Interview: Jack, BlockBeats

Editing: Sharon, BlockBeats

Editing: Jack, Jaleel, BlockBeats

This year, the name of DWF Labs has become well-known in the cryptocurrency industry.

Since March, DWF Labs has been sweeping the secondary market at a 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 tokens.

The community believes that DWF is not a real investment and that buying coins is just for market making. In recent months, three currencies, YGG, DODO, and C98, have experienced similar volatile market conditions. Although there is no direct evidence that DWF participated in this pump and dump activity, several on-chain institutions have identified wallet addresses associated with DWF that have exhibited on-chain behavior. This has further confirmed the speculation that DWF Labs has engaged in market-making activities. However, due to differences in investors' levels of expertise, some have profited from the market's volatility while others have suffered significant losses in this short-term market.

There was another incident in late August, similar to the CYBER incident, that brought attention to DWF Labs. Their actions of manipulating and profiting behind the scenes caused a huge market fluctuation and sparked great dissatisfaction within the community.

Some believe that the behavior of DWF Labs in manipulating the cryptocurrency market is too blatant, which could seriously damage the reputation of the industry and potentially lead to stricter regulations. Recently, BlockBeats conducted an exclusive interview with Andrei Grachev, co-founder of DWF Labs, to uncover more insights behind the controversy.

DWF Labs co-founder Andrei Grachev 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 and served as Managing Partner at Crypsis Blockchain Holding, as well as Vice President of Trading at the Russian Association of Cryptocurrency and Blockchain (RACIB) and CEO of Huobi Russia. In 2018, he co-founded DWF Labs.

Currently, the market needs more than just liquidity

Before 2023, DWF Labs did not "go public"; but since this year, DWF Labs has frequently participated in market-making for multiple projects, attracting great attention. According to its official website data, since 2018, DWF Labs has conducted spot and derivative trading on more than 60 top trading platforms, trading over 800 currency pairs, covering almost all vertical fields of Web3, and maintaining a leading position in the entire market-making industry.

When it comes to choosing market-making currencies, DWF Labs focuses mainly on East Asian projects and various new and old emotional themes. Its market-making 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 with high discussion rates within the cryptocurrency industry community regarding DWF Labs.

In these two projects, "sell first, buy later" is the biggest doubt in the community about DWF Labs, and it is also the controversial core of DWF Labs. Many projects in which DWF Labs participates in market making, including these two projects, have experienced large fluctuations in a short period of time, but many people suffered heavy losses in YGG and CYBER. Wintermute once stood up to question the malicious intentions of DWF Labs, and some people in the community also questioned whether DWF Labs had the suspicion of "being both a referee and a player"?

Related reading: "Who is DWF Labs, the frequent buyer? "VC+Market Maker", investing in 5 projects every month".

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

Andrei: We have made significant progress in establishing networks and meeting with partners, clients, exchanges, and project parties. This is very important for our business. Just today, I have had six meetings with some large projects and several startups involved in something 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 capitalists or partners in the cryptocurrency ecosystem should participate in market operations and provide liquidity?

Andrei: Overall, the market competition is very intense, and future competition will be even more intense than it is now, because projects increasingly require some kind of special type of support. By special, I mean that, for example, a year or two ago, it was possible to only provide liquidity without doing anything else, even if the liquidity was weak. We joined this field about a year ago and we 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 a friend of ours for many years.

Before 2022, we had never provided liquidity for projects. We have always provided liquidity for exchanges. We trade every coin with a certain trading volume and volatility, every futures and options. And 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 IOA (Initial Offering Agreement), but a project that has already been listed, what we need to do is to slightly adjust our strategy to align with the project's goals.

As for the ecosystem, it supports various aspects such as transaction volume, protocol execution, and introducing projects to the protocol. This also includes collaboration with our investment portfolio, which holds value in itself as it is currently extensive. Then there is market, technology, and human resource support, among others. I believe that if a company wants to succeed in the competitive market of providing liquidity, it should be able to generate some branch offices that can provide more complementary value. For example, if we collaborate with you and you need to find a developer, a CTO, or 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 on the other hand, you need to create opportunities as much as possible so that you can take advantage of them in the future. Moreover, I don't look like a financial person and no one in our team looks like one either. We only care about our work and not our appearance. What we care about is our performance in the market.

