Today, I heard that there are rumors online about a market maker collapsing. I don’t have proof of which one exactly, but I understand the general logic, so I’ll write a few words and share some thoughts.

First, on 1010, a certain exchange experienced issues with their liquidation mechanism. Many market makers' orders couldn’t be executed, resulting in significant losses or even forced liquidation without timely position closing or margin topping up, leading to some losses. These market makers are actively negotiating compensation with the exchange, and this part of the story is something we can find interview records about; it’s already known information.

The associated impact is that the order book lost depth, and various altcoins collectively dropped by about two-thirds.

Point one: It’s understandable that losses incurred by market makers led to a lack of depth in the order book because they ran out of funds to maintain their positions. But why did the altcoins collectively decline by such a large margin?

Currently, most market makers operate on a borrowing model, borrowing coins from project teams, then “leveraging” their positions to maintain the order book. I also want to criticize that in practice this year, the actual operation was mostly just the first few days of “leveraged” trading, then quickly dumping to the community and pouring out more cash. After that, there was little in terms of market management, and prices kept falling until the contract period was almost over, the coins were close to zero, and then they slowly bought back the coins to repay their loans. This practice of selling high and buying low is something everyone should understand, so it’s reasonable to assume that market makers would be able to buy back their positions, right? And even if buy orders are overwhelming and market makers sell off their holdings (although that never actually happened😂), these market makers generally have options, allowing them to buy coins from the project team at a specified price to settle their positions. Therefore, the losses that occur are predictable, and no project team would expect that they wouldn’t be able to recover their coins.

Going back, these market makers borrowed coins from these altcoin projects, and now they have run out of funds to maintain positions. Some projects might have already bought back a large portion after a dip, but now they’re short on cash and have no choice but to continue pouring money in to keep trading.

The problem is, if these market makers collapse and become insolvent, the coins they poured out during this period might really become unrecoverable. Ultimately, the project teams could end up losing both money and coins — the borrowed coins have already been distributed to the community, and they might have to find ways to buy back the coins themselves or simply give up and let the project die.

It’s like these altcoin communities are now effectively bleeding to fund these unprofitable market makers. If they fail to keep the funding flowing, the coins they sell to you will no longer be buy-backable.