Market Makers Deals: A Silent Threat to the Survival of Crypto Projects

Given the presence of incentives that allow for abuse, market makers could potentially create a «death spiral» for small crypto projects, rather than simply listing on centralized exchanges and providing liquidity. This concern is highlighted by Cointelegraph.

The credit option model carries this risk, as it involves transferring native tokens to a market maker, who then utilizes them to stimulate market activity.

In reality, certain intermediaries may exploit a dubious lending structure, enriching themselves at the expense of the very projects they are meant to support.

Such arrangements, often framed as low-risk, high-reward deals, can lead to significant price drops and force fledgling teams to scramble for ways to stabilize their token values.

Ariel Givner, the founder of Givner Law, explained that under this scheme, if the tokens do not get listed on a centralized exchange, market makers return them within a year — but at a higher price.

It’s not uncommon for intermediaries to initiate a dump of borrowed coins and then buy them back at a discount, thus securing their profit.

«I have yet to see a token that genuinely benefited from these market makers. I’m certain there are ethical ones, but those I have encountered simply devastate charts,» lamented an expert.

Cointelegraph’s analysis of contracts revealed that leading market makers, including Wintermute and DWF Labs, employed credit option schemes as part of their business strategy.

Representatives from DWF Labs stated they do not engage in the practices described, claiming they have a sufficient balance to sustain their operations. However, skepticism remains widespread within the industry and among on-chain analysts.

«We do not undermine the ecosystems we invest in,» asserted Andrey Grachev, a managing partner at DWF Labs.

Wintermute did not respond to the editorial’s inquiry. Journalists recalled several posts from CEO Evgeny Gaevoy, who explicitly stated that the firm is a «business focused on making money from trading» and not a charity.

According to Jell Boot, co-founder of the market maker Enflux, many teams are not fully aware of the pitfalls of the credit option model.

He recommended that teams evaluate whether handing over their tokens as a loan would provide quality liquidity based on key performance indicators, which are often either absent or vaguely presented.

The publication analyzed six such agreements, including those involving multiple market makers, and noted a decline in token values.

Kristian Slavov, co-founder of the Web3 accelerator Delta3, concurred with these findings.

«We contacted projects that found themselves in dire straits after operating under the credit option model. […] They provide tokens and then disappear. That’s roughly how it plays out,» he shared.

Boot remarked that the model isn’t inherently harmful if it is structured correctly.

An anonymous listing expert agreed with Boot’s assessment.

«I encountered a project with as many as eleven market makers — about half utilized the credit model, while the rest were smaller firms. The token did not drop in value because the team knew how to manage the price and balance risks across several partners,» he explained.

The advisor likened the model to borrowing from a bank, where various terms are available, but no institution would engage with an intrinsically unreliable project. In the crypto industry, the balance of power often favors those with greater information.

Previously, Arthur_0x, founder of DeFiance Capital, pointed out the lack of transparency in relationships between project teams and market makers, which erodes trust in the altcoin market. He accused centralized exchanges of turning a blind eye to such practices.

However, a listing expert noted that not all CEXs exhibit this behavior; some actively identify unethical conduct and suspend accounts while investigations are ongoing.

Some interviewees advocated for a reward-based model, where a project pays a market maker a fixed monthly fee in exchange for clearly defined services. Such agreements are less risky but may incur higher short-term costs.

«In such a scheme, market makers have an incentive to collaborate with projects for the long term,» Slavov added.

The industry is increasingly aware of the risks tied to credit option models, particularly as sudden token crashes raise alarm bells more frequently.

In a now-deleted post, the Onchain Bureau X account claimed that the recent 90% drop of OM from Mantra was due to an expiring credit agreement with FalconX, which the project representatives denied, clarifying that the firm is a trading partner, not a market maker.

The publication emphasized that this incident underscores a growing tendency to ascribe token failures to the credit option model.

In an environment where deal terms are often obscured by NDAs and roles such as «market maker» or «trading partner» frequently shift, it is not surprising that the public suspects the worst, Cointelegraph noted.

Until transparency and accountability improve, the credit option model will likely continue to be one of the most misunderstood and exploited agreements within cryptocurrency, the publication concluded.

Experts have previously identified insider manipulations as a cause for the recent 90% drop of OM.

Additionally, the Movement Network team initiated an investigation after Binance ceased collaboration with an unnamed market maker due to price manipulation involving MOVE.