300-400 million dollars), allowing more users to participate at reasonable prices, which is also more conducive to healthy ecosystem development. Regarding the use of ecosystem funds, we observe that project teams often fall into operational dilemmas: should they hand over to market makers? Engage in OTC trades? Or use other methods? We always recommend choosing OTC trades, as this ensures that the fund recipients align with the project's strategic goals. Celestia is a typical case; they raised over 100 million dollars at a 3 billion valuation after token issuance, but achieved effective fund allocation through reasonable planning.
(4) The Truth About Market Manipulation
Laura Shin: Is the essence of current market adjustment measures to gradually guide artificially manipulated token activities, such as market maker interventions, onto a path that aligns with natural market laws? Can this transformation achieve a win-win for all parties, safeguarding the interests of early investors while ensuring the sustainable development of project teams?
José Macedo: The structural contradiction currently faced by the market lies in the imbalance of the valuation system. In the last bull market, due to project scarcity, the market experienced a general rise; however, in this cycle, due to excessive investment from venture capital (VC), there is a severe oversupply of infrastructure tokens, leading most funds into a cycle of losses, forcing them to sell holdings to raise new funds.
This supply-demand imbalance directly alters market behavior patterns. Buyer funds exhibit fragmentation, with holding periods shrinking from years to months or even weeks. The OTC market has fully shifted to hedging strategies, with investors maintaining market neutrality through options tools, completely abandoning the naked long strategies of the previous cycle. Project teams must face this shift: the success of Solana and AVAX was built during industry voids, while new projects need to adopt a low circulation strategy (for example, Ondo controls actual circulation below 2%) and maintain price stability through OTC agreements with major holders like Columbia University.
Projects like Sui and Mantra, which have performed well this cycle, validate the effectiveness of this path, while Movement's attempt to stimulate prices through token economics design without a mainnet has proven to be a major strategic error.
Laura Shin: If Columbia University has not created a wallet, how are they receiving these tokens? This seems somewhat illogical.
Taran Sabharwal: Columbia University, as one of the main institutional holders of Ondo, has its tokens in a non-circulating state due to the lack of a created wallet, objectively creating a phenomenon of "paper circulation." The project's token economic structure shows significant characteristics: since the large-scale unlocking in January this year, no new tokens will be released until January 2025. Market data shows that although perpetual contract trading is active, the depth of the spot order book is severely lacking, and this artificial liquidity shortage makes prices susceptible to small amounts of capital.
In contrast, Mantra has adopted a more aggressive liquidity manipulation strategy. The project team shifts selling pressure to forward buyers through OTC trades while using the proceeds to pump the spot market. By utilizing only 20 to 40 million dollars, they created a 100-fold price increase on a thin order book, skyrocketing the market cap from 100 million to 12 billion dollars. This "time arbitrage" mechanism essentially uses liquidity manipulation to squeeze shorts, rather than a price discovery process based on real demand.
Omar Shakeeb: The crux of the problem lies in the project team setting multiple lock-up mechanisms, but these lock-up terms have never been publicly disclosed, which is the most challenging part of the entire event.
José Macedo: The token circulation data shown by authoritative sources like CoinGecko has serious distortions. Project teams often include "inactive tokens" controlled by the foundation and team in the circulation volume, leading to a superficial circulation rate exceeding 50%, while the actual real circulation entering the market may be less than 5%, with 4% still controlled by market makers.
This systematic data manipulation is suspected of fraud. When investors trade based on the erroneous perception of a 60% circulation, in reality, 55% of the tokens are frozen by the project team in cold wallets. This severe information gap directly distorts the price discovery mechanism, making the real circulation, which only accounts for 5%, a tool for market manipulation.
Laura Shin: The market operation methods of JP (Jump Trading) have been widely studied. Do you think this reflects an innovative model worth emulating, or does it reveal a short-term arbitrage mentality among market participants? How should we characterize the essence of such strategies?
Taran Sabharwal: JP's operations demonstrate a sophisticated ability to control market supply and demand, but its essence is a short-term value illusion achieved by artificially creating liquidity shortages. This strategy is not replicable and will undermine the healthy development of the market in the long run. The current phenomenon of imitation in the market exposes participants' short-sighted mentality, focusing excessively on market cap manipulation while neglecting true value creation.
