Original author: flowie, Nianqing, ChainCatcher
Last week, Binance suddenly issued an order to close down market makers, and the conflict finally shifted from VCs and exchanges to market makers. But for most people, market makers are like a black box that is hard to understand and often misunderstood. This article sorts out some of the questions and reference answers that people often care about about crypto market makers (mainly referring to market makers on CEX service projects).
1. What are the crypto market makers?
RootData currently lists about 60 crypto market makers. However, the actual number of market participants may be far more than these, and many market makers remain anonymous behind the scenes.
Of the 60 companies that have been publicly disclosed, only a few are active in everyone’s field of vision. Which market making projects the market makers are involved in is also a black box to most ordinary users.
It is difficult to clearly classify or rank market makers, but currently, judging from the total on-chain holdings, the ones with larger capital scale include Jump Trading, Wintermute, QCP Capital, GSR Markets, B2C 2 Group, Cumberland DRW, Amber Group, and Flow Traders, which are also well-known market makers in the market.
2. Which type of market maker may be the market manipulator?
From an insiders perspective, market makers are usually divided into active market makers and passive market makers. @MetalphaPro Head of Ecosystem Maxxx once gave a detailed introduction in his tweet. Recommended reading: Confessions of Market Makers: A Guide for Project Owners to Save Themselves in the Dark Forest
In simple terms, active market makers are generally known as “bankers” who collude with or backstab project owners to manipulate market prices and reap profits from retail investors. Many active market makers may only come to light after being investigated and prosecuted by regulators.
Passive market makers mainly place maker orders on both sides of the order book of centralized exchanges to provide market liquidity. They are more neutral and do not dominate the price of coins. The strategies and technologies they provide are also relatively standard.
Active market makers mostly remain anonymous due to the huge compliance risks.
Some active market makers may be disguised as investment institutions, incubators, etc.
We b 3 port, the market maker that was reported to be banned by Binance, appeared as an incubator and participated in 26 investments in the past year, including at least 6 projects that have issued coins.
The degree of profitability can also tell whether it is an active or passive market maker. According to the understanding of crypto KOL @octopusycc , profitable market makers are probably all bankers, and rarely market makers.
Because a healthy market maker business should quote prices to both buyers and sellers, maintaining market liquidity and relatively stable prices. In this model, there is not much profit, and it needs to rely on exchange incentives and other models.
3. Which crypto market makers have been sued or investigated by regulators?
After the crypto crash in 2022, crypto market makers became one of the key targets of investigation by regulators. However, after Trump took office, the regulatory environment was relaxed, and some lawsuits were gradually withdrawn or settled.
Jump Crypto was the first to be targeted by regulators. According to the 2023 U.S. class action lawsuit, in the Terra UST stablecoin crash in 2022, Jump Cryptos subsidiary Tai Mo Shan Limited worked with Terra to manipulate the UST coin price and made a profit of nearly $1.3 billion. As a result, it was sued by the SEC for market manipulation and failure to register as a securities dealer. However, in December 2024, Tai Mo Shan finally agreed to pay the SEC a settlement of $123 million, and has recently expanded its team to resume its crypto business.
In addition to the SECs allegations, on June 20, 2024, Fortune reported that the CFTC was also investigating Jump Crypto, but the CFTC has not yet filed formal charges. Recommended reading: Damaged by its dark history, Jumps full resumption of its crypto 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 that Cumberland had made millions of dollars in illegal profits through transactions with investors. The lawsuit was also dropped recently.
Compared with the above two large market makers, in October 2024, the SEC, FBI, and DOJ launched a large-scale fraud and manipulation charge against 18 individuals and entities in the crypto market, which brought some market makers to the surface, including Gotbit Consulting, ZM Quant Investment, and CLS Globa. These market makers are accused of being mainly meme market makers.
In addition to being accused by regulators, DWF Labs, a very active crypto market maker in the past two years, has been repeatedly exposed by media such as CoinDesk and The Block for details of market making manipulation.
For example, The Block said that the reason why DWF has cooperated with 35% of the top 1,000 tokens by market value in its short 16-month history is that DWF Labs promised to pull the market when talking to customers. For example, shortly after its establishment in September 2022, the promotional materials produced by DWF mentioned price actions a lot. In the section called Price Management, DWF claimed that it could synchronize with the marketing team of potential customers to help the price of tokens respond to related events. This is commonly known as cooperating with favorable factors to pull the market.
Recommended reading: The Block reveals the secrets behind DWF Labs investment in 470 projects
4. What are the common manipulative behaviors of market makers?
Market makers’ evil deeds usually manifest themselves in doing evil to the market and to the project parties. Their common manipulation behaviors include:
1. Wash trading. Creating artificial trading activity by buying and selling assets simultaneously to increase trading volume and liquidity.
2. Fraud. Placing large buy or sell orders without the intention to execute them. The purpose is to mislead other traders and influence the price of assets.
