Interview: Jack, BlockBeats
Editing: Sharon, BlockBeats
Editor: Jaleel, BlockBeats
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This year, the name of DWF Labs is well-known in the cryptocurrency industry.
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 and sparking heated discussions in the community. Andrei Grachev, Managing Partner of DWF Labs, stated in an interview that in most cases, DWF Labs invests in projects by directly purchasing their tokens.
However, the community believes that DWF Labs is not a real investor and that they only hold tokens for market-making purposes. In recent months, three currencies, YGG, DODO, and C98, have experienced similar volatility, although there is no direct evidence that DWF participated in these pump and dump activities. However, several on-chain institutions have identified wallet addresses associated with DWF as having significant on-chain activities, which confirms the speculation that DWF Labs has been engaged in market-making activities. However, due to the differences in investors’ abilities, some have profited from the volatility while others have suffered significant losses in these short-term market conditions.
Similarly, the CYBER incident at the end of August once again drew attention to DWF Labs. Its arbitrage activities behind the scenes caused significant market fluctuations and dissatisfaction within the community.
Some believe that DWF Labs’ blatant manipulation of the cryptocurrency market will seriously affect the reputation of the industry and may result in stricter regulations. Recently, BlockBeats conducted an exclusive interview with Andrei Grachev, co-founder of DWF Labs, to uncover the considerations behind the controversies.
DWF Labs co-founder Andrei Grachev graduated from Orenburg State University (OSU) and has previous work experience in the logistics and online trading industries. He joined the blockchain and cryptocurrency industry in 2017 and served as a managing partner at Crypsis Blockchain Holding and as the Deputy Director of Trading at the Russian Association of Cryptocurrency and Blockchain (RACIB) and the CEO of Huobi Russia. In 2018, he co-founded DWF Labs.
What the current market needs is more than just liquidity
Before 2023, DWF Labs did not gain much attention. However, this year, DWF Labs has been actively participating in market-making activities for various projects, attracting significant attention. According to data from their official website, since 2018, DWF Labs has conducted spot and derivatives trading on more than 60 top-tier exchanges, trading over 800 currency pairs, covering almost all verticals in the Web3 ecosystem, and maintaining a leading position in the market-making sector.
In terms of the selection of projects for market-making, DWF Labs focuses on projects from East Asia and various emerging and established sentiment themes. The market-making projects include but are not limited to CFX, MASK, ACH, FET, and YGG. Among them, YGG and CYBER at the end of August are projects that have generated high discussions within the cryptocurrency community regarding DWF Labs.
In these two projects, “pull first, smash later” is the biggest skepticism in the community towards DWF Labs, and it is also the controversial core of DWF Labs. Many projects, including these two projects, in which DWF Labs participates in market making, have experienced significant short-term fluctuations, but many people have suffered heavy losses in YGG and CYBER. Wintermute has stood up to question the malicious intentions of DWF Labs, and some in the community have questioned whether DWF Labs has 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 establishing 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 large projects and several startups involved in certain matters in our incubator.
BlockBeats: I understand that DWF has a very unique way of operating projects and you are very active on social platforms, which has sparked discussions. 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: Overall, market competition is very fierce, and future competition will be even more intense, as projects increasingly need a certain type of special support. By special, I mean, for example, a year or two ago, it was possible to only provide liquidity without doing anything else, even with weak liquidity. We entered this field about a year ago and also received a report from another market maker. One of the projects had a conversation with us, and the founder of that project has been our friend for many years.
Before 2022, we had never provided liquidity for projects, we had always provided liquidity for exchanges. For every coin with a certain trading volume and volatility, every futures and options, we trade them. And when we work with projects, we don’t need to build systems from scratch or make adjustments for specific projects. 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 adjust our strategies slightly to align with the goals of that project.
As for the ecosystem, ecosystem support includes trading volume, protocol execution, introducing projects to protocols, etc. This also includes collaboration with our portfolio because we now have a large portfolio that has value in itself. Then there is market, technology, and human resources support, and so on. 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 directly ask us because we are partners and we will provide complementary services.
