WEBVTT 1 00:00:03.497 --> 00:00:05.318 Bankless Nation, I'm here with Nick Forster. 2 00:00:05.358 --> 00:00:07.899 He's the co-founder and CEO of Derive. 3 00:00:07.919 --> 00:00:11.760 Derive is the largest on-chain options exchange on Ethereum. 4 00:00:12.000 --> 00:00:13.220 Nick, welcome to the show. 5 00:00:13.380 --> 00:00:13.881 Hey, David. 6 00:00:13.921 --> 00:00:14.681 Thanks for having me on. 7 00:00:15.041 --> 00:00:20.363 Nick, I want to kind of get to just some very basic questions about crypto and options, mainly... 8 00:00:21.183 --> 00:00:38.357 Options really haven't come online in the crypto sense in ways that the perpetual has, or in ways that if we extrapolated to from how much TradFi loves options, they don't, the options in crypto don't really meet that level of popularity in the crypto industry. 9 00:00:38.797 --> 00:00:39.858 And I want to know why. 10 00:00:40.218 --> 00:00:46.003 Like, why haven't options grown as large in crypto as we would have otherwise expected? 11 00:00:47.372 --> 00:00:48.553 Yeah, it's a great question. 12 00:00:48.773 --> 00:00:52.675 I think to some extent, it's the natural evolution of all financial markets. 13 00:00:52.835 --> 00:00:55.456 Options are always the last vertical to mature. 14 00:00:55.476 --> 00:01:11.084 You kind of need to anchor the market like some of these bigger, slower moving institutional players really trying to earn yield on their assets, whether it's equities in the equity market or in crypto, like on Bitcoin and ETH, or you need structural hedgers. 15 00:01:11.124 --> 00:01:13.225 So things like, you know... 16 00:01:13.625 --> 00:01:20.791 airlines hedging their jet fuel costs or farmers hedging the sort of price of their crop before harvest. 17 00:01:20.831 --> 00:01:25.514 Those are the big repeat flows that just take a while to emerge in a new industry, a new asset class. 18 00:01:25.995 --> 00:01:31.559 And for options, in crypto, speculation is dominated and options are good for speculation. 19 00:01:31.599 --> 00:01:39.586 But to really serve that use case, they need those guys in the market, selling options, creating a competitive two-way marketplace first. 20 00:01:40.226 --> 00:01:42.067 And it's just taken a long time for that to happen. 21 00:01:42.087 --> 00:01:43.948 But now it really is starting to accelerate. 22 00:01:44.388 --> 00:01:49.171 And what options do really well, and it's a criticism people give them often is like, there are just so many of them. 23 00:01:49.211 --> 00:01:51.812 There's so many choices and different strikes and expiries. 24 00:01:51.832 --> 00:01:53.033 And it's like kind of the point. 25 00:01:53.533 --> 00:01:55.874 It's the same reason prediction markets are beginning to take off. 26 00:01:55.894 --> 00:02:01.937 They give you this level of control and granularity and ability to express lots of different opinions about the market. 27 00:02:01.997 --> 00:02:07.920 And when typically you can do that in a more precise and defined way, you can make more money on your trading opinion when you're... 28 00:02:08.000 --> 00:02:08.340 correct. 29 00:02:08.440 --> 00:02:11.421 So I expect options to continue. 30 00:02:11.441 --> 00:02:13.642 They've started to really grow as a market share in crypto. 31 00:02:13.662 --> 00:02:16.863 I expect that to really, you know, kick on over the next couple of years. 32 00:02:17.143 --> 00:02:25.366 So your answer is that really there needs to be a pretty rich diversity of market participants in order for the options markets to grow. 33 00:02:25.646 --> 00:02:32.849 And maybe that stands in contrast to the perpetual as an instrument where really you just need two market participants. 34 00:02:32.989 --> 00:02:35.410 You need people to LP, you need people to lend. 35 00:02:36.110 --> 00:02:39.253 to the people going long or short, and then you need people going long or short. 36 00:02:39.393 --> 00:02:43.136 And the simplicity is maybe what allowed the perpetual to grow so fast. 37 00:02:43.616 --> 00:02:58.107 Options, on the other hand, has a wider variety of need of different participants doing different things to create the double coincidence of wants, and a lot of them in order for the options market to really manifest. 38 00:02:58.147 --> 00:02:58.608 Is that correct? 39 00:02:58.868 --> 00:03:01.069 Yeah, that's really, really well said. 40 00:03:01.689 --> 00:03:14.953 And I think to date in crypto, again, if you think about the assets that have been popular or available in the market, we've got this new recent wave of tokenized equities and commodities that's bringing big, useful assets on chain. 41 00:03:14.973 --> 00:03:26.917 But to date, we've had Bitcoin, Ethereum, maybe a couple other coins, but a lot of the coins that have done perpetrating, those meme coins or whatever it is, they last for two or three weeks before people move on to the next thing. 42 00:03:27.077 --> 00:03:30.638 And this is not enough time for that market and that coincidence of wants to develop. 43 00:03:31.178 --> 00:03:38.661 But now, as I said, you've got this, you know, more and more high quality crypto tokens that are emerging with longer term, more sophisticated holder bases. 44 00:03:38.681 --> 00:03:43.542 Like Hype is kind of the most recent one that's had a breakout options market over the last year for that reason. 45 00:03:44.423 --> 00:03:51.625 And then also you have, you know, all of these quality assets, RWAs, equities, commodities being issued and available and tokenized on chain. 46 00:03:52.345 --> 00:04:01.834 And I think those two trends are really, really good for the emergence of options markets and those coincidences of ones across the board. 47 00:04:01.914 --> 00:04:09.020 OK, so your primary answer, your first answer as to why options haven't come on chain yet is just a market structure one. 48 00:04:09.080 --> 00:04:11.623 The market structure for options is complex. 49 00:04:11.783 --> 00:04:12.584 It needs to be rich. 50 00:04:12.684 --> 00:04:13.664 It needs to be liquid. 51 00:04:13.985 --> 00:04:15.987 It takes time for these pieces to come together. 52 00:04:16.567 --> 00:04:18.228 What about technical constraints? 53 00:04:19.008 --> 00:04:23.690 Technically speaking, what has inhibited options from coming on chain up to this point? 54 00:04:23.710 --> 00:04:24.610 A couple of things. 55 00:04:24.650 --> 00:04:27.551 So one, we've been doing this for five years now. 56 00:04:27.711 --> 00:04:30.492 We started with like an AMM architecture back in 2021 on an L2. 57 00:04:33.273 --> 00:04:38.455 We've been kind of at the forefront, I think, of scaling and sort of blockchain technology since that time. 58 00:04:39.655 --> 00:04:53.239 Now we've kind of come to this model, which we think is the right structure, which involves, you know, like an off-chain order book and integrated RFQ for price matching and price discovery and all of these different instruments and low latency and written in Rust and very high performance. 59 00:04:53.319 --> 00:05:02.222 But the on-chain components, the critical pieces, self-custodial, portfolio margin, clearing and settlement is all happening in smart contracts. 60 00:05:02.322 --> 00:05:10.473 And now the systems are good enough to support all of that at like the level of like the institutional level that is kind of expected by a lot of traders. 61 00:05:10.513 --> 00:05:14.718 And we're now competing with, you know, centralized exchanges just on merit alone. 62 00:05:15.119 --> 00:05:17.321 The tech is finally good enough on that front. 63 00:05:17.401 --> 00:05:20.345 And I think on the other front, it just takes time to like really build out 64 00:05:21.046 --> 00:05:21.847 all of the stack. 65 00:05:21.887 --> 00:05:25.291 It's like a very difficult problem to solve to build liquidity. 66 00:05:25.431 --> 00:05:34.901 And I do think, I guess, one final reason for why options haven't been that successful is, again, like the most liquid venue in the market for a long time was Derivate. 