3. Pump and dump. These schemes involve coordinating with other market participants to artificially increase the price of an asset through active buying. Market makers then sell at a higher price, causing the price to plummet.
Examples of doing evil to the market are not uncommon, such as Jump Crypto, which was fined $123 million for cooperating with Terra to manipulate the UST coin price, and Alameda Research, which caused the collapse of the last bull market.
Let’s look at another case of doing evil to the project party:
In October 2024, crypto game developer Fracture Labs sued Jump Trading, accusing Jump of using its DIO game tokens to implement a pump and dump scheme.
In the lawsuit, Fracture Labs claimed that it reached an agreement with Jump in 2021 to assist in the initial issuance of its DIO token on the cryptocurrency exchange Huobi (now HTX). Fracture Labs lent 10 million DIOs to Jump, worth $500,000, and sent another 6 million tokens to HTX, worth $300,000. The token price then soared to a high of $0.98, and Jumps loaned currency was worth as much as $9.8 million. Jump then sold all its holdings at the high point.
The “mass liquidation” caused DIO to drop to $0.005, and Jump subsequently repurchased 10 million tokens at a lower price (around $53,000) and returned them to Fracture Labs before terminating the agreement.
In this incident, the cooperation model between Fracture Labs and Jump is the mainstream Token loan model. Although it is common, there are many cases where project parties are cut off.
5. What are the cooperation models between market makers and project parties?
As mentioned earlier, market makers are divided into active and passive.
Active market makers may not have many standards. Maxxx mentioned in his tweet that the terms of cooperation are varied, involving different models such as borrowing coins, connecting to APIs, allocating funds, and profit sharing. There are even cases where wild dealers do not communicate with the project party, directly use their own funds to grab chips, and operate the market after grabbing enough chips.
So how do market makers trade? Guangwu, the founder of Canoe, once shared in his article the common ways that institutions trade tokens.
The first is strong market control, that is, when the fundamentals of the project are good, choose a target to start the operation (the project party may or may not know, it does not matter much)
The first stage of accumulation of funds: the typical market situation is continuous accumulation of funds at low prices.
The second stage is the consensus stage of market makers. The main indicator in this stage is trading volume. First, it will rise to a certain level, and then it will change hands with other market makers during the fluctuation (recovering costs, improving capital utilization, and establishing a risk control model).
The third stage is the leeks harvesting stage. Further push up the price, sell the goods to recover funds, and boost the market. In this step, some institutions will also spontaneously assist the project party in building the fundamentals.
The second is to anchor the value of the target, and quickly improve the fundamental quality of the project in terms of funds and trading volume through means such as lending and derivatives. The former head of trade of FTX @octopuuus mentioned that in the lending model, FTT is pledged to borrow BTC/ETH, and the value anchor of FTT is BTC and ETH. With circular lending and leverage, it is even possible to pull the borrowed BTC/ETH to FTT.
Recommended reading: The past of market makers: the love-hate relationship between market makers, project parties and exchanges
The services of more benign passive market makers are relatively standard. The service models are divided into Token loan model and monthly fee model. The Token loan model is also the mainstream and the most widely used cooperation model. Recommended reading: Confessions of Market Makers: A Guide for Project Owners to Save Themselves in the Dark Forest
Source: Maxxx tweet
Under the Token Loan model, the project party needs to lend a certain proportion of tokens to market makers for market making.
After the service expires, the project party needs to return it, but it will be settled according to the signed option value. (Option value refers to the economic value of the option contract at a specific point in time). For example, if 100 wU of currency is borrowed, the option value accounts for 3% of the borrowed currency assets. When it is returned, the project party can earn 3 wU 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 can quickly establish liquidity through the professional capabilities of market makers and avoid the risks of their own operations.
The monthly fee model is relatively easier to understand. The project party does not lend the currency to the market maker. The market maker makes the market through API access. The project party does not worry about the market maker doing evil, but the profit and loss in the order placing process are at their own risk. 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 making teams?
Maxxx mentioned a piece of information in his tweet. Not only are market makers becoming increasingly inward-looking, but many VCs and project owners have also set up temporary teams to start market making. Some teams don’t even have basic trading capabilities, but they just take the coins first. In the end, they will return to zero anyway, so there is no need to worry about not being able to redeem them.
The reason is very clear. When the currency price becomes the only product of most projects, the liquidity unlocked at the opening is the most valuable part.
For example, in the past, although VCs obtained token shares earlier, they had to wait for the project party to open the market and unlock them step by step according to the rules. However, market makers can unlock them as soon as the market opens, leaving huge room for operation.
7. Why are crypto market makers investing?
According to a perspective provided by industry insiders, generally good projects are surrounded by market makers. Through investment, you can get in touch with the project parties in the early stage, and at the same time, you can change from a passive pure second party to a party with certain initiative. After the investment, you can also legitimately follow up on the progress of the project party, seize key projects and key nodes, and seize the initiative in market making.
