Original title: Crypto Pump & Dumps Have Become the Ugly Norm. Can They Be Stopped?
Original source: Unchained
Original text compiled by: lenaxin, ChainCatcher
This article is compiled from interviews on the Unchained blog, featuring guests José Macedo, founder of Delphi Labs, Omar Shakeeb, co-founder of SecondLane, and Taran Sabharwal, CEO of STIX, discussing topics such as liquidity shortages in the crypto market, market manipulation, overvaluation, opaque lock-up mechanisms, and self-regulation in the industry. The content has been organized and compiled by ChainCatcher.
TL;DR
1. The core function of market makers is to provide liquidity for tokens and reduce trading slippage.
2. The incentive mechanisms 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 needs to adapt to decentralized characteristics.
5. Exchange regulation and industry self-regulation are key entry points for promoting transparency.
6. Project parties manipulate the market through methods such as inflating circulation volumes and transferring selling pressure through over-the-counter trading.
7. Reduce project financing valuations to avoid retail investors taking over high-bubble assets.
8. Opaque lock-up mechanisms force early investors to non-standard liquidate, triggering a sell-off: dYdX plummets.
9. The misalignment of interests between VCs and founders, disconnection between token unlocking and ecological development.
10. Disclose real circulation volume, lock-up terms, and market maker dynamics on-chain.
11. Allow reasonable liquidity release and layered capital collaboration.
12. Verify product requirements before refinancing to avoid VC hype misleading.
(1) The Functions of Market Makers and Manipulation Risks
Laura Shin: Let's delve into the role of market makers in the crypto market. What core problems do they actually solve for project parties and the market? What potential manipulation risks exist in the current market mechanism?
José Macedo: The core function of market makers is to provide liquidity across multiple trading venues to ensure that the market has adequate 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, occupying a significant proportion of circulation, which gives them the potential to manipulate prices.
Such option agreements usually include the following elements:
1. The exercise price is usually based on the previous round financing price or a 25%-50% premium over the 7-day weighted average price (TWAP) after issuance.
2. When the market price reaches the exercise price, market makers have the right to exercise and profit.
This type of agreement structure can to some extent incentivize market makers to artificially inflate prices. Although mainstream market makers are usually more cautious, non-standard option agreements do indeed pose potential risks. We recommend that project parties adopt a 'fixed fee' model, paying a fixed fee monthly to hire market makers and requiring them to maintain reasonable bid-ask spreads and sustained market depth, rather than pushing prices through complex incentive structures. In short, fees should be unrelated to token price performance; cooperation should be service-oriented; avoid distorting objectives due to incentive mechanisms.
Taran Sabharwal: The core value of market makers lies in reducing trading slippage. For example, I once made a seven-figure transaction on Solana, which generated 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 receive corresponding compensation. Project parties need to clarify incentive goals when selecting market makers. 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, for example, using a TWAP trigger mechanism to stabilize prices.
However, if the exercise price is set too high, once the price far exceeds expectations, market makers may execute options arbitrage and dump tokens on a large scale, exacerbating market volatility. Lessons learned indicate that one should avoid setting overly high exercise prices and prioritize the basic service model to control the uncertainties brought by complex agreements.
Omar Shakeeb: The current market-making mechanism has two core issues.
First, there is a misalignment in incentive mechanisms. Market makers often focus more on the arbitrage opportunities brought by rising prices rather than fulfilling their basic duty of providing liquidity. They should attract retail trading by continuously providing liquidity, rather than simply betting on price fluctuations for arbitrage profits. Second, there is a severe lack of transparency. Project parties usually hire multiple market makers at the same time, but these institutions operate independently, lacking a collaborative mechanism. Currently, only project foundations and exchanges have access to specific lists of market maker collaborations, while secondary market participants are completely unable to obtain relevant information about trading execution parties. This opacity complicates accountability for relevant parties when abnormal situations arise in the market.
(2) The Movement Incident: The Truth About Private Placements, Market Making, and Transparency
Laura Shin: Has your company participated in Movement-related business?
Omar Shakeeb: Our company has indeed participated in Movement-related business, but only in the private market. Our business processes are very rigorous, maintaining close communication with project founders, including Taran. We conduct strict investigations and reviews of every investor, advisor, and other participants. However, we are not privy to the pricing and specific operations involved in the market-making process. Relevant documents are only held internally by the project foundation and market makers and have not been disclosed to others.
