Original title: Crypto Pump Dumps Have Become the Ugly Norm. Can They Be Stopped?
Original source: Unchained
Original translation: lenaxin, ChainCatcher
This article is compiled from an interview on the Unchained blog. The guests are José Macedo, founder of Delphi Labs, Omar Shakeeb, co-founder of SecondLane, and Taran Sabharwal, CEO of STIX. They talked about liquidity shortages, market manipulation, inflated valuations, opaque lock-up mechanisms, and how the industry can self-regulate in the crypto market. ChianCatcher compiled and edited the content.
TL;DR
1. The core function of a market maker is to provide liquidity for tokens and reduce transaction slippage.
2. Option incentives in the crypto market may induce “pump and dump” behavior.
3. It is recommended to adopt a fixed fee model to reduce manipulation risks.
4. The crypto market can refer to the regulatory rules of traditional finance, but it needs to adapt to the decentralized nature.
5. Exchange supervision and industry self-discipline are key entry points for promoting transparency.
6. The project owner manipulates the market by falsely reporting the circulation volume and transferring the selling pressure through over-the-counter transactions.
7. Reduce project financing valuations to prevent retail investors from taking over highly bubbled assets.
8. The lock-up mechanism is not transparent, and early investors are forced to cash out informally, causing a stampede: dYdX plummeted.
9. The interests of VCs and founders are misaligned , and token unlocking is out of touch with ecological development.
10. Disclose the real circulation volume, lock-up terms and market maker dynamics on the chain.
11. Allow reasonable liquidity release and layered capital collaboration.
12. Verify product demand before raising funds to avoid being misled by VC hot spots.
1. Market Makers’ Functions and Manipulation Risks
Laura Shin: Let’s first take a deep dive into the role of market makers in the crypto market. What core problems do they solve for projects and the market? At the same time, what potential manipulation risks does the current market mechanism have?
José Macedo: The core function of market makers is to provide liquidity in multiple trading venues to ensure that the market has sufficient buying and selling depth. Its profit model mainly relies on the bid-ask spread. Unlike traditional financial markets, in the cryptocurrency market, market makers often obtain a large number of tokens through option agreements , thereby occupying a large proportion of the circulation, which gives them the potential ability to manipulate prices.
Such option agreements typically contain the following elements:
1. The exercise price is usually based on the price of the previous round of financing or the 7-day weighted average price (TWAP) after issuance, with a premium of 25%-50%.
2. When the market price reaches the strike price, the market maker has the right to exercise the option and make a profit.
This protocol structure will, to a certain extent, incentivize market makers to artificially push up prices. Although mainstream market makers are generally more cautious, non-standard option protocols do have potential risks. We recommend that project parties adopt a fixed fee model, that is, pay a fixed fee per month to hire market makers and require them to maintain a reasonable bid-ask spread and continuous market depth, rather than driving prices through complex incentive structures. In short, fees should be unrelated to token price performance; cooperation should be service-oriented; and avoid distorting goals due to incentive mechanisms.
Taran Sabharwal: The core value of market makers is to reduce transaction slippage . For example, I once made a seven-figure transaction on Solana, which generated a 22% on-chain slippage, and professional market makers can significantly optimize this indicator. Given that their services save costs for all traders, market makers should be compensated accordingly. When selecting market makers, project parties need to clarify incentive goals. In the basic service model , market makers mainly provide liquidity and lending services; in the short-term consulting model , short-term incentives are set around key nodes such as the mainnet launch, such as stabilizing prices through the TWAP trigger mechanism.
However, if the strike price is set too high, once the price exceeds expectations, market makers may execute option arbitrage and sell tokens on a large scale, thereby exacerbating market volatility. Lessons learned show that we should avoid setting too high a strike price and give priority to the basic service model to control the uncertainty brought by complex protocols.
Omar Shakeeb: There are two core problems with the current market-making mechanism.