67 00:05:35.402 --> 00:05:36.543 And they've done a great job. 68 00:05:36.583 --> 00:05:40.367 They did a great job of building a great business, but like never really managed to, you know, 69 00:05:40.567 --> 00:05:46.912 switch up their user interface or really go after like a broader audience other than like the big institutional OTC desk. 70 00:05:47.413 --> 00:05:56.180 And I think we're now on the cusp of, you know, we are kind of liquid enough for the very first time to start making a push at, you know, a more broader audience for options too. 71 00:05:56.560 --> 00:05:59.143 Is there an appetite conversation as well? 72 00:05:59.903 --> 00:06:05.968 I know we talked about like that we need more market participants who are interested in options to come online, obviously, but 73 00:06:07.029 --> 00:06:15.738 Has just the appetite, the typical investor base in the crypto market, the crypto industry, just have they just not been interested in options? 74 00:06:16.038 --> 00:06:19.842 Or is it really just a lack of a venue that has prevented them from having options? 75 00:06:20.002 --> 00:06:25.408 What can you say about the appetite of the typical crypto market participant up to like, you know, this year, for example? 76 00:06:25.628 --> 00:06:30.070 There was a step change on October 10 last year, the 1010 crash. 77 00:06:30.150 --> 00:06:33.792 So we had like very little interest across the board up until 1010. 78 00:06:34.192 --> 00:06:37.134 I think what 1010 did was showcase a couple of things. 79 00:06:37.674 --> 00:06:50.821 One was that like it obviously the obvious point is that perps are very path dependent and you can do everything right and be delta neutral and manage your risk and yet still get blown out on like a scam whip to the downside. 80 00:06:51.361 --> 00:06:53.041 And a lot of people lost a lot of money doing that. 81 00:06:53.141 --> 00:06:55.542 Options, you know, you lose in other ways and options. 82 00:06:55.562 --> 00:06:57.142 You put a bet on, you buy an option. 83 00:06:57.402 --> 00:06:59.023 You have to get the timing, right? 84 00:06:59.143 --> 00:07:01.783 Otherwise, if you don't, you're going to lose your whole premium. 85 00:07:02.104 --> 00:07:03.844 But at least you've kind of locked into that bet. 86 00:07:03.864 --> 00:07:10.325 Whereas with perps, you can be very right on everything and still have like a bad print on where it can get liquidated if you're using leverage. 87 00:07:10.526 --> 00:07:14.286 And people found that out on 1010 and started looking for other forms of leverage. 88 00:07:14.306 --> 00:07:17.227 And that's when they started to think on the speculation side of things. 89 00:07:17.367 --> 00:07:21.008 Okay, we're going to look to maybe trade options and use them for that. 90 00:07:21.428 --> 00:07:27.292 I think on the other side, there's this whole like, really, you use options for three things. 91 00:07:28.152 --> 00:07:29.713 Speculation is clearly one of them. 92 00:07:30.514 --> 00:07:33.876 Hedging is one of them because you can sort of buy insurance and buy downside. 93 00:07:33.896 --> 00:07:34.836 And then yield generation. 94 00:07:34.856 --> 00:07:42.541 You can sell options on your asset and ring yield out of any asset, not just USDC, but stocks and whatever, by selling the volatility and expressing that view. 95 00:07:43.461 --> 00:07:48.884 I think the other thing that happened on 1010 was it was the death knell for two big sources of yield in crypto. 96 00:07:48.904 --> 00:07:51.466 The first was the basis trade. 97 00:07:51.506 --> 00:07:57.049 Like it was already on the decline and this like truly killed it where the leverage in the industry got wiped and those rates got reset. 98 00:07:57.069 --> 00:08:06.434 And there were a lot of like hedge funds, family offices, liquid funds that had built their entire like four year trajectory and like track record on earning, you know, 10 to 15% delta neutral. 99 00:08:06.494 --> 00:08:08.775 And that went up in flames on 1010. 100 00:08:09.135 --> 00:08:12.277 And the second was it crushed a ton of token valuations across the space. 101 00:08:12.757 --> 00:08:23.361 And there were a lot of teams kind of playing this game where you would sell tokens pre-TGE and get TVL into your protocol and make it look like you had traction. 102 00:08:23.802 --> 00:08:32.505 And you could sort of promise investors some sort of a yield in your own native token on that and hedge it out with OTC markets or some of the Pendle pre-market point stuff. 103 00:08:32.685 --> 00:08:33.886 Not that Pendle had anything to do with it. 104 00:08:33.906 --> 00:08:36.667 It was just like a function of people were using that as the venue to clear. 105 00:08:37.567 --> 00:08:37.968 And so... 106 00:08:38.928 --> 00:08:41.249 That got wiped out too because all the valuations got crushed. 107 00:08:41.549 --> 00:08:49.072 So at that point, you have this really nice beginning of an inflection point for options where the speculators started looking into it. 108 00:08:49.132 --> 00:08:58.335 And also on the yield generation side, it was the only place you could earn yield in crypto and it has been sustainably really for the last year at institutional scale. 109 00:08:59.075 --> 00:09:03.317 And those trends have been a tailwind and a turning point in the market. 110 00:09:03.457 --> 00:09:04.378 That's fascinating. 111 00:09:04.598 --> 00:09:10.582 I was not ready for the idea that 1010 was a tailwind for options. 112 00:09:10.922 --> 00:09:13.704 Can we go into why that's true? 113 00:09:14.345 --> 00:09:21.590 What about the market structure of a perpetual does an option buffer against? 114 00:09:21.630 --> 00:09:24.912 What are options strengths against the perpetual? 115 00:09:24.992 --> 00:09:31.337 And why was 1010 so illustrative about the strength of an option and the risk of a perpetual? 116 00:09:31.557 --> 00:09:32.697 Yeah, I'll give you an example. 117 00:09:32.737 --> 00:09:33.618 And like perps are great. 118 00:09:33.658 --> 00:09:34.918 Like you can use them for lots of things. 119 00:09:34.938 --> 00:09:36.779 They're just not the solution to everything. 120 00:09:36.799 --> 00:09:40.780 And I think that's been a lot of people's opinion in crypto to date is that you have perps. 121 00:09:40.820 --> 00:09:41.781 Why do I need anything else? 122 00:09:41.901 --> 00:09:44.822 I'll give you an example from a trade that went up on Derive yesterday. 123 00:09:45.902 --> 00:09:50.284 And it was a user buying the Ethereum, March, 2027 expiring. 124 00:09:50.304 --> 00:09:52.244 So we got about six months from time of recording. 125 00:09:52.264 --> 00:09:56.166 It was the, they were buying the 5,000 calls and selling the 7,000 calls. 126 00:09:56.186 --> 00:09:59.007 So that's a 5,000, 7,000 call spread expiring in March. 127 00:09:59.839 --> 00:10:02.720 He has put down $300,000 worth of premiums. 128 00:10:03.501 --> 00:10:18.328 If ETH goes to 7K by March, that cold spread will pay out about $20 million, which is about like, you know, you could look at it as like a 66X payout on the original 300 grand in capital with ETH at like $2,500. 129 00:10:20.065 --> 00:10:28.995 Now, if you were to try and like get 66X leverage on a PUP, let's use $1,000 as the example because it's easier to work with the 300,000, but it's the same thing scaled up. 130 00:10:29.555 --> 00:10:31.257 You do like $1,000 at 66X leverage. 131 00:10:31.277 --> 00:10:33.900 At 10% funding, you get a $66,000 position on ETH. 132 00:10:37.682 --> 00:10:47.028 if there's a negative 1.5% drawdown from the current spot, which we might have just seen in the last 10 minutes before recording this, you're getting instantly liquidated. 133 00:10:48.108 --> 00:10:52.191 And that's at 66x leverage, which is like, you know, kind of reckless and big. 134 00:10:52.471 --> 00:10:57.714 You also have the double beat of the funding rate is, you know, typically around 10% for these things. 135 00:10:58.554 --> 00:11:06.239 After a year on $66,000, that's, you know, $6,600 in funding, which is six times as much margin as you're putting down in the 136 00:11:06.239 --> 00:11:10.381 You just can't express that view in any way, shape or form using the perps. 137 00:11:11.241 --> 00:11:17.904 And so we're starting to find users beginning to express those leverage speculative bets using options versus perps. 138 00:11:18.584 --> 00:11:24.806 And I think the other thing to note is on 10.10, people weren't doing 66x leverage. 139 00:11:24.906 --> 00:11:25.587 They were doing... 140 00:11:26.347 --> 00:11:30.288 you know, 1.5x leverage or 1.25x leverage. 141 00:11:30.308 --> 00:11:36.590 And you can get those big dislocations on a given exchange where it's like a one touch on the liquidation. 142 00:11:36.810 --> 00:11:37.910 It's not some TWAP. 143 00:11:38.170 --> 00:11:40.231 It's you can, you know, you're path dependent. 