BlockBeats: However, people may argue that market makers or ecosystem partners are for long-term existence, while venture capital is inherently a short-term participant. How do you view this?

Andrei: If we are in 2021, venture capital is indeed somewhat short-term in nature. If 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 is only 5% of the unlocked tokens, you can break even or even make money, because the increase may be 20 or 50 times; but now the times are completely different, as far as the current situation is concerned, this kind of venture capital is a long-term strategy with great risks, because you can predict the market in the near future, but you cannot predict the market two years later. We are in a bear market cycle, which seems to be turning into a bull market soon, but this is only apparent, and the bull market will not come soon.

This is our venture capital philosophy. On the one hand, we focus more on quality than quantity, building influence first and then converting it into quantity, because venture capital is always related to numbers. If you only have 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 of them fail, there are still 25 projects that can make you billions. This is a statistical game. But the quality of your decision-making 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 encryption industry's criticism of DWF Labs focuses on its dual focus on market making and investment. "VC+Market Maker" is the biggest point of criticism for DWF Labs, which is clearly stated on its official website. DWF Labs seems to embrace this attribute. The DWF Labs website previously stated that "regardless of market conditions, DWF Labs invests in an average of 5 projects per 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 others. It seems difficult to find DWF Labs' investment focus, as their projects range from blockchain infrastructure, DeFi, NFT, gaming, DAO, decentralized social media, data analysis, privacy, and entertainment. However, many of their invested projects involve the phenomenon of "buying the dip".

For example, on April 25th of this year, DWF Labs announced an investment in ARPA Network. Subsequently, the price of ARPA token more than doubled within a month, but 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 token also rose nearly 2 times, but then dropped over 40% on the second day of the high point.

There has been a heated discussion in the community regarding this, with some people believing that DWF is not a real investment and that holding coins is only for market making purposes. Others have accused DWF Labs of manipulating the market for profit. These controversies and doubts have made DWF Labs a hot topic in the cryptocurrency industry.

BlockBeats: As a market maker or ecosystem partner, do your investment methods and styles differ? Besides providing economic assistance, do you also incorporate other aspects?

Andrei: We always do more than just giving them money. We have a dedicated entity for investing on our behalf. Because it's a difficult time for projects right now, even big ones are suffering due to lack of funding; and the market is too fragile with the risk of a crash. In the cryptocurrency industry, it makes sense to invest while providing liquidity to the market.

There is a risk of market collapse in the cryptocurrency industry, which is why we try to invest in some projects. However, these projects also need to explain to their communities and investors the rationale behind their decisions. Why don't they just go to the exchange? This is also a question, because the situation is completely different. If we do something and provide some value, it is acceptable and people usually have a friendly attitude towards it. However, if a project goes directly to the exchange and sells tokens, it often looks like a frenzy.

Because people know that this is just for 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 this project, why should ordinary investors still hold these tokens? This seems strange and very dangerous for the project. So we are working hard to help them.

BlockBeats: Especially in the Chinese cryptocurrency industry community, people have been discussing the abnormal prices 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 fall back. What is your opinion on this?

Andrei: We do not engage in any manipulative behavior. When people see signs that this asset may be profitable, they will flock to 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 positions and trading clubs. We are completely different from directional traders.

For directional traders, assuming you have $100, and you enter the futures market with 25x leverage, your position has increased by 25 times, right? Assuming the coin price rises 10 times, you start thinking, I can earn $20,000 with my own $100. People usually underestimate risks but are overconfident in opportunities, and then they suffer.

Of course, there are also people who open positions in the completely opposite direction. This person will be very happy if someone sends a screenshot showing that they have made money and feel great. This is the way the market operates. I think people always need someone to bless or blame, and in this market cycle, we are the object, and the next market cycle may be someone else.

