Ten questions and answers to clarify the "black box" of market makers: Why did VCs end up making market? Is the project party really prone to "back stab"?

Author: flowie, Nianqing, ChainCatcher

Last week, Binance suddenly ordered the market maker to be sealed off, and the conflict finally moved from VCs and exchanges to market makers. But for most people, market makers are like a black box, and they don’t understand it and often have misunderstandings. This article sorts out some questions and reference answers that everyone is often concerned about for crypto market makers (mainly referring to market makers in CEX on service projects) .

1. What crypto market makers are there?

RootData currently includes about 60 crypto market makers. But there may be much more than these actual market participants, and many market makers are hiding their names behind the scenes.

Only a few of the 60 publicly disclosed companies are active in everyone's vision. What market makers have participated in are also a black box for most ordinary users.

It is difficult to clearly classify or rank market makers, but at present, from the total on-chain position, the main ones with larger funds include Jump Trading, Wintermute, QCP Capital, GSR Markets, B2C2 Group, Cumberland DRW, Amber Group, and Flow Traders, which are also well-known market makers in the market.

2. **Which market maker may be the market maker that manipulates the

market?**

From an expert's perspective, market makers are usually divided into active market makers and passive market makers. @Metal p haPro Market Maker Business Head of Ecosystem Maxxx once gave a detailed introduction in his tweet . Recommended reading: " Confessions of front-line practitioners of market makers: Project parties' self-rescue guide "

Simply put, active market makers are generally what everyone calls "bank makers", conspiring with the project party or back-sting the project party to manipulate market prices and harvest retail investors in the market. Many proactive market makers may be investigated and prosecuted by regulators before they can be exposed.

Passive market makers mainly place maker orders on the order book side of centralized exchanges to provide market liquidity, which is more neutral and does not dominate the currency price. The strategies and technologies provided are also relatively standard.

Most active market makers have hidden names because they have great compliance risks .

There are also some active market makers who may be wearing the guise of investment institutions, incubators, etc.

Web3port, a market maker that was exposed for being banned by Binance, appeared as an incubator and participated in the investment 26 times in the past year, including at least 6 coin projects.

From the degree of making money, we can also know to a certain extent whether it is an active or a passive market maker. According to the understanding of encrypted KOL @octopusycc , "money-making market maker institutions" may be all making marketers, and rarely making markets.

Because the benign market maker business should quote the buyer and seller, maintaining the liquidity and price of the market relatively stable. Under this model, there is not much oil and water, and it needs to rely on exchange incentives and other models.

**3. Which crypto market makers have been prosecuted or investigated by

regulatory authorities?**

After the cryptocurrency storm in 2022, crypto market makers have become one of the key investigators of regulators. But after Trump came to power, the regulatory environment was loosened and some lawsuits were gradually revoked or settled.

The first thing that was focused on by regulators was Jump Crypto. According to 2023 U.S. class action documents, in the 2022 Terra UST stablecoin crash, Jump Crypto's subsidiary Tai Mo Shan Limited cooperated with Terra to manipulate the UST currency price, making a profit of nearly $1.3 billion. Therefore, the SEC sued the market for manipulating the market and to be a registered securities dealer. But in December 2024, Tai Mo Shan finally agreed to pay the SEC $123 million settlement, and recently expanded the team to resume crypto business.

In addition to the SEC allegations, on June 20, 2024, according to Fortune, the CFTC is also investigating Jump Crypto, but the CFTC has not yet initiated official charges. Recommended reading: " Black history plagued by Jump's full recovery of encryption business is in an embarrassing situation"

Another large market maker, Cumberland DRW, was also accused by the SEC of being an unregistered securities dealer, and Cumberland has obtained millions of dollars in illegal gains through trading with investors. The lawsuit was also recently revoked.

Compared with the above two large market makers, in October 2024, the allegations of large-scale fraud and manipulation against 18 individuals and entities in the crypto market initiated by the SEC and the FBI and DOJ have brought some market makers to the surface, including Gotbit Consulting, ZM Quant Investment, and CLS Globa. These market makers are said to be mainly meme market makers.

In addition to being accused by regulators, DWF Labs, a crypto market maker that has been very active in the past two years, has been disclosed by media such as CoinDesk and The Block.

For example, The Block said that DWF has cooperated with 35% of the top 1,000 tokens in its short 16-month history. One of the important reasons is that DWF Labs promises to "pull the market" when talking about customers. For example, shortly after its establishment in September 2022, DWF produced a lot of promotional materials referring to price action. In the chapter called "Price Management", DWF says it can be synchronized with the marketing team of potential customers to help the token price respond to related events. It is commonly known as "cooperation with good luck to pull the market".

Recommended reading: " The Block Exposed DWF Labs: The Operational Secrets Behind Investing in 470 Projects"

4. What are the common manipulation behaviors of market makers?

Market makers do evil things usually manifest as doing evil things to the market and doing evil things to the project party. Its common manipulation behaviors include:

1. Clean the transaction. Create artificial trading activities by simultaneously buying and selling assets to increase trading volume and liquidity.

