Hidden Traps in the Crypto Market: Potential Risks of Loan Options Models

Recently, the primary market performance of the crypto industry has been sluggish, with many projects facing difficulties. In this "bear market," some industry drawbacks and regulatory loopholes are gradually becoming apparent. As important partners for new projects, market makers should support project development by providing liquidity and stabilizing prices. However, a collaboration method known as "loan options model" is being abused by some bad actors in the current market environment, causing serious damage to small crypto projects and triggering a crisis of trust and market chaos.

The traditional financial market has faced similar problems, but has minimized risks through完善的监管和透明机制. The crypto industry can learn from the experiences of traditional finance to address current chaos and build a fairer ecosystem. This article will delve into the operational mechanisms of the loan Options model, its potential risks for projects, comparisons with traditional markets, and the current market situation.

Options Loan Model: Appearing Glamorous, Hiding Risks

In the crypto market, the main responsibility of market makers is to ensure that the market has sufficient trading volume by frequently trading tokens, to prevent prices from fluctuating wildly due to a lack of liquidity. For startup projects, finding market maker cooperation is almost a necessary path, as it helps the project go live on exchanges and attract investors. The "loan Options model" is a common cooperation model: the project side provides a large number of tokens to market makers at low cost or for free; market makers use these tokens to conduct "market making" operations on exchanges, maintaining market activity. Contracts usually include Options clauses, allowing market makers to return tokens at an agreed price or purchase them directly at specific future points in time, but they also have the option not to execute this option.

On the surface, this seems to be a win-win cooperation model: 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 information asymmetry between the project party and the market makers, which provides opportunities for some dishonest market makers. These market makers may not be genuinely helping the project but rather using borrowed tokens to disrupt the market, prioritizing their own interests.

Predatory Behavior: How Projects Are Victimized

When the loan options model is abused, it can cause serious damage to the project. The most common tactic is "market dumping": market makers sell off a large number of borrowed tokens, leading to a rapid price drop, triggering panic selling among retail investors, and plunging the market into chaos. Market makers can profit from this through methods like "short selling", for example, by selling tokens at a high price and then buying them back at a low price after the price crashes to return to the project party, earning the price difference. Alternatively, they may take advantage of the options terms to "return" tokens at the lowest price, greatly reducing costs.

This operation is fatal to small projects. We have observed multiple cases where the token price has plummeted significantly in a short period, leading to a rapid evaporation of market value, making subsequent financing for the project nearly impossible. Worse still, the lifeline of encryption projects lies in community trust; once the price collapses, investors either consider the project a "scam" or completely lose confidence, resulting in the disintegration of the community. Exchanges have strict requirements for the trading volume and price stability of tokens, and a price crash may directly lead to delisting, casting a grim outlook for the project.

What makes matters worse is that these cooperation agreements are often covered by non-disclosure agreements (NDAs), making it difficult for outsiders to understand the specific details. The project teams are mostly newcomers with a technical background, and their understanding of the financial market and contract risks is relatively weak. When faced with experienced market makers, they often find themselves in a passive position, struggling to perceive potential risks in the contracts. This information asymmetry makes small projects easy victims of predatory behavior.

Other Potential Risks

In addition to the issues of driving down prices by selling borrowed tokens and abusing Options terms for low-priced settlements in the "loan options model", crypto market market makers also have other tricks targeting inexperienced small projects. For example, they may engage in "wash trading", using their own accounts or associated accounts to trade with each other, creating false trading volumes to attract retail investors. Once this operation stops, the trading volume will quickly drop to zero, prices will collapse, and the project may even face the risk of being delisted from the exchange.

Contracts may also hide "traps," such as excessively high margin requirements, unreasonable "performance bonuses," or even allowing market makers to acquire tokens at low prices and sell them at high prices after listing, causing a price crash that harms retail investors and tarnishes the project's reputation. Some market makers may exploit information advantages to learn about important project news in advance, engage in insider trading, disseminate positive news to drive up prices to lure retail investors into buying, and then sell off large amounts, or spread negative news to lower prices for accumulation.

Liquidity "kidnapping" is another serious issue, where market makers may threaten to raise prices or withdraw funds after the project party becomes dependent on their services, threatening to crash the market if the contract is not renewed, putting the project party in a dilemma.