First, there is a misalignment in the incentive mechanism . Market makers are often more concerned about arbitrage opportunities brought about by price increases rather than fulfilling their basic responsibility of providing liquidity. They should have attracted retail transactions by continuously providing liquidity rather than simply betting on price fluctuations to obtain arbitrage gains. Second, there is a serious lack of transparency . Project parties usually hire multiple market makers at the same time, but these institutions operate independently of each other and lack a coordination mechanism. At present, only project foundations and exchanges have a specific list of market makers to cooperate with, while secondary market participants have no access to relevant information about the transaction executors. This opacity makes it difficult to hold the relevant responsible parties accountable when abnormal situations occur in the market.
(II) Movement incident: the truth about private placement, market making and transparency
Laura Shin: Has your company been involved in any Movement-related business?
Omar Shakeeb: Our company did participate in Movement-related business, but only in the private market. Our business process is extremely rigorous and we maintain close communication with the project founders, including Taran. We conduct rigorous background investigations and audits on every investor, consultant, and other participant. However, we are not aware of the pricing and specific operations involved in the market making process. The relevant documents are only held by the project foundation and market makers, and are not disclosed to other parties.
Laura Shin: So, has your company ever acted as a market maker during a projects token generation event (TGE)? However, I guess the agreement between your company and the foundation should be very different from that of a market maker?
Omar Shakeeb: No, we are not involved in market making. We are in the private market business, which is a completely different field from market making. Private market is essentially an over-the-counter (OTC) transaction, which usually occurs before and after the TGE.
José Macedo: Did Rushi sell tokens over the counter?
Omar Shakeeb: As far as I know, Rushi did not sell tokens through over-the-counter transactions. The foundation has made it clear that there will be no sales, but how to verify this commitment remains a problem. The same risk exists for market maker transactions. Even if a market maker completes a large transaction, it may only sell tokens on behalf of the project team, and the outside world cannot know the specific details. This is exactly the problem caused by lack of transparency . I suggest that starting from the early stages of token distribution, wallets should be clearly marked , such as foundation wallet, CEO wallet, co-founder wallet, etc. In this way, the source of each transaction can be traced, so as to clarify the actual sales of each party.
José Macedo: We did consider tokenizing wallets, but this measure could lead to privacy breaches and raise barriers to entrepreneurship.
(III) Exchanges and industry self-discipline: the feasibility of regulatory implementation
José Macedo: As Hester Pierce emphasized in the recent safe harbor rule proposal, project parties should disclose their market-making arrangements. Currently, exchanges tend to maintain low circulation to achieve high valuations, while market makers rely on information asymmetry to obtain high fees. We can learn from the regulatory experience of traditional finance (TradFi). The Securities Exchange Act of the 1930s and the market manipulation methods of the 1970s and 1980s revealed by Edwin Lefebvre in Reminiscences of a Stock Operator, such as inflating trading volume to induce retail investors to take over, are exactly the same as some phenomena in the current cryptocurrency market.
Therefore, we suggest that these mature regulatory systems be introduced into the cryptocurrency field to effectively curb price manipulation . Specific measures include:
1. It is prohibited to manipulate market prices by means of false orders, preemptive trading and priority execution.
2. Ensure the transparency and fairness of the price discovery mechanism and prevent any behavior that may distort price signals.
Laura Shin: There are many challenges in achieving transparency between issuers and market makers. As Evgeny Gavoy pointed out on The Chop Block, market making mechanisms in Asian markets generally lack transparency, and achieving global unified regulation is almost impossible. So, how can these obstacles be overcome? Can changes be driven by industry self-discipline? Is it possible to form a hybrid model of global convention + regional implementation in the short term?
Omar Shakeeb: The biggest problem is that the underlying operation of the market is extremely opaque. If the top market makers can spontaneously establish an open source information disclosure mechanism, it will significantly improve the current market situation.
Laura Shin: But will this approach lead to the phenomenon of bad money driving out good money? Violators may avoid compliance agencies, so how can we really curb this bad behavior?
José Macedo: At the regulatory level, we can use the exchange review mechanism to promote transparency. Specific measures include: requiring exchanges to publish a list of market makers and establishing a compliant whitelist system.
In addition, industry self-discipline is equally important. For example, the audit mechanism is a typical case. Although there is no legal requirement, it is almost impossible for projects that have not been audited to obtain investment. Similarly, similar standards can be established for the qualification review of market makers. If a project is found to use non-compliant market makers, its reputation will be damaged. Just as there are good and bad audit institutions, a reputation system for market makers also needs to be established.
