Dialogue DWF Labs: We do not manipulate anything

Interview: Jack, BlockBeats

Organizer: Sharon, BlockBeats

Editor: Jaleel, BlockBeats

This year, the name DWF Labs has become well-known in the crypto space.

Since March, DWF Labs has been actively purchasing in the secondary market at an average rate of 5 projects per month, frequently making large investments, which has sparked heated discussions in the community. DWF Labs Managing Partner Andrei Grachev stated in an interview that, in most cases, DWF Labs invests in projects by directly purchasing tokens.

However, the community believes that DWF is not making real investments, but rather acquiring tokens for market-making purposes. In recent months, the tokens YGG, DODO, and C98 have experienced extreme volatility, and although there is no direct evidence that DWF participated in this manipulation, several on-chain institutions have marked wallet addresses associated with DWF as having significant on-chain activity, reinforcing suspicions among some institutions and investors regarding DWF Labs' repeated market-making behavior. However, due to varying levels of investor sophistication, some have profited from the volatility while others have suffered significant losses.

Coincidentally, the CYBER incident at the end of August brought DWF Labs back into the spotlight, as its arbitrage activities caused significant market fluctuations, leading to considerable dissatisfaction within the community.

Some viewpoints suggest that DWF Labs' market manipulation behavior is too blatant, which could severely impact the reputation of the crypto space and may lead to stricter regulations. Recently, BlockBeats conducted an exclusive interview with DWF Labs co-founder Andrei Grachev to explore the considerations behind the controversies.

DWF Labs co-founder Andrei Grachev graduated from Orenburg State University (OSU) and previously worked in the logistics and online trading industries. He joined the blockchain and cryptocurrency industry in 2017, serving as Managing Partner at Crypsis Blockchain Holding, Vice President of Trading at the Russian Association of Cryptocurrency and Blockchain (RACIB), and CEO of Huobi Russia, before co-founding DWF Labs in 2018.

The Current Market Needs More Than Just Liquidity

Before 2023, DWF Labs had not "broken out" into the mainstream; however, this year, DWF Labs has frequently made moves, participating in multiple projects' market-making, attracting significant attention. According to data from its official website, since 2018, DWF Labs has conducted spot and derivatives trading on over 60 top trading platforms, trading more than 800 currency pairs, covering almost all verticals of Web3, and maintaining a leading position in the entire market-making field.

In selecting tokens for market-making, DWF Labs primarily targets East Asian projects and various new and old sentiment themes. Its market-making projects include but are not limited to CFX, MASK, ACH, FET, and YGG. Among these, YGG and the CYBER incident at the end of August have been highly discussed within the crypto community regarding DWF Labs.

In these two projects, the community's biggest criticism of DWF Labs has been the "pump and dump" strategy, which is also the core of the controversy surrounding DWF Labs. Many projects that DWF Labs has participated in for market-making have experienced significant short-term price fluctuations, with many suffering heavy losses in YGG and CYBER. Wintermute has publicly questioned DWF Labs' intentions, and some in the community have raised concerns about whether DWF Labs is "both the referee and the player."

Related Reading: "Who is DWF Labs, which frequently makes moves? 'VC + Market Maker', investing in 5 projects monthly"

BlockBeats: What progress has DWF Labs made in its projects?

Andrei: We have made significant progress in building networks and meeting with partners, clients, exchanges, and project teams. This is very important for our business. Just today, I had six meetings regarding our incubator with some large projects involved in something and several startups.

BlockBeats: I understand that DWF has a very unique approach to project operations, and you are very active on social media, which has sparked a lot of discussion. How do you think venture capital in the crypto industry or ecosystem partners should participate in market operations and provide liquidity?

Andrei: Overall, market competition is very fierce, and future competition will be even more intense because projects increasingly need a specific type of support. Special means, for example, a year or two ago, it was acceptable to provide liquidity without doing anything else, even if the liquidity was weak. We entered this field about a year ago, and we received a report from another market maker. One of the projects sat down with us to discuss, and the founder of that project has been a friend of ours for many years.

