Forward the Original Title‘Ten questions and ten answers to clarify the “black box” of market makers: Why do VCs end up making markets? Is it really easy for project teams to be “backstabbed”?’

Last week, Binance suddenly ordered the closure of 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 they cannot understand and often misunderstand. This article has sorted out some common questions and reference answers about crypto market makers (primarily those serving projects listed on CEX platforms).

1. What are some notable crypto market makers?

Currently, RootData has listed around 60 crypto market makers. However, the actual number of market participants is likely much higher, as many market makers operate behind the scenes under anonymity.

Among the 60 disclosed firms, only a few are actively visible to the public. The specific market-making projects they participate in remain a mystery to most regular users, adding to the perception of a “black box.”

It’s challenging to provide a clear classification or ranking of market makers. However, based on on-chain holdings, some of the major players with significant capital include Jump Trading, Wintermute, QCP Capital, GSR Markets, B2C2 Group, Cumberland DRW, Amber Group, DWF Labs, and Flow Traders — all of which are well-known in the market.

2. Which type of market maker is likely to be a manipulative “dealer”?

From an insider’s perspective, market makers are generally divided into active market makers and passive market makers. The Head of Ecosystem at Metalpha’s market-making business, Maxxx, provided a detailed explanation in a recent post. Recommended reading: “A Market Maker’s Confession: A Guide for Project Teams to Survive the Dark Forest“

In simple terms, active market makers are typically what people refer to as “dealers.” They often collude with project teams or betray them to manipulate market prices, profiting by exploiting retail investors. Many active market makers only come to public attention after being investigated or sued by regulatory authorities.

Passive market makers, on the other hand, primarily place bid and ask maker orders on centralized exchange order books, providing market liquidity in a more neutral manner without driving price movements. Their strategies and technologies tend to be more standardized.

Due to significant compliance risks, most active market makers operate anonymously.

Some active market makers may also disguise themselves as investment firms, incubators, or other entities.

The recently reported market maker that Binance banned, Web3port, presented itself as an incubator. Over the past year, Web3port participated in 26 investments, including at least six projects that have already issued tokens.

The degree of profitability can also indicate whether a market maker is active or passive. According to crypto KOL @octopusycc, “Profitable market makers” are often engaged in manipulative activities rather than genuine market-making.

A healthy market-making business should focus on quoting prices for buyers and sellers, maintaining market liquidity, and ensuring price stability. In this model, profits are relatively limited and often rely on exchange incentives.

3. Which crypto market makers have been prosecuted or investigated by regulatory authorities?

Following the crypto market crash in 2022, crypto market makers became a key focus for regulatory investigations. However, after Donald Trump took office, regulatory pressure eased, and some lawsuits were gradually withdrawn or settled.

The first one to be targeted by supervision was Jump Crypto. The 2023 U.S. class action lawsuit document shows that during the 2022 Terra UST stablecoin collapse, Tai Mo Shan Limited, a subsidiary of Jump Crypto, was accused of collaborating with Terra to manipulate the price of UST currency and made nearly $1.3 billion in profits. Therefore, it was sued by the SEC for market manipulation and for being a registered securities dealer. But in December 2024, Tai Mo Shan finally agreed to pay the SEC a settlement of US$123 million, and has recently expanded its team to resume encryption business.

In addition to SEC charges, on June 20, 2024, Fortune reported that the CFTC was also investigating Jump Crypto, although no formal charges have been filed yet.

Recommended reading: “Jump’s Troubled Past: Struggling to Resume Crypto Operations”

Another major market maker, Cumberland DRW, was also accused by the SEC of operating as an unregistered securities dealer and allegedly profiting millions of dollars through investor transactions. This lawsuit was recently dismissed.

Compared to the two major market makers above, a larger-scale crackdown occurred in October 2024, when the SEC, in collaboration with the FBI and the DOJ, filed charges against 18 individuals and entities for extensive fraud and manipulation in the crypto market. This case revealed several market makers, including Gotbit Consulting, ZM Quant Investment, and CLS Global, which were identified as primarily meme token market makers.