José Macedo: It is essential to distinguish between "innovation" and "manipulation." In traditional financial markets, similar operations would be classified as market manipulation. The regulatory void in the crypto market makes it seem "legitimate," but it is essentially a wealth transfer through information asymmetry, rather than sustainable market innovation.
Taran Sabharwal: The core issue lies in the behavior patterns of market participants.** Currently, the vast majority of retail investors in the crypto market lack basic due diligence awareness, and their investment behavior is essentially closer to gambling than rational investing. This irrational mindset chasing short-term profits objectively creates an ideal operating environment for market manipulators.
Omar Shakeeb: The key issue is that the project team has set multiple lock-up mechanisms, but these lock-up terms have never been publicly disclosed, which is the most challenging part of the entire event.
Taran Sabharwal: The truth about market manipulation often lies in the order book. When a buy order of 1 million dollars can drive a 5% price fluctuation, it indicates that market depth is virtually non-existent. Many project teams exploit technical unlocking loopholes (tokens are unlocked but effectively locked long-term) to misreport circulation volumes, leading short sellers to misjudge risks. When Mantra first broke through a 1 billion market cap, many short sellers were thus forced to liquidate. WorldCoin is a typical case. At the beginning of last year, its fully diluted valuation reached 12 billion, but its actual circulating market cap was only 500 million, creating a more extreme liquidity shortage than ICP that year. Although this operation has allowed WorldCoin to maintain a valuation of 20 billion, it is essentially harvesting the market through information asymmetry. However, JP deserves an objective evaluation: during the market's low point, he even sold personal assets to repurchase tokens, maintaining project operations through equity financing. This dedication to the project indeed demonstrates the founder's responsibility.
Omar Shakeeb: Although JP is trying to turn the tide, it is not easy to make a comeback after falling into such a situation. Once market trust collapses, it is difficult to rebuild.
(5) The Game Between Founders and VCs: The Long-Term Value of Token Economics
Laura Shin: Is there a fundamental disagreement in our development philosophy for the crypto ecosystem? Are Bitcoin and Cex essentially different? Should the crypto industry prioritize encouraging short-term arbitrage in token game design, or should it return to value creation? When prices are disconnected from utility, does the industry still have long-term value?
Taran Sabharwal: The problems in the crypto market are not isolated; similar liquidity manipulation phenomena exist in the traditional stock market for small-cap stocks. However, the current crypto market has evolved into a fierce battleground among institutions, with market makers hunting proprietary traders, quantitative funds harvesting hedge funds, while retail investors have long been marginalized.
This industry is gradually deviating from the original intention of crypto technology. When new institutions promote Dubai real estate to practitioners, the market has essentially devolved into a blatant wealth harvesting game. A typical case is dBridge; despite its leading cross-chain technology, its token market cap is only 30 million dollars, while meme coins with no technical content easily surpass a valuation of 10 billion dollars due to marketing gimmicks. This distorted incentive mechanism is undermining the foundation of the industry. When traders can profit 20 million dollars by speculating on "goat coins," who will still focus on refining products? The spirit of crypto is being eroded by a culture of short-term arbitrage, and the innovative drive of builders is facing severe challenges.
José Macedo: Currently, there are two completely different narrative logics in the crypto market. Viewing it as a "casino" in a zero-sum game versus seeing it as a technological innovation engine leads to entirely opposite conclusions. Although the market is filled with speculative behaviors such as VC short-term arbitrage and project teams managing market capitalization, there are also many builders quietly developing foundational infrastructures like identity protocols and decentralized exchanges.
Just like in traditional venture capital, 90% of startups fail but drive overall innovation. The core contradiction of the current token economy lies in the poor launch mechanisms that may permanently damage project potential. When engineers witness a token plummet by 80%, who would still be willing to join? This highlights the importance of designing sustainable token models: they must resist the temptation of short-term speculation while reserving resources for long-term development. Encouragingly, more and more founders are proving that crypto technology can transcend financial games.
Laura Shin: The real dilemma is how to define a "soft landing."
Ideally, token unlocking should be deeply tied to the maturity of the ecosystem. Only when the community achieves self-organized operation and the project enters a sustainable development phase can the profit-seeking behavior of the founding team be justified. However, the reality is that, apart from time locks, almost all unlocking conditions can be manipulated, which is the core contradiction facing current token economic design.
