Token investing and the next bull in digital wave finance

Venture capital is a key driver for many startups in the blockchain space. The founders know how competitive it is to get valuable VC funding to pay the lights and staff in the critical early days of a new project.

In a new interview series, Cointelegraph sat down with executives from some of the most active funds investing in the crypto space to get their perspective, hear their successes and failures, and find out what excited them about a new project in the Web3 space. .

This week, Cointelegraph spoke with Andrei Grachev, co-founder and market maker of crypto trading firm Digital Wave Finance (DWF) and managing partner of multi-stage Web3 investment firm DWF Labs. DWF Labs has been very active since late 2022, investing in Telegram Open Network (TON), Orbs, Radix, CryptoGPT (now Layer AI), and others.

Cointelegraph: DWF Labs seems to have come out of nowhere and started dominating the industry by force. Tell us more about the history of the fund and the background of its partners.

Andrei Grachev: DWF Labs started working in late 2021 and was founded by experienced partners of DWF, a very successful high-frequency trading company that has been operating since 2018. We want to recognize the potential of blockchain technology and explore investment opportunities in the industry. After making several small investments, we refined our investment strategy and risk tolerance. Since then, we have been actively investing in promising projects and consistently providing long-term funding.

CT: DWF Labs only invests in tokens. Many players in the industry see this approach as market manipulation. What is the reasoning behind this decision and why do you believe investing in tokens is the best approach?

AG: First of all, let me explain that every project we work on has different parts of the deal. While some involve pure venture investment, others may involve token purchases. Over the last 12 to 18 months we have seen an increasing number of market makers entering the investment space. While I can't speak for the entire industry, it seems to me that marketers are very supportive of projects that are critical to their growth.

For example, marketers typically have relationships with exchanges, and can assist with promotions by listing projects. However, it is an exchange to accept or not to accept the recommendations. Another advantage of working with market makers is that they can provide liquidity support for tokens when needed. In other words, market makers provide value beyond executing trades, which is why we believe investing in tokens is the best approach.

CT: How do you assess the risks associated with investing in tokens, and what steps do you take to mitigate those risks? Are there specific metrics or criteria that you use to evaluate a token's potential?

AG: As a Web3 investment firm, we have developed various investment proposals over time to assess project risks and potential. While we cannot fully describe our current investment strategy, we have identified a number of verticals that we are interested in supporting. On our website, we divide our investments into nine macro categories, which allows us to diversify our risk exposure within each vertical by selecting a few projects with different characteristics.

For example, if we identify a growing vertical where multiple players are building or building value, we will look at the possibility of supporting more than one project. If one project has a clear emphasis on infrastructure, the next project we choose may be on the B2B side, and the next on the retail side. This approach gives us comprehensive coverage of the vertical dimension of an industry.

When evaluating the potential of a token, we use different metrics and criteria that are specific and vertical to each project. We analyze the market size, competition, team experience and track record, tokennomics and community engagement among other factors. In addition, we will consult with industry experts to ensure that the project has a strong foundation and strong growth potential. While investing in tokens carries inherent risks, we believe that a diversified approach combined with rigorous research can mitigate those risks and generate positive returns for our investors.

Portfolio companies

CT: What does an ideal portfolio company look like for DWF? What do you prioritize: a founder's idea, personality, team or traction?

AG: Our investment portfolio is diverse, but there are a few categories that stand out due to their weight in terms of the number of investments. Decentralized Finance and Marketing, Metaverse and GameFi, and Infrastructure and Enterprise are the categories that seem to have caught our attention the most.

When it comes to prioritizing investment conditions, market adoption should be given priority. This is because a great idea or product without a large user base will not be successful in the long run. Addressable market size is also an important factor, as it helps determine a company's potential revenue and growth prospects.

Latest: ETF filings changed the Bitcoin narrative overnight – Ledger CEO

However, even with a large potential market and a good product, the team's ability to execute is essential to success. A talented and experienced team with a track record of success increases the likelihood of successful execution and effectively markets the product.

Finally, the buzz and noise of market demand and potential views can be useful, but they can also be misleading and should be taken with a grain of salt. It is important to evaluate the fundamentals and long-term success of the market rather than being swayed by advertisements or trends.

CT: You have invested in TON and EOS among others. Both projects have a complicated history and a controversial reputation in the industry. What do you find attractive about these projects?

