LD Capital How should we dance with the wolves by dissecting the DWF business logic?

Unlocking the Secrets of DWF's Business Logic Navigating the Dance with the Wolves in the LD Capital Way

Author: Yuuki & Jill, LD Capital

Introduction

Since the beginning of this year, DWF has gained popularity with continuous large investments, and the associated tokens have experienced significant price increases. How did DWF achieve this in the current bear market? And how can retail investors participate in related projects?

Summary

DWF is a product of the bear market under weak regulation. It takes advantage of the difficulties faced by project teams and the psychology of retail investors to achieve dual benefits. In the bear market, project teams generally face challenges in cashing out and raising funds. Directly selling tokens would undermine fragile market confidence, negatively impacting token prices and project ecosystems. In this scenario, DWF acts as a bridge for project teams to sell their tokens, assisting them through OTC or other marketing methods. Describing the act of selling tokens from project teams through OTC as strategic investments does not actually provide substantial help to the project’s long-term development. Instead, it merely facilitates the sale of tokens. By disguising the nature of the project teams’ indirect selling through promotional packaging, DWF profits from both the project teams and the market.

As a secondary market investor, upon seeing information about a project collaborating with DWF, it is important to first differentiate the nature of DWF’s business (secondary investment, OTC, market-making, marketing) and use different strategies accordingly. Based on previous market performances: 1) Projects in which DWF directly participates in secondary market investments should be closely monitored. These projects typically involve well-structured new coins listed on exchanges or meme coins. 2) Projects in which DWF buys tokens from project teams through OTC (packaged as strategic investments) often experience a few months of price decline before a rapid surge. After DWF deposits the tokens into exchanges, the price surge ends (usually within a week). 3) Genuine market-making projects by DWF do not experience significant price increases, but they often attract speculative trading activities, creating a short-term window for positioning. 4) The probability of profit and loss is relatively poor for market movements triggered by DWF-related marketing news. The underlying logic is that stakeholders utilize DWF’s current market influence to attract liquidity and sell off their positions. Once it is determined that DWF has the intention to drive up prices, a significant increase in contract positions and spot trading volume signals the start of the market trend. Interactions between DWF’s on-chain addresses and exchange addresses (at high prices), declining positions, and extreme negative funding rates often indicate the end of the market trend.

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Main Text

DWF Labs is a subsidiary of Digital Wave Finance (DWF), a global cryptocurrency high-frequency trading firm that has been involved in spot and derivative trading on over 40 top-tier exchanges since 2018. When DWF Labs first appeared in the cryptocurrency market, it was recognized as a market maker. DWF gained market attention starting with the explosive growth of Hong Kong concept coins such as CFX and ACH in the first quarter, followed by meme coins with tens of times the increase such as PEPE and LADYS in the second quarter, and more recently, listed projects like YGG and CYBER with multiple-fold increases. Among them, CFX, ACH, and YGG were obtained through OTC, while PEPE (MEME), LADYS (MEME), CYBER (Binance Launch Pool), and other coins were directly purchased through the secondary market by DWF due to their well-structured chip distribution.

Some DWF-related tokens have attracted market attention with their multiple increases.

The reasons behind the market attention on DWF are not only because the currencies it handles have significant price fluctuations, but also because it doesn’t get along with other peers. Well-known market makers Wintermute and GSR have publicly expressed dissatisfaction with DWF, considering it to be a poor-quality market maker and a bad actor.

Breaking down DWF’s business scope:

In the crypto market, investment and market-making are usually two distinct concepts. Investment usually refers to injecting funds into teams before the token sale to support project development, operations, marketing, etc., and receiving token shares with a locking period as a reward after the project goes live. On the other hand, market-making aims to build good liquidity for already issued tokens, reduce trading costs, and attract more traders. The income from investment activities comes from the token returns of the invested projects, while the income from market-making comes from market-making fees paid by the project, as well as the spreads earned during the market-making process. Notable investment institutions in the crypto market include A16Z, LianGuairadigm, and well-known market makers include Wintermute and GSR.

DWF has been criticized by participants in the crypto market for often confusing the concepts of investment and market-making. It positions itself as a Web3 venture capital and market-making firm on its official website, with three types of businesses: investment, OTC, and market-making.

Looking at the performance of past DWF-related projects, it mainly focuses on emotional themes, and the market-making currencies include CFX, MASK, YGG, C98, WAVES, etc. However, when looking at its past market-making cases, it is rare to find genuine support for the long-term development of projects. DWF usually chooses to inject funds at a discount and obtain tokens for “struggling” projects that have already issued coins, and then sell them for profit in the secondary market. Moreover, during this process, it often aggressively pumps up the price of the projects it has “invested” in, creating a money-making image for itself in the minds of retail investors, and then continues to sell this image advantage as a product to project teams. For example, by jointly disclosing large investment information with project teams, creating market optimism, and attracting liquidity to sell more coins.