144 00:11:40.571 --> 00:11:51.514 And if the exchange infrastructure, the liquidity is shaky, you can get ADL'd even if you have, maybe you have a long on one alt and a short on another or a long Bitcoin shorty, you have your correlation hedge. 145 00:11:52.394 --> 00:11:54.235 doesn't matter, you're getting wiped out nonetheless. 146 00:11:54.335 --> 00:11:55.835 And I think that's what a lot of people found out. 147 00:11:55.855 --> 00:11:58.196 So obviously the example I gave was extreme. 148 00:11:58.216 --> 00:12:03.938 You can't really replicate that payoff with perps, but that scales into the shorter dated, lower leverage stuff too. 149 00:12:04.199 --> 00:12:15.263 Would you say that it's accurate that a perpetual as an instrument is better for longer tail assets on shorter term timeframes and options are better for 30%, 150 00:12:15.663 --> 00:12:19.045 batter tail assets on longer term timeframes. 151 00:12:19.185 --> 00:12:29.733 And like what I'm really getting out of that story is that going leverage long on a perpetual exposes you to a number of risks beyond just the price of the asset. 152 00:12:29.993 --> 00:12:33.636 You know, platform risk, contagion risk. 153 00:12:33.696 --> 00:12:42.102 You said path dependency risk where with an option I can have an extreme option, something very, very high out on the risk. 154 00:12:42.442 --> 00:12:45.144 But I won't be liquidated on my way there 155 00:12:45.544 --> 00:12:49.587 I will only be liquidated at the date of expiry, which is by design. 156 00:12:49.667 --> 00:12:56.972 And that's not true with a perpetual, a perpetual, you could be directionally correct, but still get liquidated on the way there. 157 00:12:57.092 --> 00:12:59.433 And so just bluntly, 158 00:13:00.560 --> 00:13:09.524 perpetuals are better for longer tail assets in shorter term timeframes and options are better for fatter tail assets on longer term timeframes. 159 00:13:09.544 --> 00:13:11.024 Would you say that that's a fair summary? 160 00:13:11.264 --> 00:13:11.505 Yeah. 161 00:13:11.705 --> 00:13:16.387 I mean, I would even argue that you can still speculate better on the short term with options too. 162 00:13:17.067 --> 00:13:18.187 Again, they're more precise. 163 00:13:18.327 --> 00:13:19.648 They're still less path dependent. 164 00:13:19.688 --> 00:13:21.209 You can get a lot more leverage out of them. 165 00:13:21.249 --> 00:13:22.629 People don't quite realize that. 166 00:13:22.729 --> 00:13:24.010 They are a little more complicated. 167 00:13:24.090 --> 00:13:24.150 And 168 00:13:25.470 --> 00:13:27.371 I'm not out here advocating people do that. 169 00:13:27.511 --> 00:13:33.333 Like you need to have an opinion and I think you should just consult and see whether like, what is the best way to express it? 170 00:13:33.353 --> 00:13:38.455 And the trade off to be very explicit around options is you have to be right within the timeframe. 171 00:13:38.795 --> 00:13:46.738 The bull case for perps in my example is if the price of Ethereum never moves for six months, you get your money back in the perp case minus the funding. 172 00:13:48.219 --> 00:13:51.280 Whereas in options case, you're losing it if it doesn't go beyond 5K. 173 00:13:51.680 --> 00:13:56.123 You get to 4,500 beats and you still would expire at zero. 174 00:13:56.183 --> 00:14:04.728 So, you know, there are like trade-offs here, but it's about like the bet that you make and kind of making sure that you know that you're expressing in the best way possible. 175 00:14:04.989 --> 00:14:09.912 So options and perps are just so frequently placed head-to-head with each other. 176 00:14:10.012 --> 00:14:12.934 Like perp bulls will tell you that like options are obsolete. 177 00:14:13.034 --> 00:14:14.575 You know, perps are the cool new thing. 178 00:14:14.995 --> 00:14:17.697 Just like options are for boomers, they're for TradFi. 179 00:14:17.777 --> 00:14:20.759 Like we found this cool new thing called the perp and it's going to replace everything. 180 00:14:21.319 --> 00:14:29.924 And like directionally, both of these instruments allow you to take a small amount of capital and get an outsized amount of return if you are correct. 181 00:14:30.224 --> 00:14:33.166 And so directionally, the form factor is like congruous. 182 00:14:34.287 --> 00:14:36.768 Is it fair to say options versus perps? 183 00:14:37.148 --> 00:14:38.489 Is it really verse? 184 00:14:38.809 --> 00:14:46.994 Like how much verse is it versus it just being just these are two different instruments that actually don't conflict with each other? 185 00:14:47.234 --> 00:14:47.994 Do you have an opinion on this? 186 00:14:48.294 --> 00:14:48.875 That's the thing. 187 00:14:48.935 --> 00:14:50.395 They're completely complementary. 188 00:14:51.036 --> 00:14:55.878 And we support options in perps, like portfolio margined and cross margined on derive. 189 00:14:55.938 --> 00:14:58.239 Like you need them both in different spots. 190 00:14:58.939 --> 00:14:59.999 And perps are great. 191 00:15:00.019 --> 00:15:01.220 As I said, great instruments. 192 00:15:01.240 --> 00:15:03.821 You're not going to hear me arguing against perps at any point in time. 193 00:15:03.881 --> 00:15:05.261 But you need options also. 194 00:15:06.202 --> 00:15:09.943 Because I would say perps are, yeah, like more of a blunt instrument that's simple to use. 195 00:15:09.963 --> 00:15:13.385 You have a leverage slider that good for price discovery and short dated speculation. 196 00:15:13.945 --> 00:15:16.306 Options are much more like a Swiss Army Knife. 197 00:15:16.406 --> 00:15:29.233 The reason we started Derive in the first place was because you can create any payoff structure imaginable for hedging, yield generation, or speculation out of a different combination of calls and puts. 198 00:15:29.673 --> 00:15:42.464 And so you put them into a programmable environment for capital and you've kind of got like, it's like the perfect form factor for, you know, like the on-chain economy, in my opinion, because they're so malleable and flexible and programmable. 199 00:15:42.985 --> 00:15:45.026 And that was the thesis we started with five years ago. 200 00:15:45.046 --> 00:15:46.528 It's the thesis we still believe today. 201 00:15:46.948 --> 00:15:48.750 I do think that's something perps can't replicate. 202 00:15:48.770 --> 00:15:49.810 And I think they go hand in hand. 203 00:15:49.871 --> 00:15:55.736 Perps for like quick price discovery, pre-market stuff, excellent for speculation, options for, you know, 204 00:15:56.316 --> 00:16:02.258 like almost everything else, structured products, yield generation, fine-tuned hedging and speculation. 205 00:16:02.978 --> 00:16:05.378 And I think the whole thing really kind of comes together. 206 00:16:05.398 --> 00:16:08.679 And the vision for what we've been trying to build is the infinite payoff factory. 207 00:16:08.699 --> 00:16:14.361 You can really build any trade on any asset 24-7 in a programmable way. 208 00:16:14.861 --> 00:16:17.322 And that's what we've been setting up for this whole time. 209 00:16:17.342 --> 00:16:20.402 And finally starting getting close to realizing that vision, I think. 210 00:16:20.623 --> 00:16:21.703 How do you like this comparison? 211 00:16:22.623 --> 00:16:33.185 In crypto, the AMM really beat out the order book on-chain as like in the first, and maybe even to this day, the iteration of just like liquidity and DEXs. 212 00:16:33.705 --> 00:16:37.866 The AMM really found resonance with like the nature of a blockchain. 213 00:16:38.286 --> 00:16:40.107 It was really good for long-tail liquidity. 214 00:16:40.127 --> 00:16:44.928 It was really good for centralizing liquidity in one single place, whereas like the on-chain order book 215 00:16:45.568 --> 00:16:47.048 It's just there's more moving parts. 216 00:16:47.369 --> 00:16:49.289 It's harder to bootstrap liquidity. 217 00:16:49.729 --> 00:16:53.430 You need more sophisticated actors to do market making. 218 00:16:54.171 --> 00:16:59.552 But me as like a retail less sophisticated trader, I'm not doing order book management. 219 00:16:59.652 --> 00:17:02.253 I'm buying and selling into the liquidity. 220 00:17:02.813 --> 00:17:15.204 And that kind of seems to be like an order book seems to be more like an options platform, whereas the perpetual seems to be more like the AMM, where it's so much more passive and simple and accessible. 