Ebb & Flow: Mastering the Tides of Crypto Liquidity | Raajeev Reddy | Wenny Cai |

Yeah, global capital formation truly is the big unlock. Quick announcement, don't forget to sign up for the official closing party tonight at Real Works Denver. Free entry with your ETHDenver ticket. Register on Luma. Next up, we have Ebb and Flow: Mastering the Tides of Crypto Liquidity with Ranjiv Reddy, Winnie Chai from SynFutures, and Shuki Ma from Plume.

Hi. Hello, everyone. This is Shuki from Plume. And I'm I'm the I'm the Chief Strategy Officer at Plume Network. And Plume Network is the RWA focused layer one.

And we're going to launch our mainnet next month. So, stay tuned for more campaigns. And if you want to be on Plume, let me know. So, today I'm with Winnie Chai and Rajiv Reddy. Do you want to introduce yourself before you start the panel?

Sure. Before I start, I really appreciate that there's still such a big crowd in this room today. I was not expecting I was expecting max 10 people. So, I'm Winnie. I'm a partner at SynFutures.

And SynFutures is decentralized exchange. We're live on Base. We are actually right now running about 60 and 70% of the derivative volume on daily basis on Base. And we have been in the place since 2021. And before I joined, you know, SynFutures, I was mainly working at CeFi platform called Matrixport where I was leading the RWA and wealth management business.

Hi, I'm Rajiv Reddy. I've spent the last few years building engineering teams at Coinbase up around liquidity management, bridging, optimizations, custodial Bitcoin and Ethereum wallets, and I'm super excited to be here today. So, today we're going to talk about liquidity both on chain and off chain. So, before we actually jump into, you know, the discussion, do you want to introduce like what does liquidity mean on DeFi side and on the CeFi side? Sure, I can I can start first.

So, I see futures we are we adopt a rather we call innovative approach of when approaching liquidity. We have a order book. You know, you can basically making or taking the market or you can passively market make in the market through our AMM. So, liquidity for us has always been um you know, driving the retail users coming to see futures and trade on the alternative assets that they couldn't really trade on central exchange like Coinbase. And on top of that we're going to launch our own, you know, vault product which means you can essentially passively deposit your assets into a market making vault and that is going to launch in the next few months.

Yeah. Cool. Talking about liquidity in general, it's a measure of cryptocurrency. If it's if it's deep, then you can buy and sell immediately. For centralized exchanges, how is this different?

Think of this as you are trying to swim in a pool where there's a shallow water. It's it's very hard because you're trying to displace the water every time you're trying to swim. So, the price of the asset would change along with the the transactions. And similar way for the think of you're swimming in the ocean then it's it's very easy to swim or probably if you know swimming and you have a deep liquidity so it means that you are not displacing the water a lot and the price is going to be a lot more stable. So for liquidity it's both very important for centralized exchange and decentralized exchange but how does it mean like how does it impact trading volume and you know the market efficiencies you know in both of your companies?

I can start. Um So liquidity on DeFi has always been a hot topic because there are simply too many DeFi protocols out there and too thin of liquidity on chain. Let's just admit that. And um because we run a permissionless on chain protocol that means we can list any meme coins, any altcoins in 30 seconds. But where does the liquidity come from and if the liquidity is not there the trading experience is never going to be compatible or even performant compared to a centralized exchange.

That's something we have been you know iterating over the last three years we've building the product. But for now of course thin liquidity well first of course it means higher price impact and secondly we observe that for products projects we're working with let's say we list your perp market XYZ coin and if they have a very thin liquidity on the spot side it's very very easy it's very easily manipulated on the price side which means essentially the bad actors can push the price on the perp side and then they can you know take the profit from the spot side or vice versa. So we now are and and that as in futures we don't do cross margin which means every single market is isolated. And that's really helpful for our risk management. Otherwise, we wouldn't be able to support such a wide range of of assets.