Some market makers also promote "one-stop" services, including marketing, public relations, price manipulation, etc. On the surface, these services seem comprehensive and thoughtful, but in reality, they may involve fake traffic and short-term price manipulation, causing prices to soar and then quickly crash, which not only leads to huge expenses for the project party but may also incur regulatory risks. Even worse, market makers serving multiple projects may favor large clients, intentionally lowering the prices of smaller projects or transferring funds between different projects to create the effect of "one rising while the other falls," resulting in significant losses for smaller projects.

These issues stem from the regulatory loopholes in the crypto market and the lack of experience from project teams, which may ultimately lead to the evaporation of project market value and community dissolution.

Lessons from Traditional Financial Markets

Traditional financial markets, such as stocks, bonds, and Options, have also faced similar challenges in the past. For example, a "bear market attack" can drive down stock prices through massive selling of shares, profiting from short selling. High-frequency trading firms sometimes leverage ultra-fast algorithms to gain an edge in market making, amplifying market volatility for personal gain. The lack of transparency in the over-the-counter (OTC) market also provides some market makers with opportunities for unfair pricing. During the 2008 financial crisis, some hedge funds were accused of maliciously short selling bank stocks, exacerbating market panic.

However, traditional markets have developed mature coping strategies that are worth learning from for the crypto industry. Here are several key points:

1. Strict Regulation: The U.S. Securities and Exchange Commission (SEC) has established Rule SHO, which requires that stocks must be available to borrow before short selling to prevent "naked short selling". The "uptick rule" restricts short selling to times when stock prices are rising, curbing malicious price suppression. Market manipulation is strictly prohibited, and violations of Section 10b-5 of the Securities Exchange Act may face hefty fines or even criminal penalties. The European Union has also implemented the Market Abuse Regulation (MAR), specifically targeting price manipulation.

2. Information Transparency: Traditional markets require listed companies to report the content of agreements with market makers to regulatory authorities, and trading data (such as prices and volumes) must be publicly transparent, allowing investors to query through professional terminals. Large transactions must be reported to prevent covert "dumping". This transparency effectively curbs the improper behavior of market makers.

3. Real-time Monitoring: The exchange uses algorithms to monitor the market in real-time. Once abnormal price fluctuations or trading volumes are detected, such as a stock suddenly dropping significantly, an investigation procedure will be immediately triggered. The circuit breaker mechanism automatically suspends trading during severe price fluctuations, providing the market with a cooling-off period to prevent the spread of panic.

4. Industry regulations: Institutions such as the Financial Industry Regulatory Authority (FINRA) have established ethical standards for market makers, requiring fair quotes and maintenance of market stability. Designated Market Makers (DMM) on the New York Stock Exchange must meet strict capital and conduct requirements, or they will lose their eligibility.

5. Investor protection: If market makers disrupt market order, investors can seek compensation through class action lawsuits. After the 2008 financial crisis, several banks were sued by shareholders for market manipulation. The Securities Investor Protection Corporation (SIPC) provides a certain degree of compensation for losses caused by improper conduct of brokers.

Although these measures cannot completely eliminate the problem, they have indeed greatly reduced predatory behavior in traditional markets. The core experience of traditional markets lies in the organic combination of regulation, transparency, and accountability mechanisms to build a multi-layered protection system.

Special Challenges Facing the Crypto Market

Compared to traditional markets, the crypto market appears to be more fragile, with the main reasons including:

1. The regulatory system is immature: Traditional markets have over a hundred years of regulatory experience, and the legal system is relatively sound. However, the global regulatory situation in the crypto market is still fragmented, with many regions lacking clear regulations against market manipulation or dealer behavior, providing opportunities for bad actors.

2. Smaller market size: The market capitalization and liquidity of cryptocurrencies still have a significant gap compared to mature stock markets. The operations of a single market maker can significantly impact the price of a specific token, while large-cap stocks in traditional markets are not easily manipulated by a single entity.

3. Lack of experience from the project party: Many crypto project teams are primarily composed of technical experts and lack an in-depth understanding of the operation of the financial market. They may fail to fully recognize the potential risks of the loan Options model and can easily be misled by market makers when signing contracts.

4. Lack of Transparency: The crypto market generally uses confidentiality agreements, and contract details are often not disclosed to the public. This opacity has long been subject to strict scrutiny by regulatory agencies in traditional markets, but has become the norm in the crypto space.

These factors combined make smaller projects more vulnerable to predatory behavior, while also gradually eroding the trust foundation and healthy ecology of the entire industry.