Surface business: investment, market-making, OTC, marketing

Essence of the business: injecting funds into “struggling” projects, obtaining coins at a discount through OTC, selling them for profit in the secondary market; aggressively pumping up prices to build brand image and continue selling it as a product to project teams. Specific cases are as follows:

1. YGG & C98: OTC coin purchase, pumping up prices in the secondary market

On February 17, 2023, the gaming guild Yield Guild Games (YGG) raised $13.8 million through the sale of tokens, with DWF Labs and A16Z leading the investment (YGG had already issued coins in 2021).

Of note, DWF Labs received 8 million YGG tokens from the YGG treasury on February 10th and transferred 700,000 tokens to Binance on February 14th as their first transfer. On February 17th, media reported on the investment information, and thereafter DWF made two more transfers to Binance on June 19th and August 6th, each involving 3.65 million tokens. With regard to YGG’s price performance: on February 17th, YGG experienced a 50% increase due to the investment information, closing the day with a 33% increase. It then began a downward trend that lasted for 5 and a half months, until the beginning of August when the uptrend started and YGG rose over 7 times from its previous low. The uptrend ended with DWF transferring the final batch of YGG tokens to Binance.

If you are a secondary market investor, you could observe abnormal contract data at the beginning of the YGG uptrend. YGG’s contract data showed a rapid increase in open interest and stable fees in the early stages. In the mid-term, there was a slowdown in open interest growth and a decrease in fees. In the later stages, there was a decrease in open interest due to long positions being closed.

Similar trading strategies can also be observed in assets like CYBER: on August 22nd, DWF withdrew 170,000 CYBER tokens from Binance. At the time, the price of CYBER was around $4.5, and it subsequently experienced continuous price drops, reaching a low of $3.5. 7 days later, an uptrend in CYBER started, with the price reaching a high of $16.2. This resulted in a price increase of about 3.6 times compared to the price when DWF withdrew the tokens and about 4.6 times compared to the previous low. CYBER, as a Binance Launch Pool project, had a good initial token structure with relatively low selling pressure in the secondary market. DWF’s involvement in the CYBER project is inferred as buying and driving up the price in the secondary market, with less involvement with the project itself. (Similar to DWF’s involvement in Meme tokens like PEPE and LADYS in the second quarter of this year)

In terms of funding data, CYBER’s performance is similar to that of YGG: in the early stages, the contract data showed a rapid increase in open interest and stable fees. In the mid-term, there was a slowdown in open interest growth and a decrease in fees. In the later stages, there was a decrease in open interest due to long positions being closed.

On February 2nd, 2023, DWF’s on-chain address received a transfer of approximately 4.12 million tokens from Coin98’s official address, equivalent to around $1.11 million based on the market price on that day (with C98 trading around $0.27 in the secondary market). It was then immediately transferred to Binance. On August 8th, Coin98 announced receiving a seven-figure investment from DWF Labs to promote the widespread adoption of Web3. On October 12th, according to media reports, DWF transferred 1 million USDT to C98. Considering C98’s price performance, after DWF received the tokens and transferred them to the exchange, C98 briefly increased in price before entering a 5-month downward trend. Two days after the media reported on August 8th, the price increased by 58% from its previous low and then rapidly declined. Looking back at this event, its essence may be DWF acquiring coins from the C98 project at a discount and then selling them in the secondary market for profit.

C98’s data performance in the early stage of the rally was a significant increase in positions. The end of the market is marked by a decrease in positions caused by long liquidation and the return of rates.

Similar pumping techniques can be seen in symbols such as LEVER, WAVES, CFX, MASK, and ARLianGuai.

The above are recent typical DWF operation symbols. It can be seen that DWF usually participates in both contract and spot markets. In the early stage of the market’s rise, a large amount of money can be observed flowing into the contract market. Since the main force of money tends to go long on contracts in the early stage, it does not affect the rates while positions increase. In the middle term, it usually shows a spot market rally, with the main longs in contracts starting to close positions. This stage often sees a surge in spot prices and a significant negative rate on contracts, while the increase in positions stagnates or decreases. Some symbols may have a final pump to create liquidity and allow the main spot market to obtain better selling prices and liquidity. After the main longs in contracts take profit, the market will directly end. The key is to determine whether the profits from the continued rise in the spot market in the final stage outweigh the costs (including whether there is a key resistance level and whether there is a large amount of selling pressure in the market).

