Original Title: "How DWF Labs makes deals and its tendency to talk about price"

Author: Tim Copeland, The Block

Compiled by: ChainCatcher

Earlier this year, a new company emerged in the cryptocurrency space—DWF Labs, which injected funds into projects struggling to secure financing after the collapse of FTX and a widespread market downturn.

The company seems to be throwing money around everywhere. Last year, it raised $20 million for an investment deal in the Synthetix protocol, $28 million for the blockchain platform Conflux, $40 million for the AI platform Fetch.AI, $45 million for the EOS Network Foundation, and $50 million for the Algorand Foundation. According to Foresight News, the company currently claims to have invested in a total of 470 projects, collaborating with 35% of the tokens ranked in the top 1000 by market capitalization in its short 16-month history.

However, for a young company to invest such large sums raises questions about how these deals are made and whether everything is as it seems.

In April, some of these questions were answered. Reports from The Block and CoinDesk revealed how these deals are structured, showing that they are mostly not traditional investment rounds but rather over-the-counter transactions. However, questions remain about how DWF Labs conducts its business and the structure of these and other transactions.

To learn more, The Block interviewed 16 clients, potential clients, and individuals with deep insights into the company's operations, analyzing 10 proposals and contracts between DWF Labs and its clients and potential clients, as well as their communications. One significant finding is that DWF Labs often discusses potential price movements when trying to attract the attention of potential clients and even during collaborations with clients.

Discussing Price Action

Shortly after its establishment in September 2022, DWF Labs created promotional materials for potential clients. The promotional materials, obtained and verified by The Block, frequently mentioned price action.

In a section titled "Price Management," the promotional materials stated that the trading company could synchronize with potential clients' marketing teams to help the token's price respond to relevant events.

It then explained how this could be achieved. "Before or during significant scheduled news events, algorithms can lean towards one side of the order book, thereby driving the price up."

It added, "Since this is done at passive order levels rather than by actively creating artificial trading volume, the increase in token price appears genuine." It should be noted that while DWF can provide artificial trading volume, there is little need for it due to competitive pricing.

For a time, the template language provided to clients by DWF Labs explained that the company would leverage its market-making services and proprietary trading of clients' tokens to improve the token market. It stated that this would lead to "bullish sentiment, organic trading activity, and price uplift." The Block had seen a proposal sent to potential clients containing this wording, and a source directly familiar with the matter confirmed that multiple proposals used this language.

This was also reflected in verbal conversations. A potential client told The Block that in the past few months, an employee from DWF Labs pointed to charts showing token prices rising after previous collaborations while trying to win their business. A source directly familiar with the matter stated that during calls with potential clients, if the clients hesitated, a DWF Labs executive would start mentioning the price increases of tokens from projects they had previously collaborated with.

The same was true in written communications. Earlier this year, a potential client provided information from DWF Labs executives confirming they were raising token prices. Additionally, information provided by a client earlier this year showed that DWF Labs managing partner Andrei Grachev asked clients how much they wanted to raise their token prices and discussed whether the company could achieve that.

Recently, according to two independent documents provided to two potential clients over the past few months, the company seems to have gradually phased out this written language related to price management (at least in its proposals).

Conducting Liquid Investments

DWF Labs focuses on three types of transactions: liquid token investments, locked token investments, and market-making arrangements, often packaging these transactions together.

For liquid token investments, DWF Labs typically attempts to purchase a certain amount of tokens using stablecoins, with the terms of three transactions seen by The Block indicating that the stablecoin price would be 5-15% lower than the then-current market price. Over a month or several months, they would purchase approximately $100,000-$150,000 worth of tokens daily, at a price that is the token price at the start of the day minus the discount.

This means that project founders can effectively cash out (at a slight premium) through DWF Labs while boasting that their project has received significant investment.

A person directly familiar with DWF Labs' operations said, "Over-the-counter trading platforms have become a godsend for many small projects because they can sell tokens, associate themselves with a larger company, claim they have received investment, and extend their runway."

A client of DWF Labs stated that this was precisely why they collaborated with the company. They said this partnership was a good way to offload tokens without directly selling them on the market.

In a previous interview with The Block, Grachev expressed skepticism about this idea, stating that transferring funds to cryptocurrency exchanges does not mean the company is immediately selling tokens.

He said in an interview in April, "We transfer coins to exchanges, but we never sell them. What I want to say is that most of the transactions we conducted last month, or even more, we haven't sold—maybe a small portion." One contentious issue is that DWF Labs often announces token purchases in advance, even though these tokens may not be completed later. Reports indicate that the company has changed its strategy in response to this backlash.

Grachev stated in an interview with BlockBeats, "We have learned a lot since the first half of this year. We will not announce anything that is not yet completed. If we announce something, it is already done."

Building Market Maker and Venture Capital Transactions

Regarding market-making services, according to two proposals seen by The Block for potential clients and one contract signed with a client, DWF Labs typically offers services for one year. As indicated in the two proposals, this may involve lending project tokens.

