Behind the Movement Turmoil: A Comprehensive Analysis of the Game and Breakthrough between Project Parties, Market Makers, and VCs

Source: Crypto Pump & Dumps Have Become the Ugly Norm. Can They Be Stopped?

Compiled by: 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 in the crypto market.

ChainCatcher has organized and compiled the content.

TL;DR

1. The core function of market makers is to provide liquidity and reduce trading slippage.
2. Incentives in the crypto market may induce "pump and dump" behavior.
3. A fixed fee model is recommended to reduce manipulation risks.
4. The crypto market can refer to traditional financial regulatory rules but must adapt to decentralized characteristics.
5. Exchange regulation and industry self-discipline are key entry points for promoting transparency.
6. Project teams manipulate the market through means such as inflating circulation volume and transferring selling pressure through OTC trades.
7. Lower project financing valuations to avoid retail investors taking over high-bubble assets.
8. Opaque lock-up mechanisms force early investors to liquidate informally, leading to crashes: dYdX plummeted.
9. VC and founders have misaligned interests, with token unlocks disconnected from ecosystem development.
10. Disclose real circulation volume, lock-up terms, and market maker dynamics on-chain.
11. Allow reasonable liquidity release and tiered capital collaboration.
12. Refinance after validating product demand to avoid VC hype misguidance.

(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 issues do they solve for project teams and the market? At the same time, 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 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 circulation volume, giving them the potential to manipulate prices.

Such option agreements typically include the following elements:

1. The strike price is usually based on the previous round of financing or a 25%-50% premium over the 7-day weighted average price (TWAP) after issuance.
2. 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 indeed pose potential risks.

We recommend that project teams adopt a "fixed fee" model, which involves 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; cooperation 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 trigger mechanisms.

However, if the strike price is set too high, once the price exceeds expectations, market makers may execute option arbitrage and sell tokens in large quantities, exacerbating market volatility.

Lessons learned indicate that one 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 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 solely profiting from betting on price fluctuations.

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 unable to obtain relevant information about trading parties. This lack of transparency makes it difficult to hold responsible 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 participated in any related business with 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, and we maintain close communication with project founders, including Taran. We conduct strict investigations and audits of every investor, advisor, and other participants' backgrounds.

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 the market makers internally 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) for 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 entirely different from market-making activities. Private placement is essentially an over-the-counter (OTC) transaction that typically occurs 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 makers also face this risk. Even if market makers complete large transactions, 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 "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 labeling wallets, but this measure may raise issues of privacy leakage and increase the barriers to entry for startups.

(3) Exchanges and Industry Self-Regulation: The Feasibility of Regulatory Implementation

José Macedo: Hester Pierce recently emphasized in her safe harbor rule proposal that project teams should disclose their market-making arrangements.

Currently, exchanges tend to maintain low circulation 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 methods revealed by Edwin Lefebvre in "Reminiscences of a Stock Operator" during the 1970s and 80s, such as inducing retail investors to take over through inflated trading volumes, are 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 behaviors. Specific measures include:

1. Prohibiting market price manipulation through false orders, front-running, and preferential execution.
2. Ensuring 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 Asian markets generally lack transparency, and achieving global unified regulation is nearly impossible.

So, how can we overcome these obstacles? Can industry self-regulation drive change? Is it possible to form a hybrid model of "global agreement + 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 will significantly improve the current market situation.

Laura Shin: But wouldn't this approach lead to the phenomenon of "bad money driving out good?" Violators may evade compliant institutions, so how can we truly curb such misconduct?​​

José Macedo: At the regulatory level, we can leverage the exchange review mechanism to promote transparency. Specific measures include requiring exchanges to publish lists of market makers and establishing a "compliance whitelist" system.

Moreover, 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 makers' qualifications 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 among auditing firms, a reputation system for market makers also needs to be established.