221 00:17:15.785 --> 00:17:20.109 And maybe that's why it just kind of got bootstrapped in the crypto context first. 222 00:17:21.070 --> 00:17:26.915 How do you like this comparison where like order books are more like options and AMMs are more like perpetuals? 223 00:17:27.502 --> 00:17:28.983 I don't hate that at first pass, actually. 224 00:17:29.003 --> 00:17:29.723 I kind of like it. 225 00:17:30.003 --> 00:17:35.945 I would say it's definitely true that perps are one. 226 00:17:36.205 --> 00:17:37.745 It's great to unify liquidity. 227 00:17:37.845 --> 00:17:39.906 It's one instrument per asset. 228 00:17:41.087 --> 00:17:43.027 It is certainly easier to market make. 229 00:17:43.307 --> 00:17:47.229 And that's why it's easier to spin up new perp taxes in theory and get liquid. 230 00:17:48.489 --> 00:17:50.069 And they both have their roles to play. 231 00:17:50.570 --> 00:17:51.050 I do think 232 00:17:52.244 --> 00:18:03.889 if I had to sort of draw the distinction, I do think AMMs, as someone who was building early AMM technology and we did okay with it, they do have a fundamental limit on like how good they can get in terms of 233 00:18:06.247 --> 00:18:08.668 you know, competitiveness in the market in the long run. 234 00:18:08.768 --> 00:18:12.488 And I do think that differs from perps and the perps are just going to be really, really big. 235 00:18:12.548 --> 00:18:15.049 I am very bullish on perps in the long run. 236 00:18:15.089 --> 00:18:21.630 And I don't think it's going to be a, you know, it's going, as I said, it's going to be both. 237 00:18:21.990 --> 00:18:29.912 Whereas I think, I don't really know the latest on the AMMs, but my gut feeling is with the Uniswap before, they do kind of function behind the scenes 238 00:18:30.912 --> 00:18:39.341 In terms of like how participants engage with them, like how they would similar to an order book, it has to be really actively managed if you want to make money over the long run. 239 00:18:40.062 --> 00:18:49.112 Having said that, Uniswap, again, for the longest of tail assets, where no market makers are going to touch the beginning, it's still great for spinning up, you know, new pools, new assets, new liquidity, which I love. 240 00:18:49.377 --> 00:18:57.406 I've been trading crypto for almost a decade, and I've used so many different wallets, exchanges, aggregators, different front ends over the years, and I'm always kind of looking for the same thing. 241 00:18:57.566 --> 00:19:07.578 Just one interface with deep liquidity across a bunch of chains and assets where I can access all the markets like perps, earn yield, trade confidentially, and still control all my own funds. 242 00:19:07.898 --> 00:19:09.859 And I've never really found this experience. 243 00:19:09.899 --> 00:19:13.981 And I'm always switching wallets, juggling gas fees, and just getting eaten by slippage. 244 00:19:14.261 --> 00:19:15.942 Near.com is not that. 245 00:19:16.242 --> 00:19:17.823 It feels fundamentally different to me. 246 00:19:17.903 --> 00:19:22.325 I can do everything I want from any chain, and I keep all my activity confidential. 247 00:19:22.525 --> 00:19:25.306 I can even earn yield confidentially. 248 00:19:25.546 --> 00:19:27.307 It's the way crypto should work. 249 00:19:27.487 --> 00:19:37.192 The Near.com wallet is powered by Near, and it's moved over $25 billion cross-chain, using post-quantum signing, and has run over five years on mainnet with zero downtime. 250 00:19:37.352 --> 00:19:40.593 Near.com is simply the best way to be on-chain and be in control. 251 00:19:40.733 --> 00:19:45.675 Get 20% of your trading fees back using the Bankless link in the show notes, not investment advice. 252 00:19:45.835 --> 00:19:47.455 Bankless Nation, we've built something for you. 253 00:19:47.615 --> 00:19:49.396 Introducing the Bankless MCP. 254 00:19:49.516 --> 00:20:00.500 ChatGPT and Claude are great at a lot of things, but ask them anything beyond the basics of crypto about protocol mechanics, tokenomics, or just what happened last week in crypto, and the gaps will start to show. 255 00:20:00.600 --> 00:20:01.580 The problem is context. 256 00:20:01.740 --> 00:20:06.667 Bankless, on the other hand, has spent almost a decade building one of the deepest archives of crypto data anywhere. 257 00:20:06.807 --> 00:20:13.037 More than 2,000 podcast transcripts, 10,000 articles, and countless conversations with the people actually building this industry. 258 00:20:13.237 --> 00:20:16.422 And now we've structured all of that data into the Bankless MCP. 259 00:20:16.702 --> 00:20:24.189 So you can go and connect it to your Claude or ChatGPT and suddenly your AI can answer your crypto queries with the entire Bankless archive behind it. 260 00:20:24.309 --> 00:20:30.154 And every new Bankless article or episode gets added automatically so the context keeps staying up to date. 261 00:20:30.414 --> 00:20:34.358 The Bankless MCP is exclusively available to Bankless premium subscribers. 262 00:20:34.578 --> 00:20:38.681 So you can go to Bankless.com, upgrade to premium and connect the MCP in just a few minutes. 263 00:20:38.782 --> 00:20:43.706 And all of a sudden, your crypto queries to your AI, LLM, whatever you use, will get a thousand times better. 264 00:20:43.826 --> 00:20:44.467 So go check it out. 265 00:20:44.567 --> 00:20:45.768 There is a link in the show notes. 266 00:20:45.828 --> 00:20:50.011 And once you become a Bankless Premium member, you can hop into the Bankless Discord and let me know how you like it. 267 00:20:50.131 --> 00:20:50.791 Some exciting news. 268 00:20:50.892 --> 00:20:55.635 We are launching a new podcast to help people figure out the crypto cycle, how to navigate it. 269 00:20:55.715 --> 00:20:58.397 The best crypto cycle investor I know, his name is Michael Nato. 270 00:20:58.497 --> 00:20:59.538 He runs the DeFi Report. 271 00:20:59.598 --> 00:21:04.362 This is the guy that sent me a sell alert before the 1010 price drop happened. 272 00:21:04.542 --> 00:21:07.004 His cycle analysis has been absolutely on point. 273 00:21:07.084 --> 00:21:08.425 I've been following him for years. 274 00:21:08.605 --> 00:21:12.008 And this year we started recording weekly podcast episodes. 275 00:21:12.168 --> 00:21:19.933 Each one, we get into his portfolio, what he's holding, the market structure, entry targets, fair market value of Bitcoin and Ether, and where we are in the cycle. 276 00:21:20.033 --> 00:21:22.435 There's new episodes that are released every Wednesday. 277 00:21:22.495 --> 00:21:23.215 They're 30 minutes. 278 00:21:23.296 --> 00:21:23.756 They're short. 279 00:21:23.796 --> 00:21:24.436 They're punchy. 280 00:21:24.556 --> 00:21:26.938 I think this crypto cycle is harder to navigate than most. 281 00:21:27.178 --> 00:21:28.419 So let's do it together. 282 00:21:28.559 --> 00:21:29.760 Go subscribe to this podcast. 283 00:21:29.820 --> 00:21:32.422 Search The DeFi Report wherever you get your podcasts. 284 00:21:32.482 --> 00:21:35.564 YouTube, Apple, Spotify, or find a link in the show notes. 285 00:21:35.684 --> 00:21:37.245 There's a new episode waiting for you now. 286 00:21:37.525 --> 00:21:39.626 This was a super educational section. 287 00:21:39.746 --> 00:21:40.367 It's for me. 288 00:21:40.407 --> 00:21:41.267 I really, really enjoyed this. 289 00:21:41.327 --> 00:21:45.330 I want to move on to just the sector, the options sector in crypto. 290 00:21:45.350 --> 00:21:50.393 Can you just paint some numbers as to how big options are in crypto? 291 00:21:50.793 --> 00:22:06.323 And then is it possible also just to talk about how big options are generally speaking so we can kind of like anchor the size of the crypto industry options market versus what we hope it to be if we were to extrapolate like TradFi's options market? 292 00:22:06.443 --> 00:22:15.269 Yeah, I think relative to perps, in terms of the crypto market, my stats could be slightly off on this, but I think order of magnitude is probably correct. 293 00:22:15.289 --> 00:22:18.292 We're like 3% or 4% of the perp market. 294 00:22:18.372 --> 00:22:22.134 And in TradFi, they're about the same, if not options being slightly bigger. 295 00:22:23.335 --> 00:22:27.438 So that's like 30 or 40x to go to sort of equalize to where we are. 296 00:22:28.039 --> 00:22:33.743 In TradFi, I mean, the absolute numbers are staggering in terms of the amount that options desks 297 00:22:34.363 --> 00:22:38.605 are making on the market maker side, how much volume is going through them, there really was an inflection point. 