Source: Cointelegraph Original: "{title}"

A suitable market maker can become a booster for cryptocurrency projects, opening the doors to mainstream exchanges and providing valuable liquidity to ensure token tradability. However, when the protocol includes incorrect incentive mechanisms, these market makers can become destructive forces.

One of the most popular yet easily misunderstood services in the market-making field is the "loan option model." In this model, project teams lend tokens to market makers, who use these tokens to create liquidity, improve price stability, and help the project go live on cryptocurrency exchanges. However, in reality, this model has become a death knell for many emerging projects.

Behind the scenes, some market makers are exploiting this controversial token lending structure for personal gain, which undermines the projects they are supposed to support. These transactions, packaged as low-risk, high-return opportunities, can actually lead to a plummet in token prices, putting nascent crypto teams in a difficult position.

Ariel Givner, founder of Givner Law, stated in an interview with Cointelegraph: "The way this model works is that market makers borrow tokens from the project at a specific price. In exchange, they promise to help the tokens get listed on major exchanges. If they fail to fulfill this promise, they need to return the tokens at a higher price within a year."

The reality is often that market makers will sell off the borrowed tokens. The initial sell-off leads to a price crash. Once the price collapses, they buy back the tokens at a discount, profiting from the difference.

Source: Ariel Givner

"I haven't seen any token truly benefit from these market makers," Givner said. "I believe there are ethical market makers, but the large ones I've seen are just destroying price charts."

DWF Labs and Wintermute are the most well-known market makers in the industry. Governance proposals and contracts reviewed by Cointelegraph show that both companies have proposed the loan option model as part of their services—though Wintermute refers to it as "liquidity provision" services.

DWF Labs told Cointelegraph that its balance sheet is sufficient to support operations across various exchanges without relying on liquidation risks, and therefore does not fund positions by selling borrowed assets.

Andrei Grachev, managing partner at DWF Labs, stated in a written response to Cointelegraph: "Pre-selling borrowed tokens harms the liquidity of the project—especially for small and mid-cap tokens—and our business purpose is not to undermine the ecosystems we invest in."

Despite DWF Labs emphasizing its commitment to ecosystem development, some on-chain analysts and industry observers have expressed concerns about its trading behavior.

Wintermute did not respond to Cointelegraph's request for comment. However, in a February X post, Wintermute CEO Evgeny Gaevoy shared a series of posts with the community about the company's operations. He candidly stated that Wintermute is not a charity but a "business entity that makes money through trading."

Source: Evgeny Gaevoy

Jelle Buth, co-founder of market maker Enflux, told Cointelegraph that the loan option model is not exclusive to well-known market makers like DWF and Wintermute; other institutions are also offering this "predatory trading."

"I call it information arbitrage; market makers are very aware of the pros and cons of these trades, but they can package them as beneficial proposals for the project. They will say: 'This is free market-making service; as a project, you don't need to invest funds; we provide the capital, we provide the market-making service,'" Buth said.

On the other hand, many projects do not fully understand the downsides of loan option agreements and often pay the price to realize that these agreements are not designed in their best interest. Buth suggests that project teams assess whether lending tokens can bring quality liquidity before signing such agreements, which can be measured through order books and clearly listed key performance indicators (KPIs). In many loan option agreements, KPIs are either missing or vaguely stated.

Cointelegraph reviewed the performance of several project tokens that signed loan option agreements with market makers, including some projects that collaborated with multiple institutions. The results of these cases were the same: the project's final situation was worse than at the start.

Six projects that signed loan option agreements with market makers saw their prices plummet. Source: CoinGecko

Kristiyan Slavev, co-founder of Web3 accelerator Delta3, told Cointelegraph: "We have encountered some projects that were severely impacted after using the loan model."

He said: "It's the exact same model. They give out tokens, and then the tokens are sold off. That's basically how it happens."

According to Buth, the loan option model itself is not harmful and can even be beneficial for large projects, but poorly designed structures can quickly turn into predatory models.

An anonymous token listing advisor echoed this view in an interview with Cointelegraph, emphasizing that a project's success or failure depends on how it manages liquidity relationships. "I've seen a project work with 11 market makers at the same time—about half using the loan model, while the rest are smaller institutions," the advisor said. "The token price didn't crash because the team knew how to manage the price and balance risks among multiple partners."

The advisor compared this model to borrowing from banks: "Different banks offer different interest rates. No one runs a losing business unless they expect a return," he added, noting that in the cryptocurrency space, the balance of power often tilts toward the party with more information. "It's survival of the fittest."

However, some believe the problem runs deeper. In a recent X post, Arthur Cheong, founder of DeFiance Capital, accused centralized exchanges of turning a blind eye to the artificial pricing caused by collusion between token projects and market makers. He wrote: "Confidence in the altcoin market is waning. Centralized exchanges are completely ignoring this; it's outrageous."

However, the token listing advisor insisted that not all exchanges are complicit: "Exchanges at different levels are taking extreme measures against any predatory market makers and projects that may show signs of running away. Exchanges will immediately freeze relevant accounts during investigations."

"While there is a close working relationship between the two parties, market makers do not influence the token listing decisions of exchanges. Each exchange has its own due diligence process. Frankly, depending on the level of the exchange, such arrangements are impossible."

Some advocate for a "fixed fee model," where project teams pay market makers a fixed monthly fee in exchange for clearly defined services, rather than pre-allocating tokens. This model carries less risk but has higher short-term costs.

Slavev said: "The fixed fee model is better because it incentivizes market makers to work with the project long-term. In the loan model, you get a one-year contract; they give you tokens, you sell the tokens, and return the tokens a year later. It's completely worthless."

While the loan option model may seem "predatory," as Buth stated, Givner pointed out that both parties agree to sign secure contracts in all these agreements.

"I don't think this is illegal at the moment," Givner said. "If someone wants to investigate market manipulation, that's another matter, but we are not dealing with securities. So there is still this gray area in the cryptocurrency space—it's still somewhat the 'Wild West.'"

As sudden token crashes increasingly raise alarms, awareness of the risks associated with the loan option model is growing in the industry. In a now-deleted X post, the on-chain account Onchain Bureau claimed that the recent 90% drop in Mantra's OM token was due to the expiration of a loan option agreement with FalconX. Mantra denied this claim, clarifying that FalconX is its trading partner, not a market maker.

Edited Onchain Bureau's LinkedIn post. Source: Nahuel Angelone

But this incident highlights a growing trend: the loan option model has become a scapegoat for token crashes—often with good reason. In a realm where trading terms are hidden by non-disclosure agreements (NDAs) and roles like "market maker" or "trading partner" are vaguely defined, it is not surprising that the public speculates about the worst-case scenarios.

Buth said: "We are speaking out because we make money through the fixed fee model, but at the same time, this [loan option model] is excessively destroying projects."

Until transparency and accountability improve, the loan option model will remain one of the most easily misunderstood and abused transactions in the cryptocurrency space.

Related: DeFiance CEO: If exchanges ignore market manipulation, cryptocurrency will be "uninvestable"

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