Regulatory implementation 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-regulation 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 intentionally chooses non-compliant market makers, and these institutions lack the motivation to publicly disclose their partnerships, then the following situation may arise: project teams superficially use compliant market makers to maintain their reputation while actually entrusting opaque institutions to operate. The key questions are:

1. How can we ensure that project teams fully disclose all cooperating market makers?
2. How can the outside world discover violations by market makers that do not proactively disclose information?

José Macedo: If exchanges are found to be using non-whitelisted institutions, it is equivalent to fraud. Although project teams can theoretically cooperate with multiple market makers, in practice, due to the limited circulation volume of most projects, there are usually only 1-2 core market makers, making it difficult to conceal the true 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 non-regulated exchanges 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.

Regulatory challenges include regional differences, monopolization by leading players, and excessively high entry barriers. In terms of responsibility allocation, 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 evasive operations.

Taking Movement as an example, its issues are essentially social failures, such as over-promising and improper control transfer, rather than technical flaws. Although its token market cap dropped from 14 billion FTB to 2 billion, many new projects still follow suit. However, the team's structural errors, 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: The disclosure of real circulation volume is key. Many projects inflate their circulation volume to raise valuations, but in reality, 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 day of the token launch.

This operation is essentially a "soft exit" strategy: 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 withdraw after temporarily boosting the protocol's TVL.

In terms of token distribution mechanisms, cost-based unlocking mechanisms should be introduced, such as those used by platforms like Legion or Echo. Currently, channels like Binance Launchpool have significant 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 still needed. To this end, it is necessary 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 to help them make more informed investment decisions.

Overall, disclosing real circulation volume, 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 earlier valuation levels like those of Solana (300-400 million dollars), allowing more users to participate at reasonable prices, which is also more conducive to the healthy development of the ecosystem.

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 take other approaches? We always recommend choosing OTC trades (OTC), as this ensures that the recipient of the funds aligns with the project's strategic goals. Celestia is a typical case; they raised over 100 million dollars at a valuation of 3 billion 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 development track that aligns with natural market laws? Can this transformation achieve a win-win situation for all parties, safeguarding the interests of early investors while ensuring the sustainable development of project teams?

José Macedo: The structural contradictions currently faced by the market lie in the imbalance of the valuation system. In the last bull market, due to project scarcity, the market exhibited a general upward trend; while in this cycle, due to excessive investment by venture capital (VC), there is a severe oversupply of infrastructure tokens, causing most funds to fall into a loss cycle and having to sell off holdings to raise new funds.

This supply-demand imbalance directly alters market behavior patterns. Buyer funds exhibit fragmentation, with holding periods shortening 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 blank periods, while new projects need to adopt a low circulation strategy (for example, Ondo controls actual circulation below 2%) and stabilize prices through OTC agreements with major holders like Columbia University.

Projects like Sui and Mantra, which have performed well this round, have validated 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 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 creating a "paper circulation" phenomenon. The token economic structure of this project exhibits 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 artificially created liquidity shortage makes prices susceptible to small amounts of capital.

In contrast, Mantra adopted a more aggressive liquidity manipulation strategy. The project team transferred selling pressure to forward buyers through OTC trades while using the funds obtained to pump the spot market. By using only 20 to 40 million dollars, they created a 100-fold price increase on a thin order book, boosting the market cap from 100 million to 12 billion dollars. This "time arbitrage" mechanism essentially uses liquidity manipulation to force shorts, rather than a price discovery process based on real demand.

Omar Shakeeb: The crux of the problem lies in the project team's establishment of 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: Authoritative data sources like CoinGecko show serious distortions in token circulation volume. Project teams often include "inactive tokens" controlled by foundations and teams in the circulation volume, leading to an apparent circulation rate exceeding 50%, while the actual volume 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 volume, in reality, 55% of the tokens are frozen in cold wallets by the project team. This severe information asymmetry directly distorts the price discovery mechanism, making the real circulation volume, 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 reflect the short-term arbitrage mentality of 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 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 genuine 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 behavioral 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 mentality of chasing short-term profits objectively creates an ideal operating environment for market manipulators.

