Understanding the Risks of the Loan Option Model: How Market Makers Affect Token Stability in the Crypto Space

In the evolving landscape of cryptocurrency, a proficient market maker can significantly enhance a project’s chances of success by facilitating listings on major exchanges and providing essential liquidity. One prevalent yet frequently misconstrued strategy within this domain is the loan option model. This model involves a project lending its tokens to a market maker, who utilizes them to foster market stability and liquidity. Nevertheless, this approach has led to troubling outcomes for numerous startups. Behind the scenes, unscrupulous market makers can exploit token loans for their personal gain. These schemes, often marketed as low-risk and high-return, can wreak havoc on new tokens’ valuations, placing emerging teams in precarious situations. Ariel Givner, founder of Givner Law, elaborates that market makers are supposed to guarantee exchange listings after borrowing tokens, but many opt to sell these assets prematurely, triggering immediate price declines followed by opportunistic repurchases at discounted rates.