Beyond regulatory accusations, DWF Labs, a very active crypto market maker over the past two years, has faced multiple media reports from CoinDesk and The Block exposing its manipulation tactics.

For instance, The Block reported that one key reason DWF Labs managed to collaborate with 35% of the top 1,000 market cap tokens in just 16 months was its practice of promising clients “pump support”. Shortly after its founding in September 2022, DWF’s promotional materials frequently emphasized price action strategies. In a section titled “Price Management”, DWF claimed it could coordinate with a client’s marketing team to help token prices respond to favorable news — commonly referred to as “pumping on good news”.

Recommended reading: “The Block’s Deep Dive into DWF Labs: The Secret Tactics Behind 470 Project Investments”

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

The evil behavior of market makers is usually reflected in doing harm to the market and doing harm to the project teams. Common manipulative behaviors include:

1. Wash Trading: Creating artificial trading activity by simultaneously buying and selling assets to inflate trading volume and liquidity.

2. Spoofing: Placing large buy or sell orders without the intention of executing them. The goal is to mislead other traders and influence asset prices.

3. Pump and Dump: These schemes involve coordinating with other market participants to artificially drive up an asset’s price through aggressive buying. The market maker then sells at the higher price, causing a sharp price drop.

Instances of market manipulation are not uncommon. For example, Jump Crypto was fined $123 million for manipulating UST prices in collaboration with Terra, and Alameda Research played a major role in the crash of the previous crypto bull market.

Let’s look at another case of doing harm to the project side:

In October 2024, crypto game developer Fracture Labs sued Jump Trading, accusing the firm of executing a “pump and dump” scheme with its DIO game token.

In the lawsuit, Fracture Labs said it reached an agreement with Jump in 2021 to facilitate the initial issuance of its DIO token on cryptocurrency exchange Huobi (now HTX). Fracture Labs loaned 10 million DIO to Jump, worth $500,000, and sent an additional 6 million tokens to HTX, worth $300,000. The token price then surged to a high of $0.98, with Jump borrowing coins worth up to $9.8 million, and Jump subsequently sold all of its holdings at the peak price.

The resulting massive sell-off caused the DIO token to plummet to $0.005. Jump then repurchased 10 million DIO tokens at the lower price (for approximately $53,000) and returned them to Fracture Labs before terminating the agreement.

In this case, Fracture Labs and Jump followed a common token loan model. While this practice is standard, numerous project teams have fallen victim to similar manipulative tactics.

5. What are the common collaboration models between market makers and project teams?

As mentioned earlier, market makers are divided into active and passive.

Active market makers often operate without a clear standard. In a tweet, Maxxx mentioned that cooperation terms vary widely, involving different models such as token loans, API integration, leveraged financing, and profit sharing. In some cases, rogue dealers may even bypass the project team entirely, using their own funds to accumulate tokens and manipulate the market once they’ve secured enough control.

So how do market makers operate? Canoe’s founder Guang Wu, once shared insights on common institutional strategies for token manipulation:

The first is to strengthen market control, that is, the market maker takes control of a token’s price movement after assessing the project’s fundamentals (whether the project team is aware of this or not may vary).

• Accumulation Phase: The typical market pattern shows continuous accumulation at low prices.
• Consensus Phase: This stage focuses on increasing trading volume. The market maker pushes the price up slightly, then oscillates the price to exchange tokens with other market makers. This helps the primary market maker recover costs, improve capital efficiency, and establish risk control models.
• Profit-Taking Phase: The market maker drives the price higher while offloading tokens to retail investors. Some institutions may also assist the project team with fundamental improvements during this phase to sustain the price action.

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. For example, the former FTX Head of Trade, @octopuuus, mentioned that under this lending model, FTX pledged FTT tokens to borrow BTC or ETH. This effectively positioned BTC and ETH as value anchors for FTT. The borrowed BTC/ETH could then be used to pump FTT’s price further through cyclical lending and leverage.