Before 2022, we had never provided liquidity for projects; we had always provided liquidity for exchanges. For every currency with a certain trading volume and volatility, for every futures and options, we traded. When we collaborate with projects, we do not need to build systems from scratch or make adjustments for specific projects. In 99% of cases, if it is not an IOA (Initial Offering Agreement) but an already listed project, what we need to do is slightly adjust our strategy to align with the project's goals.

As for the ecosystem, ecosystem support includes trading volume, protocol execution, bringing projects into protocols, etc. This also includes collaborating with our portfolio because we now have a large portfolio that has value in itself. Then there is market, technology, human resource support, etc. I believe that if a company wants to win in the competitive market of providing liquidity, it should be able to create some branches that can provide more complementary value. For example, if we collaborate with you, and you need to find a developer, a CTO, a marketing director, you do not need to go elsewhere; you can ask us directly because we are partners, and we will provide complementary services.

This is our philosophy; risk is key. On one hand, you need to manage your risks well, and you need to create opportunities as much as possible so that you can leverage them in the future; on the other hand, I do not look like a financier, and no one on our team looks like a financier. We only care about our work, not our appearance. What we care about is our performance in the market.

BlockBeats: But people will say that market makers or ecosystem partners are meant to exist long-term, while venture capital is inherently a short-term participant. How do you view this?

Andrei: If we were in 2021, venture capital indeed had a somewhat short-term nature. You invest in a project today, and the token will be listed on exchanges in one to two months, allowing you to cash out your investment, even if it is just 5% of unlocked tokens, you could break even or even make a profit because the price might increase by 20 times or 50 times; but now the times are completely different. Currently, this type of venture capital is a long-term strategy with high risks because you can predict the market's short-term situation, but you cannot predict the market two years from now. We are in a bear market cycle, which seems to be turning into a bull market soon, but that is just an appearance; the bull market will not come quickly.

This is our venture capital philosophy. On one hand, we focus more on quality rather than quantity, first establishing some influence and then converting it into quantity because venture capital is always about numbers. If you only have one project, even if you have a 75% chance of success, there is still a one in four chance of failure; but if you have 100 projects, even if 75 fail, there are still 25 that can earn you billions. This is a statistical game. But the quality of your decision-making depends on your goals and skills. Now we are working hard to enhance our skills and capabilities in venture capital.

"DWF Does Not Manipulate Anything"

Currently, the crypto industry’s skepticism towards DWF Labs focuses on its dual approach of market-making and investment. "VC + Market Maker" is the biggest criticism of DWF Labs, which is also clearly stated on its official website. DWF Labs does not seem to shy away from branding itself this way. DWF Labs' website previously stated, "Regardless of market conditions, DWF Labs invests in an average of 5 projects each month."

According to public information, DWF Labs' investment projects include Fetch.ai, Synthetix, Flare Network, Coin98, Yield Guild Games (YGG), TON, Conflux, Mask Network, etc. From blockchain infrastructure, DeFi, NFT, chain games to DAO, decentralized social, data analysis, privacy, and entertainment, it seems difficult to pinpoint DWF Labs' investment focus. However, many of its invested projects have exhibited "pump and dump" phenomena.

For example, on April 25 of this year, DWF Labs announced its investment in ARPA Network, after which the ARPA token's price more than doubled within a month, only to drop nearly 40% on the day of its peak price; on June 22, Adventure Gold DAO announced it received investment from DWF Labs, which committed to purchasing AGLD tokens worth seven figures, and subsequently, the AGLD token nearly doubled in price within a month, only to drop over 40% the day after its peak.

This has sparked heated discussions in the community, with some believing DWF is not making real investments but acquiring tokens for market-making; others accuse DWF Labs of profiting through market manipulation. Various controversies and doubts have led DWF Labs to become a "hot topic" in the crypto industry.

BlockBeats: As a market maker or ecosystem partner, do your investment methods and styles differ? Besides providing economic assistance, do you also incorporate other aspects?

Andrei: We always do more than just give them money; we have a dedicated entity for our investments. Because it is a difficult time for projects now, even large projects are suffering due to lack of funds; and the market is too fragile, with risks of collapse. It makes sense to invest while providing liquidity to the market in the cryptocurrency industry.