This is our philosophy, where risk is key. On 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 on 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: But people say that market-making or ecosystem partners are for long-term existence, while venture capital is inherently short-term. How do you see this?
Andrei: If we were in 2021, venture capital indeed had 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 unlocking 5% of the tokens. You can break even or make money because the price may increase 20 or 50 times. But now the times are completely different. Currently, venture capital is a long-term strategy with high risk. You can predict the market in the near term, but you can’t predict it 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 how it looks. The bull market won’t arrive quickly.
This is our philosophy of venture capital. On one hand, we focus more on quality rather than quantity. We need to establish influence first and then convert it into quantity because venture capital always involves numbers. If you only have one project, even if you have a 75% chance of winning, there is still a one in four chance of failure. But if you have 100 projects, even if 75 of them fail, there are still 25 projects that can make you billions. It’s a statistical game. But the quality of your decision 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 role as a market maker and investor. “VC + market maker” is the biggest criticism of DWF Labs, and this is clearly stated on its official website. DWF Labs seems to embrace this label of itself. The DWF Labs website has also stated before that “regardless of market conditions, DWF Labs invests in an average of 5 projects per month.”
According to public information, DWF Labs has invested in projects such as Fetch.ai, Synthetix, Flare Network, Coin98, Yield Guild Games (YGG), TON, Conflux, Mask Network, etc. From blockchain infrastructure, DeFi, NFTs, chain games, DAOs, decentralized social, data analysis, privacy, entertainment, it seems difficult to find DWF Labs’ investment focus. But many of the projects it invests in involve the phenomenon of “pump and dump.”
For example, on April 25th of this year, DWF Labs announced an investment in ARLianGuai Network. Subsequently, the price of ARLianGuai tokens more than doubled within a month and then dropped nearly 40% on the day of the highest price. On June 22nd, Adventure Gold DAO announced an investment from DWF Labs, with DWF Labs committing to purchase AGLD tokens worth seven figures. Within a month, the price of AGLD tokens nearly doubled and then dropped over 40% on the second day of the high point.
There has been heated discussion in the community regarding this matter. Some believe that DWF’s investment is not genuine and that they are only holding the tokens for market-making purposes. Others accuse DWF Labs of manipulating the market for profit. These controversies and doubts have gained DWF Labs considerable attention in the cryptocurrency industry.
BlockBeats: As market makers or ecosystem partners, do you have different approaches and styles when making investments? Besides providing economic assistance, do you also consider other aspects?
Andrei: We always do more than just giving them money. We have a dedicated entity for making investments. Because it is a difficult period for projects now, even large projects suffer due to a lack of funds. Moreover, the market is too fragile and there is a risk of a collapse. In the cryptocurrency industry, it makes sense to provide liquidity to the market while making investments.
There is a risk of a market collapse, which is why we try to invest in some projects. But projects also need to explain to their communities 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, that is acceptable and people usually have a friendly attitude towards it. But if a project goes directly to an exchange and sells tokens, it often looks like a carnival.
Because people know it’s just about making money, 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 the project, why would ordinary investors still hold these tokens? It seems strange and very dangerous for the project. So we are working hard to help them.
BlockBeats: Especially in the Chinese cryptocurrency community, people have been discussing the abnormal prices in investments or the partners and projects you cooperate with. For example, sometimes when DWF invests in a project, the price of the project experiences a huge increase and then quickly drops. What is your view on this?
Andrei: We do not engage in any manipulation. When people see signs that indicate 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 affected by people, driven by the market itself. Of course, we have the futures market, which is a tool for hedging our positions and for the trading club. We are completely different from directional traders.
For directional traders, let’s say you have $100 and you enter the futures market with 25x leverage. Your position has increased 25 times, right? Let’s say the price of the currency rises 10 times, and you start thinking, I can make $20,000 with my $100. People often underestimate risks but are overly confident in opportunities, and then they suffer.
Of course, there are also people who open positions completely in the opposite direction. This person would be very happy, someone would send screenshots showing that they made money, and they would feel great. This is how the market works. I think people always need someone to bless or blame, and in this market cycle, we are the ones, and the next market cycle may be someone else.
