What happened to Movement? Dragonfly learned a lesson from it, and Wintermute calls on the industry to establish a market maker disclosure mechanism.

The Unchained show is hosted by Dragonfly partners Haseeb Qureshi, Tom Schmidt, Robot Ventures founder Tarun Chitra, and Compound founder Robert Leshner. In this episode, renowned market maker Wintermute's CEO Evgeny joins to discuss the impact of market makers in the market and the recent Movement incident. Movement co-founder Rushi resigned due to allegations of signing strange contracts with external market makers. The remaining team members are forming Move Industries to take over Movement.

(Movement Labs co-founder, MOVE token insider trading triggers major upheaval )

Movement Core Team Established Move Industries

Movement Labs has signed an agreement with external market makers, whereby if Movement's FDV exceeds 5 billion USD, they can liquidate these tokens and share the selling profits with the Movement Foundation 50-50. This means that market makers, who were supposed to neutrally provide liquidity, are actually incentivized to push up the token price and then sell.

This arrangement not only allows market makers to make a profit, but the Movement Foundation will also share in the profits. They handed over 5% of the total token supply to a single market maker, which is a huge amount compared to the circulating supply of less than 10% of (. The day after the listing, they sold off Move tokens worth 38 million USD, resulting in Binance banning the related accounts. Rushi was accused of colluding with the market maker and resigned. Currently, Movement is managed by Move Industries, with the former BD head Torab serving as CEO and CMO Will serving as president.

Market maker profit models often come from the token issuer, exchanges, and options.

If you want to list on exchanges of the level of Coinbase or Binance, the token issuer needs to reach an agreement with large market makers like Wintermute. Standard market-making agreements typically include some KPIs, such as operating hours of the market making, spread widths )spread widths(, and order book posting volume, etc.

In return, market makers are compensated, and one common method is for the token issuer to lend tokens to market makers, allowing them to have inventory for market making. Additionally, market makers may receive compensation in cash or through options structures. If the token is successful, market makers can retain a portion of the tokens at a predetermined price, which is higher than the initial listing price.

Regarding the market maker issue, Wintermute CEO Evgeny stated that market makers typically receive compensation from project parties in a structure similar to call options )call option(. At the end of the agreement, market makers can choose not to return the borrowed tokens but instead return stablecoins or US dollars at a certain strike price )strike price(. This price is usually 25%, 50%, or sometimes even higher than the time-weighted average price )TWAP( after the listing. This is the typical mode of operation. However, Movement's contract has no call options and no similar structure.

Market Maker Leader: Web3Port Unseen in Contracts

Since there are options structures and strike prices, why don’t market makers manipulate the price of every token? The issue is the size of the incentives; market makers might receive 0.5% of the token supply, but usually much lower, depending on the market cap of the protocol. However, even if you are a market manipulator, with this kind of options structure, after you push up the price, you also need to keep the price stable before expiration.

Generally speaking, if the market maker does not provide buy and sell quotes in a programmed manner, the token issuer can cancel the entire contract, causing the market maker to lose the option. If they try to sell the tokens after driving up the price, it may lead to a price drop. Therefore, the incentives must be significant enough to both drive up the price and enable cashing out later. In the case of Web3Port, it is particularly interesting that there is a clear selling incentive after exceeding a valuation of 5 billion dollars.

Interestingly, Web3Port provided the Movement Foundation with a massive fund of 60 million in the transaction as a guarantee for contract completion. This is unimaginable for Wintermute. This amount of money is so large that even if the agreement offers you 5% of the token supply, the income for market makers primarily comes from trading. This is a matter of opportunity cost; using 60 million dollars for perpetual contract strategies, market-making strategies, or DeFi can all yield returns.

Receiving the agreement tokens while paying 60 million USD as collateral essentially encourages market makers to drive up the price and sell $MOVE tokens as much as possible to reclaim their funds; otherwise, they would be losing the earnings on idle funds every day. Evgeny pointed out that this is an unethical and uncommon agreement. As the leader among market makers, he only became aware of its existence a few months ago when Binance kicked Web3Port out.

Evgeny stated that market makers can also be "serial entrepreneurs"; many market makers from Asia do not promote themselves and restart their businesses only after scandals break out. However, for tokens that are only listed on second or third-tier exchanges and have never entered Binance or Coinbase, this is not uncommon. Many nominal market makers are actually a way for founders to illegally cash out. They claim to be providing liquidity, but in reality, they take the tokens, sell them off, and then split the profits with the founders, which is exactly the structure of the Web3Port protocol.

Robert Leshner stated that such scandals actually occur frequently, but the public is unaware of the details behind them. There may be more dramatic events happening every day that go unreported because they have not attracted the attention of a publication like CoinDesk. After seeing this incident, he thought it was like a farce.

He analyzed that this incident is just market makers messing around, while the team does not know how to negotiate correctly. These terrible terms and incentive mechanisms are simply a disaster. Now everyone has a better understanding of how market makers operate, and hopes for more stories to reveal the truth behind it, because the transparency is really too low right now. Additionally, he also added that he believes it is difficult for market makers to do these things without the agreement's knowledge. Those agreements that claim they don’t know what’s going on are most of the time actually aware.

In the case of Movement, they clearly knew. You can see from the email that the foundation's response was: "What the hell is this, this is the most ridiculous agreement I've ever seen." But a few days later, they still signed it.

