Liquidity Trap After TGE: How Can Project Teams Restructure Market Making Strategies and Order Book Defense Amidst the Wave of Star Token Price Drops?

In the cryptocurrency market, Token Generation Events (TGE) are often seen by teams as the finish line of a long race. However, for the vast majority of projects, the first week after listing on exchanges often marks the beginning of a liquidity crisis and price collapse.

A common and perplexing phenomenon is that project teams have completed financing of tens of millions of dollars, possess impressive technical narratives and community enthusiasm, and even list on several top centralized exchanges (CEX) simultaneously. However, 48 hours after opening, the token price begins a long downward trend, with prices falling below private placement costs and even public offering prices becoming the norm within two weeks. Faced with community accusations of "team dumping," founders often feel aggrieved—project teams have not sold off, and market makers have provided large reports of "daily trading volume."

Where does the problem lie?

If we look beyond the surface market sentiment, we find that token price drops are often not a single-dimensional "poor market conditions," but rather a systemic failure triggered by initial asset structure mismatches, conflicts of interest in traditional market making contracts, and weak micro-order book depth.

1. Tracing the Price Drop Chain: Structural Weakness of "Low Circulation, High FDV"

Understanding the starting point of price drops lies in examining the mainstream token issuance structure formed over the past two cycles: low circulation and high fully diluted valuation (FDV).

This design was initially intended as a capital defense strategy. Venture capital firms (VCs) enter with valuations in the billions of dollars, and to avoid a paper value inversion at the time of public listing, project teams are forced to anchor the fully diluted valuation at a very high range during TGE. To maintain this valuation in a public market with limited buying capital, the only lever available to project teams is to compress the initial circulation, reducing the TGE release ratio to 5%–10%, with over 90% of tokens released linearly over the next three to five years.

On the surface, a very small circulation can artificially create asset scarcity, reducing the total selling pressure at the moment of opening, thereby aiding price discovery. However, in actual secondary trading, this design often amplifies structural risks in reverse:

1. Concentrated Release of Highly Certain Immediate Selling Pressure

Among the only 5%–10% initial circulating shares, aside from the inventory borrowed by market makers, the vast majority is allocated to two groups: airdrop users and liquidity miners.

In the absence of strong token application scenarios and value capture mechanisms, these holders are purely "non-price-sensitive sellers." Regardless of whether the opening price is $1 or $5, since their acquisition cost is close to zero, their optimal strategy is to liquidate as quickly as possible through market orders within the first minute of opening. The homogenous actions of hundreds or even thousands of retail accounts can initiate a dense limit pressure test on the order book within milliseconds.

2. Valuation Inversion Squeezes Natural Buying Pressure, Creating Structural Liquidity Vacuum

Current individual investors and retail traders in the secondary market have matured completely, exhibiting a strong defensive psychology towards the narrative of "absorbing VC exit liquidity." When retail investors see a project with an active user base yet to launch its mainnet and an FDV as high as $5 billion, very few are willing to act as long-term holders at a high premium in the secondary market. The lack of real buyer funds entering the secondary market directly leads to an exceptionally weak order book on the receiving side. At this point, the market is no longer driven by fundamentals but has devolved into a pure zero-sum battle of existing liquidity.

3. Forward Unlocking Pressure Induces OTC Hedging and Hedging Positions

Low circulation does not mean that selling pressure is limited to 5%. Many early institutional investors and advisory teams face lock-up periods of 12 to 36 months. Seeing the inflated market price after opening, driven by the rational motivation to lock in capital gains, they may use over-the-counter (OTC) transactions to transfer unlocked shares at a discount or directly borrow token spot from centralized exchange lending markets and open equivalent short positions in the contract market for delta-neutral hedging.

This early disguised exit of unlocked tokens means that although the circulation is frozen on-chain, the corresponding selling pressure has already been transmitted to the secondary spot market in advance through the derivatives market, directly locking in all upward price rebound potential.

When a weak receiving side encounters a surge of immediate selling, the microstructure of the token becomes highly dependent on the last line of defense—market makers.

2. Mismatched Interests: Inherent Conflicts in Traditional "Borrowing + Options" Market Making Models

Project teams generally hold an optimistic vision: by providing a considerable amount of token chips and hiring well-known market makers, they can leverage the latter's strong financial strength and top-notch algorithmic models to build an impregnable "moat" in the market, both stabilizing sharp declines and maintaining tight spreads.