298 00:22:39.125 --> 00:22:44.248 I was on a desk at Susquehanna in 2019, 2020, 2021. 299 00:22:44.608 --> 00:22:55.173 It's kind of at the beginning of that inflection point around, you know, zero commission trading with Robinhood leading to some early meme-like activity on cannabis stocks through to the pandemic. 300 00:22:55.193 --> 00:22:57.614 And then finally, like the GameStop stuff in 2020, 2021. 301 00:22:59.115 --> 00:23:01.498 And that's really when we saw that inflection point. 302 00:23:02.158 --> 00:23:04.221 And the numbers just have continued to grow since then. 303 00:23:05.122 --> 00:23:11.028 Globally, it is an enormous market, both from a retail perspective as well as like an institutional hedging perspective. 304 00:23:11.509 --> 00:23:14.732 A lot of that activity doesn't even show up on the exchange. 305 00:23:14.912 --> 00:23:18.957 A lot of it is in OTC bilateral type deals as well. 306 00:23:18.997 --> 00:23:20.799 I think the market split is like, you know, 307 00:23:21.299 --> 00:23:22.200 50-50 even. 308 00:23:22.640 --> 00:23:25.043 So there's double the actual amount of reported volume. 309 00:23:25.483 --> 00:23:29.006 In terms of actual roll stats, it's really hard to come up with. 310 00:23:29.086 --> 00:23:31.108 It's in the quadrillions of notional volume. 311 00:23:32.309 --> 00:23:38.114 You have deaths from single market makers turning out like $3 or $4 billion of profit in a quarter. 312 00:23:38.855 --> 00:23:41.357 You're hearing like the sort of Jane Streets of the world now. 313 00:23:42.158 --> 00:23:43.459 It's just gargantuan numbers. 314 00:23:43.900 --> 00:23:43.960 And 315 00:23:45.556 --> 00:23:57.806 you know, this broader trend in markets where there are so many people with, you know, money and opinions on the markets and, you know, the sort of finance and the value of the stock market has just gone up so much. 316 00:23:58.347 --> 00:24:00.569 And all of these trading tools are getting democratized. 317 00:24:01.550 --> 00:24:04.092 And, you know, costs to entry are coming down. 318 00:24:04.152 --> 00:24:11.858 And, you know, at some point in the next 10 to 15 years as well, you're going to have this big wealth transfer from the boomers over to the younger generations. 319 00:24:11.919 --> 00:24:12.019 And, 320 00:24:12.559 --> 00:24:18.721 But yeah, I think trading will continue to just have this big tailwind behind it in general. 321 00:24:19.001 --> 00:24:26.404 As we know in crypto, the exchange is the first business of crypto, the first business after producing hard assets. 322 00:24:26.424 --> 00:24:34.067 So after we built blockchains, we built Bitcoin, we built Ether, we built the monies, the next big product in crypto is the exchange. 323 00:24:34.787 --> 00:24:37.208 And it's the most lucrative business model in crypto. 324 00:24:38.149 --> 00:24:42.933 And then the perpetual, again, exchanges love perps because of how lucrative perps are. 325 00:24:43.053 --> 00:24:49.618 Like you just take a spot exchange, you ratchet it up by 3x, 5x, 10x, and that's the amount of fees that you get. 326 00:24:50.079 --> 00:24:52.861 And so super lucrative industry here. 327 00:24:52.901 --> 00:24:55.103 Like the exchange is just like such a cash cow. 328 00:24:55.830 --> 00:24:58.813 How lucrative are options as a product? 329 00:24:58.953 --> 00:25:03.577 And like, what is that actual like fee structure or take rate look like? 330 00:25:03.597 --> 00:25:09.001 Can you kind of paint a picture of the economics of options as an exchange? 331 00:25:09.281 --> 00:25:17.088 Yeah, as an exchange, I mean, we do have, I think the lowest fees of like any liquid marketplace in general, it's like a, you know, 332 00:25:17.668 --> 00:25:39.098 basis point structure like on the notional um i think our headline rates around three basis points um for takers uh lower for makers as well on the notional value it's capped because some options are uh you know very like tail or wingy so they cost a lot of like not very much money to get a lot of notional exposure like the out of the money deep out of the money stuff and those are capped at like a 333 00:25:39.378 --> 00:25:40.578 you know, percentage of the premiums. 334 00:25:41.658 --> 00:25:59.802 We're confident we have the lowest fees, but the business model in general, because they are more specialized, because it's harder to build liquidity for, there are stronger network effects around options exchanges, even more so than perps because of how slow moving the anchor, you know, participants are, the big institutional traders who are building the market. 335 00:26:00.042 --> 00:26:07.584 It's why Derivate had such a, you know, stranglehold on the market despite well-funded attempts from, you know, Binance to sort of muscle in in 2020, 2021. 336 00:26:08.484 --> 00:26:10.145 And they had more liquid perps, Binance did. 337 00:26:10.485 --> 00:26:11.205 But it doesn't matter. 338 00:26:11.225 --> 00:26:14.067 It's about like that options liquidity network effect. 339 00:26:14.947 --> 00:26:17.668 So yeah, there's a lot of, I would say, pricing power. 340 00:26:17.728 --> 00:26:22.771 At the same time, we are running, you know, Derive to try and encourage people to come and build on top of us. 341 00:26:23.431 --> 00:26:27.553 And the new version that we have out in a month is going to make it exceptionally easy to do that. 342 00:26:27.893 --> 00:26:34.956 We want people to come in and build, you know, retail interfaces on top of us, like structured products using the options, hedging products using the options. 343 00:26:35.537 --> 00:26:36.037 And, you know, 344 00:26:36.557 --> 00:26:44.543 you know, the economics for those sort of integrators can be even better because you can sell people, you know, not just options, but you can sell them like a payoff structure. 345 00:26:44.563 --> 00:26:54.551 Like, hey, you put your Bitcoin in our structured product and you earn 10% on your Bitcoin and it gets converted into cash if Bitcoin goes above, you know, $90,000. 346 00:26:54.591 --> 00:26:55.332 That's a covered call. 347 00:26:56.012 --> 00:26:56.153 Um, 348 00:26:57.037 --> 00:27:06.379 Anything in the English language, they can charge a commission on that yield or they can market up how they want if they're a retail facing app too. 349 00:27:06.399 --> 00:27:12.801 And retail, it's for options and what Robinhood was making on their options as part of their payment for order flow. 350 00:27:12.821 --> 00:27:17.462 It was zero commission, but they were making buckets on the actual order flow that they were selling to. 351 00:27:17.542 --> 00:27:20.303 So a lot of big businesses have been built around this flow. 352 00:27:20.783 --> 00:27:26.125 I think it will only continue and we want other teams to come in and try and monetize that themselves. 353 00:27:26.486 --> 00:27:30.688 Talk to me about just like the market structure of options in crypto as it stands. 354 00:27:30.708 --> 00:27:35.110 You talked about Darabit kind of owning the golden goose of options. 355 00:27:35.710 --> 00:27:40.092 And, you know, this analogy can apply to like spot exchanges too, right? 356 00:27:40.152 --> 00:27:42.153 Binance holds the golden goose. 357 00:27:42.273 --> 00:27:43.433 It holds the most liquidity. 358 00:27:43.553 --> 00:27:45.314 It can monetize the strongest. 359 00:27:45.734 --> 00:27:48.536 Coinbase also very dominant in the U.S. market. 360 00:27:49.196 --> 00:27:52.158 What's it look like currently today in the options world? 361 00:27:52.538 --> 00:27:54.939 Deribit, I think, is still number one in terms of volume. 362 00:27:55.400 --> 00:27:56.280 Who are the players? 363 00:27:56.540 --> 00:27:57.361 Who's dominant? 364 00:27:57.441 --> 00:28:01.643 And then also, what's your strategy at Derive for penetrating into this market? 365 00:28:01.723 --> 00:28:05.025 How do you wrestle the golden goose out of the hands of Deribit? 366 00:28:05.325 --> 00:28:08.649 Yeah, so Deribit, I think, are still like 70%, 75% of the market. 367 00:28:08.749 --> 00:28:13.255 They have some well-funded attempts to disrupt them from the bullishers of the world. 368 00:28:13.335 --> 00:28:18.962 Maybe Bybit as well are growing in OKEx, doing some market share, but they're not making huge headwinds in. 369 00:28:19.042 --> 00:28:20.624 And we are now too, finally. 