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Depth analysis of risks and reform directions for encryption market loan options models
The Hazards of the Options Model for Crypto Market Loans and How to Address Them
Recently, the primary market of the crypto industry has fallen into a slump, exposing various human weaknesses and regulatory loopholes in the bear market. As important supporters of new projects, market makers should assist project development by providing liquidity and stabilizing prices. However, a collaborative method called "loan options model" is being abused by some bad actors in the current market environment, quietly harming small crypto projects, leading to a collapse of trust and market chaos.
Traditional financial markets have faced similar challenges, but through comprehensive regulation and transparent mechanisms, they have minimized negative impacts. The encryption industry can fully learn from the experiences of traditional finance to address current chaos and build a fairer ecosystem. This article will explore in depth the operational mechanisms of the loan Options model, its potential risks to projects, comparisons with traditional markets, and an analysis of the current situation.
Options Loan Model: Shiny Surface but Hidden Risks
In the crypto market, the responsibility of market makers is to ensure that there is sufficient trading volume by frequently trading tokens, preventing prices from fluctuating drastically due to supply and demand imbalances. For startups, collaborating with market makers is almost a necessary path; otherwise, it is difficult to land on trading platforms and attract investors. The "loan options model" is a common way to collaborate: project parties lend a large number of tokens to market makers at no cost or at a low cost; market makers use these tokens to perform "market making" operations on trading platforms, maintaining market activity. Contracts typically include options clauses that grant market makers the right to return or purchase tokens at an agreed price at specific points in the future, but do not impose mandatory execution.
On the surface, this model seems to achieve a win-win situation: the project party gains market support, and the market makers earn trading spreads or service fees. However, the problem lies precisely in the flexibility of the Options terms and the opacity of the contracts. There is an information asymmetry between the project party and the market makers, which provides opportunities for some dishonest market makers. They may not genuinely help the project, but rather disrupt the market with the chips in their hands, placing their own interests first.
Predatory Behavior: How Projects Get Into Trouble
When the loan options model is abused, it can cause serious damage to the project. The most common tactic is "market crashing": market makers concentrate on selling borrowed tokens, leading to a rapid price drop, triggering panic selling by retail investors, and the market subsequently collapses. Market makers can profit from this, for example, by "short selling"—selling tokens at a high price first, then buying them back at a low price after the price plummets to return to the project party, earning the difference. Alternatively, they can use the options terms to "return" tokens at the lowest price, achieving profits at extremely low costs.
This operation is devastating for small projects. There are numerous cases showing that token prices can be halved in just a few days, with market value significantly evaporating, and the difficulty of project refinancing sharply increasing. More seriously, the lifeline of a crypto project lies in community trust; once the price collapses, investors either regard the project as a "scam" or completely lose confidence, leading to the disintegration of the community. Trading platforms have strict requirements for the trading volume and price stability of tokens, and a price crash may directly lead to delisting, putting the project's prospects in jeopardy.
What makes matters worse is that these collaboration agreements are often tightly sealed by non-disclosure agreements (NDAs), leaving outsiders unable to understand the details. The project teams are mostly newcomers with technical backgrounds, and their understanding of the financial market and contract risks is still shallow. Faced with experienced market makers, they often find themselves in a passive position, making it difficult to assess the potential risks in the contracts. This information asymmetry makes small projects easy targets for predatory behavior.
Other Potential Risks
In addition to the pitfalls of lowering prices by selling borrowed tokens and abusing options terms for low-priced settlements in the loan options model, market makers in the crypto market have other means specifically targeting inexperienced small projects:
False trading volume: By trading among self-operated accounts or related parties, false trading activity is created to attract retail investors. Once operations cease, trading volume plummets, prices collapse, and the project may face the risk of being delisted from the trading platform.
Hidden clauses in contracts: Setting high margins, unreasonable "performance bonuses" in the contract, or even allowing market makers to acquire tokens at low prices and sell them at high prices after listing, causing a price crash and harming the interests of retail investors, while the project party has to bear the responsibility.
Insider trading: Using information advantages to be aware of major project news in advance and engage in insider trading. It may involve driving up prices to lure retail investors before selling off after positive news, or spreading rumors to lower prices and accumulate positions before negative news.
Liquidity control: By controlling the liquidity of the project, threatening price increases or withdrawals, the project party is forced to yield to unreasonable demands, or else they face the risk of market collapse.
Comprehensive Service Trap: Promoting "all-around" services including marketing, public relations, and price pumping, which may actually cover up problems through fake traffic and short-term price increases, ultimately leading to price collapse and causing more trouble for the project party.
Differential treatment: When serving multiple projects simultaneously, there may be favoritism towards large clients, intentionally lowering the prices for small projects, or transferring funds between projects, creating a "this rises while that falls" situation, resulting in losses for small projects.