The implementation of regulation is feasible, and centralized exchanges are the key entry point. These exchanges generally want to serve American users, and American law has a wide range of jurisdiction over crypto businesses. Therefore, whether users are in the United States or not, as long as they use American exchanges, they must comply with relevant regulations.
To sum up, exchange supervision and industry self-discipline can both become important means to effectively regulate market behavior.
Laura Shin: You mentioned that market makers’ information should be made public and that compliant market makers should be recognized by the market. However, if someone deliberately chooses non-compliant market makers, and such institutions themselves lack the motivation to publicly disclose their partnerships, then the following situation may occur: the project party uses compliant market makers on the surface to maintain its reputation, but actually entrusts opaque institutions to operate at the same time. The key issue is:
1. How to ensure that the project party fully discloses all cooperating market makers?
2. For market makers who do not proactively disclose information, how can the outside world discover their illegal operations?
José Macedo: If an exchange is found to have violated regulations by using non-whitelisted institutions, this is equivalent to fraud . Although the project party can theoretically cooperate with multiple market makers, in practice, due to the limited circulation of most projects, there are usually only 1-2 core market makers, so it is difficult to conceal the real cooperation partner.
Taran Sabharwal: This issue should be analyzed from the perspective of market makers . First of all, it is one-sided to simply divide market makers into compliant and non-compliant. How to require non-regulated exchanges to ensure the compliance of their trading entities? The top three exchanges (Binance, OKEx, Bybit) are all offshore and unregulated institutions, while Upbit focuses on spot trading in the Korean market. Supervision faces many challenges, including regional differences, head monopoly, and high entry barriers. In terms of division of responsibilities, project founders should bear the main responsibility for their manipulative behavior. Although the exchanges review mechanism is already quite strict, it is still difficult to prevent circumvention operations.
Take Movement as an example. Its problems were essentially social mistakes , such as over-promising and improper transfer of control, rather than technical defects. Although its token market value fell from 14 billion FTB to 2 billion, many new projects followed suit. However, the teams structural errors, especially the improper transfer of control, eventually led to the projects return to zero.
Laura Shin: How should all parties work together to solve the many problems currently exposed?
José Macedo: Disclosure of the true circulation is key. Many projects inflate their valuations by falsely reporting circulation, but in fact a large number of tokens are still in the lock-up period. However, tokens held by foundations and laboratories are usually not subject to lock-up periods, which means they can sell them through market makers on the first day of the token launch. This operation is essentially a soft exit : the team cashes out when the market is hottest on the first day of the launch, and then uses the funds to repurchase the unlocked team tokens one year later, or use them to short-term increase the TVL of the protocol before withdrawing the investment.
In terms of the token distribution mechanism, a cost-based unlocking mechanism should be introduced, such as the practices of platforms such as Legion or Echo. At present, there are obvious flaws in channels such as Binance Launchpool, and it is difficult to distinguish between real user funds and platform self-held funds in the multi-billion dollar fund pool. Therefore, it is urgent to establish a more transparent public sale mechanism. Transparency in the market making process and ensuring that retail investors can clearly understand the actual holdings of tokens are also crucial. Although most projects have made some progress in transparency, further improvement is still needed. To this end, it is necessary to require the details of the token lending agreement of the market maker to be made public, including key information such as the lending quantity, option agreement and its exercise price, so as to provide retail investors with more comprehensive market insights and help them make more informed investment decisions.
In general, disclosing the true circulation volume, standardizing the disclosure of market-making agreements, and improving the token distribution mechanism are the most urgent reform directions at present.
Omar Shakeeb: The first issue is to adjust the financing valuation system . The current project valuation is inflated, generally 3-5 billion US dollars, which is beyond the affordability of retail investors. Taking Movement as an example, its token valuation fell from 14 billion to 2 billion. This overly high initial valuation is not beneficial to anyone. It should return to the early valuation level of Solana (300-400 million US dollars), allowing more users to participate at a reasonable price, which is also more conducive to the healthy development of the ecosystem. Regarding the use of ecosystem funds, we have observed that project parties often fall into operational difficulties. Should they hand it over to market makers? Over-the-counter transactions? Or other methods? We always recommend choosing over-the-counter transactions (OTC), which can ensure that the recipient of funds is consistent with the strategic goals of the project. Celestia is a typical case. After the token issuance, they raised more than 100 million US dollars at a valuation of 3 billion, but achieved effective allocation of funds through reasonable planning.