370 00:28:20.684 --> 00:28:20.784 So 371 00:28:22.028 --> 00:28:26.969 We went from doing almost nothing like 0.1, 0.15% like a year, year and a half ago. 372 00:28:27.529 --> 00:28:29.990 But we managed to like the product finally got good enough. 373 00:28:30.110 --> 00:28:32.830 We, you know, improved our liquidity by orders of magnitude. 374 00:28:33.430 --> 00:28:38.531 And I think the big wedge that we had, we think we're like the fastest moving, most innovative options exchange. 375 00:28:38.551 --> 00:28:45.053 And so we listed hyperliquid options in November last year when hype was like $20 or a lot lower than it was. 376 00:28:46.133 --> 00:28:51.237 And suddenly, you know, we were the only venue for hype and hype went on this huge run. 377 00:28:51.337 --> 00:28:59.764 And we started getting interest from, you know, big takers who were doing dealing with like OTC desks directly because Derivit hadn't listed hype options. 378 00:29:00.325 --> 00:29:04.248 And over time, we started to get more and more takers for our hype options. 379 00:29:04.468 --> 00:29:08.972 And we became the most liquid venue globally for it and started to win market share from the OTC desks. 380 00:29:09.792 --> 00:29:16.436 And now Derivate, you know, took, they only launched it like two months ago or something, and we're still the dominant majority of hype volume. 381 00:29:17.136 --> 00:29:20.057 And we've created that network effect around that market. 382 00:29:20.258 --> 00:29:30.123 And that's, you know, kind of the playbook we're going to be running back for every new asset, both on the crypto front, where, you know, we have the most alt markets, I think we're biggest on Solana now too. 383 00:29:31.223 --> 00:29:33.285 We're competitive in Bitcoin and ETH shows now. 384 00:29:34.166 --> 00:29:50.902 And then also for RWAs, commodities, anything that becomes popular in crypto, which has that sort of like profile I described before with like a sophisticated holder base, a long term view and a big market cap like we're going to list and we will be able to outcompete and go faster than Bitcoin. 385 00:29:51.102 --> 00:30:01.370 both Darabit, but also faster than, you know, provide a better experience than a lot of the OTC desks and the bilateral deals that a lot of the big takers are using currently because they don't have an option to go anywhere else. 386 00:30:01.711 --> 00:30:05.654 What can you do with on-chain options that you can't with, like, trad options? 387 00:30:05.854 --> 00:30:11.619 And, you know, it's worthwhile to know that, you know, Darabit is a crypto options platform, but it's 388 00:30:12.219 --> 00:30:17.362 It's like centralized, it's trad in the sense that it's a centralized database with, you know, centralized infrastructure. 389 00:30:17.802 --> 00:30:19.222 That's not what derive is. 390 00:30:19.242 --> 00:30:21.263 You guys are on chain. 391 00:30:21.764 --> 00:30:30.548 Is there what advantage or what option, what can be unlocked with on chain options that you can't with like a centralized or trad options platform? 392 00:30:30.688 --> 00:30:31.909 Yeah, there's a couple of things. 393 00:30:32.069 --> 00:30:39.552 I mean, one is the obvious point that like some people really value and particularly in crypto, but less so over time, which is it is self-custodial. 394 00:30:39.572 --> 00:30:43.014 You can verify the state of the risk engine and the margin in real time. 395 00:30:43.034 --> 00:30:47.236 And that has been a problem for some other exchanges all the way up to regulated traditional ones. 396 00:30:47.256 --> 00:30:51.678 Like this is still a problem that people don't quite realize because there hasn't been a blow up since 2011, I think. 397 00:30:52.518 --> 00:30:58.581 But these, you know, even regulated commodities exchanges can go under because of like capital mismanagement. 398 00:30:58.621 --> 00:31:04.303 And we have all of our, you know, the state of the system is verifiable and transparent. 399 00:31:04.723 --> 00:31:15.008 And it's, you know, the credit risk is kind of, you can view it entirely by how, and all the rules are written in smart contracts with, you know, the margin and the liquidations and the settlement. 400 00:31:15.660 --> 00:31:24.690 I think that is a major win for some people and particularly relative to some of these OTC desks that we're in competition with for some of the big chunky order flow via our RFQ. 401 00:31:26.052 --> 00:31:31.778 When you're doing a deal with an OTC desk, you're kind of taking credit or like underwriting that desk solvency. 402 00:31:31.818 --> 00:31:37.024 And, you know, crypto has a long history of those desks blowing up at exactly the time you need them to function. 403 00:31:38.872 --> 00:31:51.590 With respect to like just raw like user experience stuff, I think the thing that we get out of the box and particularly with the new version in v3, you can integrate and build a product on top of derive an hour of work. 404 00:31:52.872 --> 00:32:03.207 and structured product or vaults, like quantitative investment strategies, like vaults, asset management vaults with like, you know, really like transparent execution, clear track records. 405 00:32:03.547 --> 00:32:07.953 You're going to be able to spin up and deploy those with three clicks on derive, like copy trading vaults. 406 00:32:08.694 --> 00:32:13.876 Things that are just not possible to do in a transparent or verifiable way anywhere else. 407 00:32:14.516 --> 00:32:16.596 But also like just the ease of integration. 408 00:32:16.636 --> 00:32:20.918 You don't have to deal with like five different service providers and on ramps and off ramps. 409 00:32:20.938 --> 00:32:29.060 Like if it's just tokenized, we can interact with it, list it as collateral and start to build structured products. 410 00:32:29.520 --> 00:32:31.961 Other people can start to build structured products and user interfaces. 411 00:32:32.481 --> 00:32:37.986 And they know that they can do that on top of us because we are, you know, they can see the open source code. 412 00:32:38.006 --> 00:32:42.270 They can see, um, how the exchange is built and the collateral on the system and the solvency. 413 00:32:42.290 --> 00:32:53.460 And they don't have to, you know, hack through five or six different service providers onboarding off ramps, on ramps, just to be rugged by like a terms of use update from Terabit, um, or another, you know, third party provider. 414 00:32:53.500 --> 00:32:56.682 We found people who are building those sorts of products on us, um, 415 00:32:57.523 --> 00:32:59.465 who couldn't do it on a centralized venue. 416 00:33:00.226 --> 00:33:06.793 And I think that that advantage is only going to sort of continue as more high-quality assets come online and are tokenized. 417 00:33:06.933 --> 00:33:08.995 We can onboard and interact with them very, very quickly. 418 00:33:09.336 --> 00:33:12.278 Technically speaking, how is derive actually built? 419 00:33:12.498 --> 00:33:19.362 So like if we pop the hood open and we look into the engine, the engine compartment of derive, what do we actually see? 420 00:33:19.402 --> 00:33:21.243 What are the components that go into building derive? 421 00:33:21.643 --> 00:33:29.268 At a high level, as I said before, we have like an order book and an RFQ product, both of them live, written in Rust, off chain. 422 00:33:30.068 --> 00:33:35.372 And then once a price gets matched between parties, so someone wants to buy some options or some perps or whatever it is, 423 00:33:36.072 --> 00:33:39.475 it gets sent through to the protocol for margin clearing and settlement. 424 00:33:39.495 --> 00:33:46.501 So all of the rules for margin, we have both portfolio margin, which looks at your entire, like all of the assets that you have in your account. 425 00:33:46.561 --> 00:33:54.388 So maybe some Bitcoin spot, some USDC, like a few calls, and maybe like a short position. 426 00:33:54.488 --> 00:33:58.892 You look at all of that and it runs it through 27 different risk scenarios, like Bitcoin. 427 00:33:59.492 --> 00:34:03.074 what happens if SPOT goes up 20% and volatility goes up 100%? 428 00:34:03.114 --> 00:34:05.775 Like what is the maximum loss of this portfolio? 429 00:34:06.435 --> 00:34:10.857 And it takes the worst case scenario and that is your margin out of those margins. 