For the project side, in addition to getting real money, they also gain a sense of security to a certain extent by sharing common interests with market makers. In the coin listing stage, market makers can indeed help a lot. The exchange has some market maker requirements for coin listing projects.
But this is not entirely a good thing. The investment that the project party gets from the market maker may also be marked secretly. Even if the market maker invests in the project party, it may also choose to dump the market in order to make money after getting the liquidity unlocked at the opening.
In addition, the investment of market makers is not necessarily real investment. The Block said in its report on DWF that many industry insiders believe that DWFs multi-million dollar investment in crypto startups is more appropriately called over-the-counter transactions. These over-the-counter transactions allow startups to convert their tokens into stablecoins, rather than DWF pre-injecting cash, and then DWF transferring the tokens to exchanges.
The investment dynamics of some market makers once became a signal for pulling 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, the market maker can also promise to provide liquidity support to the project.
As well as matchmaking with VC, exchanges and other resources. For example, introducing more VC investors and helping project parties to connect with exchanges. Especially in the Korean market where the buying market is relatively strong, there are market makers who can provide some so-called overall liquidity planning.
8. Why do most project parties choose multiple market makers?
Knowing that all eggs should not be put in one basket, the project party will choose three or four market makers to disperse the opening liquidity in the hands of the market makers and reduce the risk of them doing evil.
However, three monks have no water to drink, and this approach may also have risks. According to industry insiders, for example, some market makers will just give up and do nothing. Since it is difficult for project parties to detect the market making behavior of market makers, it is also difficult to supervise and hold them accountable.
9. Do market makers have such great ability to do evil?
A 2022 Forbes study of 157 cryptocurrency exchanges found that more than half of all reported Bitcoin trading volume was fake or non-economic wash trading.
As early as 2019, Bitwise Asset Management pointed out in a white paper submitted to the U.S. SEC that 95% of Bitcoin trading volume among the 83 crypto exchanges analyzed at the time was false or non-economic. This finding has aroused widespread concern in the industry about the behavior of market makers.
Market makers may not be the main culprits, but they are indeed the main tool for implementing operations.
As a service provider, market makers are more often just a tool. The needs of exchanges and project owners are the starting point.
In the bull market, the whole system jointly created huge profits, so all stakeholders could maintain the most basic harmony. But in the bear market, this whole chain accelerated the outbreak of the liquidity crisis, and the drama of tearing faces and blaming each other was staged again.
Market makers are not entirely the scapegoats for the depletion of liquidity. The current predicament of the crypto market is not entirely caused by market makers. Although they are the direct creators of the false prosperity, the entire chain of interests also includes project owners, VCs, KOLs, and LuMao studios.
10. Why is it difficult to restrain market makers from doing evil?
The lack of supervision is indeed the core reason why market makers do evil, but the inability of market makers’ counterparties such as project parties and exchanges to effectively restrain them is also an important factor.
Since the behavior of market makers is hidden, the industry has not yet formed clear and unified standards and norms for them. It is also difficult for the project parties themselves to supervise and restrict the operations of market makers. Once they do something wrong, the project parties can only rely on post-event accountability, but this kind of accountability is also very weak.
According to industry insiders, in addition to on-chain market making, currently only centralized exchanges can monitor the behavior of market makers. Although market makers generally agree on monitoring methods with project owners, once the coins are transferred to a third party, they need to rely on their reputation and ethical standards.
Of course, the project party can also choose the monthly fee model provided by the market maker. The monthly fee model is usually a short-term contract (monthly settlement). The project party can flexibly adjust the cooperation object or strategy according to the market performance to avoid long-term binding with unreliable market makers. The project party can also add KPIs (such as minimum daily trading volume and maximum spread limit) to the monthly fee contract through negotiation to ensure the service quality of the market maker. However, the problem with this model is that the project party transfers the risks originally dispersed to the market maker back to itself and needs to bear the losses by itself.
In addition, although the project party can agree on details such as liability after breach of contract in the contract terms, it is also difficult to judge whether the market maker has breached the contract. The project party needs to provide sufficient evidence to prove that the market maker has breached the contract, but even if there are transaction records, proving the causal relationship (that is, the market makers behavior directly caused the price collapse) requires a lot of data analysis, which is costly and time-consuming in legal proceedings. Market makers can still argue that market fluctuations are caused by external factors (such as macroeconomic events or investor panic).
The entire process involves different counterparties such as exchanges, project parties, and market makers. It is difficult for market makers to be 100% informed of the project parties and the market.
In addition, due to the cooperative and symbiotic nature of centralized exchanges and market makers, it is difficult for exchanges to carry out a thorough crackdown on the makers who have the greatest interests. Therefore, in the GPS and SHELL incidents, Binance finally chose to freeze the accounts of market makers related to the GPS incident and publish detailed evidence and malicious methods, which is of great pioneering significance. Actively disclosing evidence and taking action is, to some extent, a positive response to regulatory pressure and a manifestation of industry self-discipline. It may promote other exchanges to follow suit and form a new trend of industry protection of users.
