Crypto Market Makers EXPOSED: Inside the $38M Move Token Dump - The Chopping Block

This episode dissects the scandalous $38M Move token dump, exposing the murky world of crypto market maker agreements and the urgent need for transparency to protect investors and maintain market integrity.

Episode Introduction

• The hosts, Tom, Robert, and Hib, are joined by repeat guest Evgeny, Head Honcho at Wintermute, a major crypto market making firm.
• The discussion centers on the recent Movement L2/L1 project scandal, market maker practices, and the broader implications for the crypto industry, particularly concerning transparency and regulation.
• L2 (Layer 2): A secondary framework or protocol built on top of an existing blockchain (Layer 1) to improve scalability and efficiency.
• L1 (Layer 1): The base blockchain, like Bitcoin or Ethereum.

The Movement Labs Scandal Unpacked

• Hib outlines the Movement Labs controversy: a deal with a market maker, Web3ort, involving a 5% token supply (a massive amount relative to the float) and an incentive structure to dump tokens if Movement's Fully Diluted Valuation (FDV) exceeded $5 billion, with profits split 50/50 with the Movement foundation.
• Market Maker: An entity that provides liquidity to a market by placing buy and sell orders, aiming to profit from the bid-ask spread.
• Fully Diluted Valuation (FDV): The total value of a crypto project if all its tokens (including those not yet in circulation) were trading at the current market price.
• This led to a $38 million dump of Move tokens, resulting in Web3ort's account being banned by Binance.
• Initial denials from the Movement team were eventually superseded by evidence from Coindesk, leading to the firing of Rushi, Movement Labs' co-founder and CEO.
• Hib notes the project was backed by large VCs and had significant marketing clout, which silenced early critics.
• Robert discloses that Robot Ventures is a minor investor in Movement but had no knowledge of the controversial agreements.

Actionable Insight for Crypto AI Investors/Researchers:

• The Movement scandal underscores the critical need for deep due diligence into tokenomics, market maker agreements, and team incentives, even for projects with significant VC backing and hype. AI tools could potentially be developed to analyze and flag risky clauses in such agreements.

Understanding Market Making Agreements: Standard vs. Shady

• Evgeny explains that the Web3ort agreement with Movement was "a very non-market agreement."

Standard Market Making Agreements:

• Include Key Performance Indicators (KPIs) like uptime, spread width, and order book depth.
• KPIs (Key Performance Indicators): Quantifiable measures used to evaluate the success of an organization or a particular activity.
• Often involve a call option structure where the market maker can buy tokens at a pre-agreed strike price (typically 25-50% above a post-launch price) at the end of the agreement, instead of returning the loaned tokens.
• Call Option: A contract giving the holder the right, but not the obligation, to buy an asset at a specified price (strike price) within a specific time period.
• Strike Price: The set price at which a derivative contract can be bought or sold.

Movement/Web3ort Agreement Deviations:

• No standard call option; instead, a direct profit-sharing incentive to sell above a $5 billion FDV.
• Web3ort reportedly transferred a large sum ($60-100 million) to Movement as collateral for the loaned tokens, creating immense pressure to sell tokens and recoup the capital. Evgeny states, "in our case we would never do because it's just an insane amount of money."
• Hib clarifies the role of market makers: they provide liquidity for tokens on exchanges, which is crucial for listings on major platforms like Coinbase or Binance. Projects typically loan tokens to market makers and compensate them via cash or option structures.

Actionable Insight for Crypto AI Investors/Researchers:

• Investors should scrutinize market making terms. The presence of large upfront payments from the market maker to the project for token loans is a major red flag, indicating misaligned incentives. AI could help identify such non-standard terms in publicly available (or leaked) documents.

Prevalence of Shady Market Making Practices

• Evgeny admits he hadn't heard of Web3ort until Binance banned them, suggesting many such firms, especially in Asia, operate under the radar.
• He believes such highly irregular agreements are uncommon with "proper protocols" but likely more frequent with tokens on tier 2 or tier 3 exchanges.
• Robert expresses concern: "Yeah, this seems like a [ __ ] show. I wonder how many more [ __ ] shows there are under the surface right now where there's a crazy market maker doing a crazy thing and a team that didn't know how to negotiate it correctly." He highlights the general lack of transparency.
• Evgeny adds that protocols are usually aware of these deals, disputing claims of ignorance from teams.
• The discussion touches on the bizarre details of the Movement case, including claims about legal counsel and the international setup of involved entities.