2. “Marketing” investments, on-chain transfers, and the use of brand image to create positive news and hide the nature of selling

As a new investment institution, DWF frequently takes action in the bear market and has cooperated with over 260 projects. According to media reports, DWF has invested in over 100 projects, including some with large amounts of investment. Some projects where the investment exceeded 5 million US dollars are:

DWF co-founder Grachev stated that DWF Labs has no external investors, but such frequent and large-scale investments raised doubts about where their funds came from. Many of the projects they invested in are not industry trending projects, but rather mostly older projects with average or poor fundamentals (such as EOS, ALGO, etc.). After announcing their investment, there has been no improvement in the product development, market marketing, and community cooperation of these projects. Some of DWF’s actions may be “marketing” investments to create positive news and attract retail investors, and then repeatedly speculate on the coin price in the secondary market in order to facilitate the team’s token sales. (FET announced a $40 million investment, but DWF has only received about $3 million worth of tokens so far)

In addition, on September 8th, the DWF on-chain address received a transfer of PERP from Binance. Previously, PERP had already increased several times in value. After the withdrawal from the exchange, there was a noticeable increase in buying pressure for PERP, causing a brief price spike followed by a significant sell-off, signaling the end of the bullish trend.

On October 17th, BNX announced a strategic partnership with DWF. Prior to this announcement, BNX had experienced a sharp increase in price for a week, but after the news was released, there was a rapid sell-off. It is highly likely that insider trading was involved, capitalizing on the brand effect of DWF to create liquidity for profit-taking.

Examples of project teams leveraging the brand influence of DWF to create positive news and attract liquidity for profit-taking are not uncommon. Market participants need to carefully discern information related to DWF. Many assets related to DWF have experienced continued price declines, such as EOS, CELO, FLOW, BICO, and others.

3. Seeking “challenged” projects to maximize profit by leveraging bargaining power in a bear market

Abracadabra (SPELL) is a stablecoin project backed by interest-bearing asset certificates (such as stablecoin LPs in Curve and stablecoin deposit certificates in Yearn). After experiencing the UST default (UST was previously an important underlying asset for Abracadabra, and after the UST default, Abracadabra accumulated a large number of bad debts) and a prolonged bear market, the protocol’s total value locked (TVL), token price, and development have all been struggling. On September 14th, they passed Proposal AIP#28, which introduced DWF as a market maker for SPELL. The market-making terms are as follows: 1. Abracadabra provides DWF with a $1.8 million SPELL loan for a period of 24 months; 2. DWF will buy $1 million worth of tokens from the DAO at a 15% discount to market price, with these tokens locked for 24 months; 3. Abracadabra pays DWF a European-style call option on the exercise date as market-making fees, which will be settled after the loan period ends.

The cost borne by the Abracadabra project team in these market-making terms is significantly higher compared to other market-making projects in the industry, including discounted token purchases and European-style options. From DWF’s perspective, short-term manipulation of the token price is advantageous for maximizing their interests. Combined with the market performance, the price of SPELL has been declining consistently since DWF entered the market. Specifically:

The proposal was voted on from September 11th to September 14th and was approved. As a result, the price of SPELL increased from its low point of 0.0003716 on September 11th to a high of 0.0006390 on September 19th, representing a maximum increase of 72% (market speculation).

On September 19th, Abracadabra provided a SPELL loan of 3.3M to DWF, which was then transferred to Binance. SPELL entered a downward trend and is currently priced at 0.0004416, representing a 31% decrease from its previous high.

From the funding data, it can also be observed that there is poor consistency in the short-term trend of SPELL. The 70% increase is driven by multiple funds, leading to high uncertainty.

In summary, DWF initially created a wealth effect and built its brand image through market manipulation. It is a product of the bear market under weak regulation, taking advantage of the development difficulties faced by project teams and the psychology of retail investors to profit from both ends. Project teams in the bear market generally struggle with difficulties in cashing out and fundraising. Directly selling tokens would negatively impact the fragile market confidence and significantly lower the token price, affecting the project ecosystem. In this scenario, DWF acts as a bridge for project teams to sell tokens, providing assistance through OTC or other marketing methods. Although the behavior of OTC token sales from project teams is portrayed as strategic investment, it does not provide substantial long-term help to the project but instead sells the tokens. By disguising this nature through propaganda packaging, DWF achieves profit from both project teams and users.

As a secondary market investor, after seeing information about a project collaborating with DWF, it is important to differentiate the type of business DWF is involved in (secondary investment, OTC, market making, or marketing) and utilize different strategies accordingly. Based on past market performance:

1. Projects where DWF directly participates in secondary market investments require closer attention, as these targets typically involve well-structured chips of newly listed coins or Memes.

2. Projects where DWF buys tokens from project teams OTC (packaged as strategic investments) often experience a few months of price decline in the secondary market, followed by a rapid pullback after DWF deposits tokens into exchanges (typically lasting no more than 1 week).

3. True market-making projects by DWF do not usually experience exponential price increases. However, they often attract speculative trading, presenting a brief window for positioning ahead of others.

4. The success rate and risk-reward ratio of price movements triggered by DWF-related marketing news are not favorable. The underlying logic is that vested parties exploit DWF’s current market influence to attract liquidity and sell off. When predicting DWF’s intention to pump, a surge in contract positions and spot trading volume is a signal that the market is starting. The interaction between DWF’s on-chain addresses and exchange addresses (at high prices), a decrease in positions, and extremely negative funding rates often signify the end of the market trend.

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