Compiled by Wu Blockchain about Blockchain
Original link:
https://x.com/_choppingblock/status/1912899938238820599
This episode of The Chopping Block podcast discusses topics such as the flash crash of OM tokens, the controversy over market-making transparency, and whether centralized exchanges should assume the role of industry regulators. Four guests — Haseeb (Dragonfly managing partner), Tom (DeFi expert), Robert (Superstate founder), and Tarun (Gauntlet founder and CEO) — analyzed Mantra (OM)’s manipulation of market value by falsely reporting circulation from the perspectives of investment, protocol design, and market governance, and explored the loopholes in the Coingecko/CMC data disclosure mechanism and the possible gaming reactions that may be caused by the disclosure of market-making protocols. They further debated whether Coinbase and Binance should work together to promote "industry self-regulatory standards" and exchanged views on the realistic path and possible side effects of promoting disclosure mechanisms.
OM crash reveals circulation fraud and market manipulation
Haseeb: Although we are now seeing a decline in US stocks, a decline in US bonds, and a weakening US dollar, this "triple kill" combination usually means that capital is flowing out of the United States, which is a very bad signal. In the United States, this situation is extremely rare. Usually when the stock market falls, US bonds will rise and act as a safe-haven asset. But this time it is not. This is a bad sign for financial assets in general.
This may mean that the Fed will have to intervene, and may have to intervene earlier than expected. Even if inflation rises due to tariffs, the Fed may have to cut interest rates or even restart quantitative easing to stabilize the dollar and bond markets, regardless of the state of other financial assets. From this perspective, this may be one of the most favorable macro narratives for crypto assets at the moment. Because it represents the possibility of a new round of liquidity release, even if the real economy is in a weak state.
Okay, before we turn this into a macroeconomic podcast, let’s get back to crypto. The first piece of news today is about a token called Mantra, and its ticker symbol is OM, not OHM like OlympusDAO, but OM.
The original version of this OM came from another team in 2020, when it was listed on Bitfinex. Later, a new team took over and reshaped it into the Mantra project, claiming to be a chain for RWA (real world assets). It is said that the project originated in the Middle East, involving a lot of Middle Eastern capital, and some RWA transactions from Dubai families. However, the whole project is very opaque.
The price of this token has skyrocketed over the past year, and it once ranked among the top 25 crypto assets. But the strange thing is that even after it ranked in the top 25, almost none of the four of us had actually heard of this project, let alone what it was doing. This seems particularly suspicious, whether it is the team, the company or the project itself.
Many people believe that the reason behind this surge is that its liquidity is extremely low and the project has exaggerated the number of tokens actually circulating in the market. Although they claim to have a market capitalization of billions of dollars, in fact, according to many observers, the actual amount in circulation is less than 1% of the total supply.
This question was first raised by a man named Mosi, who often exposes this kind of information on Twitter. His Twitter name is Ivana Charmer.
Haseeb: Although the token once rose to more than $5, it plummeted 90% in 90 minutes last Sunday, from $5.21 to $0.5, triggering $71 million in liquidations and billions of dollars in market value evaporating in an instant.
At first, many people thought that this might be the project owner's escape or deliberate manipulation, but the current evidence shows that this is not the case. It is more likely that an investor was forced to close his position, and there was no buying support in the market, causing the price to fall freely. In other words, although the token seems to have a market value of billions, it actually does not have enough liquidity.
Now the token has basically been beaten back to its original state, and the market generally believes that there must be something wrong. And this may not be an isolated case. Many people have begun to suspect that there are other similar projects on the market that are also misleading the market by falsely reporting the circulation volume. Although this behavior may not be common, it is not zero, and several projects have been named.
Most of this is “self-reported” by the project. When collecting information, data sites like Coingecko or CoinMarketCap will ask the project: “How many tokens are in circulation now?” The project party can actually say any number. Although these platforms will also conduct some verification, such as:
1. Are you listed on major exchanges?
2. Is your trading volume real or fake?
3. How many on-chain addresses are there?
But in the final analysis, if a project really wants to cheat, it can actually bypass these checks. You can keep the so-called "community distribution" tokens in your own hands, and then give them to market makers to make fake transactions, creating the illusion of high circulation and activity. In this way, Coingecko and CMC will think that you really have so many tokens circulating in the market.
