Options Models for Loans in the Crypto Market: Opportunities and Risks Coexist

Recently, the primary market in the crypto industry has been sluggish, and various issues are gradually emerging. Market makers are supposed to assist new projects by providing liquidity and stabilizing prices to support project development. However, a cooperation method known as "Loan Options Model" has been abused by some bad actors in the current market environment, causing serious harm to small crypto projects, leading to a collapse of trust and market chaos.

The Operating Mechanism of Loan Options Model

In the crypto market, the main responsibility of market makers is to ensure sufficient market liquidity by frequently trading tokens, preventing severe price fluctuations caused by the absence of buyers and sellers. For emerging projects, collaborating with market makers is almost a necessary path; otherwise, it will be difficult to list on exchanges or attract the attention of investors.

The "Loan Options Model" is a common form of cooperation: project parties lend a large amount of tokens to market makers at low cost or for free, and market makers use these tokens to perform market-making operations on exchanges, maintaining market activity. The contract usually includes options clauses that grant market makers the right, but not the obligation, to repurchase or return tokens at an agreed price at a specific point in the future.

This model seemingly achieves a win-win situation on the surface: the project party gains market support, while the market makers earn trading spreads or service fees. However, the problem lies in the flexibility of the Options terms and the lack of transparency in the contracts. The information asymmetry between the project party and the market makers provides opportunities for some dishonest market makers.

Manifestations of Predatory Behavior

When the loan options model is abused, it can cause serious damage to the project. The most common tactic is "dumping": market makers sell a large amount of the borrowed tokens, leading to a rapid price drop and triggering panic selling by retail investors, causing chaos in the market. Market makers can profit from this through short selling or by using options terms to "return" the tokens at the lowest price, gaining huge profits.

This kind of operation often has a devastating impact on small projects. Numerous cases show that the token price plummets significantly in a short period, and the market value shrinks sharply, making subsequent financing extremely difficult for the project. More seriously, the foundation of encryption projects lies in community trust; once the price collapses, investors may view the project as a "scam" or completely lose confidence, leading to the disintegration of the community. In addition, because exchanges have certain requirements for the trading volume and price stability of tokens, a price crash may directly lead to the token being delisted, putting the project in a difficult situation.

What makes matters worse is that these cooperation agreements are often protected by non-disclosure agreements (NDAs), making it difficult for outsiders to understand the specific details. Most project teams lack experience in the financial market and risk awareness, often finding themselves at a disadvantage when facing seasoned market makers, and may even be unclear about the types of agreements they have signed. This information asymmetry makes small projects easy targets for predatory behavior.

Other Potential Risks

In addition to driving down prices through the sale of borrowed tokens and abusing options terms for low-price settlements, market makers in the crypto market also have other tricks specifically targeting inexperienced small projects:

1. False trading volume: By trading between their own accounts or associated accounts, they create false trading activity to attract retail investors. Once the operation stops, the trading volume quickly returns to zero, the price collapses, and the project may face the risk of being delisted by the exchange.

2. Contract traps: Setting high margin requirements, unreasonable performance bonuses, and other terms in the contract, or allowing market makers to acquire tokens at low prices and sell them at high prices after listing, resulting in a price crash that harms retail investors while placing the responsibility on the project party.

3. Insider trading: Using information advantages to gain prior knowledge of significant project news and engage in insider trading. This may involve driving up prices to entice retail investors to buy in before selling off, or spreading rumors to lower prices and accumulate shares.

4. Liquidity control: After the project party becomes dependent on its services, it threatens to raise prices or withdraw funds. If the contract is not renewed, it takes retaliatory actions such as dumping, putting the project party in a passive position.

5. Comprehensive Service Trap: Promoting a "full package" service that includes marketing, public relations, and pump-and-dump schemes may actually involve fake traffic and short-term price manipulation. The project parties not only spend huge amounts of money but may also face legal risks.

6. Differential Treatment: When providing services for multiple projects simultaneously, favoritism is shown towards large clients, deliberately lowering the prices for smaller projects, or transferring funds between different projects, resulting in a "this rising while that falls" effect, causing losses for the smaller projects.

These actions exploit the weaknesses of insufficient regulation in the crypto market and the lack of experience from project parties, which may lead to serious consequences such as a significant shrinkage in project market value and community disintegration.

The Response of Traditional Financial Markets

The traditional financial market has developed a relatively mature response mechanism when facing similar issues, which is worth learning from for the encryption industry:

1. Strict regulation: The "Rule SHO" established by the U.S. Securities and Exchange Commission (SEC) requires that stocks must be available to borrow before engaging in short sales to prevent "naked short selling". The "up-tick rule" restricts malicious price manipulation. Market manipulation is explicitly prohibited, and violations of relevant regulations may face severe penalties.

2. Information Transparency: Listed companies are required to report agreements with market makers to regulatory agencies, and trading data must be publicly accessible. Large transactions must be reported to prevent covert "dumping" behavior.

3. Real-time Monitoring: The exchange uses algorithms to monitor abnormal market fluctuations or trading volumes. The circuit breaker mechanism automatically suspends trading during severe price fluctuations to prevent panic from spreading.

4. Industry Standards: For example, the Financial Industry Regulatory Authority (FINRA) sets ethical standards for market makers, requiring them to provide fair quotes and maintain market stability. Exchanges have strict capital and conduct requirements for market makers.

5. Investor Protection: Investors can hold market makers accountable through class action lawsuits. Some institutions provide compensation for losses caused by improper actions of brokers.

These measures, although not perfect, have effectively reduced predatory behavior in traditional markets. The core experience lies in combining regulation, transparency, and accountability mechanisms to build a multi-layered protection system.

Challenges Facing the Crypto Market

Compared to traditional markets, the crypto market appears to be more vulnerable in dealing with these issues, primarily due to the following reasons:

1. Regulatory immaturity: The global crypto regulatory framework is still incomplete, and many regions lack clear regulations regarding market manipulation or market maker behavior.

2. The market size is relatively small: The market capitalization and liquidity of cryptocurrencies are far lower than those of traditional financial markets, and the operations of a single market maker may have a significant impact on token prices.

3. Lack of experience from the project team: Many crypto project teams are primarily composed of individuals with technical backgrounds and lack financial knowledge, making them susceptible to being misled when signing contracts.

4. Lack of Transparency: The crypto market commonly employs confidentiality agreements, making it difficult to disclose contract details, a secrecy that has been strictly regulated in traditional markets.

These factors work together to make small projects easy targets for predatory behavior, while also undermining the trust foundation and ecological health of the entire industry.