AG: We invested in TON and EOS because they have the potential for market adoption and attainable market size. Both projects are ambitious and aim to address fundamental issues in the blockchain industry such as scalability and usability. We are impressed by the teams behind each project and their ability to execute their vision despite the challenges they face. Although there will certainly be controversies and obstacles along the way, we believe that these projects can have a significant impact on the industry, and we are willing to take the risk. Ultimately, our decision to invest in TON and EOS was based on a deeper analysis of their potential for long-term success than the current level of buzz or hype in the industry.

CT: One of your most recent investments is Crypto GPT. what is that?

AG: As stated in our investment research, we seek to reduce risk by diversifying our portfolio across certain industry verticals. This approach allows us to balance potential gains with potential losses. Our investment in Crypto GPT comes as we support various AI projects. The first version of Crypto GPT may not be impressive, we believe that our investment will facilitate further development and bring innovation to the market. Based on the current implementation, it is too late to completely cancel the project. For example, the first iPhone didn't have a copy/paste feature, but subsequent iterations improved on the original model. The Crypto GPT team is actively developing and launching new products, and we look forward to seeing the results in the long run.

CT: What's the best way to capture your passion for a startup?

AG: Our investment strategy is a combination of various evaluation criteria such as group, market, traction, competitive landscape and others. As we receive a large volume of funding applications each month, we prioritize the unique and unusual for projects that capture our attention. In traditional marketing terms, this is what we call a USP, or “unique selling proposition.” We value projects that demonstrate strength in their community and traction, as it allows us to easily identify potential gems and begin our due diligence process.

CT: What is your fastest growing portfolio company?

AG: There are several fast-growing projects in our portfolio, which makes it challenging to focus on just one. However, some projects have been able to grow their communities significantly, such as Generation Guild Games, which accelerated GameFi adoption. Conflux, with its signature partnership with China Telecom, and Coin98, which has seen massive adoption in Southeast Asia. In particular, Syntex is a leading financial enabler for the creation of synthetic assets. Syscoin has been working for years to provide a solution to the blockchain trilemma, and Fetch.ai offers comprehensive tools for developing, deploying and monetizing applications.

CT: How do you find the best deals?

AG: I owe it to my partners and our team who work tirelessly to find information, while evaluating the potential of existing projects and pursuing new projects. We also attend industry events to connect with the community, which is still very much connected through “decentralized human nodes”. These events give us the opportunity to network and expand our relationships, which is critical to securing promising deals.

CT: Many big names – including a16z, Shima and others – are investing in Web3 games, but all Metavas and game projects seem to be very predictable. Decentraland reportedly had 38 “active users” per day at one point in its $1.3 billion ecosystem. What do you think about Web3 games and meters?

AG: We, like many other VCs, are keeping a close eye on the Web3 games and metaverse space. While we see the potential of these projects to transform the gaming and virtual world industries, we also recognize the risks and challenges they face. It is true that some projects are highly estimated, but this is a new industry, and we are still in the early stages of testing. As with any new technology, it takes time to develop and gain widespread acceptance.

About the industry

CT: How will the industry change in the near term and long term?

AG: The industry is so large that it is difficult to talk about it without diving into each vertical. For example, the massive impact AI is having on the world cannot be ignored. Also, GameFi's phenomenal growth has contributed significantly to increasing adoption. And definitely, DeFi is here to stay.

Ever since the FTX bankruptcy, decentralized exchanges have been the talk of the day. Recently, there seems to be a renaissance of memecoins. Behind the noise of the token price is a huge building block. We are always interested in supporting builders. Currently, we are particularly interested in supporting infrastructure projects from layers to IoT and real-world assets. We believe these projects will play a vital role in shaping the future of the industry.

CT: Some critics of token investing argue that many tokens are not real investments but speculative assets subject to price manipulation and volatility, which has a negative impact on the entire industry. How do you respond to this criticism, and what evidence can you provide to support the idea that token investing is a legitimate form of investment?

AG: Token investing has been criticized as a form of speculation that lacks legitimacy as an investment vehicle. However, tokens are attractive to both retail and institutional investors. Tokens can be seen as the next evolution of stocks on stock exchanges. In traditional markets, the democratization of access to the stock market through platforms such as Robinhood and eToro has allowed retail investors to organize into communities that can advance their investment research beyond market logic. The development of memecoins is a prime example of this community approach to crypto investing.

