The Backstory of the Movement Controversy: A 10,000-Word Analysis of the Game Between Project Teams, Market Makers, and VCs
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The Backstory of the Movement Controversy: A 10,000-Word Analysis of the Game Between Project Teams, Market Makers, and VCs
Exchange regulation and industry self-discipline are key entry points for promoting transparency.
Navigating Web3 tides with focused insightsSource: Crypto Pump & Dumps Have Become the Ugly Norm. Can They Be Stopped?
Compiled & Translated: lenaxin, ChainCatcher
This article is compiled from the Unchained podcast interview, featuring José Macedo, founder of Delphi Labs; Omar Shakeeb, co-founder of SecondLane; and Taran Sabharwal, CEO of STIX. They discussed topics including liquidity shortages, market manipulation, inflated valuations, opaque vesting mechanisms, and self-regulation in the crypto market.
ChainCatcher has compiled and translated the content.
TL;DR
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The core function of market makers is to provide token liquidity and reduce trading slippage.
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Option-based incentives in crypto markets may encourage "pump and dump" behavior.
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Fixed-fee models are recommended to reduce manipulation risks.
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Crypto markets can reference traditional financial regulations but must adapt to decentralized characteristics.
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Exchange regulation and industry self-discipline are key entry points for promoting transparency.
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Projects manipulate markets through tactics like overstating circulating supply and offloading sell pressure via OTC deals.
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Lower project fundraising valuations to prevent retail investors from inheriting overinflated assets.
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Opaque vesting mechanisms force early investors into informal exits, triggering sell-offs: dYdX crash.
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Misaligned interests between VCs and founders lead to token unlocks decoupled from ecosystem development.
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On-chain disclosure of true circulating supply, vesting terms, and market maker activities.
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Allow reasonable liquidity release and foster tiered capital collaboration.
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Secure funding only after validating product demand to avoid being misled by VC trends.
(1) The Role of Market Makers and Manipulation Risks
Laura Shin: Let's dive deeper into the role of market makers in the crypto market. What core problems do they solve for projects and the market? And what potential manipulation risks exist within current market mechanisms?
José Macedo: The primary role of market makers is to provide liquidity across multiple exchanges, ensuring sufficient bid-ask depth. Their revenue model mainly relies on bid-ask spreads.
Unlike traditional finance, in crypto markets, market makers often acquire large token allocations through option agreements, giving them significant control over circulating supply and thus potential price manipulation power.
These option agreements typically include:
The strike price is usually set at a 25%-50% premium over the previous funding round or the 7-day weighted average price (TWAP) post-launch.
When the market price hits the strike price, market makers have the right to exercise the option and profit.
This structure inherently incentivizes market makers to artificially inflate prices. While mainstream market makers tend to be cautious, non-standard option agreements do pose real risks.
We recommend that projects adopt a "fixed fee" model—paying market makers a fixed monthly fee to maintain reasonable spreads and consistent market depth, rather than using complex incentive structures to drive price movements.
In short, fees should not be tied to token price performance; the relationship should be service-oriented; avoid distorting objectives due to incentive misalignment.
Taran Sabharwal: The core value of market makers lies in reducing trading slippage. For example, I once executed a seven-figure trade on Solana, which incurred a 22% on-chain slippage. Professional market makers could significantly optimize this. Since their services save costs for all traders, market makers deserve fair compensation.
When selecting market makers, projects need to clarify their incentive goals. Under a basic service model, market makers primarily provide liquidity and borrowing support. In a short-term consulting model, temporary incentives are set around key events like mainnet launches, such as using TWAP triggers to stabilize prices.
However, if the strike price is set too high, once the price far exceeds expectations, market makers may execute options and dump large amounts of tokens, exacerbating market volatility.
Lessons learned: Avoid setting excessively high strike prices. Prioritize the basic service model to control uncertainties from complex agreements.
Omar Shakeeb: Current market-making mechanisms face two core issues.
First, misaligned incentives. Market makers often focus more on arbitrage opportunities from price increases than on their fundamental duty to provide liquidity. They should attract retail trading through continuous liquidity provision, not merely profit from betting on price swings.
Second, severe lack of transparency. Projects often hire multiple market makers who operate independently without coordination. Currently, only project foundations and exchanges know the full list of market makers, while secondary market participants have no access to information about who executes trades. This opacity makes accountability nearly impossible during market anomalies.
