Interviewed the well-known market maker DWF Labs in the cryptocurrency industry to understand the truth behind the liquidity controversy that has recently caused community disputes.
Interviewer: Jack
Organizer: Sharon
Editor: Jaleel
This year, the name DWF Labs has become well-known in the cryptocurrency circle.
Since March, DWF Labs has been buying projects 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. Andrei Grachev, Managing Partner of DWF Labs, said in an interview that in most cases, DWF Labs invests in projects by directly purchasing tokens.
However, the community believes that DWF is not a real investment and that holding coins is only for market making. In recent months, three currencies, YGG, DODO, and C98, have experienced similar volatile trends. Although there is no direct evidence that DWF participated in this pump and dump activity, several on-chain institutions have marked DWF’s wallet addresses with a lot of on-chain activities, which has further confirmed the speculation that DWF Labs has engaged in market making activities. However, due to the different levels of investors, some have profited from the price fluctuations while others have suffered heavy losses in this short-term market.
Coincidentally, the CYBER incident at the end of August once again brought attention to DWF Labs. Its brick-moving arbitrage behind the scenes caused a huge market fluctuation, which has greatly dissatisfied the community.
Some believe that DWF Labs’ manipulation of the cryptocurrency market is too obvious, which will seriously affect the reputation of the cryptocurrency circle and may face more severe regulation. Recently, BlockBeats exclusively interviewed Andrei Grachev, co-founder of DWF Labs, to explore the considerations behind the controversy.
Andrei Grachev, co-founder of DWF Labs, graduated from Orenburg State University (OSU) and has previous work experience in the logistics industry and online trading industry. He joined the blockchain and cryptocurrency industry in 2017 and served as a managing partner at Crypsis Blockchain Holding, as well as the Deputy Director of Transactions at the Russian Association of Cryptocurrency and Blockchain (RACIB) and CEO of Huobi Russia. In 2018, he co-founded DWF Labs.
The current market needs more than just liquidity
Before 2023, DWF Labs did not make much noise; but since this year, DWF Labs has frequently participated in market making for multiple projects, attracting great attention. According to data from its official website, since 2018, DWF Labs has conducted spot and derivative trading on more than 60 top-tier trading platforms, trading over 800 currency pairs, covering almost all vertical sectors of Web3, and maintaining a leading position in the entire market making field.
In terms of selecting trading currencies, DWF Labs focuses primarily on East Asian projects and various new and old emotional theme targets. Its trading projects include but are not limited to CFX, MASK, ACH, FET, YGG, etc. Among them, YGG and CYBER at the end of August are projects that have attracted a high level of discussion within the crypto community regarding DWF Labs.
In these two projects, the “pump and dump” strategy is the biggest question raised by the community towards DWF Labs, and it is also the controversial core of DWF Labs. Many projects in which DWF Labs participated in trading, including these two projects, have experienced rapid fluctuations in a short period of time. However, many people suffered heavy losses in YGG and CYBER. Wintermute was the first to question the malicious intentions of DWF Labs, and some in the community also questioned whether DWF Labs had the suspicion of being both a referee and a player.
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 have had six meetings with some large projects and several startups involved in a specific matter related to our incubator.
BlockBeats: I understand that DWF has a very unique way of operating projects, 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 partners in the crypto ecosystem should participate in market operations and provide liquidity?
Andrei: Generally speaking, market competition is very fierce, and the competition in the future will be even more intense than it is now because projects increasingly need a certain type of special support. By special, I mean that, for example, a year or two ago, it was acceptable to only provide liquidity without doing anything else, even if the liquidity was weak. We entered this field about a year ago and received a report from another market maker. One of the projects had a conversation with us, and the founder of that project has been a friend of ours for many years.
