Original compilation: Felix (PANews)
1. Overview
1) DWF Labs rose from obscurity to become one of the most active investors in crypto this year.
2) But behind the boom, some in the industry see red flags in its opaque investment structure and habit of moving token investments to exchanges.
3) DWF refuted this and said there was nothing wrong with its approach.
DWF Labs has soared up the list of the most active investors in the crypto industry, causing concern and dissatisfaction.
The number of institutional investments in the encrypted data platform RootData in Q1
In a turbulent six months for an industry rife with scandals, bankruptcies and a crackdown by U.S. regulators, DWF Labs has emerged from obscurity into the spotlight. Block Pro’s trading data shows the company has invested $232 million in 25 funding rounds, 18 of which were in which DWF was the sole investor, while the company itself says it has invested at least $100 million in more than 100 projects.
What has fueled speculation about its investments is not only DWF’s spending, but also the fact that many of its venture capital deals appear to be opaque and non-standard, and has drawn comparisons to Alameda Research, a hedge fund and market maker founded by former FTX CEO SBF, which collapsed last year. In its defense, DWF responded to all questions raised against it.
“I’ve seen this playbook before, where retail investors get burned and the SEC takes enforcement action,” said Matt Walsh, founding partner at Castle Island Ventures. “The industry doesn’t need Alameda 2.0.”
DWF Labs was founded in 2018 by managing partner Andrei Grachev — CEO of Huobi Russia and several crypto trading firms. DWF Labs describes itself online as a leading “digital asset market maker and Web3 investment firm” with operations in Singapore, Switzerland, the United Arab Emirates, and the British Virgin Islands. It is a subsidiary of Digital Wave Finance, an entity with little online presence that DWF Labs’ website describes as “one of the world’s largest high-frequency cryptocurrency trading entities, trading spot and derivatives markets on more than 40 top exchanges.”
2. Problems with DWF Labs
Central to the concerns about DWF are that the deal to trade startup tokens is sometimes reported as venture capital investments, and that DWF has a habit of transferring those tokens to exchanges for sale.
Starting with the deal structure, many industry insiders raised concerns to The Block that DWF’s multi-million dollar investments in crypto startups are better described as over-the-counter transactions. These OTC transactions allow startups to convert their tokens into stablecoins, rather than DWF infusing cash upfront, which then transfers the tokens to an exchange.
“All of these ‘investments’ you see are not actual investments,” said one person with direct knowledge of DWF’s operations. “They are over-the-counter transactions. They are all token purchases. They are over-the-counter transactions that took place over a period of time.”
3. DWF Labs’ “Promise”
In late February, for example, crypto privacy startup Beldex announced a $25 million deal with DWF. In a blog post, Beldex said DWF Labs would "commit $25 million to research and development of the Beldex network and ecosystem." However, in some coverage of the deal, the word "committed" was left out, with the deal instead described as a straight-up funding round. A Beldex spokesperson said the money had actually been committed for two years.
The spokesman said this week that DWF remains involved in the project as a “marketing and partnership advisor” and also helps introduce other industry players, including developers and researchers. DWF called the arrangement “extremely beneficial to Beldex.”
Just this week, CryptoGPT announced that it had received $10 million in Series A funding from DWF Labs, with a token valuation of $250 million. However, CryptoGPT co-founder and CTO Dejan Erja said that the total investment amount so far is only $420,000. Erja said that DWF began investing last week and the remaining amount will be in place within 285 days. As part of the transaction, DWF Labs will also make markets for CryptoGPT's GPT tokens.
4. DWF’s “unwise” transaction
Bainy Zhang (who goes by Hedgedhog on Twitter), founder of Fisher 8 Capital and eGirl Capital, said, “The types of projects and amounts DWF Labs invests in really don’t make sense to me.” Neither seems wise. Presumably, the amounts DWF invests in projects represent a significant portion of those projects’ token supply. For example, Beldex’s $25 million is 5% of its fully diluted valuation, assuming DWF pays market prices.
Once public, such deals could have a huge impact on the price of a project’s tokens. According to CoinGecko data, in the days after the announcement of the deal with Beldex, the price of its BDX token rose by about 50%, from $0.04 to $0.06. It is now around $0.057.
A project called Tomi, which aims to build an alternative internet platform, said it had raised $40 million from DWF Labs on March 22. In a short period of time, the price of its token surged from $1.3 to $4.3 before falling to around $2.58 currently. The price also rose after The Block reported that DWF Labs pledged to buy $10 million worth of tokens issued by crypto infrastructure project Orbs.
5. “I don’t see anything wrong with it”
When asked in an interview whether the DWF Labs investment was an upfront venture capital check or an over-the-counter token transaction, Grachev made no mistake.
“We allocate funds based on our risk management. Frankly, I don’t think there’s anything wrong with that,” he said. “I don’t care what other market makers/investors are doing. Because our main goal is not to imitate what other market participants are doing. Our goal is to make our partners happy.”
Continuing with the discussion of DWF moving its token investments to centralized crypto exchanges, it’s not uncommon to find people citing on-chain data to highlight this practice and wondering if this means DWF is selling tokens.
When asked about the changes, Grachev denied the company was selling for profit. Instead, he said DWF found it safer to keep the tokens on exchanges than using on-chain wallets.
“We transfer tokens to exchanges, but we never sell,” Grachev said in an interview. “If we send tokens to an exchange, it does not mean that we will sell them immediately or in the near future. We transfer tokens to exchanges all the time because for us, storing them on exchanges is a more convenient way of inventory management.”
In another Twitter post this week, he added: “Crypto market makers must be prepared for emergencies and extreme volatility and have an inventory of tokens and stablecoins available to aim for 24/7 liquidity.”
6. DWF’s funding situation
DWF’s big spending has also made some in the industry wonder where its funding comes from. Grachev said DWF Labs has no external investors and has been funded by trading activities since the company was founded in December 2018. Some are cryptocurrency-based loans.
In addition to running DWF Labs, Grachev’s LinkedIn profile shows he has held several other positions over the past five years — all involving trading and cryptocurrencies.
From 2018 to June last year, he was CEO of a high-frequency trading firm called VRM.Trade. From May 2018 to July the following year, he was vice president of trading at a Moscow-based company called Racib. Prior to that, he ran another cryptocurrency company called Crypsis Blockchain Holding, also based in Moscow, according to LinkedIn.
Grachev also served as CEO of Huobi Russia, a subsidiary of the Chinese cryptocurrency exchange, for a year from September 2018. Huobi Russia closed in 2020. A Huobi spokesperson said: "Due to strategic adjustments within the Huobi Group, the parties have reached an agreement to terminate this partnership."
While Grachev has been keen to refute allegations of wrongdoing in an interview with The Block and on social media, many in the crypto industry remain concerned.
“DWF was investing tens of millions of dollars a week in over-the-counter token deals at a time when most VCs were tightening their purse strings,” said Matthew Howells-Barby, an angel investor and former chief marketing officer at DWF. “Something felt wrong.”
Disclaimer: Evgeny Gaevoy, founder and CEO of DWF Labs competitor Wintermute, is a board member and shareholder of The Block.