Crypto Pump & Dumps Have Become the Ugly Norm. Can They Be Stopped? - Ep. 834
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Companies
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Key Quotes
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Topics
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Insights
🎯 Summary
Podcast Summary: Crypto Pump & Dumps Have Become the Ugly Norm. Can They Be Stopped? - Ep. 834
This 77-minute episode of Unchained, hosted by Laura Shin, dives deep into the opaque and often manipulative world of crypto market making, specifically addressing how incentive structures can lead to pump-and-dump schemes, using the recent Movement Labs scandal as a central case study.
1. Focus Area
The primary focus is Market Making in Crypto, contrasting its theoretical function (providing liquidity) with its problematic reality in the current ecosystem, particularly concerning token issuance agreements, incentive structures, and the lack of transparency. Secondary topics include OTC trading, regulatory arbitrage, and the role of centralized exchanges (CEXs) in policing these activities.
2. Key Technical Insights
- Non-Standard Option Agreements: Unlike traditional finance (TradFi), crypto market-making deals often involve the project loaning tokens to the market maker (MM) and granting them a call option. The strike price is frequently set at a premium (e.g., 25-50%) above a post-launch Time-Weighted Average Price (TWAP), creating a direct incentive for the MM to artificially inflate the price to exercise the option profitably (a pump-and-dump mechanism).
- Alternative Fee Structure: A less problematic model involves paying market makers a flat, fixed retainer fee purely for providing liquidity and maintaining bid-ask spreads, decoupling their compensation from token performance.
- Liquidity Gaps and Slippage: The necessity of market makers is highlighted by real-world examples, such as experiencing 22% slippage on a seven-figure on-chain transaction on a major chain, demonstrating the severe liquidity issues that MMs are meant to solve.
3. Market/Investment Angle
- Incentive Misalignment: The core investment risk stems from MMs being incentivized for upside rather than neutral market provision, leading to potential manipulation that harms retail investors.
- Founder Responsibility: Founders are advised to avoid performance-based option agreements and instead pay MMs for service delivery (uptime, spread guarantees) to maintain cleaner incentives.
- Market Structure Concentration: A small number of top market makers (estimated at the top seven) control the vast majority (95%) of the industry’s business, creating high barriers to entry for smaller, potentially more competitive firms.
4. Notable Companies/People
- Movement Labs: The central subject of the scandal, involving market makers Web Report and Run Tech, who allegedly executed a contract incentivizing a pump-and-dump, resulting in Binance banning Web Report.
- Delphine Labs (Jose): Provided the framework for understanding the problematic option agreements common in crypto market making.
- Second Lane (Omar Shakim): An established OTC desk provider who noted that founders often lack visibility into their token’s trading activity post-launch.
- Stix (Taren Subberwal): Emphasized the lack of transparency, noting that multiple MMs often work in silos, and that exchanges benefit from the status quo due to trading fees.
- Hester Peirce: Mentioned in reference to her proposed safe harbor rules, which suggest projects should disclose market-making arrangements.
- Wintermute (Gidey): Mentioned in a related discussion (The Chopping Block) regarding the difficulty of knowing all market makers, especially those operating in Asia.
5. Regulatory/Policy Discussion
- TradFi Parallels: The discussion drew strong parallels between current crypto market manipulation and historical practices in TradFi (like Jesse Livermore’s activities), which led to strict rules against spoofing, layering, and front-running customer orders.
- Enforcement Leverage: The most effective regulatory path suggested is leveraging Centralized Exchanges (CEXs). Since most CEXs seek US access, they can be compelled to enforce best practices (e.g., requiring listed tokens to use regulated MMs or follow specific standards).
- Self-Policing Potential: Similar to the social custom of requiring audits, the industry could adopt a social norm where using reputable, transparent MMs becomes a prerequisite for legitimacy, reflecting poorly on projects that use shady operators.
6. Future Implications
The conversation suggests the industry is at an inflection point where the current opaque market-making structures are unsustainable due to scandals like Movement’s. Future health depends on either industry self-regulation (top MMs setting standards) or exchange-enforced compliance, likely driven by the desire of CEXs to maintain access to lucrative US markets. Without change, the “ugly norm” of pump-and-dumps will continue to erode retail trust.
7. Target Audience
This episode is highly valuable for Crypto Founders, Institutional Investors, Compliance Officers, and Crypto Traders/Analysts who need a deep, professional understanding of the structural risks embedded in token liquidity provision and issuance agreements.
🏢 Companies Mentioned
Bearer Chain
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layer 1
Metalex
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infrastructure
Eigen
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defi
Sunbeam
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Project/Protocol
Dodd
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Project/Protocol
Adam
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Project/Protocol
Series A
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unknown
For Eigen
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unknown
But Taren
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unknown
Bearer Chain
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unknown
What I
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unknown
Gabe Shapiro
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unknown
Richard Hertz
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unknown
Do Kwon
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unknown
World Coin
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unknown
💬 Key Insights
"if you help them out, and then when they go on to building Series A, B, C, D, whatever, then they will help you to connect with new founders who are on that level, because you have several types of investors."
"Side deals is something that in TradFi you just have to disclose, right, to your lead investor. You have to disclose if you have any side deals. Like that should be standard. Like all the liquidity deals that projects do with people should also be disclosed."
"There are all these side deals as well happening with large VC funds. I mean, I get there. They would did a side deal, wait at a 16Z, for instance, like a $2 billion, $100 million, etc., etc., that came out like months later when the funding was down. Those are the other things most of the people don't even know about it."
"VCs investing something, they want to have a return, but they also have this obligation towards their LPs, but also towards the rest of the market. They should ask the report code to be more transparent. Just post the vesting, etc., whatever you have. Post the funding rounds, like, 'Hey, we have done three funding rounds. These are the prices,' etc., etc. All the information."
"A lot of these projects will tell CoinGecko to count the treasury coins as part of the float because they're circulating and unlocked. But realistically, that's not part of the float because they control it and they're not going to sell it."
"Transparency is the best disinfectant. And that's really what's missing here, I think."
📊 Topics
#artificialintelligence
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#startup
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#investment
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🧠 Key Takeaways
be getting more transparency
sign by someone else on the team