430 00:34:10.917 --> 00:34:12.197 You know, like that's what you have to post. 431 00:34:12.217 --> 00:34:13.658 So that's really, really capital efficient. 432 00:34:13.758 --> 00:34:17.880 It's very common in the industry, but not so common in terms of on-chain protocols. 433 00:34:18.820 --> 00:34:20.401 And so that's the portfolio margin. 434 00:34:20.501 --> 00:34:23.042 Then we have standard like isolated margin, which a lot of users 435 00:34:23.582 --> 00:34:28.327 users and traders are familiar with where it's just like, you know, one position, you have your margin. 436 00:34:28.627 --> 00:34:31.290 It's like what most perp exchanges use. 437 00:34:31.390 --> 00:34:36.535 And so you have to make sure you're above your, you know, you post initial margin, you have to stay above your maintenance. 438 00:34:36.815 --> 00:34:40.920 And the positions don't offset, you don't get any cross margin or cross collateral. 439 00:34:41.801 --> 00:34:46.066 So all of that is written in smart contracts, those rules, like what the margin is. 440 00:34:47.508 --> 00:34:55.739 And when a user goes below their margin requirements, there is an on-chain liquidation, which is open for anyone to participate in. 441 00:34:56.640 --> 00:35:02.946 What it does is it starts, kicks off like a Dutch auction, which offers your portfolio of assets. 442 00:35:02.966 --> 00:35:08.491 So maybe it's like $100,000 worth of assets at a discount to the value. 443 00:35:09.131 --> 00:35:10.573 So it'll be auctioned off. 444 00:35:10.593 --> 00:35:11.834 You can buy it for like $95,000 in cash. 445 00:35:13.495 --> 00:35:17.618 And then that decays out to, you know, like 80% really quickly. 446 00:35:17.678 --> 00:35:27.165 And then it goes down to 100%, at which point like the on-chain insurance fund, which is funded by fees from trading fees from the protocol, starts to pay out users to take on the bad debt. 447 00:35:27.905 --> 00:35:35.711 And then if that gets blown through, I'm just going through the whole waterfall now, you get to like ADL rules, which again are transparent and written up front. 448 00:35:35.771 --> 00:35:38.213 So like that is the sort of core of the system. 449 00:35:38.293 --> 00:35:40.896 It's been in production now, this version for almost three years. 450 00:35:40.976 --> 00:35:43.278 We've seen some pretty crazy market conditions with it. 451 00:35:44.099 --> 00:35:50.225 And yet, like, you know, we're always very kind of monitoring the risk parameters, you know, the system itself. 452 00:35:50.265 --> 00:35:51.866 But it's worked very well in practice. 453 00:35:52.067 --> 00:35:57.792 You guys over at Derive are very close to delivering V3, version three of Derive on chain. 454 00:35:57.852 --> 00:35:59.093 What does V3 bring? 455 00:35:59.554 --> 00:36:00.395 What is in V3? 456 00:36:00.495 --> 00:36:00.615 Yeah. 457 00:36:00.935 --> 00:36:08.217 Yeah, I think it takes us from like what we are now, which is at the moment we're like a L2. 458 00:36:08.277 --> 00:36:11.998 There's a lot of custom work and difficulty integrating and building on top of Derive. 459 00:36:12.598 --> 00:36:13.878 We're in a bit of a straitjacket. 460 00:36:13.898 --> 00:36:16.219 It takes a while to list new collaterals and new markets. 461 00:36:17.059 --> 00:36:19.999 We go from all of that until like almost like a Ferrari. 462 00:36:20.039 --> 00:36:25.261 Like we think this is going to be the most integratable exchange and protocol and composable protocol in existence. 463 00:36:26.101 --> 00:36:30.702 And I think there's a huge opportunity to grow in parallel with our builders and people building on top of Derive. 464 00:36:31.442 --> 00:36:50.191 um, like the margin system is getting a huge upgrade, um, allowing for like just more complex portfolios, like more high performance in terms of the margin, like industry leading, in my opinion, as well as like multi-asset borrow land, a lot of like technical details around the options exchange, which might be like too in the weeds to really get into here. 465 00:36:50.671 --> 00:36:55.073 Um, but the, the sort of takeaway from it is that we become, I think, um, 466 00:36:57.098 --> 00:36:59.039 extraordinarily fast. 467 00:36:59.320 --> 00:37:07.785 So fast and high performance that we can continue to really start to innovate on the product front, both ourselves and as well as our builders. 468 00:37:07.805 --> 00:37:12.588 They're going to have access to the most complete payoff factory in crypto. 469 00:37:12.969 --> 00:37:24.076 You can take and draw on all of these new markets that we're going to be listing on the RWA front, as well as the existing crypto markets, route users through the RFQ or the order book and start to stand out a 470 00:37:24.136 --> 00:37:33.299 like these sort of structured products, quantitative investment strategies, which are massive markets and traditional finance, as well as start to build like more retail friendly applications on top of Derive. 471 00:37:34.020 --> 00:37:40.802 And that is going to be something that like a lot of other exchanges in crypto are kind of shooting towards over like a one to two year time horizon. 472 00:37:41.443 --> 00:37:44.764 But we've been built natively for it from day one. 473 00:37:44.824 --> 00:37:52.547 And so, yeah, I think we're in a really, really interesting spot to handle the next wave of growth, as well as to deal with... 474 00:37:53.407 --> 00:38:02.052 you know, kind of like an agent first API and, you know, integration experience too, which again, we can get into, but it's a whole other can of worms that I don't want to open up just yet. 475 00:38:02.253 --> 00:38:02.393 Yeah. 476 00:38:02.413 --> 00:38:08.737 I don't, I don't know if I'm ready as an interviewer to start saying the words options and agents in the same sentence. 477 00:38:08.837 --> 00:38:10.478 So maybe we'll save that for 2027. 478 00:38:10.498 --> 00:38:10.678 Um, but, 479 00:38:12.939 --> 00:38:22.044 Nick, let's say options, you know, grow, evolve, expand as we expect them to, to kind of meet parity with like the TradFi world. 480 00:38:22.064 --> 00:38:28.227 So like, again, as we've stated, options are very loved, used, popular financial instrument. 481 00:38:28.347 --> 00:38:31.889 They're like lagging in crypto just because they're complicated and sophisticated. 482 00:38:31.909 --> 00:38:33.810 But nonetheless, they are they are coming. 483 00:38:34.610 --> 00:38:41.497 And in the future, hopefully in the short term future, let's just say that they grow into what you expect them to grow into. 484 00:38:41.817 --> 00:38:44.419 How does that change the market structure in crypto? 485 00:38:44.840 --> 00:38:53.728 Like what would be different in this world when options like 10x, 100x, just like how would that impact the rest of the industry? 486 00:38:53.988 --> 00:39:07.994 Well, the first thing is when our options markets become liquid, volatility actually generally comes down because you get a lot of these option sellers who, you know, stuff dealers with like, you know, kind of vol and gamma, and then they have to hedge that themselves. 487 00:39:08.955 --> 00:39:13.957 So you start to see things in markets develop more in a more mature way over time. 488 00:39:14.117 --> 00:39:15.557 And I do think that that will happen. 489 00:39:15.597 --> 00:39:21.340 Like at the moment, there are still lots of assets where you can, you know, and like a lot of the OTC desks are doing this or like. 490 00:39:21.760 --> 00:39:27.401 OTC takers are doing this, they're selling volatility into the OTC desks and earning yield. 491 00:39:27.542 --> 00:39:34.323 And as that becomes more productized, you start to get a dampening effect across the industry. 492 00:39:34.703 --> 00:39:39.224 I do think options will become a mandatory offering for a lot of the exchanges. 493 00:39:39.244 --> 00:39:41.285 They're going to have to figure out a way to support it. 494 00:39:42.105 --> 00:39:44.447 And for a lot of them, it's going to be very difficult to build themselves. 495 00:39:44.507 --> 00:39:47.649 It's really hard to retrofit a perp risk engine to add options. 496 00:39:47.749 --> 00:39:50.170 And I think a lot of teams are finding this out at the moment. 497 00:39:50.590 --> 00:39:55.894 You kind of have to start from day one with the options cross margin with the perps for a variety of technical reasons. 498 00:39:55.934 --> 00:39:59.576 So I would expect to see a lot of white labeling, a lot of integrations. 