Actionable Insight for Crypto AI Investors/Researchers:

• The existence of a "long tail" of questionable projects and market makers means that vigilance is required, especially when dealing with less established entities or tokens on lower-tier exchanges. AI-driven sentiment analysis and network analysis could help identify projects with unusually high levels of undisclosed or suspicious market activity.

VC Due Diligence and Founder Incentives

• Hib notes Movement wasn't an "S-tier" project but had reputable VCs, raising questions about oversight.
• Robert likens the current state of market making agreements to venture investing before the YC Safe, where terms were opaque and often predatory.
• YC Safe (Simple Agreement for Future Equity): A standardized, founder-friendly investment contract popularized by Y Combinator, which simplified early-stage fundraising.
• Hib points out that while services exist to help teams navigate market maker selection, the initial choice is critical. Reputable market makers (like Wintermute) are less likely to engage in manipulative practices.
• The conversation shifts to founder motivations: why would a seemingly successful project resort to dumping tokens? The Movement team was known for being young and ambitious but also heavily focused on marketing over substance, with rumors of a weak technical team.
• Evgeny questions the role of VCs in identifying and warning against "fleshy, very marketing-driven founders" who may be prone to scammy behavior.
• Hib states Dragonfly passed on Movement due to uninteresting tech, not because they predicted outright fraud, though screening for integrity is attempted.
• Robert, whose firm invested in Movement's Series A, views it as a "growing up experience" for all involved, suggesting the technology itself isn't impacted. He emphasizes that earlier stage (pre-seed) investments are more founder-driven, while later stages (like Series A) focus more on traction.

Actionable Insight for Crypto AI Investors/Researchers:

• Founder profiling and incentive analysis are crucial. Overemphasis on marketing, lack of technical depth, and opaque operations can be red flags. AI could assist in analyzing founder backgrounds, communication patterns, and project development velocity against marketing claims.

The Case for Market Making Agreement Disclosures

• Hib proposes a disclosure regime where market making agreements, including terms, are made public, similar to traditional market requirements. He argues this would reduce the information asymmetry between exchanges and retail investors.
• Evgeny strongly supports this: "myself I'm very supportive of that in general because I think we have to get there." He cites Worldcoin as a project that did disclose its market maker loans and strike prices but faced criticism, disincentivizing others.
• Robert notes that mandatory disclosures (like in registered securities) lead to universal compliance, whereas voluntary disclosures create an equilibrium where no one discloses.
• Evgeny suggests top market makers could collectively agree to disclose, pushing the market towards normalization, but acknowledges it's a difficult coordination problem without regulatory enforcement.
• Hib outlines three potential channels for normalizing disclosures:
• Exchanges: Mandating disclosure for listing (easiest).
• VCs: Requiring it from portfolio companies via side letters.
• Side Letter: An agreement subsidiary to a main contract, detailing additional, often private, terms between specific parties.
• Market Makers: Collective agreement (harder due to potential for non-participating shady actors).
• Hib argues that industry self-regulation is preferable to waiting for slow, potentially ill-fitting SEC rules, and that disclosure doesn't equate to admitting tokens are securities.

Actionable Insight for Crypto AI Investors/Researchers:

• The push for transparency in market making agreements is a significant trend. Investors should favor projects that voluntarily disclose such information. AI researchers could explore how to standardize and analyze disclosed data for market risk assessment.

Market Maker Influence and Profitability

• Hib addresses the FUD that market makers like Wintermute "control token prices."
• Evgeny attributes this perception to market cycles: in bull markets, MMs are seen as pumping prices; in bear markets, as dumping. He notes the recent FUD coincided with a market downturn.
• He debunks theories of MMs colluding with exchanges like Binance to crush prices for liquidation profits, stating both MMs and exchanges profit most from active, healthy retail participation ("uninformed flow").
• Evgeny explains that retail activity dying down significantly hurts market maker profitability, as their revenue isn't linear with volume reduction.
• Hib questions if crypto's momentum-driven nature makes market making against retail harder. Evgeny clarifies their model involves arbitraging across venues, but large, informed funds can "run over" MMs on illiquid tokens.
• Evgeny estimates Wintermute loses money on at least 50% of its individual market making contracts for illiquid tokens, especially in bear markets when call options are out-of-the-money. Profitability comes from the successful ones and diversified business lines like OTC.
• OTC (Over-the-Counter): Trading done directly between two parties, without the supervision of an exchange.
• Hedging these token-specific call options is difficult for illiquid tokens.