In short, this is a mechanism that is very easy to abuse, and OM is just one of the exposed cases.
How do project owners manipulate prices and rankings by disguising liquidity?
Haseeb: CoinGecko or CoinMarketCap sometimes check the address distribution on the chain to make sure the data looks reasonable. But to be honest, if the project really wants to falsify, it is difficult for the platform to find out the problem. How to falsify? You can claim to have issued an airdrop or completed a community distribution, but actually keep these tokens in your hands, and then transfer the tokens to market makers to brush the volume on the exchange and create a false transaction. In this way, the data on the chain looks fine and the distribution chart looks normal, but in fact, there are no retail investors who actually hold these tokens. You only need a very small amount of real circulation to easily manipulate the price direction.
I think that’s the story of OM. Others have talked about this on the Unchained podcast a few weeks ago. What do you think? Do you think this is common? If so, is there anything we as industry insiders can do to better curb it? What are the root causes behind it besides saying “OM is doing it wrong”?
Tarun: Let me start with something. You guys should definitely watch the interview between the OM founder and Coffeezilla that was just launched 4 hours ago. He sounds really guilty.
Tarun: It was like, “I didn’t manipulate the prices, officer.” He was talking like Bill Clinton explaining what sex is. They both had completely different definitions of market manipulation. The OM founder was saying that it was only manipulation if you did it yourself, and if a third party did it, it was none of his business.
Tarun: Yes, what he meant is that as long as I didn’t place the order myself, it wouldn’t be considered manipulation. This is really worth a look. I wasn’t familiar with OM, but this reminded me of my investment experience in the Cosmos ecosystem. To be honest, I learned a lot of “negative examples” from Cosmos.
Haseeb: Are you saying that there are often people in the Cosmos community who push projects too hard?
Tarun: Yes, OM is a chain of the Cosmos ecosystem. I first heard about OM before it rose sharply, and it was mainly promoted by people in the Cosmos community. Every time this happens, I have a feeling that I should "short it". It's not that I have an opinion on the Cosmos technology itself, but the operation of the Cosmos community in financial products has been really bad in history.
Haseeb: It sounds like you are not bullish on the “price action” of Cosmos.
Tarun: Yes, technically speaking, Cosmos is very strong, and many users don’t even know they are using it. But from the perspective of financial products, it has historically been prone to problems.
Haseeb: Yes, the cases of OM and Terra have indeed damaged the reputation of Cosmos. Tom, what do you want to say?
Tom: I had heard about the OM project last year by “taking over old tokens”, and I was surprised that so few projects were doing this. I thought Bitfinex had delisted the token a long time ago, but I didn’t expect it to be “resurrected” - it’s really strange.
Moreover, it is not just a matter of circulation. If you look at the data on the chain, you will know that there is almost no transaction volume, no TVL, no real users, and the entire chain is a "ghost town", but it can run a FDV of several billion US dollars. This in itself is very questionable.
Tarun: Speaking of old tokens, do you remember when Avalanche was first launched, they wanted to use AVA as the token code, but it was taken by an old project Travala, so they later switched to AVAX. At that time, Binance was unwilling to let them take back AVA. Now these old chains are like "heaps of garbage code", whoever wants it can take it.
Haseeb: This is more like a "reverse backdoor listing", right? It's a bit like directly acquiring an old chain, buying out the original tokens and market value, and then restarting a new project. This is actually quite smart, and it is more economical and efficient than launching a new token from scratch. You can even buy the old coins of Binance or Coinbase directly and start a new story.
Tarun: They are really treating Binance listing qualification as a domain name transaction.
Haseeb: Yes, this strategy of “acquiring old project shells” is actually a more efficient way. Otherwise, these chains will slowly die and become “tombstone order books” on exchanges.
Back to the story of OM, when we noticed that its price started to soar, we looked at its chain and found that no one was using it. This was clearly an artificial pump.
Another important signal is that when the market as a whole is falling, a certain token is rising against the trend. This is usually a sign of unnatural trading. For example, the market is falling by 5% to 10%, but OM is rising - it is very likely that the project owner is buying it.
In addition, everyone always talks about looking at TVL, but it is actually very difficult to achieve a TVL of $1 billion. Even if your token market value is 10 billion, it is still difficult to implement a real DeFi use case.