Before 2022, we had never provided liquidity for projects, only for exchanges. We trade every currency with a certain trading volume and volatility, every futures and options contract. When we collaborate with a project, we don’t need to build a system from scratch or make specific adjustments for that project. In 99% of cases, if it’s not an IOA (Initial Offering Agreement) but a project that is already listed, what we need to do is slightly adjust our strategy to align with the goals of that project.
As for the ecosystem, ecosystem support includes trading volume, protocol execution, and introducing projects to protocols. This also includes cooperation with our investment portfolio because we now have a large investment portfolio that has value in itself. And then there’s market, technology, and human resources support, etc. I believe that if a company wants to succeed in the competitive market of providing liquidity, it should be able to generate some branches that can provide more complementary value. For example, if we work with you and you need to find a developer, a CTO, a marketing director, you don’t need to go elsewhere, you can ask us directly because we are partners and we provide complementary services.
This is our philosophy, where risk is key. On the one hand, you need to manage your risks well and create as many opportunities as possible to take advantage of them in the future. On the other hand, I don’t look like a financier, and no one in our team looks like a financier. We only care about our work and not our appearance. We care about our performance in the market.
BlockBeats: However, people say that market makers or ecosystem partners are for long-term existence, while venture capital is inherently short-term. How do you view this?
Andrei: If we are in 2021, venture capital does indeed have a short-term nature. You invest in a project today, and the token will be listed on an exchange in one to two months. You can cash out your investment, even if it’s just 5% of unlocked tokens, and break even or make money because the price increase could be 20 times or even 50 times. But times have changed completely now. Currently, this type of venture capital is a long-term strategy with high risks because you can predict the market’s near-term situation, but you can’t predict the market two years from now. We are currently in a bear market cycle, and it seems like it will soon turn into a bull market, but that’s just the appearance, and the bull market won’t arrive soon.
This is our venture capital philosophy. On the one hand, we focus more on quality than quantity. We need to establish some influence first before converting it into quantity because venture capital is always related to numbers. If you only have one project, even if you have a 75% success rate, there’s still a one-quarter chance of failure. But if you have 100 projects, even if 75 of them fail, there are still 25 projects that can make you earn billions. It’s a statistical game. But the quality of your decisions depends on your goals and skills. We are currently working hard to improve our skills and capabilities in venture capital.
“DWF doesn’t manipulate anything”
Currently, the crypto industry’s doubts about DWF Labs focus on its dual roles as a market maker and investor. “VC + Market Maker” is the biggest criticism of DWF Labs, and this is explicitly marked on its official website. DWF Labs doesn’t seem to shy away from highlighting this attribute. The DWF Labs website previously stated, “Regardless of market conditions, DWF Labs invests in an average of five projects every month.”
According to publicly available information, DWF Labs’ investment projects include Fetch.ai, Synthetix, Flare Network, Coin98, Yield Guild Games (YGG), TON, Conflux, Mask Network, and more. 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 the projects they invest in involve the phenomenon of “pump and dump.”
For example, on April 25th this year, DWF Labs announced an investment in ARLianGuai Network, and the ARLianGuai token’s price more than doubled within a month, only to drop nearly 40% on the day of the price peak. On June 22nd, Adventure Gold DAO announced an investment from DWF Labs, with DWF Labs promising to purchase AGLD tokens worth seven figures. Subsequently, within a month, AGLD tokens rose nearly 2 times in value, only to drop over 40% on the second day of the price peak.
There has been a heated discussion in the community, with some people believing that DWF is not a real investment and that holding coins is just for market-making. Some people also accuse DWF Labs of manipulating the market for profit. All these controversies and doubts have made DWF Labs a hot topic in the cryptocurrency industry.
BlockBeats: As market makers or ecosystem partners, do you have different ways and styles of investing? Besides providing economic assistance, do you also combine other aspects?
Andrei: We always do more than just giving them money. We have a dedicated entity that handles our investments. Because it is a difficult period for projects now, even big projects suffer because of lack of funds. Moreover, the market is too fragile and there is a risk of collapse. In the cryptocurrency industry, it makes sense to invest while providing liquidity to the market.
