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If crypto tokens were used cars, how would you tell a bargain from a clunker? The answer might have spared investors in Libra or Hawk Tuah a lot of pain.
According to a study by Solidus Labs, nearly 99% of tokens on DIY meme platform Pump.fun collapse into worthless pump & dump schemes. On Raydium's DEX, the firm found roughly 93% of token liquidity pools have ‘rug pull characteristics.'
An analysis of token promotions on Telegram by CertiK found that nearly half of the 93,930 new tokens promoted between 2023 and 2024 were involved in deceptive exit swindles — an astonishing 46,526.
Fraudsters got 282,699.96 ETH off the back of these cons, roughly $800 million.
The numbers are staggering — and not just the losses. Tokens proliferate at a pace that makes it all but impossible for buyers to discern a promising investment from a money-losing sinkhole.
But experts say volume isn't the issue , it's lack of transparency. A dearth of reliable information has created what 1970s economist George Akerlof called A Market for Lemons, where information asymmetry can cause entire markets to collapse.
Are tokens broken?
In a recent presentation at Blockchain VC DBA's Research Day 2025, Theia Research co-founder Felipe Montealegre captured the nub of the problem.
"In Akerlof's model, there are peaches and there are lemons. Peaches are good, but lemons don't work, and even if you get them fixed, they'll be broken again in months. The problem is that buyers don't know which of these two car types they're buying, because there's no credible signal to differentiate between the two."
In other words, a salesman may tell you a car is in great shape, but a lack of credible support for the claim means it can't be trusted.
"This is the risk with token markets. We have asymmetric information about what's going on with market maker deals, what's going on with insider selling, and what's going on with basic financial disclosures." As a result, he says the market "is beginning to price all tokens as loans. That creates problems."
Death by 1,000 Unlocks
One is a dampening effect on token valuations across the board. If you can't have full confidence in the quality of any car, Montealegre said it is safest to assume that only people with lemons are selling. The price of cars generally will tend to drop as a result. That's happening with tokens.
Another is the visibility of the price signals investors rely on to make decisions about where to allocate their money. In token markets, the ‘feedback loop' between investors and end customers is broken. He added:
"Capitalism works when investors can see product-market fit (companies making products customers are happy to pay for) and allocate funds appropriately. If your companies don't find product market fit, you are removed from the capital allocator gene pool.
"The problem in token markets is that the feedback loop has not been based on ‘Can we get customers to pay for this product?' It has been based on ‘Can I get this token to pump long enough to exit my position?"
Prediction Markets Offer a Way Out
To help ensure that any hidden issues make their way to the surface, Montealegre suggests new projects look to futarchy, a form of governance that borrows from prediction markets.
It works by creating two conditional markets around any big change to a token's economic or underlying model.
Let's say a project decided to turn on a fee switch that redirected transaction fees to token holders, liquidity providers, or other ecosystem stakeholders.
"You'd create one market that lets you buy or short if the fee switch is turned on, and another market that lets you buy or short if the fee switch is not turned on," Montealegre explained.
Because prediction markets have an uncanny ability to surface hidden information, "the market knows, and that information gives a team the ability to know which of the two decisions will lead to a higher token price."
The Take Away
In the end, Akerlof's lemon problem was solved, more or less, by the auto industry. Manufacturers decided to allow third-party audits and inspections of factory processes, sending powerful trust signals that made it much easier for buyers to differentiate between lemons and peaches.
Safe harbor regulations proposed by Trump-appointed SEC commissioner Hester M. Peirce will also help, Montealegre said, though he believes the crypto industry needs to clean up its act first.
"We want permissionless, cheap, programmable capital raising on an open internet, but that's not the way regulators think. They're operating off a 90-year-old securities framework.
"If they look at the state of token markets today, and they see a cesspool of fraud, waste, and abuse, they will not take us seriously. So we need to get our own house in order before this happens, so we can persuade them to consider our view of the world."
© 2025 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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