Laura Shin: So, during the token generation event (TGE), did your company act as a market maker? However, I believe the agreements between your company and the foundation should differ significantly from those with market makers?
Omar Shakeeb: No, we have not participated in market-making business. What we are engaged in is private market business, which is entirely different from market-making. The private market is essentially an over-the-counter (OTC) trading, which usually takes place before and after the TGE.
José Macedo: Did Rushi sell tokens through over-the-counter trading?
Omar Shakeeb: To my knowledge, Rushi did not sell tokens through over-the-counter trading. The foundation has clearly stated that it will not sell, but how to verify this promise remains a challenge. The trading of market makers also carries this risk. Even if market makers complete large transactions, it may only represent the project team selling tokens, with the outside world unable to know the specific details. This is precisely the problem caused by a lack of transparency. I suggest that starting from the early stages of token distribution, wallets should be clearly marked, such as labeling '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 did consider marking wallets, but this measure could lead to privacy breaches and increase entry barriers for startups.
(3) Exchanges and Industry Self-Regulation: The Feasibility of Regulation Implementation
José Macedo: Hester Pierce emphasized in her recent safe harbor rule proposal that project parties should disclose their market-making arrangements. Currently, exchanges tend to maintain lower circulation volumes to achieve high valuations, while market makers rely on information asymmetry to earn 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 his 'Reminiscences of a Stock Operator' during the 1970s-80s, such as inflating trading volumes to lure retail investors, are strikingly similar to certain phenomena in the current cryptocurrency market.
Therefore, we recommend introducing these mature regulatory systems into the cryptocurrency field to effectively curb price manipulation. Specific measures include:
1. Prohibit market price manipulation through false orders, front-running, and priority execution.
2. Ensure the transparency and fairness of the price discovery mechanism, preventing 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 the Asian market generally lack transparency, and achieving global unified regulation is almost impossible. So, how can we overcome these barriers? Is it possible to promote change through industry self-regulation? In the short term, is it possible to form a hybrid model of 'global convention + regional implementation'?
Omar Shakeeb: The biggest problem is the extreme opacity of the underlying market operations. If top market makers could spontaneously establish an open-source information disclosure mechanism, it would significantly improve the current market situation.
Laura Shin: But would this practice lead to a phenomenon where 'bad money drives out good'? Violators may evade compliance institutions, so how can we truly curb such bad behavior?
José Macedo: At the regulatory level, the exchange review mechanism can be utilized to promote transparency. Specific measures include: requiring exchanges to publish lists of market makers and establishing a 'compliance whitelist' system.
Furthermore, industry self-regulation is equally important. For example, audit mechanisms are a typical case. Although there is no legal compulsion, projects that have not undergone audits can hardly attract investment nowadays. Similarly, the qualification review of market makers can establish similar standards. If a project is found to be using non-compliant market makers, its reputation will suffer. Just as there are distinctions between auditing agencies, a reputation system for market makers also needs to be established.
The implementation of regulation is feasible, with centralized exchanges being a key entry point. These exchanges generally wish to serve US users, and American laws have extensive jurisdiction over crypto operations. Therefore, regardless of whether users are in the US, as long as they use American exchanges, they must comply with relevant regulations.
In summary, both exchange regulation and industry self-regulation can become important means of effectively regulating market behavior.
Laura Shin: You mentioned that market maker information should be made public and that compliant market makers should gain market recognition. But if someone deliberately chooses non-compliant market makers, and such institutions themselves lack the motivation to publicly disclose their partnerships, the following situation may arise: the project party superficially uses compliant market makers to maintain their reputation while actually commissioning opaque entities to operate. The key issue is:
1. How to ensure that project parties fully disclose all cooperating market makers?
2. How can the outside world discover violations by market makers who do not actively disclose information?
José Macedo: If a trading platform is found to be illegally using non-whitelist institutions, this is equivalent to fraud. Although project parties 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, making it difficult to conceal the true cooperating entities.
Taran Sabharwal: This issue should be analyzed from the perspective of market makers. First, simply classifying market makers as 'compliant' and 'non-compliant' is one-sided. How can non-regulated exchanges ensure the compliance of their trading entities? The top three exchanges (Binance, OKEx, Bybit) are all offshore and unregulated institutions, while Upbit focuses on the Korean market's spot trading. Regulation faces many challenges, including regional differences, monopolies by top players, and high entry barriers. In terms of responsibility allocation, project founders should bear primary responsibility for their manipulative behaviors. Although the review mechanisms of exchanges are already quite strict, it remains difficult to eliminate evasion operations.
