Behind the Movement storm: Ten thousand words analyze the game and breaking the situation between project parties, market makers and VCs

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

Organize & compile: lenaxin, ChainCatcher

This article is compiled from an interview with Unchained's blog. The guests are José Macedo, founder of Delphi Labs, Omar Shakeeb, co-founder of SecondLane, and Taran Sabharwal, CEO of STIX. They talked about topics such as liquidity shortage, market manipulation, inflated valuation, opaque locking mechanisms, and how the industry can self-regulate in the crypto market.

ChianCatcher organizes and compiles the content.

TL;DR

1. The core function of market makers is to provide liquidity for tokens and reduce trading slippage.
2. Option incentives in the crypto market may induce "pull up shipments" behavior.
3. It is recommended to adopt a fixed fee model to reduce manipulation risks.
4. The crypto market can refer to traditional financial regulatory rules, but it needs to adapt to the decentralized characteristics.
5. Exchange regulation and industry self-discipline are key entry points to promote transparency.​
6. The project party manipulates the market by falsely reporting circulation volume and transferring selling pressure from over-the-counter trading.​
7. Reduce the project financing valuation and avoid retail investors taking over high-bubble assets.
8. The lock-up mechanism is opaque, and early investors were forced to make informal cash, causing a stampede: dYdX plummeted.
9. VCs are dislocated from the founder’s interests , and token unlocking is disconnected from ecological development.
10. The real circulation volume, lock-up terms and market maker news are disclosed on the chain.
11. Allow reasonable liquidity release and stratified capital cooperation.
12. Verify product demand and refinancing to avoid misleading VC hot topics.

(I) Functions and manipulation risks of market makers

Laura Shin: Let’s first explore the role of market makers in the crypto market. What core issues have they solved for the project party 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 in multiple trading venues to ensure that the market has sufficient buying and selling depth. Its profit model mainly relies on bid-ask spreads.

Unlike traditional financial markets, in cryptocurrency markets, market makers often acquire large amounts of tokens through option agreements , thus occupying a large proportion of circulation, which gives them the potential ability to manipulate prices.

Such option agreements usually contain the following elements:

1. The exercise price is usually based on the previous round of financing price or the 7-day weighted average price (TWAP) premium of 25%-50%.
2. When the market price reaches the exercise price, the market maker has the right to exercise the right and make a profit.

This protocol structure will to some extent inspire market makers to push up prices. Although mainstream market makers are usually more cautious, non-standard option agreements do have potential risks.

We recommend that project parties adopt the " fixed fee " model, which means paying fixed fees monthly to hire market makers and require them to maintain reasonable bid-ask spreads and continuous market depth, rather than pushing prices through complex incentive structures.

In short, fees should have nothing to do with token price performance; cooperation should be service-oriented; avoid distorting goals due to incentive mechanisms.

Taran Sabharwal: The core value of market makers is to reduce trading slippage . For example, I once had a seven-digit deal on Solana that generated 22% on-chain slippage, and professional market makers were able to significantly optimize this metric. Given that its services save costs for all traders, market makers deserve corresponding compensation.

When choosing a market maker, the project party needs to clarify the incentive goals. Under the basic service model , market makers mainly provide liquidity and lending services; while in the short-term consultation model , short-term incentives are set around key nodes such as main network online, such as stabilizing prices through the TWAP trigger mechanism.

However, if the exercise price is set too high, once the price is far beyond expectations, the market maker may execute option arbitrage and sell tokens on a large scale, thereby aggravating market volatility.

Lessons learned show that excessive exercise prices should be avoided and basic service models should be preferred to control the uncertainty brought about by complex agreements.

Omar Shakeeb: There are two core issues in the current market making mechanism.

First, there is a misalignment in the incentive mechanism . Market makers tend to focus more on arbitrage opportunities brought about by rising prices than on their basic responsibilities of providing liquidity. They should have gained arbitrage returns by continuously providing liquidity to attract retail trading, rather than simply betting on price fluctuations.