There is a risk of market collapse, which is why we try to invest in some projects. But projects also need to explain to their communities and investors what the rationale behind this is. Why don't they go to exchanges? This is also a question because the situation is completely different. If we do something and provide some value, that is acceptable, and people usually have a friendly attitude towards it; however, if a project goes directly to an exchange to sell tokens, it usually looks like a frenzy.

Because people know this is just to make money, they do not care about the market. But in this case, if there are no investors, no OTC buyers, no market makers, and no one accepting this project, why would ordinary investors still hold these tokens? This seems strange, and it is very dangerous for the project. So we are working hard to help them.

BlockBeats: Especially in the Chinese crypto community, there has been ongoing discussion about price anomalies in investments, or regarding your partners or projects. For instance, sometimes when DWF invests in a project, the project's price experiences a huge surge followed by a rapid decline. What do you think about this?

Andrei: We do not engage in any manipulative behavior. When people see signs that this asset might be profitable, they rush into it; the liquidity in the market is not as good as it was a year ago, and it is easily driven by the market itself. Of course, we have a futures market, which for us is a tool for hedging positions and trading clubs, and we are completely different from directional traders.

For directional traders, suppose you have $100, and then you enter the futures market with a 25x leverage, your position has increased 25 times, right? Suppose the price of the coin rises 10 times, you start thinking, I can make $20,000 with my $100. People usually underestimate risks but are overly confident about opportunities, and then they suffer.

Of course, some people open positions in the completely opposite direction, and that person will be very happy; some send screenshots showing they made money, feeling great. This is how the market operates. I think people always need someone to bless or blame, and in this market cycle, that object is us; the next market cycle might be someone else.

BlockBeats: This is a very interesting perspective. Do you think this is an unexpectedly good outcome? In a way, it helps you implement your market-making strategy and encourages people to follow your investments?

Andrei: Our market strategy is completely independent of DWF Labs because we do not have manual operations. We have our own system, built in 2018, for proprietary trading. It trades specifically for the market, providing liquidity for some currencies and markets, and it is completely independent. When (people's) sentiment changes, it self-adjusts, and we never planned it.

First of all, for us, we do not need it; we are quite successful in trading. Since 2018, we have never lost money. We do not need these things; the second point is that if you look back a few months ago, when the market was calmer, the situation could have been completely different. We always maintain market neutrality; we do not take on directional risks, which is very difficult.

BlockBeats: One more thing I want to ask you, whenever you announce an investment, most announcements are for $10 million, very precise. What considerations are behind this?

Andrei: This is indeed a type of investment strategy. We have learned a lot since the first half of this year; when we have some long-term agreements, people do not like it; now we do not announce anything that has not been completed. If we announce something, it has already been completed. Moreover, if someone wants to know more, they can ask us or the project for some transaction IDs and verify them; these are all on-chain. Now we will not announce anything that has not been completed, even if we have signed agreements because we are learning; this is our lesson. We will not make the same mistakes again.

BlockBeats: Many people are interested in how you raise funds. What is your strategy, and where does the funding come from?

Andrei: We have never raised funds, nor do we have investors; we truly started from scratch. In 2018, I was the CEO of Huobi in Russia, and at that time, I had not yet joined DWF Labs. We only met because they were looking for a suitable exchange account with good rates, as they were starting from scratch.

I was the CEO of a local exchange and urgently needed traders because that was my key performance indicator. Then we met, and I persuaded Huobi to provide DWF Labs with the best rates because high-frequency trading requires low latency and optimal rates. It took me two months to persuade Huobi's management, and in April 2018, they agreed. I still remember when DWF Labs deposited $50,000 into Huobi, the trading volume reached $10 million on the first day and $22 million on the second day.

Why could this $50,000 in operating capital generate such a huge trading volume? (Clearly) it was crazy, and the market was also crazy at that time. In the spring of 2019, Binance launched its first issuance platform, and the market became bullish again. Fortunately, in the summer of 2019, I introduced them to Okex and Huobi, and my responsibility was to deal with their partners.