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 community and investors the rationale behind it. 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, it is acceptable and people are generally friendly towards it. But if a project goes directly to an exchange and sells tokens, it often looks like a carnival.
Because people know it is just for making money and they don’t care about the market. But in this case, if there are no investors, no over-the-counter buyers, no market makers, and no one accepting this project, why would ordinary investors hold these tokens? It seems strange and very risky for the project. So we are working hard to help them.
BlockBeats: Especially in the Chinese cryptocurrency community, people have been discussing price anomalies in investments, or your partners or projects. For example, sometimes when DWF invests in a project, the price of the project will experience a huge increase and then quickly drop. What do you think about this?
Andrei: We do not engage in any manipulation. When people see signs that an asset may 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 people and the market itself. Of course, we have the futures market, which is a tool for hedging our positions and trading club. We are completely different from directional traders.
For directional traders, let’s say you have $100, and then you enter the futures market with 25x leverage, your position has increased by 25 times, right? Assuming the price of the coin rises 10 times, you start thinking that you can earn $20,000 with your $100. People often underestimate the risks but are too confident about the opportunities, and then they suffer.
Of course, some people take the opposite direction and go long. They would be very happy when someone sends a screenshot showing that they have made money and feel great. This is how the market works. I think people always need someone to bless or blame, and in this market cycle, that someone is us. In the next market cycle, it may be someone else.
BlockBeats: This is a very interesting point of view. Do you think this is an unexpected positive outcome? Like, in a way, it helps you implement your market-making strategy and get people to follow your investments?
Andrei: Our market strategy is completely independent of DWF Labs because we don’t have anything manual. We have our own system built in 2018 for proprietary trading. It trades solely based on the market, providing liquidity for some currencies and markets, and it’s completely independent. It adjusts itself when emotions change, and we never planned it.
Firstly, for us, we don’t need it as we are quite successful in trading. Since 2018, we have never incurred losses. We don’t need these things; secondly, if you look back a few months ago when the market was calmer, the situation could be completely different. We always maintain market neutrality and do not take directional risks, which is very difficult.
BlockBeats: There’s one more thing I’d like to ask you. Whenever you announce an investment, most of the announcements are for $10 million, very accurate. What’s the consideration behind this?
Andrei: This is indeed an investment strategy. We have learned a lot since the first half of this year, and people don’t like it when we have long-term agreements. Now we won’t announce anything that is not yet completed. If we announce something, it’s already done. And if anyone wants to know more, they can ask us or the project for some transaction IDs to verify, as they are on the chain. We won’t announce anything that is not yet completed now, even if we have signed an agreement, because we are learning, and that’s our lesson. We won’t repeat the same mistakes.
BlockBeats: Many people are interested in how you raise funds, what strategies you have, and where the funds come from?
Andrei: We have never raised funds and have no investors. We really started from scratch. In 2018, I was the CEO of Huobi in Russia, and I hadn’t joined DWF Labs yet. We just got to know each other because they were looking for an opportunity to have a suitable exchange account with good rates, as they started from scratch.
I was the CEO of a local exchange at that time and needed traders because it was my key performance indicator. Then we met, and I convinced Huobi to provide the best rates for DWF Labs because high-frequency trading requires low latency and the best rates. It took me two months to convince Huobi’s management, and in April 2018, they agreed. I still remember that 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 can this $50,000 operating capital generate such a large trading volume? (Obviously) This is crazy, and the market at that time was also crazy. In the spring of 2019, Binance launched the first issuance platform, and the market became bullish again. Fortunately, in the summer of 2019, I introduced Okex and Huobi to them. My responsibility was to deal with their partners.
I just helped them because I had connections in various exchanges in China and helped them open accounts with good rates. These people developed very quickly because we made profits of about 15 to 20 basis points through credit trading volume. You can imagine, if you trade 1 million, the profit is 20,000, and you can trade every day.