Secondly, transparency is seriously lacking. Project parties usually hire multiple market makers at the same time, but these institutions operate independently of each other and lack a synergy mechanism. At present, only the project foundation and exchange have a specific list of market makers cooperation, while secondary market participants are completely unable to obtain relevant information about the transaction executor. This opacity makes it difficult to hold the relevant responsible parties accountable when abnormal situations occur in the market.

(II) **Movement storm: The truth about private equity, market making and

transparency**

Laura Shin: Has your company been involved in Movement -related business?

Omar Shakeeb: Our company has indeed participated in Movement-related businesses, but it is limited to the private equity market . Our business processes are extremely rigorous and we maintain close communication with project founders including Taran. We conduct rigorous investigation and review of the background of each investor, advisor and other participants.

However, we are not aware of the pricing and specific operations involved in the market making process. The relevant documents are only mastered by the project foundation and market makers and have not been disclosed to other parties.

Laura Shin: So, did your company work as a market maker during the Project Token Generation Activity (TGE)? However, I think the agreement between your company and the foundation should be very different from the agreement between the market makers, right?

Omar Shakeeb: No, we are not involved in market making. We are engaged in private equity market business, which is a completely different field from market making business. The private equity market is essentially an over-the-counter trading (OTC), which usually occurs before and after TGE.

José Macedo: Did Rushi sell tokens through OTC?

Omar Shakeeb: As far as I know, Rushi has not sold tokens through OTC transactions. The foundation has made it clear that it will not sell out, but how to verify this commitment remains a difficult problem. Market makers also have this risk. Even if the market maker completes a large transaction, it may just sell tokens on behalf of the project team, and the outside world cannot know the specific details. This is exactly the problem caused by the lack of transparency .

I suggest starting from the initial stage of token allocation, the wallet is clearly marked , such as marking "Foundation Wallet", "CEO Wallet", "Co-founder Wallet", etc. In this way, the source of each transaction can be traced to clarify the actual selling situation of each party.

José Macedo: We did consider marking our wallets, but this measure could trigger privacy leaks and raise the threshold for entrepreneurship.

(III) **Exchange and industry self-discipline: the feasibility of

supervision implementation**

José Macedo: As Hester Pierce emphasized in his recent proposal for safe harbor rules, the project party should disclose its market making arrangements.

Currently, exchanges tend to maintain low circulation to achieve high valuations, while market makers rely on information gaps to obtain high fees.

We can learn from the regulatory experience of traditional finance (TradFi). The Securities Trading Act of the 1930s and the market manipulation methods of the 1970s and 1980s revealed by Edwin Lefebvre in the Memoirs of the Stock Masters, such as inducing retail investors to take over by inflated trading volume, are exactly the same as some phenomena in the current cryptocurrency market.

Therefore, we recommend introducing these mature regulatory regimes into the cryptocurrency field to effectively curb price manipulation . Specific measures include:

1. It is prohibited to manipulate market prices by false orders, first-hand transactions, and priority execution.
2. Ensure transparency and impartiality of the price discovery mechanism and prevent any behavior that may distort the price signal.

Laura Shin: There are many challenges in achieving transparency between issuers and market makers. As Evgeny Gavoy pointed out in the program The Chop Block, the market-making mechanism in the Asian market generally lacks transparency, and achieving unified global regulation is almost impossible.

So, how should these obstacles be overcome? Can change be promoted through industry self-discipline ? Is it possible to form a hybrid model of "global convention + regional implementation" in the short term?

Omar Shakeeb: The biggest problem is the extreme opaque operation at the bottom of the market. If leading market makers can spontaneously establish an open source information disclosure mechanism, this will significantly improve the current market situation.

Laura Shin: But will this practice trigger the phenomenon of " bad money drives out good money "? Violators may avoid compliance agencies, so how can they really curb this bad behavior?​​

José Macedo: At the regulatory level, transparency can be promoted by using the exchange audit mechanism . Specific measures include: requiring exchanges to publish a list of market makers and establishing a "compliance whitelist" system.

In addition, industry self-discipline is equally important. For example, the audit mechanism is a typical case. Although there is no legal mandate, it is almost impossible to obtain investment for projects that are not audited today. Similarly, market makers’ qualification review can also establish similar standards. If a project is found to be using a non-compliant market maker, its reputation will be damaged. Just as audit institutions have advantages and disadvantages, the reputation system of market makers also needs to be established.