Using Movement as an example, the essence of its problem lies in social failures, such as over-promising and improper transfers of control, rather than technical flaws. Although its token market cap fell from 14 billion FTB to 2 billion, many new projects still emulate it. However, the structural errors of the team, particularly the improper transfer of control, ultimately led to the project's demise.
Laura Shin: How should various parties collaborate to solve the many issues currently exposed?
José Macedo: Disclosing real circulation volume is key. Many projects inflate their valuations by misreporting circulation volumes, while a large number of tokens remain locked. However, tokens held by foundations and labs are typically not subject to lock-up periods, meaning they can sell through market makers on the token's launch day when market enthusiasm is at its highest. This operation is essentially a 'soft exit' tactic: the team cashes out at the highest market heat on launch day, then uses those funds to repurchase unlocked team tokens a year later or to withdraw investment after temporarily boosting protocol TVL.
In terms of token distribution mechanisms, cost-based unlocking mechanisms should be introduced, such as the practices of platforms like Legion or Echo. Currently, channels like Binance Launchpool exhibit significant flaws, making it difficult to distinguish between real user funds and platform-held funds in pools of billions of dollars. Therefore, establishing a more transparent public sale mechanism is urgently needed. The transparency of the market-making process and ensuring that retail investors can clearly understand the actual token holdings are also crucial. Although most projects have made some progress in transparency, further improvements are necessary. To this end, it is essential to require public disclosures of the token lending agreements of market makers, including key information such as lending amounts, option agreements, and exercise prices, to provide retail investors with more comprehensive market insights and help them make more informed investment decisions.
Overall, disclosing real circulation 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 in the range of 3-5 billion dollars, exceeding retail investors' capacity. Taking Movement as an example, its token valuation fell from 14 billion to 2 billion; such high initial valuations benefit no one. We should return to early valuation levels of Solana, around 300-400 million dollars, allowing more users to participate at reasonable prices, which is also more conducive to healthy ecological development. Regarding the use of ecosystem funds, we observe that project parties often fall into operational dilemmas: Should they hand over to market makers? Engage in over-the-counter trading? Or use other methods? We consistently recommend choosing over-the-counter trading (OTC) as it ensures that the fund recipient aligns 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 effectively allocated funds through reasonable planning.
(4) The Truth About Market Manipulation
Laura Shin: Is the essence of the current market adjustment measures to gradually guide artificially manipulated token activities, such as market maker interventions, onto a development path that aligns with natural market laws? Can this transformation achieve a win-win for all parties, ensuring the interests of early investors while securing the sustainable development of the project team?
José Macedo: The structural contradiction currently facing the market lies in the imbalance of the valuation system. In the last bull market, due to project scarcity, the market exhibited a widespread uptrend; however, in this cycle, due to excessive investment by venture capital (VC), there is a severe oversupply of infrastructure tokens, causing many funds to fall into a loss cycle and having to liquidate holdings to raise new funds.
This supply-demand imbalance directly alters market behavior. Buy-side capital presents fragmented characteristics, with holding periods shortened from years to months or even weeks. The over-the-counter market has fully shifted to hedging strategies, with investors maintaining market neutrality through option tools, completely abandoning the long-only strategies of the previous cycle. Project parties must recognize this shift: the success of Solana and AVAX was built during industry void periods, and new projects need to adopt small circulation strategies (e.g., Ondo controlling actual circulation below 2%) and enter into off-market agreements with major holders like Columbia University to maintain price stability.
The projects that have performed well this round, such as Sui and Mantra, have validated the effectiveness of this path, while Movement's attempt to stimulate prices through tokenomics design without a mainnet has proven to be a major strategic mistake.
Laura Shin: If Columbia University did not create a wallet, how did they receive 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 not creating a wallet, objectively forming a phenomenon of 'paper circulation volume'. The token economic structure of this project shows significant characteristics: after a large-scale unlocking in January this year, no new tokens will be released until January 2025. Market data indicates that despite active perpetual contract trading, the depth of the spot order book is severely insufficient, and this artificially created liquidity shortage makes prices susceptible to small amounts of capital.