2. Fraud. Place large buy or sell orders without intention to execute them. The purpose is to mislead other traders and influence asset prices.

3. Pull up the shipment. These plans involve coordinating with other market participants to artificially increase asset prices through active purchases. Market makers then sell at higher prices, causing prices to plummet.

Examples of evil in the market are not uncommon. For example, Jump Crypto, which was fined $123 million for working with Terra to manipulate the US currency price, and Alameda Research, which collapsed the previous bull market.

Let's look at another case of doing evil to the project:

In October 2024, crypto game developer Fracture Labs sued Jump Trading, accusing Jump of using its DIO game tokens to implement a "stock price gouging and selling" plan.

In the lawsuit, Fracture Labs said it reached an agreement with Jump in 2021 to assist its DIO tokens for the first time on cryptocurrency exchange Huobi, now HTX. Fracture Labs loaned Jump 10 million DIOs worth $500,000, and sent another 6 million tokens worth $300,000 to HTX. The token price then soared to a high of $0.98, Jump borrowed a coin worth up to $9.8 million, and Jump then sold all its holdings at the high point.

"Massive liquidation" caused the DIO to fall to $0.005, and Jump then repurchased 10 million tokens at a lower price (about $53,000) and returned it to Fracture Labs, before terminating the agreement.

In this incident, the cooperation model between Fracture Labs and Jump is the mainstream Token loan (borrowing coin model). Although it is common, there are many cases of project parties being "cut".

**5. What cooperation models do market makers and project parties

have?**

The aforementioned market makers are divided into active and passive.

Active market makers may often not have many standards. Maxxx mentioned in their tweet that the terms of cooperation are diverse, involving different models such as borrowing coins, accessing APIs, allocating funds, and sharing profits. There is even a situation where Ye Zhuang did not communicate with the project party and directly grabbed the funds and traded it by himself after grabbing enough chips.

So how do market makers operate? Canoe founder Guangwu once shared in his article the common ways institutions trade tokens.

First, strong banker control, that is, when the project fundamentals pass, select a target to start the operation (the project party may know/may not know, it has little to do with it)

• The first stage of fund-absorbing: Typical market is a continuous fund-absorbing at low prices.
• The second stage is the consensus stage of market maker institutions. The main indicators at this stage are trading volume, which first raises a band, and then changes hands with other market makers during the oscillation (recover costs, improve capital utilization, and establish a risk control model)
• The third stage is the stage of cutting leeks. Further increase, while shipping and recycling funds, some institutions will spontaneously assist project parties in building fundamentals.

The second is to serve as a value anchor for the target, and quickly improve the fundamental quality of the project in terms of funds and transaction volume through means such as lending and derivatives. The former FTX head of trade @octopuuus mentioned that in the lending mode, staking ftt to lend btc/eth, the value anchors of ftt are btc and eth, and the revolving lending is magnified, and it is even possible to pull ftt from btc/eth that borrows.

Recommended reading: " The Past of Marketing Manufacturers: Love, Hate, and Emotion between Market Makers and Project Parties and Exchanges"

More benign passive market maker services are relatively standard. The service model is divided into Token loan (borrow currency) model and monthly fee model. The Token loan model is also the mainstream at present and adopts the most extensive cooperation model. Recommended reading: " Confessions of front-line practitioners of market makers: Project parties ' self-rescue guide "

Source:Maxxx Tweets

In the Token Loan model, the project party needs to lend a certain proportion of tokens to market makers to make markets.

After the service expires, the project party needs to return it, but it will be delivered according to the signed option value. (Option value refers to the economic value of the option contract at a specific time point), for example, if you borrow 100wU of coins, the option value accounts for 3% of the borrowed currency assets. When returned, the project party can earn 3wU of cooperation income, which is also the main source of income for market makers.

The project party chooses the Token Loan model, the advantage is that it quickly establishes liquidity through the professional capabilities of market makers and avoids the risks of trading themselves.

The monthly fee model is relatively better understood. The project party does not lend money to market makers. The market makers make markets through API access. The project party is not worried about market makers doing evil, but they are responsible for their own profits and losses during the ordering process. The project party also needs to pay a monthly service fee.

**6. How many market makers are there? Why do VCs want to build their

own market maker team?**

Maxxx mentioned a message in his tweet that not only market makers are becoming more and more introverted, but many VCs have also left the market with a team and started to make markets. Some teams do not even have basic trading capabilities, so they will use the coins first. Anyway, they will return to zero in the end, and are not afraid of not being able to repay.

The reason is also clear. When the coin price becomes the only product of most projects, the liquidity unlocked at the opening is the most valuable part.

For example, although VCs in the past have obtained token share earlier, they all need to wait for the project party to open the market and unlock it step by step according to the rules. Market makers can unlock it at the opening, which has huge room for operation.

7. Why do crypto market makers leave the market to invest?

According to an perspective provided by industry insiders, generally good project parties are surrounded by market makers, and through investment, they can contact the project parties in the middle and early stages, and at the same time, they change from a passive pure party to a Party A with a certain initiative. After investment, you can also follow up on the progress of the project party with legitimate reasons, seize key projects and key nodes, and seize the initiative in market making.

