Market makers often receive tokens through undisclosed loan agreements with call options, enabling them to quietly offload significant amounts into market demand. This practice inflates perceived liquidity and volume, misleading retail investors about genuine token demand.
The details of these deals the loan amounts, repayment terms, and option strike prices remain off-chain and confidential between projects and market makers. This lack of transparency creates an uneven playing field, where market makers can profit without the market fully understanding the risks.
How the Token Loan and Call Option Scheme Works
Projects supply market makers with tokens before or during listing, sometimes at little to no initial cost. The market makers then provide liquidity on exchanges but have the right to sell those tokens directly into buy orders. If prices soar, they exercise their call options to purchase tokens at previously agreed-upon, lower prices, maximizing profit. If prices plunge, they can simply return the unsold tokens, minimizing downside risk.
This setup creates a hidden source of selling pressure that can distort price action and liquidity signals. Retail traders see healthy volume and assume strong demand, unaware that part of the circulating supply is effectively loaned and primed for offloading.
Lessons from MOVE Token and Solana’s Burn
Leaked documents from Movement Labs concerning the MOVE token’s market-making agreements exposed how one-sided these deals are in favor of market makers. Although legal, the revelations confirmed suspicions of systemic opacity in token launches.
Similar controversy hit Solana in 2020, when undisclosed token loans led the community to demand action. The Solana Foundation responded by burning 11.36 million SOL, cutting the total supply by 2.3% to counteract the dilution caused by these hidden loans. This episode shows the real impact such arrangements can have on token economics and community trust.