Tarun: Unless you have a large enough lending agreement to support you to construct TVL. For example, you can mortgage the tokens and borrow more coins to create fake TVL, but OM doesn’t even have a lending agreement, maybe only a super small one like Mars, which is impossible to play.
Robert: I saw someone on Twitter sharing a screenshot of OM before it collapsed. Someone wanted to use OM as collateral to borrow money off-market, for example, to borrow stablecoins at a 60% LTV.
Haseeb: So let's go back and talk about how to prevent this from happening again. I have to say that this is not a common phenomenon. It's not like half of the top 100 projects are doing this. It's probably only 5 to 10 projects that have this behavior, and it's usually pretty easy to identify: no users, no use cases, a sudden surge, and no one knows what it's doing.
Then I want to ask you, if you are CoinMarketCap or CoinGecko, how do you review the circulation reported by the project party? Because everyone has the motivation to falsify and report the circulation of their own tokens higher, so that the market value ranking will be higher.
Tarun: If inflation is created by someone else, then it is not called lying (laughs). This joke is also in the Coffeezilla video, and that is how they explain it.
Haseeb: In fact, this also corresponds to a list of suggestions released by Hester Peirce last week. She suggested that project parties disclose more transparent information, such as source code, multi-signature structure, token supply mechanism, etc., all of which are reasonable and feasible disclosure items.
It is recommended to disclose market making agreements to improve industry transparency
Haseeb: Hester Peirce mentioned one very important thing in her list of recommendations: market making agreements. My reaction at the time was, yes, we should push the industry to gradually disclose the contents of market making agreements on a regular basis. Of course, market makers would definitely hate this and they would definitely not want these agreements to be public.
Tarun: But it is the same process as when you submit your S1 (IPO application).
Robert: Yes, in the traditional securities market, this is completely normal and must be disclosed.
Haseeb: Yes, absolutely.
Robert: Every issuer that wants to be listed on Nasdaq must find three market makers. This is a hard and fast rule: you must have three market makers to provide you with liquidity.
Haseeb: But I think what really works is that if all the terms of the market making agreement, the additional agreement, the side letter, etc. can be disclosed publicly, then the problem of fake circulation like OM can be basically solved. Of course, someone may still lie and not disclose all the information, which is fraud. If someone knowingly commits a crime, we can't completely prevent it. But at least with this disclosure mechanism, most of the problems can be solved. What do you think?
Robert: I think we need to make a distinction first - some projects are willing to voluntarily enter the "disclosure mechanism", while some projects do not intend to do so at all. For example, projects registered offshore and with a chaotic history will definitely not voluntarily disclose.
Haseeb: I am not saying that these projects must be registered in the United States, but I hope that the industry can form a "default standard": for example, if you want to be listed on exchanges such as Binance and Coinbase, then you must disclose all your market-making agreements.
Robert: Yes, it would be great if such rules were uniformly implemented by large exchanges as a kind of “self-regulatory standard”.
Haseeb: Yes, that is exactly what I envisioned.
Robert: If this mechanism can really be implemented in the industry, it will definitely be a good thing. The more information is disclosed, the more efficient the capital allocation will be. In this way, truly high-quality projects can get more financial support, and those projects that rely on manipulation and false propaganda to attract investment will be excluded. There will also be fewer complaints about being "cheated out", and funds will flow to those teams and products that truly create value.
Incentive game and potential backlash between exchanges, project owners and market makers
Tarun: Let me play devil's advocate. Although I agree that information disclosure is a good thing on a philosophical level, if we look at the business logic of exchanges, whether it is traditional markets or crypto exchage, their core goal is to maximize transaction fee income. In other words, they want to increase trading volume while outsourcing market-making risks.
In essence, exchanges will encourage market makers to take on token inventory risks by providing them with discounts, rebates and other incentive mechanisms, while the exchanges themselves can enjoy transaction fees. This is a typical division of labor model of "I collect rent, you bear the risk".
If you enforce the rule of disclosing market-making agreements, those market makers may withdraw from the market. So I think to break this situation, a formal regulatory framework may really be needed. Otherwise, in real-life games, it is difficult for exchanges to actively promote such high-standard disclosure mechanisms.