Omar Shakeeb: The root of the current token economic design problem begins with the first-round financing negotiations between VCs and founders, emphasizing that token economics involves balancing multiple interests, satisfying LP return demands while being accountable to retail investors. However, in reality, project teams often sign secret agreements with top funds (for example, A16Z's investment in Aguilera was disclosed months later with high valuation terms), leaving retail investors unable to access OTC trading details, resulting in liquidity management becoming a systemic issue. Token issuance is not the end but the starting point of responsible engagement with the crypto ecosystem; each failed token experiment consumes market trust capital. If founders cannot ensure the long-term value of tokens, they should adhere to equity financing models.
José Macedo: The misalignment of interests between VCs and founders is the core contradiction; VCs pursue maximum portfolio returns, while founders find it hard to resist the urge to cash out when faced with immense wealth. Only when on-chain verifiable mechanisms (such as TVL fraud monitoring and liquidity wash trading verification) are perfected can the market truly move towards regulation.
(6) Industry Solutions: Transparency, Collaboration, and Returning to Essence
Laura Shin: Up to this point in our discussion, we have outlined the areas for improvement for each participant: VCs, project teams, market makers, exchanges, and retail investors themselves. How do you think improvements should be made?
Omar Shakeeb: For founders, the primary task is to validate product-market fit rather than blindly pursuing high financing.** Practice shows that it is better to validate feasibility with 2 million dollars first and then gradually expand, rather than raising 50 million dollars without creating market demand. This is also why we release monthly liquidity reports for the private placement market. Only by bringing all opaque operations into the light can the market achieve truly healthy development.
Taran Sabharwal: The structural contradictions in the current crypto market put founders in a dilemma. They must resist the temptation of short-term wealth while facing high development cost pressures. Some foundations have become private vaults for founders, with "zombie chains" worth billions of dollars continuously consuming ecological resources. While meme coins and AI concepts are being hyped, infrastructure projects are deeply trapped in liquidity exhaustion, with some teams even forced to delay token issuance for two years without launching. This systemic distortion is severely squeezing the survival space for builders.
Omar Shakeeb: Taking Eigen as an example, when its valuation reached 6-7 billion dollars, there were buy orders of 20-30 million dollars in the OTC market, but the foundation refused to release liquidity. This extreme conservative strategy actually missed opportunities; they could have asked the team if they needed 20 million dollars to accelerate the roadmap or allowed early investors to cash out 5-10% of their holdings for reasonable returns. The essence of the market is a collaborative network for value distribution, not a zero-sum game. If project teams monopolize the value chain, ecosystem participants will eventually exit.
Taran Sabharwal: This exposes the most fundamental power struggle in token economics; founders often view early exits by investors as betrayal while ignoring that liquidity itself is a key indicator of ecological health. When all participants are forced to lock up their tokens, the seemingly stable market cap actually hides systemic risks.
Omar Shakeeb: The current crypto market urgently needs to establish a positive cycle of value distribution mechanisms: allowing early investors to exit at reasonable times not only attracts quality long-term capital but also creates a synergistic effect among capital of different durations. Short-term hedge funds provide liquidity, while long-term funds support development. This layered collaborative mechanism is far more conducive to ecological prosperity than forced lock-ups; the key lies in establishing trust bonds, where reasonable returns for Series A investors will attract continuous injections of strategic capital in Series B.
José Macedo: Founders need to recognize a harsh reality: behind every successful project, there are numerous failed cases. When the market frantically chases a certain concept, most teams ultimately spend two years without being able to issue tokens, creating a vicious cycle of concept arbitrage, which essentially overdraws the industry's innovative capacity. The real breakthrough lies in returning to the essence of the product, developing real demand with the minimum viable financing rather than chasing capital market hot signals. It is especially important to be wary of mass misjudgments triggered by erroneous signals from VCs. When a certain concept receives large financing, it often leads founders to misinterpret it as genuine market demand. Exchanges, as gatekeepers of the industry, should strengthen their infrastructure functions, establish a market maker agreement disclosure system, ensure that circulation data is verifiable on-chain, and standardize the reporting process for OTC trades. Only by improving market infrastructure can we help founders escape the prisoner's dilemma of "no hype equals death" and push the industry back onto the right track of value creation.
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