Omar Shakeeb: The key problem lies in the project team's establishment of 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 push the price by 5%, it indicates that market depth is virtually non-existent. Many project teams inflate circulation volume by exploiting technical unlocking loopholes (tokens are unlocked but effectively locked long-term), leading to shorts misjudging risks. When Mantra first broke the 1 billion market cap, many shorts were thus liquidated.

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 an even 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 period, 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 once trapped in 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: 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 should it return to value creation? When prices are disconnected from utility, does the industry still hold 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 technological content easily surpass a valuation of 10 billion through 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 motivation of builders is facing severe challenges.

José Macedo: Currently, there are two completely different narrative logics in the crypto market. Viewing it as a zero-sum game "casino" 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 cap, many builders are 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 will still be willing to join? This highlights the importance of designing sustainable token models: resisting short-term speculative temptations 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 lies in how to define a "soft landing."

Ideally, token unlocks should be deeply tied to ecosystem maturity. Only when the community achieves self-organized operation and the project enters a sustainable development stage 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 the current token economic design.

Omar Shakeeb: The root of the current token economic design issues begins with the first-round financing negotiations between VCs and founders, emphasizing that token economics involves balancing multiple interests, meeting LP return demands while being accountable to retail investors. However, in reality, project teams often sign secret agreements with leading funds (such as A16Z investing in Aguilera's high valuation terms disclosed months later), making it impossible for retail investors to access OTC trade details, leading to liquidity management becoming a systemic challenge.

Token issuance is not the end but the starting point for 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 maximizing portfolio returns, while founders face the irresistible urge to cash out when confronted with massive wealth. Only when on-chain verifiable mechanisms (such as monitoring TVL fraud, validating liquidity wash trading) are perfected can the market truly move towards regulation.

(6) The Path Forward for the Industry: Transparency, Collaboration, and Returning to Essence ​

Laura Shin: As we discuss, we have outlined the improvement spaces for all parties involved: VCs, project teams, market makers, exchanges, and retail investors themselves. What do you think should be improved?

**Omar Shakeeb: The primary task for founders is to validate product-market fit, rather than blindly pursuing high financing. Practice shows that it is better to use 2 million dollars to validate feasibility and then gradually expand than to raise 50 million dollars without creating market demand.

This is also why we release monthly liquidity reports for the private placement market. Only by placing all dark operations in the 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 while facing the pressure of high development costs.

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 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 20-30 million dollars in buy orders 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 liquidate 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 fundamental power struggle in token economics. Founders often view early exits by investors as betrayal, while neglecting that liquidity itself is a key indicator of ecological health. When all participants are forced to lock up their holdings, 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 assist in development. This tiered collaboration mechanism is far more conducive to ecological prosperity than forced lock-ups, and the key lies in establishing trust bonds; 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 are numerous failures. When the market frantically chases a concept, most teams ultimately spend two years without being able to issue tokens, forming a vicious cycle of concept arbitrage, which essentially overdrafts 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 hot signals in the capital market. It is especially necessary to be wary of mass misjudgments triggered by erroneous signals from VCs. When a concept receives significant financing, it often leads founders to misinterpret it as genuine market demand.

Exchanges, as gatekeepers of the industry, should strengthen their infrastructure functions, establish market maker agreement disclosure systems, ensure that circulation volume data is verifiable on-chain, and standardize OTC trade reporting processes. Only by improving market infrastructure can we help founders escape the prisoner's dilemma of "not promoting means death" and push the industry back onto the right track of value creation.

Disclaimer

The content of this article does not represent the views of ChainCatcher. The opinions, data, and conclusions in the text represent the personal positions of the original authors or interviewees. The compiler maintains a neutral stance and does not endorse their accuracy. This does not constitute any professional advice or guidance, and readers should exercise caution based on independent judgment. This compilation is limited to knowledge-sharing purposes; readers must strictly comply with the laws and regulations of their respective regions and refrain from participating in any illegal financial activities.