On-Chain Crypto Derivatives - TOKEN2049 Singapore 2022

hi everyone good morning thank you so much for having us my name is min and I'm the managing partner of ethereal Ventures we are a global early stage crypto VC fund focused on multi-chain protocol projects and very excited to be moderating this panel today on on-chain crypto derivatives with some of the experts in our space so we have Cindy Julian and Ming and I'm going to pass it over to them to introduce themselves and speak a little bit about their companies Cindy would you like to kick us off sounds good hey everyone I am Cindy from drift uh we're building Perpetual swamps and uh derivatives on Solano uh we launched about a year ago and uh right now we're fully focused on on launching our V2 in just a matter of a week um we can talk about kind of what V2 is going to look like but in essence we're building essentially a duratos exchange to mirror the experience of a centralized exchange with an entirely decentralized back end um powered by a keeper Network and uh three unique liquidity mechanisms so we can talk about that later but I'll pass it on to our fellow co-panelists hi um I'm Julian I'm the CEO and co-founder of ribbon Finance which is the first and largest Structured Products protocol in D5 so um be on a few different chains but our most popular products are like covered call products on Ethan Bitcoin um we've been around for about two years now and we are venturing more into the option space right now uh hi everyone my name is Ming I'm the founder of rabbit X we were previously called strips Finance we were the first interest rate swaps derivatives exchanged to launch on arbitrim and we've recently uh pivoted to launching the fastest most scalable perpetuals exchange on stock net um so yeah we're really excited to to launch very soon in a couple of weeks our test net will be live fantastic thanks everyone for the introductions so you know we had a bull market for the last two years and obviously this year we've seen a quite a bit of a market correction and just wondering if you've seen any change in sort of behavior of Market participants especially those who are participating in on-chain trading most notably I think market makers like you know what has sort of changed how has that changed your projects so I think we've seen uh tvl kind of collapse from 150 at its peak in November to less than 50 billion today um and I think that's been the biggest change of behavior a lot of larger market participants have shied away from Simply aping into um you know random pools and uh you're really seeing this Behavior especially on alternative chains um like like Solana where tbl's dropped from 10 to to one um which causes a really big recursive effect in in derivatives Market especially since it's so driven by uh the participants the behavior of other participants um on on trading especially uh we're seeing spreads sort of widen in in um on-chained on-chain order books so uh serum where just a sort of essential article of Solana Spirits are widening quite a bit which shows reduce Market um just reduce risk on in general um and I think that actually mirrors activity in in centralized exchanges so don't see too much differently going on in in D5 but with the recent kind of high profile hacks um in D5 especially we're seeing definitely more skittish behavior from for market makers and all these factors are kind of compounding together um resulting in less bullish D5 activity but we're confident that with um the launches of a lot of new protocol and and V2s v3s that there's going to be a lot of renewed activity and in D5 we're also seeing that especially for us as we're launching uh you know something called a just-in-time auction market makers are getting more excited about novel mechanisms as opposed to things that are simply copy and pasted from from CFI so definitely more interest in in novel D5 stuff yeah I think we have also seen um a lot of like a super huge like tvl drop-off in the last like six months and most of it comes from retail or sort of crypto Wheels who maybe just want to sit in stables and they don't want to do anything on chain like it's not worth it to risk yeah their principle for for earning I don't know 50 bips of yield so I think we have just seen a huge uh pullback in in terms of TBL and also a lot of like consolidation into higher quality projects I would say so in a bull market everyone wants to try out like everything and just use all the experimental stuff but I think right now people just want to stick to like the the Blue Chip protocols and um the stuff that has like a track record of being used um so yeah I think we've seen a lot of that recently so I think market makers go where volume is and that's a lot of the time a function of where retail is Trading and I think with what's been happening with not just in crypto and D5 with the hacks and firms blowing up but just at a macro scale the scaling back of risk across the board and I think people are like Julia mentioned when there's a bull run people are going out the risk curve and now we're seeing that pullback and people are scaling back risk taking money off the table and as a result I think D5 is a cyclical uh representation of that but I think everyone here believes that what we've been given our financial system is broken that's why we're building in D5 that's why we're building a decentralized financial future so I'm still very bullish on the space and maybe just to add on to that you know we have seen we used to see very very high apis like you know and a lot of times um you know these are brought about by a lot of uh you know hedge fund lending and also subsidized by airdrops from D5 protocols and now you know we've kind of seeing them normalize to sometimes like you know High single digits low double digits and when you have rates kind of increasing to four to five percent like on the