Haseeb: But why wouldn’t the exchanges be willing to do this? Obviously they also see that after listing such “problematic tokens”, the trust of users is being lost. For example, if you bought OM at any time, you would almost certainly be trapped.
Tarun: But have you really looked at the transaction fee income of these "problem tokens" before and after they are launched? In fact, some projects are actively traded after they are launched, and the exchanges earn more, which is also part of maximizing their profits.
Haseeb: But you can see it from Binance’s behavior. Recently, they held a special response meeting on Twitter Space to the community because the community complained that they listed too many “shit coin”. Binance has always been considered one of the few exchanges whose listing standards are not questioned, but now even they are being criticized.
And this complaint is not groundless. Tokens like OM are not only listed on Binance, but also on OKX, Bybit and other major exchanges. This makes users increasingly doubt whether these newly launched tokens can be trusted. Although not all users will be lost due to this, it is obviously harmful to the platform's long-term brand.
Of course, exchanges still make the bulk of their money from trading in mainstream currencies, but if these fringe projects frequently “collapse,” the overall user trust in the platform will be damaged, which will also be harmful to the business itself.
Should Coinbase and Binance promote self-regulation?
Tarun: I agree with your point, but there is also a complex incentive mechanism issue here: forcing exchanges to implement stricter listing processes is actually indirectly making them bear more risks and costs.
Haseeb: Are you saying that exchanges may have to pay more to meet these requirements?
Tarun: Yes. For example, in order to ensure that newly listed tokens have sufficient liquidity, exchanges often need to give market makers more rebates or subsidies, similar to the practice in the IPO market. Each exchange relies on these rebate mechanisms to guide liquidity rather than taking inventory risks themselves. My point is: once the market making agreement is forced to be disclosed, this will increase the risk exposure of market makers, and they will ask for higher rebates as compensation.
Robert: But these costs should be borne by the project party, not the exchange?
Tarun: Yes, but once you force the disclosure of market making agreements, it will affect the market makers’ quoting strategies. Knowing that their agreements will be made public, they may raise their quotations and demand higher rebates. This cost may eventually be passed on to the exchanges.
Haseeb: But why must the exchange bear this cost? Why can’t the project continue to pay for it? Especially for platforms like Binance or Coinbase, when projects are competing to go online, the market is highly “inelastic” and the project side does not have much room for bargaining.
Tarun: But the problem is that once all market-making protocols become public information, prices are no longer a “black box”. Project owners will see the real costs of other projects and start to lower prices, or force you to match the treatment of the previous project.
Haseeb: Yes, this kind of transparency will definitely make market makers hate it, and the price war will begin.
Tarun: This is exactly my key point. To offset the pressure of price transparency, market makers will demand higher rebates from exchanges.
Haseeb: But why can’t they charge more money to the project owners? Why do they have to seek subsidies from exchanges?
Tarun: Because the project owners now know the market price and have bargaining power, they will say, "You charged so much to that project before, why do you charge me more now?" So the market becomes increasingly unfavorable to market makers, and they can only put pressure on exchanges.
Haseeb: They might say, “We only spent this much in the past, and now you’re asking me to pay more because of disclosure.” So the cost goes up.
Tarun: Yes, this part of the cost will eventually be borne by the exchange. Because after all the agreement contents, fee arrangements, loan terms, etc. are made public, it will be more difficult for market makers to sign new agreements in the future. They will naturally want to compensate for their "loss of information transparency" by increasing rebates.
Haseeb: I agree, but I have a different guess. Maybe the result will be the opposite: truly excellent market makers will profit from this disclosure, while those "underworld market makers" will completely lose market share. Because with the disclosure mechanism, project owners are more inclined to cooperate with reputable market makers. Although market makers will have fewer customers in the short term, the overall demand will be concentrated on the top. Those small market makers who originally relied on "black box operations" to make a living will be eliminated.
The end result may be that the entire industry becomes more concentrated and more transparent, with top market makers becoming stronger and the bottom-level "marginal players" being squeezed out of the market.
Tarun: In traditional finance, it is easier to achieve this coordination because there are systems like NBBO (National Best Bid and Offer Price) that force all exchanges to synchronize prices, and there will be penalties for violations. But in the crypto industry, you can always open a new exchange to specialize in those "shit coin" that no one wants to touch. The threshold is too low.