Interestingly, Kaito recently posted that Web3Port was once a collaborative market maker, but felt that Web3Port's execution strayed from its original intention, and quickly decided to terminate the partnership.

Movement practical ability has become a major hidden danger.

Tom Schmidt stated: "Movement is strange; it is neither a top-tier project nor a nameless nobody. It has investors like Robot Ventures, and the product has some appeal. Someone should step in to stop it. The Movement team is praised for being young, energetic, and ambitious founders. Naturally, questions arise: why are they doing this? Why did the founders choose not to take the conventional path? They have successful projects and so many supporters; why are they dumping tokens and cashing out early instead of focusing on the product?"

They have long been criticized for launching tokens before the mainnet went live. It is rumored that they heavily rely on contractors, their technical team is not strong enough, and they focus too much on marketing rather than substance. This has raised concerns among many, mostly based on rumors, as no one has concrete evidence. However, some say they are manipulating the circulation, not conducting airdrops, and launching tokens without any real product. All of this points to issues within the project.

Movement The outbreak of scandals in projects of this level is surprising.

After the Movement event, Haseeb talked with some people and raised several questions. First, how will this change your perception of startups or founders? Second, what incentive mechanisms for founders within the industry does this reveal? Are there countless founders like Rushi? Personally, I don't think so. This is also why Movement has attracted so much attention and FUD. I've seen many unverified claims on Twitter, but very few other projects have this situation.

Regarding Movement, after seeing these statements, everyone feels that sooner or later there will be evidence proving that they are doing unethical things. However, I believe such projects are rare; they might exist on shady exchanges, but the top 100 should not have them. In terms of market capitalization, it is less common for something like this to happen at the level of Movement, which is why it has attracted so much attention.

Hasseb read an article from Cointelegraph that mentioned market maker agreements, citing a statement from a Web3 consulting firm. I searched a bit before the show and felt that people might underestimate the number of long-tail junk projects. These projects are worthless, but there are many of them. These projects go to second and third-tier exchanges to find such market makers. However, it is indeed crazy for a high-profile project like Movement, valued at 3-4 billion dollars, to experience this kind of situation. It has now dropped more than 80%, with the price almost in a straight line decline.

As for what to pay attention to when looking at new tokens next time after this incident, Evgeny expressed that he is sensitive to founders who are high-profile and marketing-driven. However, in Silicon Valley, traditional venture capitalists often prefer energetic and aggressive founders, which can sometimes align with fraudulent behavior.

The young, ambitious founder has become a wake-up call

Haseeb stated that Dragonfly did not invest in Movement, but not because they questioned their ethics or believed they would dump tokens or violate lock-up periods. They simply felt the technology was not interesting enough and considered it a derivative project. He has only seen Rushi once or twice, and the impression is that most investors find him energetic, charismatic, and ambitious. Blockworks once published a flattering article about Movement, repeatedly stating, "They are young and have raised a lot of money." This has become a meme. Forbes 30 under 30 is usually a warning signal.

Robert Leshner stated that he is a small investor, not an early participant, and does not have a deep understanding of the team. He believes that all parties involved should learn from this, improve business transactions and transparency, and ensure fairness for the entire ecosystem.

As for the opinion on Rushi? He stated that in Round A, it was not entirely founder-driven investment. Early investments bet on the founder, but later on, they focus more on traction, technology, financing, etc. He invested in Round A, and if it were early stage, he would delve deeper into understanding the team.

Wintermute CEO takes the lead: The industry should establish market maker disclosure guidelines

What should the industry learn from this? Haseeb suggests that, in traditional markets, market makers need to disclose information, and cryptocurrencies should do the same. Exchanges know who your market makers are, but retail investors do not. My ideal disclosure system is one where there is zero information gap between what exchanges and retail investors know. When applying for listing, the public should know everything that the exchange knows. Even the terms of the market maker agreements should be made public.

As an industry-leading market maker, Evgeny fully supports this system. To put it plainly, cryptocurrencies are really similar to securities. An IPO requires the disclosure of information about market makers, investors, risks, and so on. Disclosure allows retail investors to have enough information to decide whether to purchase tokens. WorldCoin previously disclosed loans, market makers, and exercise prices, but faced significant criticism as a result, leading to other founders being reluctant to disclose.

If disclosure is voluntary, no one will disclose. If it is mandatory, like in the securities market, everyone will disclose. Evgeny believes that it would be best for market makers to unite and disclose, but this is a coordination issue. If the exchange requires disclosure, everyone will follow suit. Venture capital firms can also implement disclosure standards. Market makers can agree to disclose, but it needs to be uniform, otherwise there may be market makers who do not disclose. Ultimately, the exchange is the main enforcer. The industry should establish its own disclosure system instead of waiting for the SEC to take action.

Disclosure does not mean that tokens are securities. More disclosure is a good thing and is unrelated to securities laws. When listed, there is always an opposing party, the ) foundation or representatives of ( that need to disclose information. I believe the industry needs to mature and rebuild retail trust. Events like Movement will erode confidence in tokens. A disclosure system can help retail investors believe that tokens will not be dumped.

What happened in this article Movement? Dragonfly learned lessons from it, and Wintermute calls on the industry to establish a market maker disclosure mechanism, first appearing in Chain News ABMedia.