(2) The Movement Controversy: Truth About Private Sales, Market Making, and Transparency
Laura Shin: Did your firm participate in any Movement-related business?
Omar Shakeeb: Yes, our company was involved with Movement, but only in the private market. Our process is extremely rigorous, with close communication maintained with founders like Taran. We conduct strict background checks on every investor, advisor, and participant.
However, we were unaware of the pricing and specific operations during market making. Relevant documents are held internally by the foundation and market makers and are not disclosed to others.
Laura Shin: So, did your firm act as a market maker during the token generation event (TGE)? Though I assume your agreement with the foundation would differ significantly from a market maker’s contract?
Omar Shakeeb: No, we did not engage in market making. We operate in the private market, which is entirely different from market making. Private market transactions are essentially OTC deals occurring before and after TGE.
José Macedo: Did Rushi sell tokens via OTC?
Omar Shakeeb: To my knowledge, Rushi did not sell tokens through OTC. The foundation has clearly stated it won’t sell, but verifying this commitment remains difficult. The same risk exists with market makers. Even if large trades occur, they might represent sales by the project team, and outsiders cannot see the details. This is exactly the problem caused by lack of transparency.
I suggest marking wallets from the initial token distribution stage—for example, labeling “Foundation Wallet,” “CEO Wallet,” “Co-Founder Wallet.” This way, every transaction can be traced back to its source, clarifying actual sell-off behaviors.
José Macedo: We did consider wallet labeling, but it raises concerns about privacy leaks and higher barriers to entrepreneurship.
(3) Exchanges and Industry Self-Regulation: Feasibility of Regulatory Implementation
José Macedo: As Hester Pierce emphasized in her recent safe harbor proposal, projects should disclose their market-making arrangements.
Currently, exchanges prefer low circulating supply to maintain high valuations, while market makers rely on information asymmetry to earn high fees.
We can learn from traditional finance (TradFi) regulatory experience. The 1930s Securities Exchange Act and market manipulation tactics exposed by Edwin Lefebvre in *Reminiscences of a Stock Operator*—such as inflating volume to lure retail buyers—are strikingly similar to practices seen today in crypto.
Therefore, we recommend introducing these mature regulatory frameworks into crypto to effectively curb price manipulation. Specific measures include:
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Banning spoofing, front-running, and preferential execution to manipulate market prices.
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Ensuring transparent and fair price discovery, preventing any behavior that distorts price signals.
Laura Shin: Achieving transparency between issuers and market makers faces many challenges. As Evgeny Gavoy pointed out in *The Chop Block*, market-making mechanisms in Asian markets generally lack transparency, and achieving global unified regulation is nearly impossible.
How can we overcome these barriers? Can industry self-regulation drive change? Is a hybrid model of “global covenant + regional implementation” possible in the short term?
Omar Shakeeb: The biggest issue is the extreme opacity of market underpinnings. If top market makers voluntarily establish open-source disclosure mechanisms, it would significantly improve the current state.
Laura Shin: But wouldn't this trigger a “bad money drives out good” scenario? Violators might simply avoid compliant entities. How can we truly deter such behavior?
José Macedo: At the regulatory level, exchange vetting mechanisms can promote transparency. Measures include requiring exchanges to publish market maker lists and establishing a “compliance whitelist” system.
Industry self-regulation is also crucial. For example, audits are a classic case. Though not legally mandated, un-audited projects now struggle to secure investments. Similarly, market maker credentialing can follow suit. If a project is found using non-compliant market makers, its reputation suffers. Just as audit firms vary in quality, market makers need a credibility framework.
Regulatory implementation is feasible, and centralized exchanges are the key entry point. These platforms want to serve U.S. users, and U.S. law has broad jurisdiction over crypto activities. Thus, regardless of user location, using U.S.-facing exchanges means compliance.
In summary, both exchange oversight and industry self-regulation can effectively govern market behavior.
Laura Shin: You mentioned that market maker information should be public and compliant ones recognized by the market. But what if someone deliberately chooses non-compliant market makers, who themselves have no incentive to disclose partnerships? This could lead to projects publicly using compliant market makers for reputation while secretly hiring opaque ones. Key questions:
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How can we ensure projects fully disclose all market maker partners?
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For market makers not proactively disclosing info, how can outsiders detect misconduct?