BlockBeats: This is a very interesting point of view. Do you think this is an unexpectedly good result? In a way, it will help you implement market-making strategies and encourage people to follow your investments?

Andrei: Our market strategy is completely independent from DWF Labs because we don't have anything that is manually operated. We have our own system, built in 2018, for proprietary trading. It only trades in the market, providing liquidity for some currencies and markets, and it is completely independent. When emotions change, it will self-adjust, and we have never planned it.

First of all, we don't need it. We have been quite successful in trading. We have never lost since 2018. 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 we don't 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 of the announcements state a precise amount of 10 million US dollars. What is the reasoning 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 long-term agreements. We won't announce anything that hasn't been completed yet. 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 and verify them, which are all on the chain. We won't announce anything that hasn't been completed yet, even if we have signed an agreement, because we are learning from our mistakes. We won't repeat the same mistakes.

BlockBeats: Many people are interested in how you raised funds. What is your strategy and where does the funding come from?

Andrei: We have never raised funds or had investors. We truly started from scratch. In 2018, I was the CEO of Huobi in Russia before joining DWF Labs. We only met because they were looking for an opportunity to find a suitable exchange account with good rates, as they were also starting from scratch.

I was the CEO of a local exchange at the time and urgently needed traders because it was a key performance indicator for me. Then we met and I convinced Huobi to offer 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 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'm just helping them because I have connections in various exchanges in China to help them open accounts with good rates. These people are developing very quickly because we are making profits of about 15 to 20 basis points through credit trading volume. You can imagine that if you trade 1 million, the profit is 20,000, and you can trade every day.

However, of course, the market competition is becoming increasingly fierce and profits are decreasing. But currently, the profit brought by trading volume is still a few basis points, and in 2021, many exchanges and projects have emerged 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 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 to create so much wealth. We have several areas, such as high-frequency trading, which generates such high returns. Then we have market makers and venture capital.

Continue with Crypto or Traditional Finance?

As a VC in the encryption industry, DWF Labs invests in projects that focus on the field of encryption, but it also has an uneasy and restless heart, hoping to expand into more and larger traditional financial markets. This is also true for Paradigm, a venture capital firm in the encryption industry. In May of this year, a netizen discovered that the homepage title of Paradigm's official website was changed from "Paradigm supports disruptive encryption/Web3 companies and protocols with funds ranging from as little as $1 million to as much as over $100 million" to "Paradigm is a research-oriented technology investment company".

Although Paradigm's official website has since added "encryption" related descriptions again, co-founder Matt Huang said that the previous deletion was a mistake. However, the community still had a lot of discussion about it, with some believing that Paradigm will focus its investment on the generative AI trend led by OpenAI. Similarly, DWF Labs also hopes to put its eggs in more baskets before the bull market in the encryption industry arrives.

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 a plan and have already expanded 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 volume, liquidity, and we trade based on these, as well as data. Now we are looking for the foreign exchange market just to trade currency.

Of course, in the cryptocurrency industry, we can only optimize our strategies and wait for a bull market with large-scale trading. Additionally, we entered the options market in 2020 and believe that it 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 earn a lot of money, and we hope to be one of those people.

BlockBeats: So, what is your view 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, and when you can provide more value to the project, 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 now, and 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 believe this is 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, we are kind of waiting for the arrival of Old Money.

Andrei: Not all funds, because all these bullish cycles are driven by Asia and emerging countries, not 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 it has an impact, and the whole world jumps in, forming a bullish market, which is what we are waiting for.

BlockBeats: Another issue is on the regulatory front. Have you made any plans in advance?

Andrei: We don't have investors, nor do we need excessive regulation. We already have a license and we are looking for an auditing company in Dubai because some projects and clients require us to provide all balance sheets. However, as you know, for pure high-frequency trading, we don't want to do this because the cost is very high for all high-frequency trading companies.

For example, while we are talking, hundreds of transactions are conducted every second. When these companies need to check all these transactions, a large number of documents are required. If we want to audit high-frequency transactions, it will cost us 10 to 20 million dollars a 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 it.

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