But of course, the market competition is getting fiercer, and the profits are also decreasing. But now the profits brought by trading volume are still a few basis points, and in 2021, many exchanges and projects have been launched, and the trading volume is very large. Historically, we are very strong in the bear market, and the trading volume in the bear market is always huge. We made a lot of money this year. Now we have our own data center in Switzerland, and we also have a trading company in the Cayman Islands. We have never raised funds. This gives us some advantages because it is not simply printing money, but working hard and being able to create so much money. We have several aspects, such as high-frequency trading, which brings such high returns. Then we have market makers and venture capital.
Continue with Crypto or Traditional Finance?
As a VC in the crypto industry, DWF Labs invests in projects focused on the crypto industry, but it also has an uneasy, restless heart and hopes to expand into more and larger traditional financial markets. This is also true for LianGuairadigm, a venture capital firm in the crypto industry. In May of this year, netizens discovered that the homepage title of LianGuairadigm’s official website changed from “LianGuairadigm supports disruptive crypto/Web3 companies and protocols with funding ranging from as little as $1 million to over $100 million” to “LianGuairadigm is a research-driven technology investment company.”
Although the “crypto” related expressions were added back to the homepage of LianGuairadigm’s official website later, co-founder Matt Huang claimed that the previous deletion was a mistake. However, this still sparked a lot of discussion in the community, and some people believe that LianGuairadigm will focus its investment on the generative AI wave led by OpenAI. DWF Labs also hopes to diversify its eggs into more baskets before the bull market in the crypto industry arrives on a large scale.
BlockBeats: What are your thoughts on the future market? When profits are not as good as before, have you considered finding other markets?
Andrei: We have plans and have already expanded our business to traditional markets. For us, we trade symbols, and we don’t care if it’s Bitcoin, Ethereum, or other cryptocurrencies. We have symbols, prices, trading volume, liquidity, and we trade based on these, as well as data. Now we are looking for the foreign exchange market, just to trade currencies.
Of course, in terms of cryptocurrency, we can only optimize strategies and wait for a bull market in large-scale trading. Additionally, we entered the options market in 2020, and we believe that the options market will also be significant in the future. We have our own options trading company for cryptocurrency options. 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 an advantage in this area will make a fortune, and we hope to be that person.
BlockBeats: So, what are your views on the profit prospects of cryptocurrency?
Andrei: It’s 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, you can gain a larger share. High-frequency trading can also generate profits, but it is limited because trading volume is limited. However, I believe that the next cycle should be better than the previous one.
I see many TradeFi companies entering the market, and now they are building probe systems for high-frequency trading. These are all big companies. I think traditional financial institutions are also considering this opportunity. Although I can’t say they are bullish, they see it as a future opportunity. They prefer to participate now and wait rather than trying to jump into the market when it is bullish.
BlockBeats: So, for the future market cycle, it’s like waiting for Old Money to arrive.
Andrei: Not all funds, because all these bullish cycles are driven by Asia and emerging countries. It has never been driven by Europeans because they don’t do too much trading. For example, something happens in the United States, such as the approval of ETFs or Bitcoin futures, and then it has an impact, and the whole world jumps in, creating a bullish market, which is what we are waiting for.
BlockBeats: Another issue is regulation. Have you made plans in advance?
Andrei: We don’t have investors, and we don’t need excessive regulation. We already have a license, and we are looking for an audit firm in Dubai because some projects and clients require us to provide balance sheets. But you know, for pure high-frequency trading, we don’t want to do that because the cost is very high for all high-frequency trading firms.
For example, at the time of our conversation, hundreds of trades are conducted per second. When all these companies need to review all these trades, it requires a large number of documents. If we want to audit high-frequency trading, it will cost us $10 to $20 million per year, but we don’t need to do that. We have applied for the VASP license in the British Virgin Islands and will soon obtain it.
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