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The Block reveals DWF’s start-up model: attracting customers with pull offers

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This article interviewed 16 customers, potential customers and people familiar with DWF's operating model, and analyzed 10 proposals and business contracts provided by DWF.

Original Title: "How DWF Labs makes deals and its tendency to talk about price"

Original Source: The Block

Translated by: czgsws, Joyce, BlockBeats

Earlier this year, a new player emerged in the cryptocurrency industry. The name DWF Labs suddenly became ubiquitous, injecting funds into projects that were struggling with financing during the FTX crash and many bear markets.

The company seems to be spending money extravagantly everywhere. In the past year, they spent $20 million on investment transactions with the Synthetix protocol, provided a total of $28 million in funding for the blockchain platform Conflux, invested $40 million in the artificial intelligence platform Fetch.AI, invested $45 million in the EOS Network Foundation, and also invested $50 million in the Algorand Foundation. According to Foresight News, the company now claims to have invested in a total of 470 projects and has collaborated with approximately 35% of the projects in the top 1000 tokens by market capitalization in its short 16-month history.

However, for a young company, such a large cash investment has raised questions: how were these transactions organized and is everything as it seems on the surface?

In April, some answers to these questions surfaced. Reports from The Block and CoinDesk revealed the composition of these transactions, which were largely over-the-counter investments rather than traditional investments. However, there are still some questions about how DWF Labs conducts its business and the structure of these transactions and others.

In order to learn more information, The Block interviewed 16 customers, potential customers, and individuals familiar with the company's operations, analyzed 10 proposals and contracts between DWF Labs and customers and potential customers, as well as their communication process. The main finding of the survey is that DWF Labs often talks about potential price changes to attract potential customers' attention, especially when working with customers.

DWF Labs refuses to comment on or accept interviews regarding this article.

Discussing Price Trends

Shortly after DWF Labs launched in September 2022, this trading company created a promotional plan for potential customers. The Block obtained and verified this promotional plan, which extensively mentioned price trends.

In the promotion plan, there is a section called "Price Management", which states that trading companies can work together with the marketing team of potential customers to help influence the market price of tokens and make them responsive to relevant events.

The second part of the plan explains how to complete such an operation. The report states: "Prior to or during important news events, market-making algorithms may bias towards one side of the order book, thereby pushing prices up."

Due to the fact that this was accomplished at the order book level, rather than through artificially creating trading volume, the growth in token price appears more genuine." The plan also adds, "Please note that although DWF can provide artificial trading volume, it is essentially unnecessary due to competitive pricing.

This expression has been continuously used for a period of time. For a period of time, DWF Labs explained in its general language for advising clients that the company will use its market-making services and proprietary capital to trade clients' tokens to improve the token market. The plan states that this will result in "bullish sentiment, improved trading activity, and prices." The Block saw a document containing this wording in a proposal sent to potential clients, and a source familiar with the matter confirmed that this wording was used in multiple proposals.

This is also reflected in verbal conversations. A potential client told The Block that an employee of DWF Labs had pulled up a chart showing the rise in token prices after a previous collaboration in the past few months while trying to win business. A source familiar with the matter said that during a conference call with a potential client, if the other party showed hesitation, a senior executive of DWF Labs would start talking about the rise in token prices of previous collaboration projects.

This situation also exists in written communication. Another potential customer provided information earlier this year about a DWF Labs executive, confirming that they are offering services to increase the price of their tokens. In addition, a customer of DWF Labs provided information earlier this year showing that Andrei Grachev, a partner of DWF Labs, asked the customer how high they wanted to increase the token price and discussed whether the company could achieve this goal. The Telegram accounts of these two executives have been officially verified and can be confirmed as authentic.

Recently, according to two separate documents provided to two potential clients, it appears that DWF Labs has gradually phased out written language related to price management, at least in promotional materials.

Structure of Market Making and Venture Capital Trading

According to The Block, two proposals and a contract signed with potential clients were provided by DWF Labs. For market-making services, DWF Labs typically provides a service duration of more than one year. The two proposals indicate that this may involve obtaining loans in the form of project tokens.

According to these two proposals, DWF Labs will have a call option when obtaining a loan, which allows them to purchase the tokens of the project at the price agreed upon in the contract. This is a common feature of market-making contracts. If the token price reaches a certain level (known as the strike price), these options can be exercised. The purpose of this is to protect the market maker from losses caused by rising token prices during the service period when repaying the loan.

"Market makers must display both bid and ask prices. To obtain downside protection, they must choose the projects they are willing to hold exposure to. To obtain upside protection, they need to execute prices," said Jordi Alexander, Chief Information Officer of Selini Capital. He added that execution prices are typically close to the token price, but may also be slightly higher than the token price.

According to two insiders familiar with other cryptocurrency market-making companies, these execution prices are typically 100% higher than the token's initial price.

However, according to the terms of these two proposals, for DWF Labs, the execution price is set at many times the token price. This means that if the token price rises significantly, DWF Labs may achieve a higher return on investment.

A person familiar with DWF Labs operations directly stated: "If you are a market maker, you want the token price to rise. You can make money by pricing these tokens' options within a year, and you would want to exercise the options at a price lower than the pricing. That's where the profit comes from."

In a market-making proposal, DWF Labs made it clear that this will help promote the announcement of the project and increase interaction with its community. This is a priority internally. Insiders say the company will notify employees when the announcement is released and encourage them to post about it to maintain momentum and "strike while the iron is hot".

However, its external communication is not always clear. Unlike other cryptocurrency market makers, the company rarely provides detailed information about the market-making services it offers. A customer of DWF Labs said, "Usually you receive a detailed report. But for DWF Labs, things are not that detailed. To be honest, we really don't know what they are doing with these tokens." According to a contract seen by The Block between DWF Labs and another client, DWF Labs has the right to determine what information it provides in such reports.

Another customer stated that they did not receive a report from DWF Labs regarding the market-making services they are engaged in. The customer must contact the relevant cryptocurrency trading platform to confirm that they have indeed received the service promised by DWF Labs.

According to a client and two proposals for different potential clients, for locked token investments in the field of venture capital, trading companies typically seek larger discounts, up to 50%, with a lock-up period of one or two years. It will also be paid in stablecoins here.