Interview: Jack, BlockBeats

Editing: Sharon, BlockBeats

Editor: Jaleel, BlockBeats

This year, the name of DWF Labs has become well-known in the currency circle.

Since March, DWF Labs has been sweeping the secondary market at an average speed of 5 projects per month, frequently making large investments, 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 tokens.

However, the community believes that DWF is not making real investments, but rather providing liquidity. In recent months, three tokens, YGG, DODO, and C98, have experienced similar volatile market conditions, although there is no direct evidence to indicate DWF's involvement in this pump and dump activity, several on-chain institutions have identified wallet addresses associated with DWF with significant on-chain activities, which has further confirmed the speculation that DWF Labs has been involved in market-making activities. However, due to differences in investors' levels, some have profited from the volatility while others have suffered heavy losses in this short-term market.

Similarly, the CYBER incident at the end of August once again brought attention to DWF Labs, causing significant market fluctuations and dissatisfaction within the community.

Some believe that DWF Labs' blatant market manipulation behavior will seriously affect the reputation of the currency circle and may lead to more severe regulation. Recently, BlockBeats exclusively interviewed Andrei Grachev, co-founder of DWF Labs, to uncover the considerations behind the controversies.

Andrei Grachev, co-founder of DWF Labs, graduated from Orenburg State University (OSU) and previously worked in the logistics and online trading industries. In 2017, he joined the blockchain and cryptocurrency industry, serving as the Managing Partner of 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 did not "go public"; but since the beginning of this year, DWF Labs has frequently participated in market-making for multiple projects, attracting significant attention. According to its official website data, since 2018, DWF Labs has conducted spot and derivative trading on over 60 top-tier trading platforms, trading in over 800 currency pairs, covering almost all verticals of Web3, maintaining a leading position in the entire market-making field.

In selecting market-making tokens, DWF Labs primarily targets projects from East Asia and various new and old emotional 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 are projects with high levels of discussion within the cryptocurrency community regarding DWF Labs.

In these two projects, the "pump and dump" pattern is the biggest question raised by the community about DWF Labs and the core of the controversy surrounding DWF Labs. Many projects in which DWF Labs has participated in market-making, including these two projects, have experienced significant short-term price fluctuations, resulting in heavy losses for many in YGG and CYBER. Wintermute has led the questioning of DWF Labs' malicious intentions, and some in the community have questioned whether DWF Labs has a conflict of interest as both a referee and a player.

BlockBeats: What progress has DWF Labs' project made so far?

Andrei: We are building a network and have made significant progress in 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 related to something about 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 cryptocurrency industry or partners in the cryptocurrency ecosystem should participate in market operations and provide liquidity?

Andrei: Overall, the market competition is very fierce, and future competition will be even fiercer than it is now, as projects increasingly need a certain type of support. By "certain type," I mean that a year or two ago, it was okay to only provide liquidity without doing anything else, even if the liquidity was weak. We entered this field about a year ago, and we also received a report from another market maker. One of the projects sat down with us for a discussion, 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. We traded every currency pair with a certain trading volume and volatility, every futures and options. When we cooperate with a project, we don't need to build a system from scratch or make adjustments for a specific project. In 99% of cases, if it's not an Initial Offering Agreement (IOA) but a project that is already listed, 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, and introducing projects to the protocol. This also includes cooperation with our investment portfolio, as we now have a large investment portfolio that has value in itself. Then there is market, technical, and human resource support, and so on. I believe that if a company wants to succeed in the market competition of providing liquidity, the company should be able to generate some subsidiaries that can provide more complementary value. For example, if we cooperate 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 will provide complementary services.

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

BlockBeats: But people will say that market making or ecosystem partners are for long-term existence, while venture capital is inherently short-term participants. How do you view this?