José Macedo: If an exchange is found using unlisted entities, it constitutes fraud. While projects may theoretically work with multiple market makers, in practice, most have limited circulating supply, so only 1–2 core market makers exist—making it hard to hide real partners.
Taran Sabharwal: We should analyze this from the market maker’s perspective. First, simply dividing market makers into “compliant” and “non-compliant” is oversimplified. How can we require unregulated exchanges to ensure their trading entities comply? The top three exchanges (Binance, OKEx, Bybit) are offshore and unregulated, while Upbit focuses on Korea’s spot market.
Regulation faces challenges including geographic differences, dominance by major players, and high entry barriers. Responsibility-wise, project founders should bear primary accountability for manipulative actions. Although exchange vetting is already strict, circumvention remains possible.
Take Movement as an example—its core issues were social failures, such as over-promising and improper transfer of control, not technical flaws. Despite its token market cap falling from $14B to $2B, many new projects still emulate it. However, structural errors—especially mishandling control transfer—ultimately led to collapse.
Laura Shin: Given the many exposed issues, how should stakeholders collaborate to solve them?
José Macedo: Disclosing true circulating supply is critical. Many projects inflate valuations by overstating circulation, though most tokens remain locked. Yet, foundation and lab-held tokens are often exempt from lockups, allowing immediate selling via market makers on launch day.
This is essentially a "soft exit": teams cash out when market hype peaks, then use the funds to repurchase unlocked team tokens a year later or temporarily boost protocol TVL before exiting.
Token distribution should adopt cost-based unlocking mechanisms, as done by platforms like Legion or Echo. Current channels like Binance Launchpool have clear flaws—billions in pools make it hard to distinguish real user funds from platform-held assets. A more transparent public sale mechanism is urgently needed.
Transparency in market making and ensuring retail investors understand actual token holdings is equally vital. While many projects have improved transparency, further progress is needed. Full disclosure of market maker loan agreements—including quantities, options, and strike prices—is essential to provide retail investors with better market insights for informed decisions.
Overall, disclosing real circulating supply, standardizing market maker disclosures, and improving token distribution are the most urgent reform directions.
Omar Shakeeb: The primary issue is adjusting the fundraising valuation framework. Current valuations are wildly inflated—$3–5 billion is common, beyond retail affordability. Movement, for instance, dropped from a $14B to $2B valuation. Such high initial valuations benefit no one. We should return to early-stage levels like Solana ($300M–$400M), enabling broader participation at fair prices and supporting healthier ecosystem growth.
Regarding ecosystem fund usage, we observe projects facing operational dilemmas: hand funds to market makers? Conduct OTC? Other methods? We consistently recommend OTC, ensuring recipients align with strategic goals. Celestia is a prime example—they raised over $100M post-TGE at a $3B valuation and effectively allocated funds through careful planning.
(4) The Truth About Market Manipulation
Laura Shin: Is the essence of current market adjustments about gradually shifting artificially manipulated token activities—like market maker interventions—toward organic, market-driven development? Can this transition achieve win-win outcomes, protecting early investors while ensuring sustainable team growth?
José Macedo: The core structural issue lies in imbalanced valuation systems. During the last bull run, scarcity drove broad market gains. In this cycle, excessive VC investment has flooded infrastructure tokens, causing widespread fund losses and forcing liquidations to raise new capital.
This supply-demand imbalance has fundamentally changed market behavior. Buyer capital is fragmented, holding periods shortened from years to months or weeks. The OTC market has fully shifted to hedging strategies—investors use options to stay market-neutral, abandoning the naked long positions of the last cycle. Projects must recognize this shift: Solana and AVAX succeeded during industry voids, while new projects need small float strategies (e.g., Ondo keeping actual circulation below 2%) and OTC deals with major holders like Columbia University to stabilize prices.
Top performers like Sui and Mantra validate this path, while Movement’s attempt to boost prices through tokenomics alone—without a mainnet—proved a major strategic failure.
Laura Shin: If Columbia University hasn’t created a wallet, how did they receive the tokens? That seems illogical.
Taran Sabharwal: As a major institutional holder of Ondo, Columbia University’s tokens remain non-circulating due to uncreated wallets, creating a “paper circulation” phenomenon. The tokenomics show a distinct pattern: after a large unlock in January, no new tokens will be released until January 2025. Market data shows active perpetual contracts but severely shallow spot order books—this artificial liquidity shortage makes prices highly sensitive to small capital flows.