risk of adjusted basis perhaps yield farming you know doesn't look so attractive anymore do you think that rates will sort of revert to where they used to be or do you think this is sort of The New Normal and people should be focusing on maybe some other aspects of D5 that are very attractive yeah I mean I think there's been a very popular meme in crypto in the last like six months which is like sustainable yield uh basically what this means is like there there are a few categories of financial products where you know for example if you're selling insurance or you're selling an option like these types of things don't go away in Bear markets you're still selling the same risk so uh the the sort of risk return is pretty much the same but I mean some other stuff where you know you're just doing lending but you're getting like all these free tokens all that is really going away so I think a lot of people now are shifting to like the sustainable yield narrative and trying to figure out okay how do we build real Financial products that don't need all these coins to survive um so yeah I think we we were quite early to that uh and that's becoming quite popular and and I think you know Ponzi stable coins aside um there you there needs to be a distinction and clear uh understanding of are we using this token incentive for subsidizing our marketing or are we using it to distribute ownership of the protocol because I think when you have and I think the beauty of D5 is that you can finally give distribution to the people that use your protocol rather than people with the capital right and I think that's a very powerful usage of token incentives otherwise you can use it for marketing subsidies right when projects don't have marketing budgets you use token incentives to subsidize your marketing but as a team and as a project you need to be honest with yourself and and tell yourself okay this is for our marketing subsidies um and we're not really building a Ponzi here absolutely I think that would be very useful for Market reassurance and I think the only way to really stack yield is to create Structured Products with you know exotic sort of derivatives like what you're building um you know obviously perpetuals I had to take like 45 minutes to explain it to a very sophisticated traffic Trader friend of mine because it's so crypto native and also options and interest rate swaps what do you think you know are the sort of barriers that you need to overcome so people can start assembling this like you know the whole money Lego version like vision of Structured Products and everyone is talking about institutional adoption institutional Capital what needs to happen for like you know the institutions to actually come participate and hopefully eventually you know start offering this directly to retail customers I think um the key thing that we've been talking to institutions about in the past couple of months has very much been around safety of funds so I think the biggest thing that's driving institutional adoption right now because there is a lot of interest in defying entering the space in general it's just um custody is not 100 there yet so we've been speaking to a lot of custodians um such as a fire blocks copper to help provide that connection to to divide for institutions to help them be able to safeguard their funds in a way it's um it is reverting to uh you know like half middleman approach where your funds are held in a third party um safe Vault um but that's like an intermediate step to actually get them onto the D5 platforms so we think that that's bullish for the space uh given that yeah a lot of these institutions need that um third check right to actually get in yeah I think for our products uh they they resemble a lot like what is is being created in thread five so a lot of for us like the struggle is getting like crypto people to understand our products versus like the 25 people so like I think recently like a few weeks ago I got like an email from this Goldman managing director who said he used ribbon I was like okay interesting uh so I think our struggle is just like how do we fit these products that are well understood in traditional Finance into some sort of crypto native format so um we we created this like D5 option Vault this Dov structure which is really just like taking a traditional kind of structure which is like some sort of covered call thing and putting it into like a D5 Vault I think sort of joining these two uh like packaging that idea into like a D5 form factor really worked so yeah we've been trying to do more of that yeah and can I just say that the wallets today really suck you know I think that metamask has majority market share but I think that in order for us to get to the next billion users in defy we really need to have a good wallet experience right and something that people can bring with them in their phones and not just always do D5 operations on their desktop I think that is such a low hanging fruit that you know we just need to build right and I think that's also what got us excited about stock net and ZK in general is this idea of account abstraction where you can create arbitrary logic with your wallets just like you could with a smart contract so as an example you could use biometrics to unlock your and lock and unlock your private keys so that you don't have to trust a third party and also you don't have to write the 24 word secret phrase right and uh that's something really powerful and I think we need to solve that simple wallet experience first and foremost yeah and as a foreign and addressing all of these use cases and I think you know when one thing that you know I I think we also have to touch upon is this is very very new stuff as well so you know we've seen a lot of iteration of amm design and I know all of you also have sort of like mini like r d Quant research teams um could we maybe talk about