For the project party, in addition to getting real money, it has also gained a sense of security with market makers as a community of interests to a certain extent. During the currency listing stage, market makers can indeed help a lot. The exchange has some market maker requirements for currency listing projects.

But this is not entirely a good thing. The investments that the project party received from market makers may also be "clearly priced". Even if the market maker invests in the project party, he may choose to smash the market in order to make money after obtaining the liquidity that is unlocked at the opening.

In addition, market makers’ investments are not necessarily real investments. In a report that leaked DWF, the Block said that many industry insiders said they believed DWF's multi-million dollar investment in crypto startups was more suitable for OTC trading. These OTC transactions allow startups to convert their tokens into stablecoins instead of DWF pre-injecting cash, which then DWF transfers tokens to the exchange.

The investment dynamics of some market makers once became a signal to pull the market in the eyes of ordinary investors.

In addition to investment, crypto market makers will also provide other resource support in order to cooperate with project parties.

For example, liquidity support. If it is a DeFi project party, market makers can also promise to provide liquidity support to the project party.

And the matchmaking of resources such as VCs and exchanges. For example, introduce more VC investors and help project parties connect and handle exchange relationships. Especially in the Korean market where the buying market is relatively strong, market makers can provide some so-called full liquidity plans.

8. Why do most project parties choose multiple market makers?

After knowing that eggs cannot be placed in one basket, the project party will choose three or four market makers to disperse the opening liquidity of market makers and reduce their risk of doing evil.

But "the three monks have no water to eat", this method may also be risky. According to industry insiders, for example, some market maker chambers of commerce are not doing anything, and it is difficult for project parties to supervise and hold them accountable if the market maker is difficult to detect market maker behavior.

9. Do market makers have such great ability to do evil?

A 2022 study by Forbes on 157 cryptocurrency exchanges found that over half of all reported bitcoin transactions were false or non-economic cleaning transactions (wash transactions).

As early as 2019, a white paper submitted by Bitwise Asset Management to the US SEC pointed out that of the 83 crypto exchanges analyzed at the time, 95% of the Bitcoin transaction volume was false or non-economic. This discovery has aroused widespread attention from the industry on market maker behavior.

Market makers may not be the culprit, but they are indeed the main tool for implementing operations.

As a service provider, market makers are often guns and tools. The needs of exchanges and project parties are the starting point.

During a bull market, the entire system jointly creates huge profits, so all interests can maintain the minimum harmony. But in the bear market, this entire chain accelerated the outbreak of the liquidity crisis, and the scene of tearing off the face and blaming each other was once again staged.

Market makers are not entirely the "burden" of liquidity exhaustion . The current dilemma of the crypto market is not entirely caused by market makers. Even though they are direct makers of "false prosperity". But there are project parties, VCs, KOLs, Maolu Studios, etc. in the entire complete interest chain.

10. Why is it difficult to restrain market makers?

The lack of supervision is indeed the core reason why market makers do evil, but the inability of counterparties to market makers such as project parties and exchanges to effectively restrict them is also an important factor.

Due to the hidden behavior of market makers, the industry has not yet formed clear and clear unified standards and norms for them. It is also difficult for the project party to supervise and restrain the operations of market makers themselves. Once they do evil, the project party can only rely on post-event accountability, but this kind of accountability is also very powerless.

According to industry insiders, in addition to on-chain market making, only centralized exchanges can monitor the behavior of market makers. Although market makers generally agree on monitoring methods with the project party. But once the currency is transferred to a third party, it needs to rely on its reputation and moral standards.

Of course, the project party can also choose the monthly fee model provided by the market maker. The monthly fee model is usually short-term contract (monthly settlement). The project party can flexibly adjust the cooperation object or strategy based on market performance to avoid long-term binding of unreliable market makers. Project parties can also negotiate to add KPIs (such as daily minimum trading volume and maximum price spread limit) to ensure the service quality of market makers. But the problem with this model is that the project party passes the risks that were originally distributed to market makers back to themselves and needs to bear the losses themselves.

In addition, although the project party can agree on details such as accountability after breach of contract in the contract terms, it is also difficult to judge the market maker's "breach of contract". The project party needs to provide sufficient evidence to prove that the market maker defaults, but even if there is a transaction record, proving the "causality" (i.e., the market maker's behavior directly leads to a price crash) requires a large amount of data analysis, which is expensive and time-consuming in legal litigation. Market makers can still argue that market volatility is caused by external factors such as macroeconomic events or investor panic.

The entire process involves different counterparties such as exchanges, project parties, market makers, etc. It is difficult for market makers to be 100% aware of project parties and markets.

In addition, due to the symbiotic nature of centralized exchanges and market makers, it is difficult for exchanges to completely crack down on the maker of their greatest interests. Therefore, in the GPS and SHELL incidents, Binance finally chose to freeze the market maker accounts related to the GPS incident and publish detailed evidence and evil methods, which is of great pioneering significance. Proactively disclosing evidence and taking action is to some extent a positive response to regulatory pressure and a manifestation of industry self-discipline. It may push other exchanges to follow suit and form a new trend in the industry to protect users.