However, if we dissect the most prevalent market making agreements from the perspective of financial engineering and incentive compatibility, we arrive at a disturbing conclusion: there exists a fundamental structural conflict between the rational self-preservation demands of traditional mainstream market makers and the asset preservation demands of project teams.

1. The Underlying Financial Logic of the "Zero-Interest Token Borrowing + Call Option" Model

In the current business practices of the cryptocurrency sector, the most common template for market making agreements is:

• Token Loan: Project teams lend 1% to 3% (sometimes even more) of their initial circulation at zero interest to market makers, with a borrowing period typically ranging from 6 to 12 months.

• Call Option: As the core return for providing market making services, project teams also grant market makers one or more call options with staggered strike prices (for example, settling at a 30%, 50%, or 100% premium over the opening price).

• Market Maker Investment: Market makers usually commit to injecting their own stablecoins (USDT/USDC) into the buying side and posting two-way quotes on centralized exchanges.

On the surface, this appears to be a perfect incentive alignment structure: if the project team's token price rises, the call options held by market makers will become in-the-money options, allowing market makers to exercise their options to buy low-priced tokens and sell them in the market, thereby sharing in the substantial profits from the project's growth.

This mechanism can achieve a win-win situation in a one-sided bull market, but in a volatile or downward market, its financial logic can lead to a fatal imbalance in the game:

                    ┌───────────────────────────────┐

│ Traditional "Borrowing + Options" Market Making Cooperation Model │ └───────────────┬───────────────┘ │ ┌────────────────┴────────────────┐

▼ ▼

【Scenario A: One-Sided Bull Market】 【Scenario B: Volatile or Price Drop Downward】

│ │

▼ ▼

Options Enter In-the-Money (ITM) Options Become Deeply Out-of-the-Money (OTM)

│ │

▼ ▼

Exercising Options Realizes Excessive Profits Option Value Approaches Zero

(Win-win for all, everyone is happy) The only risk is the depreciation of net positions

│

▼

【Market Maker's First Self-Preservation Rule】

Immediately Sell Borrowed Tokens at Market Price to the Order Book

Exchange for Stablecoins to Lock in Delta Neutral Exposure

│

▼

Withdraw Buying Depth to Avoid Taking Losses

│

▼

Project Team Tokens Become Market Maker's Escape Route

• Hedging Prioritized Over Supporting: Market makers are essentially low-risk, even delta-neutral quantitative institutions, rather than venture capital funds. When prices encounter selling pressure and begin to decline, options become deeply out-of-the-money, and the risk of holding spot increases significantly for market makers. To preserve their own capital, their most rational choice is not to use real money to resist buying pressure but to quickly sell the borrowed tokens into the market, exchanging them for stablecoins to lock in exposure.

• Illusion of "False Depth": Many project teams receive market making reports each month showing daily trading volumes in the millions of dollars, with buy-sell spreads maintained within the contractually stipulated ±2%. However, this depth often relies on simple static grid orders. Once a large market sell order is executed, the market making algorithm will automatically withdraw orders within milliseconds to prevent adverse selection risk, moving the orders back, creating what is known as a "slippage abyss."

• Rational Self-Preservation Actions: In the face of continuous selling pressure, the only instruction from quantitative risk control algorithms is to protect their balance sheets. The most rational choice for market makers is not to use their own stablecoins to "buy the dip" but to sell the borrowed project tokens directly into a market lacking buying support, quickly converting them into stablecoins, and establishing reverse hedging positions in the derivatives market.

This mechanism leads to a paradox: the tokens that project teams lend for free to prevent price drops are, at the first sign of market downturn risk, dumped by market makers under the guise of quantitative risk control into their already fragile order books.

3. Restructuring the Rules: How Project Teams Can Restructure Market Making Strategies and Assessment Dimensions

The first step to escaping the liquidity trap is to break the asymmetric game in traditional agreements. Project teams need to shift from being passive delegators to being designers of rules and supervisors of risk control.

1. Change the Cooperation Model: From "Asset Lending" to "Account Transparency Custody"

Project teams should gradually eliminate the rough model of directly transferring large amounts of tokens into uncontrolled wallets of market makers. A healthier structure is to adopt service fee/reserve system or limited permission sub-account trading model:

• Assets are retained in multi-signature custody accounts controlled by the project team or under specific exchange read-only/limited trading APIs.

• Market makers are prohibited from transferring tokens to derivatives platforms for unsupervised short selling.