Andrei: If we were in 2021, venture capital did 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, and you can cash out your investment, even if it's a 5% unlocked token, you can break even or even make money because the increase could be 20 times or 50 times; but the era is completely different now, at present, this kind of venture capital is a long-term strategy, with high risk, because you can predict the market in the near term, but you cannot predict the market two years from now. We are currently in a bear market cycle, and it seems that it will soon turn into a bull market, but that's just how it looks, the bull market won't arrive soon.

That's our venture capital philosophy. On the one hand, we focus more on quality than quantity, to establish some influence first, and then convert it into quantity, because venture capital is always about numbers. If you have only one project, even if you have a 75% chance of success, there is a one in four chance of failure; but if you have 100 projects, even if 75 projects 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 now working hard to improve our skills and capabilities in venture capital.

"DWF does not manipulate anything"

Currently, the cryptocurrency industry's scrutiny of DWF Labs focuses on its dual approach of market-making and investing. "VC+Market Maker" is the most criticized aspect of DWF Labs, which is explicitly stated on its official website. DWF Labs seems to embrace this characterization. The DWF Labs website has previously stated that "regardless of market conditions, DWF Labs invests in an average of 5 projects every month."

According to public information, DWF Labs' investment projects include Fetch.ai, Synthetix, Flare Network, Coin98, Yield Guild Games (YGG), TON, Conflux, Mask Network, and more. It seems difficult to pinpoint DWF Labs' investment focus, as it spans blockchain infrastructure, DeFi, NFT, blockchain games, DAO, decentralized social, data analysis, privacy, and entertainment. However, many of the projects it has invested in have experienced the phenomenon of "pump and dump."

For example, on April 25th this year, DWF Labs announced an investment in ARPA Network, and subsequently, the price of ARPA tokens 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 committing to purchase a seven-figure value of AGLD tokens. Subsequently, within a month, the AGLD token rose nearly 2 times, only to drop over 40% on the second day of the peak.

This has sparked intense discussions within the community. Some believe that DWF is not making real investments, but rather providing liquidity, while others accuse DWF Labs of profiting through market manipulation. 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 integrate other aspects?

Andrei: We always do more than just giving them money; we have a dedicated entity for our investments. Because it's a difficult time for projects now, even big projects are suffering due to lack of funds, and the market is too fragile, with the 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 the exchange? This is also a question because the situation is completely different. If we do something and provide some value, it's acceptable, and people usually have a friendly attitude towards it. But if a project goes directly to the exchange and sells tokens, it usually looks like a carnival.

Because people know it's just for making money, they don't care about the market. But in this case, if there are no investors, no OTC buyers, no market makers, and no one accepting the project, why should ordinary investors hold these tokens? It seems strange, and it's very dangerous 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 experiences significant growth and then quickly falls back. How do you view this?

Andrei: We do not engage in any manipulation. When people see signs that an asset may be profitable, they rush into that asset. Liquidity in the market is not as good as it was a year ago, and it is easily driven by people, by the market itself. Of course, we have the futures market, which is a tool for hedging our 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 25x leverage, your position has increased by 25 times, right? Suppose the coin price rises by 10 times, and you start thinking, I can make $20,000 with my $100. People usually underestimate the risk but are overly confident in the opportunity, and then they suffer.

Of course, there are also people who take the opposite direction completely, and they are very happy. Some people send screenshots showing that they have made money, and they feel great. That's how the market works. I think people always need someone to bless or blame, and in this market cycle, that someone is us, and in the next market cycle, it might be someone else.

BlockBeats: This is a very interesting point. Do you think this is an unexpectedly good outcome? Like, to some extent, does it help you implement your market-making strategy and make people follow your investments?

Andrei: Our market strategy is completely independent of DWF Labs because we don't manually manipulate anything. We have our own system, built in 2018, for proprietary trading. It only trades in the market, providing liquidity for some coins and markets, and it operates completely independently. It self-adjusts when emotions change, and we never plan it.

