A brief analysis of the business logic of DWF and how to use relevant information to guide secondary trading?
DWF early created a brand image through wealth effects generated by market manipulation; it is a product born from a bear market under weak regulation, leveraging the development difficulties of project teams and the psychology of retail investors in the bear market to achieve profits from both ends.Author: LD Capital
Since the beginning of this year, DWF has gained prominence with continuous large investments, and the tokens associated with it have often doubled in value; how has DWF achieved this during the current deep bear phase of the crypto market? How should secondary market investors participate in related targets?
DWF Labs is a subsidiary of Digital Wave Finance (DWF), a global cryptocurrency high-frequency trading firm that has been trading spot and derivatives on over 40 top trading platforms since 2018. DWF Labs initially appeared in the crypto market as a market maker, but it truly caught the market's attention with the explosive growth of Hong Kong concept coins like CFX and ACH in the first quarter, followed by the meteoric rise of meme coins like PEPE and LADYS in the second quarter, and more recently, the significant increases in YGG and CYBER. Among these, CFX, ACH, and YGG were obtained through OTC, while coins like PEPE (MEME), LADYS (MEME), and CYBER (Binance Launch Pool) were directly purchased by DWF through the secondary market due to their favorable chip structure, impacting their prices.
Some tokens related to DWF have attracted market attention with multiple price increases.
The reasons for DWF's market attention, apart from the significant price fluctuations of the tokens it handles, also include conflicts with other peers. Well-known market makers like Wintermute and GSR have publicly expressed dissatisfaction with DWF, considering it a subpar market maker and a bad actor.
Breaking down DWF's business scope:
In the crypto market, investment and market making are usually two distinct concepts. Investment typically refers to injecting funds into a project before the token sale to support project development, operations, and marketing, in exchange for a share of tokens with a lock-up period once the project goes live; while market making aims to build good liquidity for already issued tokens, reduce trading costs, and attract more traders. The returns from investment come from the token rewards of the invested projects, while the returns from market making come from the market-making fees paid by the project parties and the spreads earned during the market-making process; well-known investment institutions in the crypto market include A16Z and Paradigm; well-known market makers include Wintermute and GSR.
DWF has been criticized by crypto market participants for often confusing the concepts of investment and market making. It positions itself on its official website as a Web3 venture capital and market maker, with three types of business: investment, OTC, and market making.
From the past performance of DWF-related tokens, its selections are primarily based on sentiment themes, with market-making tokens including CFX, MASK, YGG, C98, WAVES, etc. However, upon examining its past market-making cases, it is found that it rarely truly supports the long-term development of projects. DWF typically chooses to inject funds at a discount into "distressed" projects that have already issued tokens, and then sells them for profit in the secondary market. Moreover, during this process, it often aggressively pumps the projects it has "invested" in, not only selling tokens at high prices but also establishing an image of profitability in the eyes of retail investors, which it then uses as a product to continue selling to project parties; for example, by jointly disclosing large investment information with project parties to create market optimism and attract liquidity for better token sales.
Surface Business: Investment, Market Making, OTC, Marketing
Essential Business: Injecting funds into "distressed" projects, acquiring tokens at a discount through OTC, selling for profit in the secondary market; aggressively pumping to create a brand image and selling it as a product to project parties. Specific cases are as follows:
1. YGG & C98: OTC Token Purchase, Secondary Market Pumping
On February 17, 2023, the gaming guild Yield Guild Games (YGG) raised $13.8 million through token sales, with DWF Labs and A16Z as lead investors (YGG had already issued tokens back in 2021).
Notably, DWF Labs had already received 8 million YGG from YGG's treasury on February 10 and transferred 700,000 to Binance for the first time on February 14. On February 17, media reported the investment information, and subsequently, DWF transferred 3.65 million YGG to Binance on June 19 and another 3.65 million on August 6. Considering YGG's price performance: on February 17, influenced by the investment information, YGG saw a maximum increase of 50% on that day, closing up 33%; it then began a decline lasting five and a half months, until the pump started in early August, with YGG rising over 7 times from its previous low, ending the rally as DWF transferred the last batch of YGG tokens to Binance.