4. The truth about market manipulation
Laura Shin: Is the essence of current market regulation measures to gradually guide artificially manipulated token activities, such as market maker intervention, to a development track that conforms to the laws of the natural market? Can this transformation achieve a win-win situation for all parties, protecting the interests of early investors and ensuring the sustainable development of the project team?
José Macedo: The structural contradiction facing the current market lies in the imbalance of the valuation system . In the last bull market, the market showed a general rise due to the scarcity of projects; in this cycle, due to the overinvestment of venture capital (VC), there is a serious oversupply of infrastructure tokens, causing most funds to fall into a loss cycle and have to raise new funds by selling their holdings.
This imbalance between supply and demand directly changes the market behavior pattern. Buyer funds are fragmented , and the holding period is shortened from years to months or even weeks. The OTC market has fully shifted to hedging strategies, and investors use options tools to maintain market neutrality, completely bidding farewell to the naked long strategy in the previous cycle. Project parties must face up to this change: the success of Solana and AVAX is based on the industry gap, and new projects need to adopt a small circulation strategy (for example, Ondo controls the actual circulation below 2%) and maintain price stability by signing OTC agreements with large holders such as Columbia University.
Projects such as Sui and Mantra, which performed well in this round, have verified the effectiveness of this path, while Movements attempt to stimulate prices through token economics design without a mainnet has proven to be a major strategic mistake.
Laura Shin: If Columbia University did not create the wallet, how did they receive these tokens? This seems a bit unreasonable.
Taran Sabharwal: Columbia University is one of the main institutional holders of Ondo. Its tokens are in a non-circulating state because no wallet has been created, which objectively forms the phenomenon of paper circulation. The token economic structure of the project presents significant characteristics: after the large-scale unlocking in January this year, no new tokens will be released until January 2025. Market data shows that despite the active trading of perpetual contracts, the depth of the spot order book is seriously insufficient. This artificial shortage of liquidity makes the price vulnerable to small funds.
In contrast, Mantra has adopted a more aggressive liquidity manipulation strategy . The project transferred the selling pressure to forward buyers through over-the-counter transactions, and used the proceeds to pull the spot market. With only $20-40 million in funds, a 100-fold price increase was created on a deep and weak order book, causing the market value to soar from $100 million to $12 billion. This time arbitrage mechanism is essentially a short squeeze using liquidity manipulation, rather than a price discovery process based on real demand.
Omar Shakeeb: The crux of the problem is that the project party has set up multiple lock-up mechanisms , but these lock-up terms have never been disclosed publicly, which is the most difficult part of the whole incident.
José Macedo: The circulation of tokens shown by authoritative data sources such as CoinGecko is seriously distorted . Project parties often count inactive tokens controlled by the foundation and the team into the circulation, resulting in a surface circulation rate of more than 50%, while the actual circulation entering the market may be less than 5%, of which 4% is still controlled by market makers.
This systematic data manipulation is suspected of fraud . When investors trade based on the wrong perception of 60% of the circulation, 55% of the tokens are actually frozen in cold wallets by the project. This serious information gap directly distorts the price discovery mechanism, making only 5% of the actual circulation a tool for market manipulation.
Laura Shin: JP (Jump Trading) market manipulation techniques have been widely studied. Do you think this is an innovative model worth learning from, or does it reflect the short-term arbitrage mentality of market participants? How should the nature of such strategies be characterized?
Taran Sabharwal: JPs operation demonstrates a sophisticated ability to control market supply and demand, but its essence is to achieve short-term value illusion 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 market imitation phenomenon precisely exposes the mentality of participants who are eager for quick success and instant benefits, that is, they pay too much attention to market value manipulation and ignore the real value creation.
