Market maker DWF Labs’ more than $200 million in deals blur what “investment” means

The giants of crypto venture capital are mostly a well-known group of firms that have been around for years, companies like A16Z, Paradigm, Pantera Capital and Digital Currency Group (CoinDesk’s parent).

So the rapid and loud emergence of a company called DWF Labs as a seemingly major player in the space over the past few months surprised many. They announced through press releases and media organizations such as CoinDesk and The Block a number of investments in projects including $40 million for internet options provider Tomi, $40 million for artificial intelligence-related token Fetch.AI and $10 million in AI-focused crypto data project CryptoGPT.

But a closer look reveals that DWF, whose founders made their money as high-frequency crypto traders, isn’t exactly a venture capital firm—not always, at least.

While the latest batch of headlines refer to DWF’s partnerships with crypto projects as “investments,” DWF Labs actually functions more like an over-the-counter (OTC) trading desk. The company typically approaches a crypto project with a token, offering to buy millions of the token at a discount to market value, according to conversations with several crypto projects that have worked with DWF.

But DWF Labs says it’s all a misunderstanding. “There may be some questions about the use of the word investment,” said DWF Labs Partner Stefano Virgilli. “When we use the word ‘investment’ – for us the most important thing is that if we buy tokens and they use the funds to further develop, it is an investment,” he added.

Investments in crypto projects usually follow a venture capital model. Projects raise venture capital companies via funding rounds (ie pre-seed, seed, Series A, etc.), and in turn the investors receive a portion of the project’s equity. In most cases, especially in early investments where a project has not yet launched a token, investors will receive a Simple Agreement for Future Tokens (SAFT), a contract that outlines the tokens allocated to the investor if the project launches a token in the future.

DWF Labs’ investments are more ad hoc in nature, and the company primarily opts for projects that have already launched a token.

While DWF Labs refers to itself as “a global web3 venture capital and market maker” or “multi-stage web3 investment firm” in press releases, the deals are often presented as “strategic partnerships” that may include token acquisitions, market making services, laws to increase a token’s liquidity and trading volume, and further support with marketing and media presence.

Even helping the projects’ treasuries sell their token holdings, according to the press release the firm distributed about the launch in September.

In the post, the firm said that “DWF Labs invests in digital asset companies and supports existing markets, enabling digital asset companies to sell their tokens for upfront capital without negative price impact,” adding that “DWF Labs purchases tokens with its own funds , allowing corporate customers to sell tokens quickly.”

It is quite common in the crypto industry for market making firms to have venture capital arms. Jump Crypto and Wintermute, two heavyweights in the crypto market-making sector, both began as trading firms. But both have since expanded into cutting venture checks for projects, and even building their own pieces of core infrastructure (Jump has backed the Wormhole cross-chain bridge and Wintermute has launched its own decentralized exchange).

However, the industry standard is that these contracts should be separated. Although the lines between the two divisions can sometimes be blurred by market makers, some industry observers have become concerned about DWF’s recent activity and apparent bundling of various services under partnerships.

“It’s a massive conflict of interest,” Walter Teng, research firm Fundstrat’s vice president of digital assets, told CoinDesk. “If you invest, you want the token’s price to go up. If you mark the market, you can manipulate the price to go up by counterfeiting.”

“All their ‘investments’ are poorly disguised agency OTC (over-the-counter) trades,” one market-making firm’s executive told CoinDesk, who asked not to be named due to company policy. “They make a big announcement about ‘partnerships, investments’ or other nonsense, but in reality it’s a way for token projects to sell their treasury without announcing that they’re selling their treasury.”

DWF managing partner Andrei Grachev defended the firm’s token maneuvers in a recent chirpingcalls it “stupid” if a market maker (MM) leaves all the acquired or borrowed assets in a wallet, because a “MM should create markets, provide depth, improve order execution instead of doing nothing and waiting for the market to skyrocket to exercise their call options.”

DWF Labs launched in September as an investment-focused arm of Digital Wave Finance, a top high-frequency trading firm that trades spot and derivatives on over 40 exchanges, according to the firm’s press release.

Grachev told CoinDesk that DWF Labs’ funding comes from money earned from profits from high-frequency trading operations. Grachev denied that the firm has received any kind of funding from Russia, a rumor circulating in the crypto industry.

Grachev said the firm has several types of investments, some with token lock-ups, others with no vesting period, and focuses on projects with tokens. “We prefer to have tokens, but we also have several equity deals,” said. “But frankly with equity … that’s not our forte,” he said.