Regulatory implementation is feasible, and centralized exchanges are the key entry point. These exchanges generally want to serve U.S. users, and U.S. law has a wide range of jurisdiction over crypto business. Therefore, regardless of whether the user is in the United States or not, as long as he uses a US exchange, he must comply with relevant regulations.

To sum up, exchange supervision and industry self-discipline can both become important means to effectively regulate market behavior.

Laura Shin: You mentioned that market maker information should be disclosed and compliant market makers should be recognized by the market. But if someone deliberately chooses non-compliant market makers, and such institutions themselves lack the motivation to publicly disclose their cooperative relationships, the following situation may occur: the project party uses compliant market makers on the surface to maintain its reputation, but in fact, it entrusts opaque institutions to operate at the same time. The key issue is:

1. How to ensure that the project party fully discloses all cooperative market makers?
2. For market makers who do not actively disclose information, how can the outside world discover their illegal operations?

José Macedo: If the exchange is found to use non-whitelisted institutions in violation of regulations, this is equivalent to fraud . Although the project party can theoretically cooperate with multiple market makers, in actual operations, since the circulation of most projects is limited, there are usually only 1-2 core market makers, so it is difficult to conceal the real cooperation partner.

Taran Sabharwal: This issue should be analyzed from the perspective of market makers . First of all, it is one-sided to simply divide market makers into "compliance" and "non-compliance". How to ask non-regulated exchanges to ensure compliance of their trading entities? The top three exchanges (Binance, OKEx, and Bybit) are offshore and unregulated institutions, while Upbit focuses on spot trading in the Korean market.

Supervision faces many challenges, including geographical differences, head monopoly and excessive entry thresholds . In terms of responsibility division, the project founder shall bear the main responsibility for his manipulation. Although the exchange's review mechanism is already quite strict, it is still difficult to eliminate evasion operations.

Take Movement as an example, the problem is essentially social errors , such as excessive commitment and improper transfer of control, rather than technical flaws. Although its token market value fell 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 resulted in the project being zeroed.

Laura Shin: How should all parties work together to solve the many problems currently exposed?

José Macedo: Disclosure of true circulation is key . Many projects raise valuations by falsely reporting circulation, but in fact a large number of tokens are still in lockdown. However, tokens held by foundations and labs are usually not subject to lock-in periods, meaning they can sell through market makers on the token’s initial day.

This operation is essentially a " soft exit" method: the team cashes out when the market is at its highest popularity on the first day, and then uses this fund to repurchase the unlocked team tokens one year later, or use it to short-term push up the protocol TVL and then withdraw the investment.

In terms of token allocation mechanisms, cost-based unlocking mechanisms should be introduced, such as the practice of platforms such as Legion or Echo. At present, channels such as Binance Launchpool have obvious flaws, and it is difficult to distinguish between real user funds and platform self-staken funds in the multi-billion-dollar fund pool. Therefore, it is urgent to establish a more transparent public offering mechanism.

Transparency in the market making process and ensuring retail investors can have a clear understanding of the actual holding of tokens. Although most projects have made a difference in transparency, further improvements are still needed. To this end, it is necessary to disclose the details of the market maker's token lending agreement, including key information such as the number of borrowings, option agreements and their exercise prices, in order to provide retail investors with more comprehensive market insights and help them make smarter investment decisions.

Overall, disclosing true circulation volume, standardizing the disclosure of market making agreements, and improving the token allocation mechanism are the most urgent reform directions at present.

Omar Shakeeb: The first issue is to adjust the financing valuation system . The current project valuation is inflated, generally US$3-5 billion, exceeding the affordability of retail investors. Taking Movement as an example, its token fell from 14 billion to 2 billion, and this excessive initial valuation will not benefit either party. The early valuation level of Solana and other such as the United States should be returned to the level of early valuation (US$300 million to US$400 million), 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 the project parties are often in operational difficulties. Should they hand them over to market makers? Conduct OTC? Or another way? We always recommend the choice of over-the-counter trading (OTC), which ensures that the recipient of the fund is consistent with the project's strategic goals. Celestia is a typical case. After the token issuance, they raised more than US$100 million in financing at a valuation of 3 billion, but achieved effective allocation of funds through reasonable planning.

