Background and Key Developments
On March 9, 2025, Binance issued an announcement stating that, due to detected order book manipulation and fake liquidity provision by market makers collaborating with the GoPlus Security (GPS) and MyShell (SHELL) projects, it had permanently revoked their market-making privileges and confiscated the illicit gains for user compensation. The implicated market maker was identified as the Web3Port team, which used multiple accounts to engage in high-frequency order placement and cancellation as well as self-trading, leading to a 60% crash in GPS’s price upon its launch and nearly 80% evaporation of SHELL’s market cap.
According to JuCoin data, following the announcement, the price of GPS fell by 14% within 24 hours, while SHELL briefly dropped by 4% before rebounding; however, the bid-ask spread on their trading pairs widened to over 3%, with liquidity significantly deteriorated. Binance emphasized that the measure was taken to preserve market fairness, and that it would strengthen its monitoring of market maker behavior in the future, including metrics like order book depth and order frequency.
Illicit Behavior and Market Impact
This incident exposes structural risks in the crypto derivatives market. The manipulative tactics employed by the Web3Port market makers included:
- Fake Liquidity Provision: Placing large volumes of bogus orders in key price ranges to induce retail investors to follow before quickly withdrawing them.
- Price Anchoring Attacks: Creating short-term price volatility through high-frequency trading, then taking advantage of panic selling by buying at low prices and selling later.
Such actions resulted in the true liquidity of the GPS/USDT trading pair being far lower than what was displayed, with retail investors suffering the most. On-chain tracking revealed that during the first week after GPS’s launch, the Web3Port team sold over 40% of its tokens via related addresses, cashing out approximately USD 12 million. The event not only triggered a sharp decline in token prices but also led to a trust crisis among market participants in small-cap projects—as CoinGlass data shows, on March 9, the altcoin market experienced liquidations totaling USD 760 million, accounting for 68% of the day’s total.
Liquidity Crisis and Industry Ripple Effects
While Binance’s punitive measures restored short-term fairness, they further exacerbated liquidity issues in altcoins. With the market makers for GPS and SHELL removed, the order book depth dropped by over 70%, and the bid-ask spread expanded to levels that hindered effective trading. This has raised concerns that if other exchanges follow Binance’s strict market maker review, small projects might spiral into a “death spiral” of liquidity exhaustion—where price declines lead market makers to exit, further worsening liquidity and triggering sell-offs.
At the industry level, exchanges such as Huobi and Bybit have already announced upgrades to their market maker review rules, requiring disclosure of ultimate beneficial ownership (UBO) information and higher margin collateral requirements. This compliance trend may force unscrupulous market makers out of the market, resulting in short-term liquidity contraction, but in the long run it could attract compliant institutions like Jump Crypto and Wintermute, thereby enhancing market stability.
User Compensation and Industry Implications
Binance has required the GPS and SHELL project teams to develop user compensation plans, though specific details have yet to be announced. If compensation is issued in the form of tokens rather than stablecoins, it may trigger additional selling pressure. For instance, in 2024 a DeFi project faced a similar incident where token-based compensation caused the price to drop by 35% again. Consequently, the market calls for project teams to use stablecoins or equivalent assets for compensation in order to minimize impact on token prices.
This incident also provides important lessons for the industry:
- Reforming Market Maker Incentives: Project teams should avoid paying market-making fees with “free tokens” to prevent market makers from quickly cashing out.
- Improving Transparency: Exchanges should disclose real-time market maker holdings and trading data for independent verification of liquidity.
- Upgrading Technical Defenses: The adoption of AI-driven anomaly detection systems can help identify suspicious behaviors such as high-frequency cancellations and self-trading.
Future Outlook and Investment Strategy
Despite short-term market pressure, the move toward compliance could yield long-term benefits for the crypto industry. The entry of compliant market makers is expected to enhance liquidity quality, and optimization of token economic models (such as through dynamic market-making funds) can reduce reliance on third-party market makers. Investors should be cautious of newly listed tokens with high valuations and low circulation, and monitor on-chain data (such as large holder movements and net inflows to exchanges) to identify potential risks.
Looking ahead, regulatory bodies may leverage this incident to push for legislation—for example, the U.S. SEC is currently discussing the “Crypto Market Integrity Act,” which would require exchanges to publicly disclose market maker holdings and trading records. Should such policies be enacted, they will further reduce opportunities for market manipulation while potentially increasing compliance costs for project teams. In an environment of volatility and change, rational evaluation of project fundamentals and liquidity health will be key for investors to mitigate risk.
Neason Oliver