Recommended reading: “The Insider Story of Dealers: The Love-Hate Relationship Between Market Makers, Project Teams, and Exchanges”

The services of more benign passive market makers are relatively standard. The service model is divided into Token Loan Model and Monthly Fee Model. The Token Loan Model is also currently mainstream and is the most widely used cooperation model.

Recommended reading: “Confessions of a front-line market maker practitioner: Self-rescue guide for project parties in the dark forest》

Source:Maxxx tweets

Under the Token Loan model, the project party needs to lend a certain proportion of tokens to market makers for market making.

When the service period ends, the project team must repay the loan, but the repayment is based on the agreed option value. (The option value refers to the economic value of the option contract at a specified point in time.) For example, if the project lends tokens worth 1 million USD, with an option value set at 3%, the project team will earn 30,000 USD in cooperative profit upon repayment. This profit margin is also a key source of income for market makers.

The advantage of the Token Loan Model for project teams is that it enables them to quickly build liquidity using the expertise of professional market makers, reducing the risks associated with managing the token’s price themselves.

On the other hand, the Monthly Fee Model is relatively simpler. The project team does not lend tokens to the market maker. Instead, the market maker integrates via API to conduct market-making activities. In this model, the project team doesn’t need to worry about malicious behavior from the market maker, but the market maker assumes all profit and loss risks during order placement. The project team is also required to pay a monthly service fee for this arrangement.

6. How competitive are market makers? Why do VCs want to build their own market making teams?

Maxxx mentioned in his tweet that not only are market makers becoming more involved, many VCs and project developers have also set up temporary teams to start making markets. Some of these teams lack even basic trading skills — they simply acquire tokens first, believing that since many projects ultimately go to zero, they’re not worried about meeting obligations.

The reason for this trend is clear: when the token price effectively becomes the core product for most projects, the immediate liquidity unlocked at listing becomes the most valuable aspect.

For example, while VCs typically acquire token allocations early on, they still have to wait for the project to launch and follow scheduled vesting rules to unlock their holdings. In contrast, market makers can unlock liquidity immediately upon listing, giving them significant operational flexibility.

7. Why are crypto market makers investing in projects?

According to industry insiders, strong projects are often surrounded by market makers. By investing in these projects, market makers can establish early connections with the project team during its development phase. Post-investment, they can naturally track the project’s progress, secure key partnerships, and position themselves ahead in market-making activities.

For project teams, beyond receiving tangible funding, they also gain a sense of security by aligning their interests with market makers. During the token listing phase, market makers can indeed provide valuable assistance, especially since exchanges often require certain market-making conditions for newly listed projects.

However, this arrangement isn’t always beneficial. Even if a market maker invests, it doesn’t guarantee they will consistently prioritize shared interests.

Furthermore, market maker investments may not always be traditional investments. According to The Block’s exposé on DWF, several industry insiders suggested that DWF’s so-called multi-million-dollar investments in crypto startups often resembled over-the-counter (OTC) trades. These deals allowed startups to convert their tokens into stablecoins rather than DWF injecting upfront cash — after which DWF would transfer the tokens to exchanges.

For some retail investors, news of a market maker’s investment has occasionally been perceived as a bullish signal, often triggering a price surge.

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, the market maker can also promise to provide liquidity support to the project party.

As well as matchmaking with resources such as VCs and exchanges. For example, introduce more VC investors and help project parties connect with exchanges. Especially in the Korean market, where the buying market is relatively strong, there are market makers that can provide some so-called comprehensive liquidity planning.

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

Knowing that eggs cannot be put in one basket, the project team will choose three or four market makers to spread the opening liquidity in the hands of market makers and reduce the risk of them doing evil.