• Clearly define the dynamic upper limit and return mechanism for market maker inventory, cutting off backdoor access to risk-free hedging using project assets.

2. Reset Assessment Indicators: Strip Away False Trading Volumes, Focus on Receiving Quality

Traditional daily trading volume indicators can easily be manipulated through wash trading, providing almost no defensive value. The next generation of market making agreements should introduce penetrating structural quantitative KPIs:

4. Technological Evolution: Micro Defensive Architecture of Next-Generation Market Making Systems

In addition to restructuring business terms, upgrades in micro-market structure and algorithm execution are the physical foundation for resisting early irrational selling pressure. High-level liquidity management is not mindless support but rather a multi-layered quantitative technique to hedge external frictions.

           [ External Order Flow / Market Sell Orders ]

│ ▼ ┌───────────────────────────┐ │ Order Flow Toxicity Identification Engine (VPIN) │ └─────────────┬─────────────┘ │ ┌─────────────┴─────────────┐ ▼ ▼

[ Toxic Arbitrage Flow ] [ Normal User Selling Pressure ]

│ │ ▼ ▼

Dynamically Expand One-Sided Spread Gradually Absorb in Batches (TWAP)

Avoid Being Arbitraged by Quantitative Robots Collaborate for DEX-CEX Fund Cross-Pool Rebalancing

1. Identify and Hedge "Toxic Order Flow"

In the early stages of opening, sell orders are mixed with two completely different flows: ordinary community users taking profits and high-frequency quantitative robots conducting latency arbitrage between CEXs. Modern intelligent market making algorithms dynamically adjust the order book tilt based on the imbalance degree of the order book and the synchronous probability toxicity (VPIN) indicators. When the system detects a surge in toxic flows with arbitrage characteristics, the algorithm will automatically widen the one-sided spread within milliseconds, raising the friction costs for attackers; while in the face of dispersed natural sell orders, it will provide ample depth for a smooth transition.

2. Multi-Center Dynamic Rebalancing Between CEX and DEX

Tokens often launch simultaneously on centralized exchanges and on-chain liquidity pools (such as Uniswap). If on-chain and off-chain liquidity is fragmented, it can easily trigger risk-free arbitrage by cross-market arbitrage robots, wasting the project’s market making capital. A mature liquidity defense system must establish a millisecond-level CEX-DEX cross-architecture rebalancing mechanism. By deploying automated hedging bridges between concentrated on-chain liquidity ranges and CEX depth, the cross-market price differences can be maintained within arbitrage cost lines, minimizing liquidity loss.

3. Absorption Algorithm for Airdrop Peaks (TWAP and Anti-Fragile Orders)

In the face of predictable on-chain claims and exchange deposit and withdrawal peaks on TGE day, defense strategies should not adopt a flat static thick order but should use time-weighted average algorithms (TWAP) combined with adaptive iceberg orders. This algorithm can spread the instantaneous massive selling pressure that erupts in a short time over several hours or even days, establishing a buffer for the market.

Conclusion: Let Liquidity Return to the Attributes of Public Infrastructure

The long-term price trajectory of tokens in the secondary market ultimately depends on the progress of the underlying technical route of the project, the ability to create endogenous cash flow within the ecosystem, and the rise and fall of global cryptocurrency macro liquidity. Any attempt to cover up fundamental deficiencies through so-called "market value management black magic" or violent upward manipulation against the trend will ultimately be ruthlessly punished by economic laws.

However, this does not mean that micro-level market making defense is meaningless. On the contrary, during the most vulnerable hatching period at the birth of a project, a scientific, transparent, and highly technically armed liquidity management system is the physical armor that protects entrepreneurial achievements from being crushed in the cradle by financial black markets, malicious arbitrageurs, and asymmetric game mechanisms.

The essence of market making should not be a predatory hedging game conducted behind the scenes by traditional capital and black-box institutions against project tokens; it should be a public infrastructure for on-chain and off-chain liquidity that is neutral, transparent, agile, and deeply aligned in interests.

As more and more founders of Web3 projects begin to break away from the blind delegation model of "handing over tokens for a false trading volume report" and shift towards penetrating structured protocol design, transparent non-custodial trading architectures, and modern micro-algorithmic risk control, the industry can truly cross the liquidity trap after TGE, allowing token valuations to penetrate the cyclical fog and return to the main channel of product refinement, technological innovation, and ecological prosperity.

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