(IV) The truth about market manipulation

Laura Shin: Is the essence of current market regulation measures lies in gradually guiding artificially manipulated token activities, such as market makers' intervention, to a development track that conforms to the laws of the natural market? Can this transformation achieve win-win results for all parties, protecting the interests of early investors and ensuring the sustainable development of the project team?

José Macedo: The structural contradiction faced by the current market lies in the imbalance of the valuation system . In the last bull market, due to the scarcity of projects, the market showed a general rise; and in this cycle, due to excessive investment in venture capital (VC), there was a serious surplus of infrastructure tokens, which led to most funds falling into a loss cycle and had to raise new funds by selling their positions.

This supply and demand imbalance directly changes the market behavior model. Buyer funds are fragmented , and the holding period is shortened from years to months or even weeks. The OTC market has fully turned to hedging strategies, and investors have kept the market neutral through option tools and completely bid farewell to the naked long strategy in the previous cycle. Project parties must face this shift: Solana and AVAX's success is built on the industry gap, while new projects require small circulation strategies (such as Ondo keeps actual circulation below 2%) and maintain price stability by signing off-site agreements with big holders such as Columbia University.

This round of projects such as Sui and Mantra, which performed well, have verified the effectiveness of this path, and Movement's attempt to stimulate prices through token economics design without the main network has proved to be a major strategic mistake.

Laura Shin: If Columbia University did not create wallets, how did they receive these tokens? This seems a bit unreasonable.

Taran Sabharwal: Columbia University, as one of the main institutional holders of Ondo, its tokens are in a non-circulating state because it has not created a wallet, objectively forming the phenomenon of "paper circulation". The token economic structure of the project is characterized by significant characteristics: since the large-scale unlocking in January this year, no new tokens will be released until January 2025. Market data shows that despite active perpetual contract trading, the depth of the spot order book is seriously insufficient, and this artificial shortage of liquidity has led to the price being susceptible to small amounts of funds.

In contrast, Mantra adopts a more radical liquidity manipulation strategy . The project party transfers the selling pressure to forward buyers through over-the-counter trading, and at the same time uses the funds obtained to pull up the spot market. Using only $20-40 million in funds has created a 100-fold price increase on the weak order book, soaring the market value from $100 million to $12 billion. This " time arbitrage " mechanism is essentially a short squeeze using liquidity manipulation, rather than a price discovery process based on real demand.

Omar Shakeeb: The key to the problem is that the project party has set up multiple locking mechanisms , but these locking clauses have never been disclosed publicly, which is the trickiest part of the entire incident.

José Macedo: There is a serious distortion problem in the circulation of tokens displayed by authoritative data sources such as CoinGecko. Project parties often include the "inactive tokens" controlled by the foundation and the team in the circulation, resulting in a surface circulation rate of more than 50%, while the actual actual circulation in the market may be less than 5%, of which 4% is still controlled by market makers.

This systematic data manipulation has been suspected of fraud . When investors trade based on the wrong perception of 60% of the circulation, 55% of the tokens are actually frozen in the cold wallet by the project party. This serious information gap directly distorts the price discovery mechanism, making the real circulation, which accounts for only 5% of the time, a tool for market manipulation.

Laura Shin: JP ( Jump Trading)’s market operation methods have been widely studied. Do you think this is an innovative model worth learning from, or does it reflect the short-term arbitrage mentality of market participants? How should the nature of such strategies be qualitative?

Taran Sabharwal: JP's operations demonstrate exquisite market supply and demand control capabilities, but its essence is a short-term value illusion achieved through artificially creating liquidity shortages . This strategy is irreplicable and will undermine the healthy development of the market in the long run. The current market imitation phenomenon just exposes the participants' eagerness for quick success and instant benefits, that is, they pay too much attention to market value manipulation and ignore real value creation.