In contrast, Mantra adopted a more aggressive liquidity manipulation strategy. The team offloaded sell pressure onto forward buyers via OTC, then used proceeds to pump the spot market. With just $20–40 million, they achieved a 100x price surge on thin order books, pushing market cap from $100M to $12B. This “time arbitrage” mechanism is essentially a liquidity-driven short squeeze, not genuine price discovery based on real demand.
Omar Shakeeb: The crux is that projects set multiple vesting mechanisms, but these terms were never disclosed—this is the most problematic aspect.
José Macedo: Authoritative sources like CoinGecko report severely distorted circulating supply figures. Projects often count “inactive tokens” controlled by foundations and teams as circulating, showing >50% circulation while real market supply may be under 5%, with 4% still held by market makers.
This systemic data manipulation borders on fraud. When investors trade based on a false 60% circulation assumption, 55% of tokens are actually frozen in cold wallets. This massive information gap distorts price discovery, turning the mere 5% real float into a manipulation tool.
Laura Shin: JP (Jump Trading)'s market operations are widely studied. Do you view this as an innovative model worth emulating, or a reflection of short-term profit-seeking? How should we characterize such strategies?
Taran Sabharwal: JP demonstrated sophisticated control over supply and demand, but the essence is creating short-term value illusions through artificial liquidity shortages. This strategy is not replicable and harms long-term market health. Widespread imitation reveals a culture of quick wins—prioritizing market cap manipulation over real value creation.
José Macedo: We must distinguish “innovation” from “manipulation.” In traditional finance, such actions would be deemed market manipulation. Crypto’s regulatory vacuum makes it appear “legal,” but it’s essentially wealth transfer via information asymmetry—not sustainable innovation.
Taran Sabharwal: The core issue is participant behavior. Most retail investors in crypto lack basic due diligence, treating investing more like gambling than rational decision-making. This irrational pursuit of quick profits creates fertile ground for manipulators.
Omar Shakeeb: The key issue is that projects set multiple vesting mechanisms, yet never disclose the terms—this is the most challenging part of the entire situation.
Taran Sabharwal: The truth about market manipulation often hides in the order book. When a $1M buy order moves prices by 5%, it reveals nonexistent market depth. Many projects falsely report circulation using technical loopholes (tokens technically unlocked but practically locked long-term), misleading short sellers. When Mantra first broke $1B market cap, many shorts got liquidated.
WorldCoin is a classic case. Last year, its fully diluted valuation hit $12B, but actual circulating market cap was only $500M—creating even more extreme scarcity than ICP did. This tactic allowed WorldCoin to maintain a $2B valuation, essentially harvesting the market via information asymmetry.
Still, JP deserves objective evaluation: during market lows, he even sold personal assets to buy back tokens and used equity financing to keep the project alive. This dedication reflects real founder responsibility.
Omar Shakeeb: While JP is trying to turn things around, recovering from such a deep hole is extremely difficult. Once trust collapses, rebuilding it is nearly impossible.
(5) Founders vs. VCs: Long-Term Value in Token Economics
Laura Shin: Is there a fundamental divide in how we view crypto ecosystem development? Are Bitcoin and CEXs fundamentally different? Should the industry prioritize short-term speculative token games or return to value creation? When price diverges from utility, does the industry still hold long-term value?
Taran Sabharwal: Issues in crypto markets aren’t unique—small-cap stocks in traditional markets also face liquidity manipulation. But crypto has evolved into a fierce battleground among institutions: market makers hunt proprietary traders, quant funds exploit hedge funds, and retail investors are marginalized.
The industry is drifting from crypto’s original ideals. When new firms pitch Dubai real estate to insiders, the market becomes a naked wealth extraction game. Take dBridge: despite leading cross-chain tech, its token cap is just $30M; meanwhile, meme coins with no tech easily surpass $1B valuations through marketing alone.
This distorted incentive structure is eroding industry foundations. When traders earn $20M flipping “goat coins,” who will build real products? Crypto’s spirit is being consumed by short-term speculation, undermining builders’ motivation.
José Macedo: There are two opposing narratives in crypto today. Viewing it as a zero-sum “casino” versus a technological innovation engine leads to completely different conclusions. While the market is filled with VC short-termism and project-level market cap management, many builders are quietly developing identity protocols, DEXs, and other infrastructure.