Haseeb: There are many such “garbage dumps” now.
Tarun: Yes, so if you, as a leading exchange, want to promote reform, the result is that this part of the trading volume will flow to small exchanges that are willing to cater to "low-quality projects", and you will be marginalized.
Haseeb: But I think top platforms like Binance, Coinbase, and OKX are not afraid of this at all.
Tarun: I think platforms like Upbit may be more inclined to continue listing these tokens. They have different risk appetites. Binance is indeed more aggressive than Upbit in listing tokens.
Tom: You may be thinking more about platforms like Gate or MEXC, which are definitely not comparable to Binance.
Tarun: Yes, those exchanges are playing a short-term game. Binance has to maintain its brand reputation after all.
Tarun: So I think the idea of “eliminating all bad market makers” is a bit idealistic. Information disclosure will bring costs, and this part of the cost may eventually be borne by the project party and the exchange. Unless there is a regulatory push, the evolution of such industry norms will be very slow and even unstable.
Haseeb: I think the model of "exchanges making money by listing shit coin" is wrong. Users will trade whatever is on Binance. Crypto users are naturally addicted to trading and have no shortage of trading targets.
Robert: And if everyone believes that the platform’s tokens are of high quality and there is no risk of running away, the willingness to trade will be stronger, and the total trading volume may even increase.
Haseeb: Yes, Binance has no shortage of new coins to list. On the contrary, if the projects they screen out perform well and have large increases, users will have more confidence, and the trading activity on the platform will only be higher. Therefore, "tidying up the garden" and improving asset quality will be beneficial to Binance in the long run. Good for users is good for the platform.
Tarun: Yes, but this is only the final state. From now to that ideal state, the intermediate platform needs to give up some short-term income, such as "cutting off" the transaction fees brought by certain currencies. This decision is not easy for many platforms.
Haseeb: But spot trading revenue only accounts for a small part of the platform's overall revenue. Your statement of "cutting off 20% of revenue" may not make any practical sense at all.
Tarun: I am just giving an example. It is true that each platform is different, but if you want to promote changes in the entire industry, there must be a certain degree of coordination and "tacit understanding". For example, Binance and Coinbase must do this simultaneously in order to make the entire industry follow suit.
Haseeb: Yes, so I think this can start with Binance and Coinbase pushing it together. If they work together to set standards, such as "all new coins must disclose market making agreements", the entire industry will be driven. Any project that wants to obtain real liquidity must comply with these standards, otherwise it will only become a "B-level project."
Tarun: Then you are treating Binance as an “industry regulator”. Their market share is their power base.
Haseeb: That’s right. Binance has such a high market share in spot trading that if they are willing to promote it, they will be the “de facto regulator”.
Tarun: This also goes back to the issue we just discussed: this kind of regulation is not the result of the natural evolution of the market, but requires "forced" promotion by industry leaders.
Robert: So eventually someone has to take the lead.
Haseeb: We are just "throwing out a proposal" now. If people from Binance hear it and find it interesting, you are welcome to talk to us. Now this issue has attracted more and more attention. If we can solve this problem, we may be able to solve many other problems at the same time.
Haseeb: I am not sure whether disclosing the market-making agreement can really solve the problem completely, but it seems to be a relatively elegant and easy-to-implement solution. It does not require global regulatory consensus, but only requires a few leading exchanges to say: From today, newly launched tokens must disclose the market-making agreement , and old projects can be exempted. This is enough to promote changes in the industry. Because in order to comply with the new compliance requirements, market makers will also adjust their pricing methods.
Tarun: I don’t disagree with this concept. I just think that if only one or two exchanges do it and others don’t, it will be easy to “break the game” and return to the state of “whoever betrays first wins first”. This kind of game has also happened in traditional finance. For example, the implementation of NBBO and the regulation of NMS in the history of US stocks is to break this “prisoner’s dilemma”.
Haseeb: I don’t agree that this is exactly the same situation. In the crypto industry, many rules are not tried. It’s not that everyone gave up after calculating, but that no one thought about it seriously.
Tarun: Someone will always be the first to defect. That’s what I’m worried about.
Haseeb: Yes, there will be individual projects or exchanges that secretly do not disclose, but even so, even if only 90% of the cases comply with the new rules, it is much better than the current "zero disclosure" situation.