If a secondary market investor could observe the abnormal contract data at the beginning of the YGG rally, they would see that YGG's contract data showed a surge in open interest early on, with stable fees; in the mid-term, open interest growth slowed, and fees decreased, while in the later stage, long positions decreased due to profit-taking.
Similar trading tactics can also be observed in targets like CYBER: on August 22, DWF withdrew 170,000 CYBER from Binance, when CYBER's price was about $4.5, and then the price fell continuously, dropping to a low of $3.5; seven days later, the CYBER rally began, peaking at $16.2, which was about 3.6 times higher than the price when DWF withdrew the tokens, and approximately 4.6 times higher than the previous low. As a Binance Launch Pool project, CYBER had a good chip structure in the early stages, with little selling pressure in the secondary market. DWF's involvement in the CYBER project is inferred to be through secondary market token purchases and less involvement with the project parties (similar to DWF's participation in meme coins like PEPE and LADYS in the second quarter).
In terms of funding data, CYBER's performance is similar to YGG's: the contract data showed a surge in open interest early on, with stable fees; in the mid-term, open interest growth slowed, and fees decreased, while in the later stage, long positions decreased due to profit-taking.
On February 2, 2023, DWF's on-chain address received a transfer of approximately 4.12 million tokens from Coin98's official address, equivalent to about $1.11 million at the day's market price (the secondary market price of C98 was around $0.27), and was immediately transferred to Binance; on August 8, Coin98 announced a seven-figure investment from DWF Labs to promote the large-scale adoption of Web3; on October 12, media reported that DWF transferred 1 million USDT to C98. Considering C98's price performance, after DWF received the tokens and transferred them to the exchange, C98 briefly rose before entering a five-month decline, with the media reporting on August 8 causing a 58% increase in price within two days compared to the previous low, followed by a rapid decline. Reviewing this event, it essentially reflects DWF acquiring tokens from the C98 project at a 10% discount and then selling them for profit in the secondary market.
C98's data performance before the price increase showed a significant growth in open interest, with the end of the rally marked by a decrease in open interest due to profit-taking alongside a return of fees.
Other targets with similar pump tactics include LEVER, WAVES, CFX, MASK, ARPA, etc.
The above are some recent typical DWF trading targets. It can be seen that DWF usually participates in both the contract and spot markets, with a significant influx of funds into the contract market at the early stage of the rally. Due to the early long positions taken by the main funds, the increase in open interest does not affect the fees; in the mid-term, it usually manifests as a spot pump, with the main contract longs starting to take profits, often resulting in a sharp rise in spot prices, severe negative fees in contracts, and stagnation or decline in open interest; some targets may also experience a final wave of price increases to create liquidity, allowing the main spot holders to achieve better selling prices and liquidity. In some cases, after the main contract longs take profits, the rally may end directly, and it is crucial to determine whether the benefits of further price increases in the spot market for the main players outweigh the costs at the final stage (e.g., whether there are key resistance levels above, whether there is significant selling pressure in the market).
2. "Marketing-style" Investment, On-chain Transfers, Using Brand Image to Create Positive Sentiment to Conceal Selling Nature
As a new investment institution, DWF frequently makes moves in the bear market, collaborating with over 260 projects; according to media reports, DWF has invested in over 100 projects, including several large investments. Summarizing its projects with investments exceeding $5 million:
DWF co-founder Grachev stated that DWF Labs has no external investors, but its high-frequency and large-scale investments have raised market suspicions about the source of its funds. Moreover, most of the projects it invests in are not industry trend projects, but rather older projects with average or poor fundamentals (such as EOS, ALGO, etc.); after announcing investments, there has been no improvement in product development, marketing, or community cooperation for the projects. Some of DWF's actions may be seen as "marketing-style" investments to create positive sentiment to attract retail investors and repeatedly hype token prices in the secondary market to facilitate the team's token sales. (FET announced a $40 million investment, but to date, DWF has only received about $3 million in tokens.)
Additionally, on September 8, DWF's on-chain address received a PERP transfer from Binance; previously, PERP had already increased several times, and after DWF's withdrawal from the exchange, buying pressure for PERP significantly increased, leading to a brief price spike followed by a large sell-off, entering a downward channel, ending the rally.
On October 17, BNX announced a strategic partnership with DWF; prior to this, BNX had experienced a week of significant price increases, and after the announcement, it quickly plummeted, likely indicating insider trading, using DWF's brand effect to release news and create liquidity for selling.
