New Challenges in the crypto market: Unveiling the Potential Risks of Loan Options Models

Recently, the primary market of the crypto industry has remained sluggish, with various problems and regulatory loopholes gradually coming to light. As important supporters of new projects, market makers are supposed to help project development by providing liquidity and stabilizing prices. However, a collaborative approach known as "loan options model" has been abused by some irresponsible participants during the bear market, causing serious harm to small crypto projects and triggering a crisis of trust and market chaos.

Although traditional financial markets have also faced similar challenges, through完善的监管和透明机制, they have minimized the negative impacts. The encryption industry can fully learn from the experiences of traditional finance to address current issues and build a fairer ecosystem. This article will delve into the operational mechanisms of the loan Options model, its potential harm to projects, comparisons with traditional markets, and the challenges currently faced.

Options Loan Model: Glossy on the Surface, Risks Lurking Beneath

In the crypto market, the main responsibility of market makers is to ensure sufficient trading volume through frequent trading of tokens, preventing prices from fluctuating sharply due to supply and demand imbalances. For newly launched projects, finding a market maker to cooperate with is almost a necessary step, as it relates to whether they can successfully list on exchanges and attract investors. The "Loan Options Model" is a common cooperation model: project parties provide 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. The contract usually also includes options clauses that allow market makers to repurchase tokens at an agreed price at specific future points in time or choose to retain them.

On the surface, this seems to be a win-win agreement: the project side gains market support, while the market makers profit from trading spreads or service fees. However, the problem lies precisely in the flexibility of the options terms and the opacity of the contract. There is information asymmetry between the project side and the market makers, providing opportunities for some dishonest market makers. They may use borrowed tokens to disrupt the market instead of genuinely helping the project develop, 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 "dumping": market makers suddenly sell a large amount of borrowed tokens, causing the price to drop rapidly. Retail investors see this situation and also follow suit to sell, causing the market to fall into panic. Market makers can profit from this, for example, by "shorting" - selling tokens at a high price first, and then buying them back at a low price after the price collapses to return to the project party, earning the difference. Alternatively, they may take advantage of the options terms to "return" the tokens at the lowest price, reducing costs to a very low level.

This operation is devastating for small projects. We have witnessed many cases where token prices have plummeted in just a few days, market capitalization rapidly evaporating, and the chances of project refinancing have basically been lost. Worse still, the lifeline of crypto projects is community trust; once the price collapses, investors either think the project is a scam or completely lose confidence, leading to 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, leaving the project's prospects in jeopardy.

What exacerbates the situation is that these cooperation agreements are often tightly protected by non-disclosure agreements (NDA), making it impossible for outsiders to know the details. The project teams are mostly newcomers with a technical background, possessing a rather limited understanding of the financial market and contract risks. Faced with experienced market makers, they often find themselves in a passive position and may not even realize what kind of "trap" clauses they have signed. This information asymmetry makes small projects ideal targets for predatory behavior.

Other Potential Risks

In addition to the main risks mentioned above, market makers in the crypto market may also adopt other strategies to undermine inexperienced small projects:

1. Fake trading volume: Engaging in mutual trading through internal accounts or related parties to create false trading activity, attracting retail investors to enter the market. Once this behavior stops, the real trading volume may plummet, prices could crash, and the project may even face the risk of being delisted from the exchange.

2. Hidden contract terms: Setting high margins, unreasonable "performance bonuses" in the agreement, or 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 must also bear responsibility.

3. Insider Trading: Using information advantages to trade before major news about a project is announced, or spreading false information to influence prices for profit.

4. Liquidity control: By monopolizing the market liquidity of the project, threatening price increases or withdrawals, forcing the project party to accept unfavorable conditions.

5. Multi-project manipulation: When providing services for multiple projects simultaneously, there may be a deliberate effort to lower the prices of certain smaller projects or to transfer funds between different projects, creating price fluctuations.

6. Bundled Service Trap: Promoting a "package" service that includes marketing, public relations, etc., may actually involve fake traffic and artificial price inflation, ultimately leading to project collapse and facing legal risks.

These practices exploit the regulatory gaps in the crypto market and the inexperience of project teams, which may lead to a significant decrease in project market value and community disintegration.

How Traditional Financial Markets Respond

Traditional financial markets—such as stocks, bonds, and futures markets—have also faced similar challenges. For example, "bear market attacks" profit from short selling by massively selling stocks to drive prices down. High-frequency trading firms may leverage algorithmic advantages to gain an edge while market making, amplifying market volatility. The opacity of the over-the-counter (OTC) market also provides some market makers with opportunities for quote manipulation. During the 2008 financial crisis, some hedge funds were accused of exacerbating market panic by maliciously short selling bank stocks.

However, traditional markets have developed a mature set of coping mechanisms that are worth borrowing from the crypto industry:

1. Strict Regulation: The U.S. Securities and Exchange Commission (SEC) has established Rule SHO, which requires that stocks must be available for borrowing before short selling to prevent "naked short selling". 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.

2. Information Transparency: Traditional markets require listed companies to report the content of their agreements with market makers to regulatory authorities, and trading data (including prices and transaction volumes) is publicly available for inspection. Any large transactions must be reported to prevent covert "dumping". This transparency greatly reduces the scope for improper behavior by market makers.

3. Real-time monitoring: The exchange uses algorithms to monitor the market and will trigger an investigation when abnormal fluctuations or trading volumes are detected. The circuit breaker mechanism automatically pauses trading during severe price fluctuations, providing the market with a cooling-off period to prevent panic from spreading.

4. Industry Standards: For example, the Financial Industry Regulatory Authority (FINRA) has 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.

5. Investor Protection: If market makers disrupt market order, investors can hold them accountable through class action lawsuits. After the 2008 financial crisis, several banks faced shareholder lawsuits due to market manipulation. The Securities Investor Protection Corporation (SIPC) provides a certain level of compensation for losses caused by broker misconduct.

Although these measures cannot completely eliminate the problem, they have indeed greatly reduced the occurrence of predatory behaviors in traditional markets. The core experience of traditional markets lies in the organic combination of regulation, transparency, and accountability mechanisms, which has built a multi-layered protective network.

Unique Challenges Facing the Crypto Market

Compared to traditional financial markets, the crypto market appears to be more vulnerable in addressing these issues, mainly due to the following reasons:

1. Immature regulation: Traditional markets have over a hundred years of regulatory experience and a sound legal framework. In contrast, the global regulatory environment of the crypto market remains fragmented, with many regions lacking clear regulations against market manipulation or market maker behavior, leaving opportunities for bad actors.

2. The market size is relatively small: The market capitalization and liquidity of cryptocurrencies still have a significant gap compared to traditional stock markets. The operation of a single market maker can have a huge impact on the price of a particular token, which is almost impossible to occur in large-cap stocks in the traditional market.

3. Insufficient experience of the project team: Many crypto project teams are primarily composed of technical experts and lack a deep understanding of the operation of financial markets. They may not fully recognize the potential risks of the loan options model and can easily be misled by market makers when signing contracts.

4. Opaque industry practices: The crypto market commonly employs confidentiality agreements, and the details of contracts are often not disclosed. This practice, which has long been strictly regulated in traditional markets, has become the norm in the world of encryption.

These factors work together, making small projects easy targets for predatory behavior, while also undermining the trust foundation and healthy development of the entire industry.

To solve these problems, the encryption industry needs to draw on the successful experiences of traditional financial markets while maintaining its innovative vitality, establish a more完善 regulatory framework, improve market transparency, and strengthen investor education and protection. Only in this way can a more fair, transparent, and sustainable crypto ecosystem be built.