In contrast, Mantra adopted a more aggressive liquidity manipulation strategy. The project party transferred selling pressure to forward buyers through over-the-counter trading, while using the proceeds to pump the spot market. By utilizing only 20-40 million dollars, it created a 100-fold price increase on a thin order book, skyrocketing its market cap from 100 million to 12 billion dollars. This 'time arbitrage' mechanism essentially manipulates liquidity rather than engaging in a price discovery process based on real demand.
Omar Shakeeb: The key issue lies in the project party setting multiple lock-up mechanisms, but these lock-up terms have never been publicly disclosed, which is the most challenging aspect of the entire incident.
José Macedo: The token circulation volumes shown by authoritative data sources like CoinGecko are severely distorted. Project parties often include 'inactive tokens' controlled by the foundation and team in circulation volume, resulting in a surface circulation rate of over 50%, while the actual real circulation volume entering the market may be less than 5%, with 4% still held by market makers.
This systematic data manipulation has allegedly involved fraud. When investors trade based on a misperception of 60% circulation volume, in reality, 55% of the tokens are frozen by the project party in cold wallets. This severe information asymmetry distorts the price discovery mechanism, making the actual circulation volume, which only accounts for 5%, a tool for market manipulation.
Laura Shin: JP (Jump Trading)'s market operation methods have been widely studied. Do you think this is a model worth emulating, or does it reflect the short-term arbitrage mentality of market participants? How should the essence of such strategies be characterized?
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 through 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 necessary to clearly distinguish between 'innovation' and 'manipulation'. In traditional financial markets, similar operations would be classified as market manipulation. The crypto market appears 'legal' due to regulatory gaps, but it essentially involves wealth transfer through information asymmetry rather than sustainable market innovation.
Taran Sabharwal: The core issue lies in the behavior patterns of market participants. Currently, in the crypto market, the vast majority of retail investors lack basic due diligence awareness, and their investment behavior is essentially closer to gambling than rational investing. This irrational mentality of chasing short-term profits objectively creates an ideal operating environment for market manipulators.
Omar Shakeeb: The crux of the problem lies in the multiple lock-up mechanisms set by the project party, but these lock-up terms have never been publicly disclosed, which is the most tricky part of the entire incident.
Taran Sabharwal: The truth about market manipulation is often hidden in the order book. When a 1 million dollar buy order can move prices by 5%, it indicates that market depth essentially does not exist. Many project parties exploit technical unlocking loopholes (where tokens are unlocked but effectively locked long-term) to inflate circulation volumes, leading short-sellers to misjudge risks. When Mantra first broke through a 1 billion market cap, many short-sellers faced liquidation and exited. WorldCoin is a typical case. At the beginning of last year, its fully diluted valuation reached 12 billion, but the actual circulating market cap was only 500 million, creating an even more extreme circulation shortage than ICP that year. Although this operation has allowed WorldCoin to maintain a 20 billion valuation to this day, it essentially involves harvesting the market through information asymmetry. However, JP deserves an objective evaluation: during the market downturn, he even sold personal assets to buy back tokens and maintained 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 getting into this 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: Do we fundamentally disagree on the development philosophy of the crypto ecosystem? Are Bitcoin and Cex essentially different? Should the crypto industry prioritize encouraging short-term arbitrage in token game design or return to value creation? When price is disconnected from utility, does the industry still have long-term value?
Taran Sabharwal: The issues in the crypto market are not isolated; liquidity manipulation is also present in the small-cap stocks of traditional equity markets. However, the current crypto market has evolved into an intense battleground among institutions, where market makers hunt down proprietary traders, quantitative funds harvest hedge funds, and retail investors have long been marginalized.
The industry is gradually straying from the original intent of cryptography. When new institutions promote Dubai real estate to practitioners, the market has essentially degenerated into a naked wealth harvesting game. A typical case is dBridge, which, despite its leading cross-chain technology, has a token market cap of only 30 million dollars; in contrast, meme coins with no technical content easily break through 10 billion in valuation purely through marketing gimmicks. This distorted incentive mechanism is undermining the foundations of the industry. When traders can profit 20 million dollars by speculating on 'goat coins', who will still focus on honing products? The spirit of crypto is being eroded by a short-term arbitrage culture, challenging the innovative drive of builders.