from a technical perspective what what some research that you're doing on New Primitives that will help derivatives function better on chain make them more composable um I think sometimes these are lots of people where you know they think it's a little bit of you know simple sort of coding but I think a lot of the things that will make this function well has does not yet exist yeah um I think two key Primitives that that we're looking at building and we're I mean we're building out for for v2 um one is um and the goal of these are essentially to provide the best liquidity on chain possible to be able to mirror the liquidity that you see um on an off-chain centralized exchange um key thing is a sort of keeper Network that where keepers are essentially incentivized to become validators of the The Exchange they keep in a local copy of the order book and they're they're able to match orders against each other and earn a rebate um as a part of their incentive program so when we talk about sustainable yield we think that allowing these participants of the network to be able to earn fees from organic trading is actually the most um the best way to to incentivize um both you know the suppliers of the exchange and then the actual participants um then you have this real ecosystem of products I think that's a very interesting primitive because then it enables different cross-chain applications as well where the validators themselves can sort of become the bridge between two chains um you can sort of have liquidity and Solana and liquidity on an arbitrum or or a certain app um using these Keepers as de facto option Bridges instead of you know uh parting that liquidity over to FTX so each of these validators will play a really important role in um pushing these um the like creating a crosstrain the code of people um the second thing that we're looking to build is essentially just an RFQ like auction that helps users break up large orders say you want to liquidate 100 Mil on chain that's that's just Impossible on an emm today as we as you all know um but doing it with an RFQ style system gives you more OTC assault execution on chain so we're really excited about those two innovations yes so I think with amms the difficult the difficulty is that as an LP you're always short gamma I think what has been interesting is that for products and assets that have exponential growth such as crypto uh Bitcoin Commodities they are it's very dangerous as LP to be short gamma in those type of assets so the question we asked ourselves when we were deciding do we want to build amm or an Autobook based model is do we believe that market makers who have been in the game of pricing assets for 20 30 years are they better at pricing risk than we are and I think the answer to that was yes if that's the case then we should give them the ability to price assets in an order book and uh have that job taken away from the exchange and I think we've learned a lot of lessons of the different amm designs I think there are some very Innovative mm designs that fix some of the flaws but uh I think we're still very early in the iteration phase and for for us as as a team as a project we wanted to Outsource the risk pricing of assets too to the market makers so that's why we adopted a Autobook model fascinating and I think I think for for D5 panel ists if we did not talk a bit about regulation so it's certainly you know the topic of discussion in the US against the receiving like you know um having some pretty bearish comments on D5 and we also saw it in like sort of traffic you know when derivatives first became popular that you know people didn't understand them and you know took a very very fearful approach to Distributing derivatives to retail um how do you sort of think about this especially when someone says oh you know I only jump into D5 when it's regulated because that's that means it's safe um and you know if there's anyone in the audience that's from Mas any sort of questions or feedback for them in terms of clarity of you sort of doing your business and innovating I'll keep this quick because I'm not the legal personality but uh I think we we have an issue especially in the US of um over regulating um the the defy space as a whole um with with Ian Bellino's reason SEC case um Regulators took the approach that you know a D5 app doesn't matter if it's a defy app if the chain itself has validators mostly in the US um which is a pretty uh crazy argument to make since that applies to you know all of D5 regardless of you know who you are and uh whether you are a U.S citizen or not um and I think taking that approach actually really hinders um any sort of development and just pushes people away from from the you know these uh regulatory forces and creates more Innovation outside of the US so in places like Singapore um even Dubai other places Southeast Asia we're seeing a lot more activity because uh in a way I think uh regulatory regulatory forces here have been more um wide with their approach on uh yeah regulating D5 yeah no I I agree with that I think uh for projects as well we are just trying to figure out how can we remove our team's involvement in like how the actual protocol operates so decentralizing different parts of the stack and just trying to figure out like yeah if our team sort of disappears tomorrow will the protocols still run I think that's like a core question that we're trying to figure out so yeah we're also just trying to figure out how to automate and decentralize all parts of the stack I think we're being very thoughtful about regulation however with what happened with tornado cash sanctioning code I think that sets a very dangerous precedent and not to mention I think Gary Chancellor mentioned that he believes ethereum is a security that also sets a very dangerous precedent for the industry I think that there needs to be more education firstly and