Actionable Insight for Crypto AI Investors/Researchers:

• Understanding market maker business models and risk factors is key to interpreting their market impact. AI could be used to model liquidity provision, identify periods of low retail flow, and assess the risk of market maker-driven volatility in specific tokens.

Evolution of Market Making Compensation

• The discussion touches on whether the crypto-specific call option structure for market maker compensation will evolve towards TradFi models (fixed fees).
• Robert describes TradFi market making as more of a service with basic economics, often a fixed fee (e.g., $100k/year) to meet exchange listing requirements.
• Evgeny suggests the crypto model evolved due to:
• High token volatility making options valuable.
• Projects having more tokens than cash.
• Market makers playing a quasi-investment banking role.
• Limited availability of token borrow facilities outside the initial loan to MMs, unlike in TradFi where stock borrow is easier.
• He speculates that if exchanges like Binance created a system to lend project-supplied tokens to any willing market maker, it could change the dynamic.

Actionable Insight for Crypto AI Investors/Researchers:

• The structure of market maker compensation can indicate a project's maturity and financial health. A shift towards fee-based models might signal a more stable, less speculative phase for a token or the broader market.

Crypto Market Structure Legislation (FIT 21 Successor)

• The hosts discuss a new market structure bill, a successor to FIT 21, aimed at providing regulatory clarity for digital assets.

Key provisions mentioned:

• Defines digital assets and criteria for token security status.
• Splits oversight: CFTC for spot markets (non-security tokens), SEC for capital raising and fraud.
• CFTC (Commodity Futures Trading Commission): U.S. regulatory agency for derivatives markets.
• SEC (Securities and Exchange Commission): U.S. agency overseeing securities markets.
• Allows projects to raise up to $150 million/year if intending to decentralize.
• Introduces a "maturity test" for "mature blockchain protocols" (decentralized and/or autonomous, no single entity with >20% voting power, value from programmatic function, impartial system).
• Regulation of DeFi is currently narrowly defined.
• DeFi (Decentralized Finance): Financial applications built on blockchain technology that operate without central intermediaries.
• Robert views the bill as a good starting point, beneficial if passed as is, but expects significant evolution and compromise. He handicaps its odds of passing at 40-50%, with stablecoin legislation progress being an indicator.
• Stablecoin: A type of cryptocurrency whose value is pegged to another asset class, like a fiat currency or gold, to maintain a stable price.
• Evgeny notes the bill seems to give more power to the CFTC over the SEC. He expresses a preference for the current SEC iteration to have more power, surprisingly.
• Tom finds crypto legislation difficult to write well, often being too specific or not specific enough.
• Hib suggests that if comprehensive market structure legislation fails, the onus falls on the industry to self-regulate. Robert counters that regulators like the SEC could still create frameworks via exemptive relief or interpretations, even without new laws from Congress, though this hasn't happened proactively.
• Exemptive Relief: Permission from a regulatory body for a company to be excused from certain legal requirements.
• The discussion touches on the Chemvron Doctrine's potential overturning, which could limit agency deference and push them to wait for explicit Congressional mandates.
• Chemvron Doctrine: A principle of U.S. administrative law where courts defer to a government agency's reasonable interpretation of an ambiguous statute that Congress has authorized it to administer.

Actionable Insight for Crypto AI Investors/Researchers:

• Regulatory developments are paramount. The proposed market structure bill, if passed, could significantly alter the landscape for token issuance, trading, and DeFi. AI investors and researchers should monitor its progress closely, as it will impact compliance requirements and investment theses. AI tools could help in analyzing the complex legal text and its potential market impacts.

Concluding Thoughts and Price Predictions

• Hib humorously asks Evgeny for a price prediction, given Wintermute's perceived control over markets.
• Evgeny demurs, stating he's horrible at predicting prices, but then quips, "I would long Ethereum."

Reflective and Strategic Conclusion

The Movement scandal and market maker debates underscore a critical need for enhanced transparency and robust due diligence in crypto. Investors and researchers should prioritize understanding tokenomic structures and advocate for industry-led disclosure standards to foster trust and mitigate risks associated with opaque market practices.