José Macedo: We need to clearly distinguish between innovation and manipulation. In traditional financial markets, similar operations would be characterized as market manipulation. The crypto market appears to be legal due to regulatory gaps, but this is essentially a wealth transfer through information asymmetry rather than sustainable market innovation.
Taran Sabharwal: The core problem lies in the behavior patterns of market participants. In the current crypto market, the vast majority of retail investors lack basic due diligence awareness, and their investment behavior is essentially closer to gambling than rational investment. This irrational mentality of pursuing short-term profits objectively creates an ideal operating environment for market manipulators.
Omar Shakeeb: The crux of the problem is that the project party set up multiple lock-up mechanisms , but these lock-up terms have never been disclosed publicly, which is the most difficult part of the whole incident.
Taran Sabharwal: The truth of market manipulation is often hidden in the order book . When a $1 million buy order can drive a 5% price fluctuation, it means that the market depth does not exist at all. Many project parties use technical unlocking loopholes (tokens are unlocked but actually locked for a long time) to falsely report the circulation volume, causing short sellers to misjudge the risk. When Mantra first broke through the 1 billion market value, a large number of short sellers were liquidated and left the market. WorldCoin is a typical case. At the beginning of last year, its fully diluted valuation was as high as 12 billion, but the actual circulation market value was only 500 million, creating a more extreme circulation shortage than ICP that year. Although this operation has allowed WorldCoin to maintain a valuation of 20 billion to date, it is essentially harvesting the market through information asymmetry . However, JP needs to be evaluated objectively: during the market trough, he even sold his personal assets to repurchase tokens and maintained the project through equity financing. This persistence in the project really shows the responsibility of the founder.
Omar Shakeeb: JP is trying to turn the tide, but it is not easy to recover from this situation. Once market trust is broken, it is difficult to rebuild.
(V) Game between founders and VCs: the long-term value of the token economy
Laura Shin: Do we have fundamental differences in the development concept of the crypto ecosystem? Are Bitcoin and Cex fundamentally different? Should the crypto industry prioritize the design of token games that encourage short-term arbitrage, or return to value creation? When price is out of touch with utility, does the industry still have long-term value?
Taran Sabharwal: The problems in the crypto market are not isolated cases. The traditional stock market also has liquidity manipulation in small-cap stocks. However, the current crypto market has evolved into a fierce game between institutions , with market makers hunting proprietary traders and quantitative funds harvesting hedge funds. Retail investors have long been marginalized.
The industry is gradually deviating from the original intention of encryption technology. When new institutions promote Dubai real estate to practitioners, the market has essentially become a naked wealth harvesting game. A typical case is dBridge. Despite its leading cross-chain technology, the token market value is only 30 million US dollars; on the other hand, meme coins, which have no technical content, easily break through the valuation of 10 billion with marketing gimmicks. This distorted incentive mechanism is undermining the foundation of the industry. When traders can make a profit of 20 million US dollars by hyping goat coins, who will concentrate on polishing products? The spirit of encryption is being eroded by the culture of short-term arbitrage, and the innovation motivation of builders is facing severe challenges.
José Macedo: There are two completely different narrative logics in the current crypto market. Viewing it as a zero-sum game casino and viewing it as an engine of technological innovation will lead to completely opposite conclusions. Although the market is full of speculative behaviors such as VC short-term arbitrage and project market value management, there are also many builders who are quietly developing infrastructure such as identity protocols and decentralized exchanges.
Just like in the traditional venture capital field, 90% of startups fail but promote overall innovation. The core contradiction of the current token economy is that a bad launch mechanism may permanently damage the potential of the project. When engineers see the token plummet by 80%, who is willing to join? This highlights the importance of designing a sustainable token model : to resist the temptation of short-term speculation and to reserve resources for long-term development. It is exciting that more and more founders are proving that encryption technology can transcend financial games.
Laura Shin: The real dilemma lies in 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-organization and the project enters the sustainable development stage, the profit-making behavior of the founding team will be legitimate. However, the reality is that, except for the time lock, almost all unlocking conditions can be manipulated artificially , which is the core contradiction faced by the current token economic design.