José Macedo: The current crypto market has two completely different narrative logics. Viewing it as a zero-sum game 'casino' versus seeing it as a technological innovation engine leads to completely opposite conclusions. Despite the market being filled with speculative behaviors such as VC short-term arbitrage and project parties managing market capitalization, numerous builders are quietly developing infrastructure such as 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 tokens drop 80%, who would still be willing to join? This underscores the importance of designing sustainable token models: resisting short-term speculative temptations while reserving resources for long-term development. It is encouraging to see more and more founders proving that crypto 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-organized operation and the project enters a sustainable development stage can the profit-taking behavior of the founding team be justified. However, the reality is that, except for 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 issues stems from the first round of financing negotiations between VCs and founders, emphasizing that token economics involves balancing interests among multiple parties, meeting LP return expectations while being accountable to retail investors. However, in reality, project parties often sign secret agreements with top funds (e.g., A16Z’s high valuation terms for Aguilera disclosed months later), and retail investors cannot access details of off-market transactions, making liquidity management a systemic challenge. Token issuance is not the endpoint but the starting point for responsible engagement in 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 core contradiction is the misalignment of interests between VCs and founders. VCs pursue maximizing portfolio returns, while founders face an irresistible urge to cash out when confronted with significant wealth. Only when on-chain verifiable mechanisms (such as TVL fraud detection, liquidity cross-check verification) are perfected can the market move towards regulation.
(6) Industry Solutions: Transparency, Collaboration, and Returning to Essence
Laura Shin: Up to this point in the discussion, we have identified the improvement spaces for all parties involved: VCs, project parties, market makers, exchanges, and retail investors themselves. How do you all think we can improve?
Omar Shakeeb: For founders, the top priority is to validate product-market fit rather than blindly pursuing high financing. Practice shows that it is better to invest 2 million to validate feasibility and then gradually expand, rather than raising 50 million without creating market demand. This is also why we release a private market liquidity report every month. Only by exposing all dark operations to sunlight can the market achieve truly healthy development.
Taran Sabharwal: The current structural contradictions in the crypto market put founders in a dilemma; they must resist the temptation of short-term wealth accumulation while facing the pressure of high development costs. Some foundations have become personal vaults for founders, with 'zombie chains' valued at billions of dollars continuously consuming ecological resources. While meme coins and AI concepts are being hyped, infrastructure projects are mired in liquidity crises, with some teams even forced to postpone for two years without launching token issuance. This systemic distortion severely squeezes the survival space of builders.
Omar Shakeeb: Taking Eigen as an example, when its valuation reached 6-7 billion dollars, there were 20-30 million dollars in buy orders in the over-the-counter market, but the foundation refused to release liquidity. This extreme conservative strategy missed a good opportunity; they could have asked the team if they needed 20 million dollars to accelerate the roadmap, or allowed early investors to liquidate 5-10% of their holdings to achieve reasonable returns. 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 exit.
Taran Sabharwal: This exposes the fundamental power struggle in token economics. Founders often see investor early exits as betrayal, while ignoring that liquidity itself is a key indicator of ecological health. When all participants are forced to lock assets, the superficially stable market cap actually harbors systemic risks.
Omar Shakeeb: The current crypto market urgently needs to establish a positive cycle of value distribution: allowing early investors to exit at reasonable times not only attracts quality long-term capital but also forms a synergistic effect of capital with different time horizons. Short-term hedge funds provide liquidity, while long-term funds support development. This layered collaboration mechanism is far more conducive to ecological prosperity than forced lock-ups; the key lies in building trust bonds. Reasonable returns for Series A investors will attract continuous investment from Series B strategic capital.
José Macedo: Founders need to recognize a harsh reality: behind every successful project are numerous failures. When the market crazily chases a concept, most teams ultimately exhaust two years without issuing a token, forming a vicious cycle of conceptual 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 minimal viable financing, rather than chasing capital market hotspots. It is particularly necessary to be wary of group misjudgments triggered by erroneous VC signals. When a concept receives large financing, it often leads founders to misinterpret it as true market demand. Exchanges, as gatekeepers of the industry, should strengthen their infrastructure functions, establish market maker agreement disclosure systems, ensure that circulation data is on-chain verifiable, and regulate off-market transaction reporting processes. Only by improving market infrastructure can we help founders escape the prisoner’s dilemma of 'if not speculating, then dying' and push the industry back on track to value creation.
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