Why Founders Sign Bad MM Deals
Market making is a niche subject. Most token founders encounter their first MM term sheet with limited context for evaluating it. The firm on the other side of the table has written hundreds of these agreements. The founder is reading their first one. That information asymmetry is where bad deals get signed.
The red flags below are not exotic edge cases. They are patterns that appear regularly in market making agreements, and they consistently lead to the same outcomes: tokens with deteriorating order book health, founders locked into long engagements with no exit mechanism, and market makers whose financial interests have quietly diverged from the project's.
For a detailed breakdown of how token loan deals work mechanically, including what a clean structure looks like, see the founder's guide to token loan deals. This article focuses specifically on what to watch for before you sign.
The Seven Red Flags
No Written KPI Commitments
If a market maker will not commit to specific, measurable performance targets in writing before signing, walk away. The absence of written KPIs is not a minor administrative gap. It means the firm has no contractual obligation to deliver anything specific, and your only recourse if performance is poor is to exit the agreement, which typically triggers its own complications. Every legitimate market maker can commit to maximum spread, minimum depth, and uptime percentage in writing. The ones who cannot are telling you something important.
Custodial Model Without Collateral
In a custodial arrangement, the market maker holds your tokens on their own exchange accounts. This is not inherently disqualifying, but it requires collateral to be safe. If the firm holds your tokens and posts no collateral against them, you have no protection against loss, misuse, or insolvency. Some of the most damaging market making arrangements in recent crypto history involved custodial models with no collateral requirement. Always ask: what is posted against the tokens you are providing, and what happens to that collateral if the engagement ends early?
Multi-Mandate Conflicts Undisclosed
A market maker who also operates as a VC investor, proprietary trading desk, or OTC counterparty has multiple potential incentives with respect to your token. None of these are automatically disqualifying, but they must be disclosed and understood. Ask explicitly: does your firm hold any investment position in our token, directly or through related entities? Does your proprietary book trade our token? What happens to those positions during our market making engagement? If a firm is reluctant to answer these questions clearly, the conflict of interest you are worried about is probably real.
Vague Volume Promises Without Depth or Spread Specs
Volume is the easiest metric to manufacture and the least useful for measuring liquidity health. A market maker who leads with volume commitments, "we will generate $X million in daily volume," without specifying spread targets and order book depth is describing something that can be produced cheaply and does not improve your token's actual tradability. Institutional investors and exchange listing committees do not look at volume. They look at spread, depth, and slippage on large orders. These are the numbers that should be in your agreement.
Korean Exchange Claims Without Verifiable Track Record
Upbit and Bithumb are frequently cited as exchange targets by market makers who have no documented history of operating on either. Upbit runs internal market making on KRW pairs, so external MM claims about Upbit order book management are structurally impossible. For Bithumb USDT pairs, where external market makers do operate, ask for names of projects the firm has managed on Bithumb, the duration, and whether any proceeded to Upbit. No specific examples means no track record. For a full explanation of how Korean exchange listings actually work, see How to Get Listed on Upbit.
One-Sided or Missing Exit Clauses
A market making agreement should allow both parties to exit under defined conditions. If the agreement gives the market maker exit rights but ties the founder to a fixed term with no performance-based exit trigger, the incentive structure is broken from day one. The market maker faces no consequence for underperformance short of the agreement's natural end. Insist on a performance-based exit clause: if defined KPIs are missed for a specified consecutive period, either party may terminate with reasonable notice. Any firm confident in its performance will accept this.
Upfront Fees With No Performance Accountability
A retainer model is not inherently a red flag. Some legitimate market makers charge a monthly fee alongside a token loan structure to cover infrastructure costs. The red flag is a large upfront retainer with no performance KPIs and no mechanism for recourse if those KPIs are missed. Upfront fees without accountability shift the entire risk onto the token project. The market maker is paid regardless of results. In an incentive-aligned model, a significant portion of the market maker's compensation should depend on your token's performance.
"A market maker confident in its own performance will commit to KPIs in writing, post collateral against any tokens held, and accept a performance-based exit clause. These are not aggressive demands. They are table stakes."
— PlaceholderMM, Capital Markets DeskWhat a Clean Term Sheet Looks Like
A clean market making agreement contains, at minimum: a token loan amount expressed as a percentage of circulating supply, collateral posted by the market maker against the borrowed tokens, written KPI commitments for spread, depth, and uptime, call option ladder terms with clearly defined strike prices and exercise windows, a reporting schedule with verifiable data, and a mutual exit clause tied to KPI performance.
It does not contain vague language about "best efforts," undisclosed investment positions, unilateral exit rights, or volume commitments without corresponding spread and depth targets. If the agreement you are reviewing does not have these elements, ask for them explicitly before signing. A firm that cannot or will not provide them is showing you what the engagement will look like.