Like traditional venture capital, where 90% of startups fail yet drive overall innovation, the core issue in token economics is that poor launch mechanics can permanently damage a project’s potential. When engineers see their tokens drop 80%, why would they join? This highlights the importance of designing sustainable token models—resisting short-term speculation while reserving resources for long-term growth.
Encouragingly, more founders are proving crypto can transcend financial gaming.
Laura Shin: The real dilemma lies in defining “soft landing.”
Ideally, token unlocks should be deeply tied to ecosystem maturity. Only when the community achieves self-governance and the project reaches sustainability should founder monetization be justified.
But the reality is that except for time locks, almost all unlock conditions can be manipulated—this is the core contradiction in current token design.
Omar Shakeeb: The root of flawed token economics begins with the first-round negotiation between VCs and founders. Tokenomics must balance multiple stakeholders—meeting LP return demands while being accountable to retail. But in reality, projects often sign secret deals with top funds (e.g., A16Z’s high-valuation Aguilera terms disclosed months later), leaving retail unaware of OTC details, making liquidity management a systemic challenge.
Token issuance isn’t the end—it’s the responsible beginning of engaging with the crypto ecosystem. Each failed token experiment depletes market trust. If founders can’t ensure long-term token value, they should stick to equity financing.
José Macedo: Misaligned VC-founder incentives are the core conflict. VCs seek portfolio-wide returns, while founders face irresistible urges to cash out amid sudden wealth. Only when on-chain verifiable mechanisms (e.g., TVL fraud detection, liquidity wash-trade verification) mature can the market truly become regulated.
(6) The Way Forward: Transparency, Collaboration, and Returning to Basics
Laura Shin: After our discussion, we’ve outlined improvement areas for all stakeholders—VCs, projects, market makers, exchanges, and retail investors. How should we move forward?
Omar Shakeeb: For founders, the priority is validating product-market fit, not chasing high valuations. Evidence shows it’s better to raise $2M to test feasibility and scale gradually than to raise $50M without real demand.
This is why we publish monthly private market liquidity reports. Only by bringing all dark operations into the light can the market achieve healthy development.
Taran Sabharwal: Structural contradictions in crypto today place founders in a bind—resisting get-rich-quick temptations while bearing high development costs.
Some foundations have turned into personal piggy banks, with multi-billion-dollar “zombie chains” draining ecosystem resources. While meme coins and AI concepts take turns hyping, infrastructure projects suffer liquidity droughts, with some teams delaying token launches for two years. This systemic distortion is severely squeezing builders’ survival space.
Omar Shakeeb: Take Eigen as an example. At a $6–7B valuation, there were $20–30M bids in the OTC market, but the foundation refused to release liquidity. This overly conservative approach missed an opportunity—they could have asked the team if they needed $20M to accelerate development or allowed early investors to exit 5–10% for reasonable returns.
The market is fundamentally a collaborative value distribution network, not a zero-sum game. If projects monopolize value, ecosystem participants will eventually leave.
Taran Sabharwal: This exposes the most fundamental power struggle in tokenomics—founders often see early investor exits as betrayal, ignoring that liquidity itself is a key indicator of ecosystem health. When everyone is forced to stay locked, seemingly stable market caps hide systemic risks.
Omar Shakeeb: Crypto urgently needs a positive-cycle value distribution mechanism: allowing early investors to exit at appropriate times attracts quality long-term capital and enables synergy across different capital tenures.
Short-term hedge funds provide liquidity; long-term funds support growth. This tiered collaboration promotes prosperity far better than forced locking. The key is building trust—fair returns for Series A investors attract continued strategic capital in Series B.
José Macedo: Founders must face a harsh reality: behind every success story are countless failures. When the market obsesses over a concept, most teams burn two years without launching tokens, trapped in a cycle of concept arbitrage—a true drain on industry innovation.
The real breakthrough lies in returning to product fundamentals—building minimum viable products for real demand with minimal funding, not chasing capital market signals. Especially beware of herd mentality triggered by VC funding announcements. When a concept secures massive funding, founders often mistake it for genuine market demand.
Exchanges, as industry gatekeepers, should strengthen infrastructure roles—establishing market maker disclosure rules, ensuring on-chain verifiable circulating supply data, and standardizing OTC reporting. Only by improving market infrastructure can we free founders from the “die if not hype” prisoner’s dilemma and steer the industry back toward value creation.
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