The right market maker can be a launchpad for a cryptocurrency project, opening the door to major exchanges and providing valuable liquidity to ensure
The 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 — but when the wrong incentives are baked into the deal, that market maker can become a wrecking ball.
One of the most popular and misunderstood offerings in the market-making world is the “loan option model.” 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.
But 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’re 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.
“How 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,” Ariel Givner, founder of Givner Law, told Cointelegraph. “If they don’t, then within a year, they repay them back at a higher price.”
What 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.
Source: Ariel Givner
“I haven’t seen any token really benefit from these market makers,” Givner said. “I’m sure there are ethical ones, but the bigger ones I’ve seen just destroy charts.”
The market maker playbook
Firms 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 — though Wintermute’s proposals call them “liquidity provision” services.
DWF Labs told Cointelegraph that it doesn’t rely on selling loaned assets to fund positions, as its balance sheet sufficiently supports its operations across exchanges without relying on liquidation risk.
“Selling loaned tokens upfront can damage a project’s liquidity — especially for small- to mid-cap tokens — and we’re not in the business of weakening ecosystems we invest in,” Andrei Grachev, managing partner of DWF Labs, said in a written response to Cointelegraph’s inquiry.
Related: Who’s really getting rich from the crypto bull run?
While DWF Labs emphasizes its commitment to ecosystem growth, some onchain analysts and industry observers have raised concerns about its trading practices.
Wintermute did not respond to Cointelegraph’s request for comment. But in a February X post, Wintermute CEO Evgeny Gaevoy published a series of posts to share some of the company’s operations with the community. He bluntly stated that Wintermute is not a charity but in the “business of making money by trading.”
Source: Evgeny Gaevoy
What happens after the market maker gets the tokens?
Jelle 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 “predatory deals.”
“I 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’s a benefit. What they say is, ‘It’s a free market maker; you don’t have to put up the capital as a project; we provide the capital; we provide the market-making services,’” Buth said.
On the other end, many projects don’t fully understand the downsides of loan option deals and often learn the hard way that they weren’t 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.
Cointelegraph 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.
Six projects that worked with market makers under the loan option agreement tanked in price. Source: CoinGecko
“We’ve worked with projects that were screwed over after the loan model,” Kristiyan Slavev, co-founder of Web3 accelerator Delta3, told Cointelegraph.
“It’s exactly the same pattern. They give tokens, then they’re dumped. That’s pretty much what happens,” he said.
Not all market-maker deals end in disaster
The loan option model isn’t inherently harmful and can even benefit larger projects, but poor structuring can quickly turn…
cointelegraph.com