According to these two proposals, when lending, the company will have call options to purchase project tokens at the price at the time of the agreement, which is a common feature of market-making contracts. If the token price reaches a certain level (i.e., the exercise price), these options can be exercised. The purpose of this is to protect the market maker during the service period, ensuring they do not incur losses when repaying the loan if the token price rises.

"Market makers must show both bid and ask prices simultaneously. To gain downside protection, they must choose projects they are willing to hold risk exposure for. Jordi Alexander, Chief Information Officer of Selini Capital, said, "To provide upside protection, they need an exercise price." He added that the exercise price is usually close to the token price but can also be slightly above it.

According to two individuals familiar with other cryptocurrency market makers, these exercise prices are often set at 100% higher than the starting price of the token.

For DWF Labs, however, according to the terms of the two proposals, the exercise price is set at several times the token price. This means that if the token price rises significantly, DWF Labs has the potential to achieve a higher return.

A person familiar with the company's operations said, "If you are a market maker, you want the token price to rise. You can profit from the options on how to price these tokens a year later," adding, "You want to be able to exercise the options at a price lower than the pricing. That's where the profit is."

In one market-making proposal, DWF Labs explicitly stated that it would help promote project announcements and increase engagement with the community. This is also a major focus internally. The insider said the company would inform employees when announcements would be made and encourage them to disseminate relevant information to maintain momentum and "strike while the iron is hot."

However, the company's external communications are not always so clear. A client of DWF Labs said that unlike other cryptocurrency market makers, the company rarely provides details about its market-making services. "Typically, you would receive a detailed report. Their reports are not that detailed. To be honest, we really don't know what they are doing with the tokens," they said. Another contract seen by The Block from a different client stated that DWF Labs has the ability to decide what information to provide in such reports.

Another client stated that they did not receive reports from DWF Labs regarding the market-making services they were engaged in. This client had to contact the relevant cryptocurrency exchange to confirm that services were indeed provided, and they did receive confirmation.

As for venture capital's locked token investments, according to one client and two proposals given to different potential clients, the trading company typically seeks larger discounts, up to 50%, with a lock-up period of one or two years.

Actively Responding

While all these transactions were taking place, DWF Labs continuously strengthened its operations and expanded its influence across the industry. It also doubled down on some collaborative projects, such as running validator nodes on the TON blockchain. Some industry partners expressed satisfaction with this outcome in written comments to The Block.

The Algorand Foundation stated that its $50 million deal was an over-the-counter transaction involving DWF Labs purchasing ALGO tokens in batches over a period of time, completed in July 2023. "At no stage in our negotiations with DWF was there any indication that they would move the market or provide artificial trading volume," said Eric Wragge, Global Head of Business Development and Capital Markets at the Algorand Foundation.

The deal between DWF Labs and the EOS Network Foundation involved the purchase of $45 million worth of EOS tokens and a commitment to invest $15 million in EOS-based enterprises and their ecosystem. Yves La Rose, CEO of the EOS Network Foundation, stated, "Our strategic partnership with DWF has been fruitful, significantly expanding our ecosystem through cross-collaboration and financial investment. We look forward to continued success and growth in 2024."

A core team member of the memecoin project Floki stated, "We are very satisfied with our collaboration with them." Floki sold $5 million worth of tokens to DWF Labs. "At the institutional level, they provided tremendous support: opening access to their network, facilitating exchange listings, connecting with their portfolio partners, and promoting our brand overall while providing support. Their team is also excellent and professional. They typically respond to our requests within minutes, almost 24/7, and often it is Andrei himself responding and pushing the work forward."

Flaunting Success

Despite ongoing controversies surrounding DWF Labs, the company and those closely associated with it show no signs of slowing down. In September of this year, HTX (formerly Huobi) awarded Digital Wave Finance the Best Partner Award. Recently, Grachev announced on X that the company is undergoing an audit by an unspecified Big Four accounting firm and is applying for multiple licenses. According to his interview with BlockBeats, the company has applied for a virtual asset service provider license in the British Virgin Islands.

In the future, the company will launch an initial incubation program for cryptocurrency companies and plans to create what Grachev calls a compliant over-the-counter trading market for cryptocurrencies—this will position it prominently among cryptocurrency traders.

A photo of a Lamborghini with the DWF Labs logo

Grachev himself is not shy about flaunting his wealth and is eager to toast to his company's success. Last month, he sent $22,000 to an anonymous cryptocurrency trader on X, allowing them to purchase a car within three hours—some observers noted that this was reminiscent of former FTX CEO SBF gifting a Tesla last year.

Reflecting on the development of DWF Labs over the past year and four months, Grachev admits to having made mistakes, stating that the company is "not ideal." However, he claims that the company is raising the standards for market-making firms by taking risks and adopting different actions. Despite the controversies surrounding the company, he remains proud of it.

Disclaimer: Evgeny Gaevoy is the founder and CEO of Wintermute (a competitor of DWF Labs) and previously served as a board member of The Block from April 2023 to early November 2023, and he remains a minority shareholder.