These methods exploit the regulatory loopholes of the crypto market and the lack of experience of the project parties, which may lead to severe consequences such as a significant decrease in project market value and community disbandment.
The Response of Traditional Financial Markets
Traditional financial markets—such as stocks, bonds, futures, and other fields—have also faced similar challenges. For example, "bear market attacks" profit from short selling by driving stock prices down through large-scale sell-offs. High-frequency trading firms may use ultra-fast algorithms to seize the initiative while making markets, amplifying market volatility for personal gain. In the over-the-counter (OTC) market, lack of transparency also provides some market makers with opportunities for unfair pricing. During the 2008 financial crisis, some hedge funds were accused of exacerbating market panic by maliciously shorting bank stocks.
However, the traditional market has developed a relatively mature mechanism to address these issues, which is worth learning from for the encryption industry:
Strict Regulation: The U.S. Securities and Exchange Commission (SEC) has established Rule SHO, which requires that stocks must be ensured to be borrowable before engaging in short selling, preventing "naked short selling" practices. The "Up-Tick Rule" restricts short selling to only when stock prices are rising, curbing malicious price suppression. Market manipulation is explicitly prohibited, and violations of Section 10b-5 of the Securities Exchange Act may face hefty fines or even criminal penalties. The European Union also has a similar Market Abuse Regulation (MAR) specifically targeting price manipulation.
Information transparency: Traditional markets require listed companies to report agreements with market makers to regulatory authorities, and trading data (prices, trading volumes) is publicly accessible and can be obtained by ordinary investors through professional terminals. Large trades must be reported to prevent covert "dumping". This level of transparency greatly reduces the room for improper behavior by market makers.
Real-time Monitoring: The exchange uses algorithms to monitor the market, and when it detects abnormal fluctuations or trading volumes, such as a sudden sharp decline in a particular stock, it triggers an investigation mechanism. The circuit breaker mechanism automatically suspends trading during significant price fluctuations to cool down the market and prevent panic from spreading.
Industry Standards: Institutions such as the Financial Industry Regulatory Authority (FINRA) have established ethical standards for market makers, requiring them to provide fair quotes and maintain market stability. Designated Market Makers (DMM) on the New York Stock Exchange must meet strict capital and conduct requirements.
Investor Protection: If market makers disrupt market order, investors can hold them accountable through class action lawsuits. After the 2008 financial crisis, several banks were sued by shareholders for manipulating the market. The Securities Investor Protection Corporation (SIPC) provides a certain level of compensation for losses caused by broker misconduct.
Although these measures are not perfect, they have indeed greatly reduced predatory behavior in traditional markets. The core experience of traditional markets lies in combining regulation, transparency, and accountability to build a multi-layered safety net.
Vulnerability Analysis of the Crypto Market
Compared to traditional markets, the crypto market appears to be more fragile, with the main reasons including:
Immature regulation: Traditional markets have a century of regulatory experience and a complete legal system. In contrast, the global regulation of the crypto market is still fragmented, with many regions lacking clear regulations against market manipulation or market maker behavior, providing opportunities for bad actors.
Small market size: The market capitalization and liquidity of cryptocurrencies are far less than those of mature markets like US stocks. The actions of a single market maker can lead to significant price fluctuations of a particular token, whereas large-cap stocks in traditional markets are not easily manipulated by a single force.
Lack of experience from the project team: Many crypto project teams are primarily composed of technical experts and lack a deep understanding of financial market operations. They may find it difficult to identify the potential risks of loan options models and are easily misled by market makers when signing contracts.
Opaque industry practices: The crypto market commonly uses confidentiality agreements, and the details of contracts are often not made public. This secrecy, which has long drawn regulatory attention in traditional markets, has become the norm in the crypto world.
These factors combined make small projects easy victims of predatory behavior, while also gradually eroding the trust foundation and healthy ecosystem of the entire industry.
To improve this situation, the encryption industry can consider the following directions:
Promote regulatory improvement: Collaborate with regulatory agencies to develop standards and punitive mechanisms for market maker behavior.
Improve transparency: Encourage project parties to disclose key terms of cooperation agreements with market makers to increase the availability of market information.
Education and Training: Provide financial and legal training for project parties to enhance their risk awareness and contract negotiation skills.
Industry Self-Regulation: Establish a credit rating system for market makers, encourage healthy competition, and eliminate bad actors.
Technological Innovation: Utilize the characteristics of blockchain technology to develop a more transparent and traceable market-making mechanism.
Through these efforts, the crypto market is expected to establish a fairer and more transparent ecosystem, laying the foundation for the long-term healthy development of the industry.