499 00:39:59.656 --> 00:40:01.017 Obviously, that's our thesis. 500 00:40:01.417 --> 00:40:02.558 We stand to benefit from that. 501 00:40:02.578 --> 00:40:04.459 That's kind of what we want to play into. 502 00:40:04.539 --> 00:40:07.181 But you guys are doing the DeFi mullet thesis. 503 00:40:07.221 --> 00:40:08.382 You guys are trying to do DeFi mullet? 504 00:40:09.338 --> 00:40:09.758 Exactly. 505 00:40:10.899 --> 00:40:12.601 And we think options are kind of perfect for that. 506 00:40:12.641 --> 00:40:35.479 I think we're going to see a lot of options as a back ended into both like just a trading experience, but also, you know, you can imagine options, our options integrated into like a neobank offering where, again, it's like you can earn 8% annually back tested with this options covered call spread selling strategy with a maximum defined drawdown of like 1% in a given week or a given month. 507 00:40:35.879 --> 00:40:44.927 And like these sorts of offerings are at the moment limited to like the highest sort of private wealth, high net worth kind of individuals and their massive markets behind the scenes. 508 00:40:45.167 --> 00:40:50.472 We think democratizing them, bringing them out in the open, making them transparent, reducing the fees, making all of that more competitive. 509 00:40:50.952 --> 00:40:58.139 is going to be a huge market that serves users, particularly for things like tokenized stocks, which you can't really do much for them at the moment. 510 00:40:58.179 --> 00:41:01.502 Like you can lend, you can borrow against them, that's useful, but you can't really earn yield. 511 00:41:01.542 --> 00:41:08.848 There's not too much to do, you know, like new or different, unless you're kind of accessing them internationally for the first time. 512 00:41:08.888 --> 00:41:13.893 And we think options are the perfect building, you know, playground for those sorts of use cases too. 513 00:41:14.712 --> 00:41:26.100 So I would expect to see options, DeFi-moleted structured products to really come up and then a variety of new, you know, strategy, vault curators, integrators, starting to incorporate them. 514 00:41:27.300 --> 00:41:31.783 And also, you know, it can enable some more fun use cases, which we haven't seen in a long time. 515 00:41:31.843 --> 00:41:35.005 So like crypto native stable coins that are over collateralized in Bitcoin and ETH. 516 00:41:35.025 --> 00:41:35.466 You can have, 517 00:41:36.146 --> 00:41:43.129 Hedges embedded via the options to protect against massive downsides and big wicks that could potentially blow up lending, you know, lending protocols. 518 00:41:43.569 --> 00:41:50.252 We want to be integrated with them and start to become like kind of the risk absorption engine for a lot of those different hedging flows. 519 00:41:50.272 --> 00:41:51.673 And you can really capture that with 520 00:41:52.673 --> 00:41:53.153 With options. 521 00:41:53.593 --> 00:42:10.840 With the success of options, it's like, and all of the volume that options bring, doesn't that also mean that number must go up in the sense that if there's a very rich options market, you know, BTC has all of these dated options, you know, three months out, six months out, two years out, you know, so does ETH. 522 00:42:11.200 --> 00:42:12.841 So does like all of the assets. 523 00:42:13.541 --> 00:42:22.009 doesn't that mean that like more market makers, more market participants need to get their hands on the assets in the first place in order to create that volume? 524 00:42:22.129 --> 00:42:34.220 And so if like volume 100Xs, wouldn't that imply that all of these assets that have volume and liquidity in the options world have gone up in price now? 525 00:42:34.780 --> 00:42:38.884 because people needed to buy the asset in the first place to create that volume? 526 00:42:38.984 --> 00:42:43.589 Like, is large volume associated with number go up? 527 00:42:43.769 --> 00:42:44.890 It can be. 528 00:42:44.930 --> 00:42:45.992 It's not necessarily. 529 00:42:46.032 --> 00:42:54.040 So not when the markets get created, but we saw, I mean, I saw that, you know, when I was at SIG, Archegas, if you remember them, they blew up. 530 00:42:54.200 --> 00:42:55.842 The guy was like buying, 531 00:42:57.437 --> 00:43:00.299 just insane amounts of like the big tech stocks at the time. 532 00:43:00.339 --> 00:43:03.221 He was single-handedly moving the NASDAQ with his options trades. 533 00:43:03.322 --> 00:43:04.743 And it was forcing all of the market. 534 00:43:04.763 --> 00:43:13.830 He's buying calls, call spreads, out-of-the-money calls, both on single names like Microsoft and Google, as well as CRM and some of the more SaaS kind of stocks. 535 00:43:14.330 --> 00:43:15.951 And then also buying NASDAQ options. 536 00:43:15.971 --> 00:43:23.437 And it was pushing the whole index up because dealers had to scramble on like the gamma squeeze kind of concept that a lot of people are familiar with from GameStop. 537 00:43:23.457 --> 00:43:23.557 Yeah. 538 00:43:23.657 --> 00:43:23.917 and whatnot. 539 00:43:23.937 --> 00:43:27.198 But this was happening at the level of the entire US stock market. 540 00:43:28.278 --> 00:43:34.120 And you can really have a big outsized impact if you have size going into these options. 541 00:43:34.440 --> 00:43:35.541 And the markets do do that. 542 00:43:35.861 --> 00:43:37.901 But at the end of the day, markets are weighing machines, right? 543 00:43:37.921 --> 00:43:40.762 So what goes up must come back down. 544 00:43:41.202 --> 00:43:47.104 If someone's putting that impact in and the fundamentals on coming up with it, it does go down. 545 00:43:47.124 --> 00:43:47.364 But it 546 00:43:47.404 --> 00:43:54.288 does reduce, you know, spreads, trading execution quality, reduces volatility in the market over time. 547 00:43:54.649 --> 00:43:56.210 And that makes everything tighter as well. 548 00:43:56.250 --> 00:44:02.694 So it generally improves liquidity across the board and makes it more investable for some people when they can put these hedges on. 549 00:44:02.734 --> 00:44:04.375 So in that sense, yes. 550 00:44:04.455 --> 00:44:08.658 But like, I think the overall impact is, you know, a little more muted than that. 551 00:44:08.938 --> 00:44:09.218 Okay. 552 00:44:09.478 --> 00:44:09.758 Okay. 553 00:44:10.099 --> 00:44:25.172 But nonetheless, a rich, healthy options market does create a healthier market structure, which makes the market itself more palatable, more accessible, more interesting to a wider set of market participants. 554 00:44:25.293 --> 00:44:26.073 And that's bullish. 555 00:44:27.054 --> 00:44:27.515 Absolutely. 556 00:44:27.635 --> 00:44:27.795 Yeah. 557 00:44:29.335 --> 00:44:29.555 Cool. 558 00:44:29.935 --> 00:44:30.255 All right. 559 00:44:30.476 --> 00:44:31.196 Options are bullish. 560 00:44:31.536 --> 00:44:33.517 Nick, thanks for coming on the show. 561 00:44:34.258 --> 00:44:37.459 What should listeners know about Derive in the short term? 562 00:44:37.759 --> 00:44:39.320 Like I said, we have V3 coming. 563 00:44:40.481 --> 00:44:44.883 If they want to learn more about Derive or if there's anywhere you want to point them to, where should they go? 564 00:44:45.003 --> 00:44:50.686 Yeah, Twitter is at DeriveXYZ and then Derive.XYZ is the site. 565 00:44:50.906 --> 00:44:53.568 And you can pretty much find everything about what we're doing. 566 00:44:54.508 --> 00:44:55.969 We publish everything. 567 00:44:56.609 --> 00:44:59.552 And we do some analysis and market updates and things like that, too. 568 00:44:59.592 --> 00:45:02.675 So hopefully that's helpful and useful for some of your listeners. 569 00:45:03.135 --> 00:45:03.415 Cool. 570 00:45:03.575 --> 00:45:05.878 Nick, we'll get all that stuff in the show notes. 571 00:45:05.898 --> 00:45:06.898 Thanks for coming on the show today. 572 00:45:07.099 --> 00:45:07.719 Thanks for having me on. 573 00:45:07.739 --> 00:45:08.160 This is great. 574 00:45:08.460 --> 00:45:10.101 Bankless Nation, y'all know the deal. 575 00:45:10.161 --> 00:45:12.604 Crypto is risky, but not risky enough. 576 00:45:12.624 --> 00:45:15.166 The institutions have landed, so we are going even further west. 577 00:45:15.206 --> 00:45:15.987 This is the frontier. 578 00:45:16.167 --> 00:45:18.869 It's not for everyone, but we are glad you are with us on the Bankless Journey. 579 00:45:18.989 --> 00:45:19.330 Thanks a lot.