BlockBeats: This is a very interesting perspective. Do you think this is an unexpectedly good result? Like, to some extent, it helps you implement market-making strategies 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 simply trades against the market, providing liquidity for some currencies and markets. It’s completely independent. When emotions change, it adjusts itself, and we have never planned for it.
First of all, for us, we don’t need it. We are quite successful in trading. Since 2018, we have never suffered any losses. We don’t need these things; the second point is that 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 is one more thing I would like to ask you. Whenever you announce an investment, most announcements are for $10 million, very accurate. What is the consideration behind this?
Andrei: This is indeed an investment strategy. We have learned a lot since the first half of this year. People didn’t like it when we had some long-term agreements; now we won’t announce anything that is not yet completed. If we announce something, it’s already done. And if someone wants to know more, they can ask us or the project party for some transaction IDs for verification, which are all on-chain. Now we won’t announce anything that is not yet completed, even if we have signed an agreement, because we are learning, and this is 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 truly started from scratch. In 2018, I was the CEO of Huobi in Russia, and I hadn’t joined DWF Labs at that time. We only met because they were looking for an opportunity to have a suitable exchange account with good rates, as they were starting from scratch.
I was the CEO of a local exchange at the time and urgently 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 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 operating capital generate such a huge trading volume? (Obviously) This is crazy, and the market was crazy at the time. 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 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 and helped them open accounts with good rates. These people grew very fast 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 becoming more and more fierce, and profits are decreasing. However, the profits generated by trading volume are still a few basis points, and in 2021, many exchanges and projects have been launched, with very large trading volumes. Historically, we have been 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’s not just 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 returns. And we have market makers and venture capital.
Continue with Crypto or Traditional Finance?
As a VC in the crypto industry, the projects invested by DWF Labs focus on the crypto industry, but it also has an uneasy and restless heart, hoping 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, a netizen 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 as much as over $100 million” to “LianGuairadigm is a research-oriented technology investment company.”
Although the “crypto” related description was later added back to the homepage of LianGuairadigm’s official website, co-founder Matt Huang said that the previous deletion was a mistake. However, this still sparked a lot of discussions in the community, with some people believing that LianGuairadigm will focus its investment on the generative AI wave led by OpenAI. Similarly, DWF Labs also hopes to put its eggs in 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 looking for other markets?
Andrei: We have plans to expand our business to traditional markets. For us, we trade symbols, and we don’t care whether it’s Bitcoin, Ethereum, or other currencies. We have symbols, prices, trading volumes, liquidity, and we trade based on these, as well as data. Currently, we are exploring the forex market, just for trading currencies.
Of course, in terms of cryptocurrencies, we can only optimize our strategies and wait for a bull market in large-scale trading. In addition, since 2020, we have entered the options market, and we believe that the options market will also be significant in the future. We have our own options trading company for cryptocurrencies. 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 lot of money, and we hope to be that person.
BlockBeats: So, what do you think about the profit prospects of cryptocurrencies?
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 a project, you can get 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 enter the market when it is bullish.
BlockBeats: So, for the future market cycle, it’s a bit like waiting for Old Money to arrive.
Andrei: Not all funds, because all these bullish cycles are driven by Asia and emerging countries, not by Europeans, as they don’t do much trading. For example, if something happens in the United States, such as ETF approval or Bitcoin futures approval, and it has an impact, the whole world jumps in, creating a bullish market that we are waiting for.
BlockBeats: There is also a question about regulation. Have you made any plans in advance?
Andrei: We don’t have investors, and we don’t need excessive regulation. We already have licenses, and we are looking for an auditing company 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 companies.
For example, while we are having this conversation, hundreds of transactions are being conducted every second. When these companies need to verify all these transactions, a large amount of documents is required. If we want to audit high-frequency transactions, it would cost us 10 to 20 million dollars per year, but we don’t need to do that. We have already applied for a VASP license in the British Virgin Islands and will soon obtain this license.
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