There are numerous examples of project parties and DWF leveraging their brand influence to create positive sentiment to attract liquidity for selling. Secondary market participants need to carefully discern information related to DWF. Many tokens associated with DWF, such as EOS, CELO, FLOW, and BICO, have seen continuous price declines.
3. Seeking "Distressed" Projects, Maximizing Profits by Mastering Bargaining Power in a Difficult Financing Bear Market
Abracadabra (SPELL) is a stablecoin project that uses yield-bearing asset certificates (such as stablecoin LPs in Curve, stablecoin deposit certificates in Yearn, etc.) as collateral. After experiencing the UST collapse (UST was once an important underlying asset for Abracadabra, and after the UST collapse, Abracadabra accumulated a large amount of bad debt) and the prolonged bear market, the stablecoin's market value shrank, leading to a decline in protocol TVL, token price, and ongoing stagnation, making development difficult. On September 14, it passed AIP#28, which proposed to introduce DWF as the market maker for SPELL. The market-making terms signed were as follows:
- Abracadabra provides DWF with a $1.8 million SPELL loan for 24 months;
- DWF will purchase $1 million worth of tokens from the DAO at a 15% discount to market price, with this portion locked for 24 months;
- Abracadabra will pay DWF a European call option as a market-making fee, exercisable after the loan period ends.
In these market-making terms, the cost incurred by the Abracadabra project party is significantly higher compared to other market-making projects in the industry, including discounted token purchases and European options. Since the market-making terms include market price discounted token purchases, from DWF's perspective, lowering the token price in the short term is beneficial for maximizing its interests; combined with market performance, SPELL's price has continued to decline after DWF's entry. Specifically:
The proposal was voted on starting September 11 and passed on September 14. Influenced by this information, SPELL's price rose from a low of $0.0003716 on September 11 to a high of $0.0006390 on September 19, with a maximum increase of 72% (market speculation).
On September 19, Abracadabra provided DWF with a $3.3 million SPELL loan, which DWF then transferred to Binance, leading SPELL into a downward channel, currently quoted at $0.0004416, a 31% decrease from the previous high.
From the funding data, it can also be seen that during SPELL's short-term rally, the consistency of funds was poor, with 70% of the increase involving multiple funds taking turns, indicating strong uncertainty.
In summary: DWF initially created a wealth effect through price pumping to build its brand image; it is a product born from weak regulation in a bear market, leveraging the development difficulties of project teams and the psychology of retail investors to achieve profits on both ends. Project parties in the bear market generally face difficulties in monetization and financing; directly selling tokens would undermine fragile market confidence, severely negatively impacting token prices and affecting project ecosystems.
In this context, DWF emerges as a bridge for project parties to sell tokens, helping them offload through OTC or other marketing methods. For instance, describing the act of acquiring tokens from project parties through OTC as a strategic investment, while in reality, it does not provide substantial long-term support for the project's development but instead turns around to sell the tokens; by packaging and promoting the project, it conceals the essence of project parties indirectly selling tokens, allowing DWF to achieve profits from both project parties and users in the process.
As a secondary market investor, upon seeing information about a project collaborating with DWF, it is essential to first distinguish which business DWF is involved in (secondary investment, OTC, market making, marketing) and apply different strategies for different businesses. In past market performances:
- Targets in which DWF directly participates in secondary market investments need to be closely monitored; these targets are usually new tokens with good chip structures or meme coins;
- Targets where DWF acquires tokens from project parties through OTC (packaged as strategic investments) often show several months of price declines in the secondary market, followed by rapid price increases, with the rally ending after DWF deposits tokens into exchanges (the pump usually lasts no more than one week);
- Genuine market-making projects by DWF do not exhibit doubling rallies but usually attract speculative trading, providing a brief window for building positions, which can be seized in advance;
- The success rate and profit-loss ratio of market movements triggered by DWF-related marketing news are relatively poor, with the underlying logic being that interested parties leverage DWF's current market influence to attract liquidity for selling.
After determining DWF's willingness to pump, a surge in contract open interest and spot trading volume is a signal for the rally to start; interactions between DWF's on-chain address and exchange addresses (at high prices), decreasing open interest, and extreme negative fees often indicate the end of the rally.