Some memecoins have evolved into projects like Floki with a great ecosystem, while others exist only as speculative tools. After all, investing is profit and an investor who does not want to make profit is called a philanthropist. Therefore, a token investment should be evaluated based on its potential to generate returns as well as potential risks and rewards. Some tokens generate good profits based on their technological value, while others flourish only because of their growing fan community.

CT: The recent collapse of FTX, 3AC and others has not added any confidence or optimism to the crypto space, but recent events indicate that traditional financial institutions and the entire current financial system are in crisis. In your opinion, what is the best way to overcome these challenges?

AG: Finance is a very complex field at the crossroads between the economy on the one hand and government control on the other. Financial institutions are an important part of the everyday economy, and it is unfortunate when such institutions fail to comply with regulations or engage in deliberate malpractice.

As for overcoming challenges, there are a few approaches that can be taken. First, increasing transparency and accountability in the industry is critical. This can be achieved through industry self-regulation and self-policing. Secondly, the adoption of technological innovations and new business models will lead to more efficient and inclusive financial systems. Finally, educating the public and increasing financial literacy is essential to building trust and confidence in the industry. Collectively, the combination of these approaches allows for a stronger, more trustworthy financial system.

CT: This is a fast-growing multi-billion dollar industry, but to the general public, it can still seem like something related to illegal activities like money laundering. What can change this perception?

AG: This concern seems outdated, because in the last few years, there has been significant adoption of blockchain technology and Web3. Many portfolio companies have made a positive impact on communities worldwide. For example, the World Mobile token will disrupt the trillion dollar telecommunications industry by enabling connectivity for everyone in a shared economy and decentralizing network ownership. […] In order to avoid negative perceptions about the crypto industry, it is important to focus on the developers and the real value they bring to the world.

CT: What are the hottest topics in the industry right now? Just 1.5 years ago, invincible tokens were everywhere. Now, every major protocol has its own NFT marketplace but very few users. Are NFTs dead or do you expect them to evolve into something? What's the next big thing?

AG: Undeniably, NFTs have taken the world by storm, showing that massive crypto adoption is possible. Although their primary use case is closely related to self-expression, NFTs represent a mere speculative tool for some. In other words, the use case wasn't very strong to build on, but it was certainly a good starting point. Now, we've seen many more new use cases in NFTs, and we're sure many more will come soon.

For example, with the advent of advanced AI engines for art creation, the ability to launch a new set of NFTs is not limited to those with the technical skills for execution. Instead, it has been democratized, allowing anyone with an idea to execute it quickly and easily. This simplification and democratization is spilling over into no-code development, gaming and entertainment as widely as music and filmmaking. Marketing will also have a significant impact on the integration of AI, and we are seeing some projects emerging in this field.

CT: What do you think will create the next bull run?

AG: GameFi continues to lead the way in mass as the low-hanging fruit. What's especially interesting is seeing how AI integrations can bring highly interactive gaming experiences to life. For example, AI-driven non-player characters will have their own emotions and personalities and interact with players beyond their scripted existence. Therefore, we need to closely monitor how AI affects all industries.

CT: There are alarmists who think that AI will “steal jobs” and there are positive thinkers who are convinced that it will make our lives better and easier. What is your view? What significant changes could AI bring to the crypto industry?

AG: The idea that AI will steal jobs is true, but in practice, people who know how to control AI integration will replace the jobs of others. AI, by itself, will not steal anyone's work unless someone sets it up to do so. There may be many ethical consequences associated with the first results of AI integration. It is not too far-fetched to think that AI will be regulated in a similar way to finance.

Magazine: 6 Questions for JW Verret — The Blockchain Professor Who Follows the Money

As for the positive impact of AI, it has the potential to bring significant change to the crypto industry. For advanced data analysis and predictive modeling, AI can help traders make informed decisions and identify market trends. It can also be used to strengthen security measures, detect and prevent fraud and cyber attacks. AI can also help develop more efficient and effective blockchain protocols, leading to faster and more scalable networks. In general, I believe that AI will play an important role in the growth and development of the crypto industry, and the impact will be mostly positive if it is applied ethically and responsibly.