José Macedo: It is necessary to clearly distinguish between "innovation" and "manipulation". In traditional financial markets, similar operations will be characterized as market manipulation behavior. The crypto market makes it seem "legal" due to regulatory gaps, but this is essentially a transfer of wealth through information gaps rather than sustainable market innovation.

Taran Sabharwal: The core issue lies in the behavioral patterns of market participants. In the current crypto market, the vast majority of retail investors lack basic due diligence awareness, and their investment behavior is essentially closer to gambling than rational investment. This irrational mentality of pursuing short-term profits objectively creates an ideal operating environment for market operators.

Omar Shakeeb: The key to the problem is that the project party sets up multiple locking mechanisms , but these locking clauses have never been disclosed publicly, which is the trickiest part of the entire incident.

Taran Sabharwal: The truth of market manipulation is often hidden in the order book . When a purchase of $1 million can drive price fluctuations by 5%, it means that the market depth does not exist at all. Many project parties use technical unlocking loopholes (though tokens are unlocked but are actually locked for a long time) to falsely report circulation, causing short sellers to misjudgment the risk. When Mantra exceeded 1 billion market value for the first time, a large number of short sellers lost their positions and left the market.

WorldCoin is a typical case. At the beginning of last year, its full dilution valuation was as high as 12 billion, but its actual circulating market value was only 500 million, creating a more extreme circulation shortage than that of the ICP. Although this operation has kept WorldCoin valuation 20 billion to date, it is essentially a harvest of the market through information gap .

However, it is necessary to evaluate JP objectively: during the market trough period, he even sold his personal assets to repurchase tokens and maintained the project through equity financing. This persistence in the project really shows the founder's responsibility.

Omar Shakeeb: Although JP is trying to turn the tide, it is not easy to make a comeback after being deeply trapped in this situation. Once market trust collapses, it will be difficult to rebuild.

(V) **The game between the founder and VC: the long-term value of the

token economy**

Laura Shin: Are there any fundamental differences in the development concept of the crypto ecosystem? Are Bitcoin and Cex essentially different? Should the crypto industry give priority to encouraging short-term arbitrage 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 problem in the crypto market is not an isolated case. Small and medium-cap stocks in the traditional stock market also have liquidity manipulation. However, the current crypto market has evolved into a fierce game between institutions . Market makers hunt down self-operated traders, quantitative funds harvest hedge funds, and retail investors have long been marginalized.

This industry is gradually deviating from the original intention of encryption technology. When new institutions sell Dubai real estate to practitioners, the market essence has become a naked wealth harvesting game. A typical case is dBridge. Although its cross-chain technology is leading, the token market value is only US$30 million; on the other hand, the meme coins, which have no technical content, easily exceeded the valuation of 10 billion with marketing gimmicks.

This distorted incentive mechanism is dismantling the industry's foundation. When traders can make $20 million by hyping "goat coins", who will still focus on polishing the products? The crypto spirit is being eroded by short-term arbitrage culture, and builders' innovation motivation is under severe challenges.

José Macedo: There are two completely different narrative logics in the current crypto market. Thinking of it as a "casino" of zero-sum game and as an engine of technological innovation will draw the completely opposite conclusion. Although the market is full of speculative behaviors such as VC short-term arbitrage and project-side market value management, many builders are silently developing infrastructure such as identity protocols and decentralized exchanges.

Just like in the traditional venture capital field, 90% of startups fail but drive overall innovation. The core contradiction of the current token economy is that a poor startup mechanism may permanently damage the project potential. When engineers witness the token plummet by 80%, who is willing to join? This highlights the importance of designing a sustainable token model : it must not only resist the temptation of short-term speculation, but also reserve resources for long-term development.

It is exciting that more and more founders are proving that encryption technology can surpass financial games.

Laura Shin: The real dilemma is how to define a “soft landing.”

Ideally, token unlocking should be deeply bound to ecological maturity. Only when the community achieves self-organization and the project enters the stage of sustainable development can the founding team's profit-making behavior be legitimate.