Omar Shakeeb: The root of the current token economy design problem began with the first round of financing negotiations between VCs and founders, emphasizing that the token economy involves a balance of interests among multiple parties, which must not only meet the LP return demands, but also be responsible to retail investors. However, in reality, project parties often sign secret agreements with top funds (such as the high valuation terms of A16Zs investment in Aguilera, which were not disclosed until several months later). Retail investors cannot obtain details of over-the-counter transactions, making liquidity management a systemic problem. Token issuance is not the end but the starting point for being responsible for the crypto ecosystem. Every failed token experiment consumes market trust capital. If the founder cannot ensure the long-term value of the token, he should stick to the equity financing model.
José Macedo: The core contradiction is the misalignment of interests between VCs and founders. VCs pursue the maximization of portfolio returns, while founders are inevitably tempted to cash out when faced with huge wealth. Only when the on-chain verifiable mechanism (such as TVL fraud monitoring and liquidity verification) is perfected, can the market truly move towards standardization.
(VI) Industry Solution: Transparency, Collaboration and Return to the Essentials
Laura Shin: So far, we have sorted out the room for improvement for each participant, including VCs, project owners, market makers, exchanges, and retail investors themselves. How do you think it should be improved?
Omar Shakeeb: For founders, the first priority is to verify product-market fit, rather than blindly pursuing high financing. Practice has shown that it is better to use 2 million yuan to verify feasibility and then gradually expand, rather than raising 50 million yuan but failing to create market demand. This is also why we publish a monthly private market liquidity report. Only when all the dark operations are exposed to the sun can the market achieve truly healthy development.
Taran Sabharwal: The current structural contradictions in the crypto market have put founders in a dilemma. They must resist the temptation of short-term wealth and stick to value creation, while also dealing with the pressure of high development costs. Some foundations have been transformed into private vaults of founders, and zombie chains with a market value of billions of dollars continue to consume ecological resources. While meme coins and AI concepts have been hyped up one after another, infrastructure projects are stuck in the dilemma of liquidity depletion, and some teams have even been forced to postpone the launch of token issuance for two years. This systemic distortion is seriously squeezing the living space of builders.
Omar Shakeeb: Take Eigen as an example. When its valuation reached $6-7 billion, there were $20-30 million in over-the-counter orders, but the foundation refused to release liquidity. This extremely conservative strategy actually missed a good opportunity. It could have asked the team whether they needed $20 million to accelerate the roadmap, or allowed early investors to cash out 5-10% of their holdings to obtain a reasonable return. The market is essentially a collaborative network for value distribution, not a zero-sum game. If the project party monopolizes the value chain, ecological participants will eventually leave.
Taran Sabharwal: This exposes the most fundamental power game in the token economy. Founders always regard early exits by investors as betrayal, but ignore that liquidity itself is a key indicator of ecological health. When all participants are forced to lock up their positions, the seemingly stable market value actually hides systemic risks.
Omar Shakeeb: The current crypto market urgently needs to establish a positive cycle of value distribution mechanism : allowing early investors to exit at a reasonable time can not only attract high-quality long-term capital, but also form a synergy effect of capital with different maturities. Short-term hedge funds provide liquidity, and long-term funds help development. This layered collaboration mechanism can promote ecological prosperity far more than forced lock-up. The key lies in establishing a bond of trust. The reasonable returns of round A investors will attract continuous injection of round B strategic capital.
José Macedo: Founders need to recognize a cruel reality. Behind every successful project, there are a large number of failed cases. When the market is crazy about a certain concept, most teams will eventually exhaust two years and still be unable to issue tokens, forming a vicious cycle of concept arbitrage, which is essentially an overdraft of the industrys innovation. The real way out is to return to the essence of the product and develop real needs with the minimum viable financing, rather than chasing hot signals in the capital market. In particular, we need to be vigilant against collective misjudgments caused by VCs wrong signals. When a concept receives a large amount of financing, it often leads to founders misinterpreting it as a real market demand. As the gatekeeper of the industry, exchanges should strengthen the infrastructure function , establish a market maker agreement disclosure system, ensure that the circulation data can be verified on the chain, and standardize the over-the-counter transaction reporting process. Only by improving the market infrastructure can we help founders get rid of the prisoners dilemma of no hype or death and push the industry back on the right track of value creation.