However, this strategy can also carry risks. As the saying goes, “Three monks draw no water” — meaning multiple parties may result in inefficiency. According to industry insiders, some market makers may intentionally slack off and avoid fulfilling their responsibilities. Since it’s difficult for project teams to monitor market-making activities directly, enforcing accountability or pursuing claims against underperforming market makers can be challenging.

9. Do market makers have that much power to manipulate the market?

A Forbes study conducted in 2022 on 157 cryptocurrency exchanges revealed that more than half of all reported Bitcoin trading volume consisted of fake or non-economic wash trades.

As early as 2019, a white paper submitted by Bitwise Asset Management to the U.S. SEC reported that 95% of Bitcoin trading volume across 83 crypto exchanges at the time was either fake or non-economic. This discovery heightened industry concerns about market makers’ behavior.

While market makers may not be the root cause of manipulation, they are often the primary tool used to execute such strategies.

As service providers, market makers are often just a tool — a weapon of sorts. The true driving force behind manipulation lies with the demands of exchanges and project teams.

During bull markets, the entire system collectively generates massive profits, allowing all stakeholders to maintain a minimum level of cooperation and harmony. However, in a bear market, this chain accelerates liquidity crises, exposing underlying tensions that often lead to disputes and blame-shifting.

Market makers are not entirely the scapegoats for liquidity crises. While they are indeed key contributors to the illusion of market prosperity, the broader responsibility extends to other players in the crypto ecosystem — including project teams, VCs, KOLs (Key Opinion Leaders), and yield farming groups

10. Why is it difficult to regulate malicious behavior by market makers?

The lack of regulation is indeed a key reason why market makers are able to act maliciously. However, another important factor is that project teams, exchanges, and other trading counterparts have limited power to effectively constrain market makers.

Due to the hidden nature of market maker activities, the industry has yet to establish clear, unified standards and guidelines. Project teams themselves often struggle to monitor and restrict market maker behavior. When malicious activities occur, project teams typically rely on post-incident accountability, which is often weak and ineffective.

According to industry insiders, aside from on-chain market-making, only centralized exchanges can effectively monitor market maker activities. Although market makers generally agree with project teams on certain monitoring mechanisms, once tokens are transferred to a third party, the project team must heavily rely on the market maker’s reputation and moral standards.

To mitigate risks, project teams can opt for the monthly fee model offered by some market makers. This model typically involves short-term contracts (billed monthly), allowing project teams to adjust their market maker partners or strategies flexibly based on market performance. This approach helps avoid long-term reliance on unreliable market makers. Additionally, project teams can negotiate KPIs (e.g., minimum daily trading volume, maximum price spread limits) within the monthly fee contract to ensure service quality. However, this model shifts the risks back to the project team itself, as they would bear any potential losses that might arise.

Additionally, project teams can negotiate KPIs (e.g., minimum daily trading volume, maximum price spread limits) within the monthly fee contract to ensure service quality. However, this model shifts the risks back to the project team itself, as they would bear any potential losses that might arise. While project teams can specify penalties for contract breaches in their agreements, proving that a market maker has violated these terms is often challenging. Demonstrating that a market maker’s actions directly caused a price crash requires substantial data analysis, which is both costly and time-consuming in legal disputes. Moreover, market makers can often argue that external factors — such as macroeconomic events or investor panic — were responsible for price fluctuations.

The entire process involves multiple players, including exchanges, project teams, and market makers, making it difficult for project teams or the broader market to fully understand market maker operations.

Furthermore, due to the symbiotic relationship between centralized exchanges and market makers, exchanges are often reluctant to impose severe penalties on their most profitable partners. However, the GPS and SHELL incidents marked a notable exception — Binance ultimately froze the accounts of the market makers involved in the GPS-related price manipulation and publicly disclosed detailed evidence and malicious tactics. This proactive disclosure and action were significant milestones, representing both a response to regulatory pressure and an effort to promote industry self-regulation. Such initiatives may encourage other exchanges to follow suit, potentially establishing new industry standards aimed at better protecting users.

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