there needs to be more open discussion and there you can't use the old framework to look at D5 because it is a totally new paradigm so either we need to change the old framework to incorporate the new paradigm or we need to rethink it from first principles again yeah I I don't think you know you can sort of copy and paste the framework like this is completely new and you know I do think uh to give The Regulators a little bit of slack I think there has been some effort by some Regulators who really try to understand the space and hopefully a lot more of that to come um you know let's talk about cross chain because people talk about it a lot and it's topic of discussion for many many conferences these days um you know Cindy on Selena Julian you're on um ethereum and minger onstart net now um you know have you considered going on to other chains or you know why what are the reasons for having a cross-chain defy application or cross-rollab application and sort of the new roll-up Paradigm that we'll see in 2023 yeah so we we actually experimented with like some cross stream stuff this year so we launched on apex and Solana as well in January um but I mean I think we we timed the market where like we launched it at the top of the market so those ecosystems have come down a lot so we haven't really invested that much in them um yeah I think purely from like a commercial perspective like we go where the the users are so um right now most of the users are on ethereum most of the assets are on ethereum so we are focusing more of our efforts there but uh yeah if these ecosystems come back we'll definitely spend more time investing in them again yeah I agree with Julian I think a lot of assets are still in ethereum I think for a lot of people in defying crypto ethereum is still their home home base so when things you know when things go south a lot of people will move their assets back to ethereum that's number one and number two as a protocol as a project you don't really want the user to care what chain they're on because it doesn't matter if I'm visiting a website through HTTP or FTP or SSH it shouldn't matter to the end user all they care about is how good is the product how good is the user experience and so we want to hopefully eventually move away from that discussion of which channel you want to hey what can I do with your products and is it easy to onboard as a user yeah I think for us it's a question of multi-chain or cross chain and with multi-chain you especially with dexes you have this issue of fragmentation of liquidity you know market makers are not sure exactly where to invest efforts into and LPS are not sure where best to to put liquidity and passive liquidity into as a result um the issue of separate order books um I think you can see in like a centralized context um like if you have a binance Vietnam order book versus a centralized binance or the book we think that it's always more powerful to aggregate everything into a single liquidity pool so with a lot of these nutrients like Aptos and sweet coming up um a lot of people are asking hey are you guys building there and and our answer is really um we will We would like to abstract away the notion of hey we're on like different chains entirely and really just be able to get users to connect the wallets from different chains and be able to connect to a single crochet in liquidity pool I think that's a big goal for us in the next year yeah I think there's um you know I think the whole thesis of one chain to rule them all is a little bit outdated and ultimately uh you know Builders should be focusing on that unique attributes of whatever they're building on that will help them make their own projects accelerate if anything I think some of the spectacular Bridge hacks that were seen in the last 12 months have taught us to be a bit more cautious about moving tokens across chain on Moss um I think we're nearing the end of the panel and I want to make sure that we end this on a high note so maybe for the next 12 months could you share and you know one of uh an exciting product launch that people can look forward to and also a prediction for defy uh yeah I'll go first I guess so we're really excited to have our meeting at launch for our perpetuals exchange on stock net soon we plan to have most crypto perpetuals first and then we want to introduce more sophisticated Brews like interest rate swaps uh we might even Explore options as well that's on the table and I think eventually uh hopefully layer 2's will take off um and and we'll start to see true scaling in in the ecosystem yeah I think uh we've been spending a lot of time sort of expanding into adjacent categories so uh we are sort of launching a new a new product actually later this afternoon which is what we think would be like the best options trading experience in D5 um so yeah we'll be launching that today and uh we'll see how that goes I think I I'm very excited for that and do you have a prediction Julian or users or a tvl or anything uh I predict that ethereum will probably stay dominant for another year so quite similar we have a product launch coming up really soon V2 is coming live uh it's already live internally um where we're testing it on mainnet um but we're gonna launch a sort of phased gated nft program to to get access to to the um to mainnet so feel free to reach out if you're interested in trading Market making and in terms of prediction I I think we will get back to all-time highs in D5 tvl at some point so don't call me on that 12 months like six months 24 maybe 24 months I think yeah alrighty I'll check back with you guys in 2024 then um so thank you everyone for sharing your thoughts they're all on Twitter and their products are also live so do you know check out uh check ribbon strips and also drift out and I think everyone be grateful for any feedback on how they can improve but thanks for your attention