However, the real dilemma is that except for 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 economy design problem begins with the first round of financing negotiations between VC and the founder, emphasizing that the token economy involves a balance of interests between multiple parties, which not only meets the LP's return demands, but also is responsible to retail investors. However, in reality, project parties often sign secret agreements with leading funds (such as the high valuation clause of A16Z investment in Aguilera was disclosed several months later), and retail investors were unable to obtain the details of over-the-counter trading, resulting in liquidity management becoming a systematic problem.

Token issuance is not the end point but the starting point for responsible crypto ecosystem. Every failed token experiment consumes market trust capital. If the founder cannot ensure the long-term value of the token, he should adhere to the equity financing model.

José Macedo: The misalignment of interests between VC and founders is the core contradiction. VC pursues maximization of portfolio returns, and the impulse of founders to cash out when facing huge wealth is inevitable. Only when the on-chain verifiable mechanism (such as TVL fraud monitoring and liquidity cross-knock verification) is perfected can the market truly move towards standardization.

(VI) Industry Outlook: Transparency **, Collaboration and Return

to ** the Essence****

Laura Shin: So far in the discussion, we have sorted out the improvement space for each participant, including VCs, project parties, market makers, exchanges and retail investors themselves. How do you think it should be improved ?

Omar Shakeeb: For founders, the first priority is to verify product market matching, rather than blindly pursuing high financing . Practice shows that instead of raising 50 million yuan but unable to create market demand, it is better to use 2 million yuan to verify the feasibility and then gradually expand it.

This is also what we publish a private equity market liquidity report every month. Only by putting all dark box operations in the sun can the market achieve truly healthy development.

Taran Sabharwal: The current structural contradiction in the crypto market puts the founder in a dilemma. We must not only resist the temptation of short-term wealth and stick to value creation, but also deal with the high pressure of development costs.

Some foundations have been alienated into the founders' private vaults, and the "zombie chain" with a market value of billions of dollars continues to consume ecological resources. While the concept of meme coins and AI were hyping in turn, infrastructure projects were in a dilemma of liquidity exhaustion, and some teams were even forced to postpone the issuance of tokens for two years. This systematic distortion is seriously squeezing the living space of builders.

Omar Shakeeb: Take Eigen as an example. When its valuation reaches US$6-7 billion, there is a US$20-30 million in the over-the-counter market to pay, but the foundation refuses to release liquidity. This extremely conservative strategy actually missed the opportunity. It could have asked the team whether it needed a $20 million acceleration roadmap, or allowed early investors to cash in 5-10% of their positions to obtain reasonable returns.

The essence of the market is a collaborative network for value distribution, not a zero-sum game. If the project party exclusively owns the value chain, ecological participants will eventually leave.

Taran Sabharwal: This exposes the most fundamental power game in the token economy. The founders always regard investors' early exit as betrayal, but ignores that liquidity itself is a key indicator of ecological health. When all participants are forced to lock in positions, the apparently stable market value actually hides systemic risks.

Omar Shakeeb: The current crypto market urgently needs to establish a positive cycle value allocation mechanism : allowing early investors to exit at a reasonable time will not only attract high-quality long-term capital, but also form synergies of capital for different maturities.

Short-term hedge funds provide liquidity, while long-term funds help development. This hierarchical collaboration mechanism can promote ecological prosperity much more than forced lock-up. The key is to build a trust bond. The reasonable returns of A-round investors will attract continuous injection of B-round strategic capital.

José Macedo: Founders need to recognize a cruel reality, and there are a large number of failures behind every successful project. When the market is crazily pursuing a concept, most teams end up spending two years and unable to issue tokens, forming a vicious cycle of concept arbitrage, which is essentially an overdrawn of industry innovation.

The real way to break the deadlock is to return to the essence of the product and develop real needs with minimal feasible financing, rather than chasing the hot signals of the capital market. In particular, we need to be wary of mass misjudgments caused by VC error signals. When a concept is financed in large amounts, it often leads to the founder misreading it as real market demand.

As an industry gatekeeper, the exchange should strengthen its infrastructure functions , establish a market maker agreement disclosure system, ensure that the circulation data link is verified, and standardize the over-the-counter transaction reporting process. Only by improving market infrastructure can we help founders get rid of the prisoner's dilemma of "death without hype" and push the industry back to the right track of value creation.