I just helped them because I had connections with various exchanges in China, helping them open accounts with good rates. These people developed very quickly because we made about 15 to 20 basis points profit through credit trading volume. You can imagine, if you traded $1 million, the profit would be $20,000, and you could trade every day.

But of course, market competition has become increasingly fierce, and profits have decreased. However, the profits from trading volume are still a few basis points, and in 2021, many exchanges and projects emerged, leading to very high trading volumes. Historically, we have been very strong in shorting the market, and the trading volume for shorting has always been huge; this year we made a lot of money. Now we have our own data center in Switzerland, and we have a trading company in the Cayman Islands; we have never raised funds. This gives us some advantages because it is not simply about printing money but working hard to create so much wealth. We have several aspects, such as high-frequency trading, which generates profits. Then we have market-making and venture capital.

Continue Crypto or Traditional Finance?

As a VC in the crypto industry, DWF Labs focuses its investments on the crypto sector, but it also has an anxious and restless heart, hoping to expand into broader and larger traditional financial markets, a sentiment echoed by the crypto venture capital firm Paradigm. In May of this year, some netizens noticed that Paradigm's homepage title changed from "Paradigm supports disruptive crypto/Web3 companies and protocols with funding from as little as $1 million to over $100 million" to "Paradigm is a research-driven technology investment firm."

Although Paradigm later re-added "crypto" related statements to its homepage, co-founder Matt Huang stated that the previous deletion was a mistake, the community still generated considerable discussion, with some believing that Paradigm would shift its investment focus to the generative AI wave led by OpenAI. DWF Labs similarly hopes to diversify its investments before a large-scale bull market arrives in the crypto industry.

BlockBeats: What are your thoughts on the future market? When profits are not as good as before, have you considered looking for other markets?

Andrei: We have plans and are already expanding our business into traditional markets. For us, we trade symbols; we do not care whether it is Bitcoin, Ethereum, or other currencies. We have symbols, prices, trading volumes, liquidity, and we trade based on these, along with data. Now we are looking into the forex market, just to trade currencies.

Of course, in the cryptocurrency space, we can only optimize strategies and wait for a large-scale trading bull market. Additionally, we entered the options market in 2020, and we believe that in the future, the options market will also be significant. We have our own options company trading cryptocurrency options. Because in traditional markets, options account for 30-40% of derivatives; while in the cryptocurrency market, options only account for 3%. If it expands to 30%, it will grow tenfold. Those who have advantages in this area will make a fortune, and we hope to be that person.

BlockBeats: So, what do you think about the profit prospects for cryptocurrencies?

Andrei: It is always about cycles. In this cycle, you can make money through market-making, venture capital, and incubation when you can provide more value to projects in exchange for larger shares. High-frequency trading can also generate profits, but it is limited because trading volume is finite. However, I believe the next cycle should be better than the previous one.

I see many TradeFi companies entering the market now, and they are building probe systems for high-frequency trading, and these are large companies. I think traditional financial institutions are also considering this opportunity; although I cannot say they are bullish, they see it as a future opportunity and prefer to get involved now and wait rather than trying to jump into the market when it is bullish.

BlockBeats: So, for the future market cycle, we are somewhat waiting for the arrival of Old Money.

Andrei: Not all funds, because all these bullish cycles have been driven by Asia and emerging countries; they have never been driven by Europeans because they do not trade much. For example, if something happens in the U.S., like ETF approvals or Bitcoin futures approvals, then it has an impact, and the whole world jumps in, creating a bullish market; that is what we are waiting for.

BlockBeats: One more question regarding regulation; have you made plans in advance?

Andrei: We do not have investors, nor do we need excessive regulation. We already have licenses, and we are looking for an auditing firm in Dubai because some projects and clients require us to provide all balance sheets. But you know, for pure high-frequency trading, we do not want to do that because all high-frequency trading firms have very high costs.

For example, just while we are talking, hundreds of trades are made every second; when these companies need to check all these trades, it requires a lot of documentation. If we want to audit high-frequency trading, it would cost us $10 million to $20 million a year, but we do not need to do that. We have applied for a VASP license in the British Virgin Islands and will soon obtain this license.