While he said that DWF Labs “typically doesn’t include marketing deals in our venture side,” he later admitted that “we have pure investments without market making, we have market making. [agreements] without investment, and we have that [them] combined.”

“As a market maker, we naturally support our portfolio. If we invest, we will provide much more liquidity to the project compared to if we do not invest, Grachev said.

When asked about DWF’s investment strategy and due diligence, Grachev spoke of focusing on five sectors – TradFi, DeFi, GameFi, CEX and artificial intelligence – and aiming to “have stakes in all major chains (…) to have access to their ecosystems.” The firm looks for projects with “life and traction,” he said, checking social media posts and which exchanges their token is listed on.

“If a project is listed on BitFinex, Coinbase or Binance, then the project is proven and good because these exchanges have very strict due diligence and very strict listing guidelines,” he added.

Grachev also said that DWF does not typically participate in specific venture rounds. “We just turn to them,” he says.

CoinDesk looked at a series of messages between DWF Labs and a crypto project that showed a member of the DWF Labs team offering to invest in the project and provide free market-making services. DWF told the project that it could invest via a direct OTC purchase of liquid tokens from the project’s treasury, or with a lock-up period and market-making services.

Messages from the market maker to another project showed that DWF offered to buy tokens in daily tranches without any lock-in period with a discount or in one installment with a one-year lock-up at a steeper discount. According to the message, DWF promised to help list the token on Korean exchanges including Binance Korea with which the firm has a “good relationship”, create options trading and “build narrative” leveraging DWF’s team and media presence.

There were several previous announcements when DWF crushed investments and market-making deals.

One example was its strategic partnership announcement with derivatives trading platform Synthetix. According to a March 16 press release, the firm said it bought $15 million of the project’s initial token SNX “aimed at increasing liquidity and market creation,” adding a quote from Grachev that “we are excited to invest in Synthetix.”

Blockchain data shows that DFW’s wallet – tagged by crypto intelligence firm Nansen – received 5.3 million SNX directly from Synthetix’s treasury between March 14th and March 16th. The firm then transferred all tokens to Binance in several transactions between March 16 and 20.

In November, DWF announced a $10 million investment in the TON ecosystem. The firm’s press release said the “strategic partnership” with the project extends to “an investment, token development, market creation and IPO.” The partnership also includes “50 seed investments planned over the next 12 months”, doubling the TON token’s trading volume in the first three months of the partnership, and developing an OTC market “to allow buyers and sellers to complete large transactions”.

Another issue is the company’s investment in the web3 influencer platform So-Col. According to a story from crypto-focused publication The Block and cited on DWF’s website, DWF invested $1.5 million in “a round” by purchasing So-Col’s native token SIMP in February. Irene Zhao, So-Col’s founder, said the tokens have a one-year vesting period ending in February 2024. The post does not mention services other than investing.

However, Nansen’s blockchain data on the Ethereum blockchain shows that DWF’s crypto wallet received 3.3 million SIMP tokens between March 6 and March 24. Within the same period, DWF sent about 2.6 million tokens to the KuCoin exchange, then transferred the rest to an unknown wallet on March 30. After the March 28 announcement, SIMP nearly doubled from around 1.7 cents in a week, then began plunging on April 4 toward 1 cent, per CoinGecko data.

CoinDesk reviewed Telegram messages from a So-Col representative who said they decided to work with DWF Labs because in addition to serving as a market maker, DWF also invested in the project and directly helped expand the startup’s runway.

Grachev said that DWF Labs holds most of its funds and investments on centralized exchanges (CEX) and transferring tokens to an exchange does not indicate that the company will sell.

“We keep all of our holdings, almost all of our holdings, not just the investments, but our own funds in exchanges,” he said.

However, keeping seemingly long-term investments on exchanges is a worrying sign for some industry experts, hiding from seasoned blockchain analysts and traders whether DWF is selling tokens or using them for market-making purposes.

“It’s a red flag,” a founder, who asked to remain anonymous, of a crypto-analytics firm with previous marketing experience told CoinDesk. “The [DWF Labs] market them as an investment, and then claim to do ‘market making’ so they can hold funds on exchanges and just dump.”

It is difficult to say anything about where a company like DWF should draw the line between VC and market making. Perhaps a page from the TradFi bankbook would work. In that realm, investment banking and trade/research are separated by a so-called Chinese wall. Where that line might need to be drawn for crypto investment companies is unclear.

In the interview, Grachev admits that his “biggest mistake” was not properly explaining the firm’s operating philosophy and investment process. – We must be more open. I wish [the community] to know how we work and then let people decide who is right and who is not right, he said.

Tracy Wang and Ian Allison contributed reporting.