First, we don't need it; we are quite successful in trading. Since 2018, we have never incurred losses. We don't need these things. Second, 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 we don't 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 announcements are for $10 million, very precise. 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. People don't like it when we have some long-term agreements; now we won't announce anything that hasn't been completed. If we announce something, it's already done. And if someone wants to know more, they can ask us or the project for some transaction IDs and verify them, as they are on the chain. We won't announce anything that hasn't been completed, even if we have signed an agreement, because we are learning, and that's our lesson. We won't repeat the same mistake.

BlockBeats: Many people are interested in how you raise funds. What strategies do you have, and where does the funding come from?

Andrei: We have never raised funds, and we don't have investors; we really started from scratch. In 2018, I was the CEO of Huobi in Russia, and at that time, I hadn't joined DWF Labs. 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 needed traders because that 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 on the first day reached $10 million, and on the second day, it reached $22 million.

How could this operating capital of $50,000 generate such a huge trading volume? (Obviously) it was crazy, and the market was crazy at the time too. In the spring of 2019, Binance launched its first launch platform, and the market turned 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 relationships with various exchanges in China and helped them open accounts with good rates. These people developed very quickly because we made a profit of about 15 to 20 basis points through credit trading volume. You can imagine, if you trade $1 million, the profit is $2,000, and you can trade every day.

However, of course, the market competition is becoming more intense, and profits are decreasing. But for now, the profits from trading still come in a few basis points, and in 2021, many exchanges and projects have brought in very large trading volumes. Historically, we have been very strong in shorting the market, and the trading volume in the bear market is always huge. This year, we made a lot of money. 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 in so much profit. Then we have market makers and venture capital.

Continuing Crypto or Traditional Finance?

As a VC in the cryptocurrency industry, DWF Labs' investment projects focus on the cryptocurrency industry, but it also has an uneasy, restless heart, hoping to expand into more and larger traditional financial markets. This is also the case for Paradigm, another venture capital firm in the cryptocurrency industry. In May of this year, some netizens noticed that the homepage title of Paradigm's official website changed from "Paradigm supports disruptive crypto/Web3 companies and protocols with as little as $1 million and as much as $100 million+" to "Paradigm is a research-driven technology investment company."

Although Paradigm's official website homepage later re-added "crypto" related statements, co-founder Matt Huang stated that the previous deletion was a mistake. However, this still sparked a lot of discussion in the community, with some people believing that Paradigm will focus its investment on the generative AI wave led by OpenAI. Similarly, DWF Labs also hopes to diversify its investments into more baskets before the bull market in the cryptocurrency 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 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 currencies. We have symbols, prices, trading volumes, liquidity, and we trade based on these, as well as data. Now we are looking into the forex market, just for trading currencies.

Of course, in the cryptocurrency aspect, we can only optimize strategies and wait for a bull market with massive trading. In addition, 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 10 times. Those who have an advantage in this area will make a lot of money, and we hope to be those people.

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

Andrei: It's always about cycles. In this cycle, you can make money through market-making, venture capital, and incubation, and when you can provide more value to projects, you can exchange for a larger share. High-frequency trading can also generate profits, but it is limited because trading volume is limited. But I think 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, and 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, and they prefer to get involved now and wait, rather than trying to jump into the market when it's bullish.

BlockBeats: So, for the future market cycle, it's like waiting for the arrival of Old Money.

Andrei: Not all funds, because all these bullish cycles are driven by Asia and emerging countries, and it has never been driven by Europeans because they don't trade too much. For example, something happens in the United States, such as the approval of ETFs, the approval of 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: There is also a question about regulation. Have you made 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 audit firm in Dubai because some projects and clients require us to provide all balance sheets. But you know, for pure high-frequency trading, we don't want to do this because all high-frequency trading companies have very high costs.

For example, as we speak, hundreds of trades are made per second; when all these companies need to check all these trades, it requires a lot of paperwork. 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 a VASP license in the British Virgin Islands and will soon obtain this license.

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