But yeah, I think for us the the most important thing because we're not we're on base. So that's why we are super bullish about you know, base the recent announcement on the block time upgrade 10x vote. So for us on the other other book side, if we can you know, introduce as efficient market making program where you know, users can leverage our SDK and do the automated trading. But it requires very high very low block time, sorry, for that to happen efficiently and to make it profitable. So it's going to be a long time of work, but for now we are improving our mechanism, but at same times we're very hopeful that when base launch will be adapt down to the to the speed.

Yeah. Yeah, usually people want to custody assets at a centralized exchanges and when something like market even activity happens, they want to flock onto centralized exchanges like Coinbase and then trying to withdraw those funds either Ethereum or Solana or trying to convert that into or the D5 trying to buy tokens. The the crunch issue is that when we when we when the customers try to get their funds, they all of them want to come at at the same time. So you're looking at a movement of funds from a huge movement of funds from a cold wallet to a hot wallet and then eventually moving towards the the individual customers wallet wallets. The gas prices are usually very fluctuated during that point of time because you're trying to move huge amount of funds over multiple different customers and sometimes the transition gets stuck and sometimes the transition go through.

There is a scalability challenges that usually the the centralized exchanges have to deal with along with the fluctuation with the gas prices. So, how does basically your company prove the liquidity to your users and what kind of infra and tools that you're using for you know, the proof of liquidity and also how do you think that we can avoid something like the hack the liquidity hack of bybit in the future? Yeah, I think I can just take this quickly because D 5 it's really easy, right? Because everything is on chain. Of course, we have you know, our mechanism where you know, we have we maintain like our community maintain a due analytics and all kinds of data dashboard that they can track our own chain a data flow or like trading volume in real time and D 5 Lama is something that's you know, all of the protocols are referring to on daily basis.

So they I think they do a really good job on tracking all the all the all the data. On the security side, you know, D 5 itself it we again, we run permissionless protocol. We audit everything independently with an independent auditor and we do run a bug bounty program as well from very early stage. So we always welcome, you know, any community members bring up some potential loopholes that we have overlooked and yeah, I guess for us is a is really like a non-custodial way of managing the assets. So um I think I would just let Raj talk more on that on the centralized exchange side.

Yeah, for centralized exchanges it's a little bit more nuanced. You have two different concepts here. One of them is the proof of reserves and other is the proof of liabilities. The proof of reserves kind of tells you that how many how many what's the value of a certain what are the different kind of assets that the com the companies like Coinbase or any other centralized exchanges would hold uh or custodied. And then there's a proof of liabilities, which kind of tells you how many um how much the total value of the funds that they owe to their customers.

Uh ideally speaking, uh proof of reserves and proof of liabilities have to be equal. Uh but in the real world, we know that there could be hacks and there could be uh a lot of different things that happen. Uh so the proof of reserves always have to be much larger than the proof of liabilities. Uh and you're talking about the hack uh which happened with the Bybit. Uh there's a 1.

5 billion uh that was hit in the forms of proof of reserves. So they were able to cover it really, really well because they they have the corporate funds. Um and uh so having additional proof of reserves is really important um uh along with the proof of liabilities. And uh I think the one of the advantages of Coinbase is it's a public company, so they declared both the proof of reserves along with the proof of liabilities. Uh I've seen Binance and Kraken uh and other exchanges actually showing the proof of reserves um on their um websites and everything, uh which is very, very transparent, too.

But overall, both the proof of uh reserves and liabilities play a big uh thing uh to say uh how much does a uh exchange own in terms of liquidity. Yeah, so um for regulations part, you know, like cuz uh Plenus building the Auto B 5 chain and we uh pay a lot of attention to regulations all over the world, especially in the United States and also emerging markets like, you know, like LatAm and also, you know, like um some very important like APAC countries like Singapore. And I was actually in Consensus last week, so we heard a a lot of like comments um from like the policy issuers from the Hong Kong governments, too. So I actually wonder like have you heard of like any interesting like current regulations or the future policies that will help um with, you know, like um the regulations on the uh liquidity on both like C5 and D5 side. Do you want to start?

Hello. Yeah, I can pick on this first. Um so, I was fortunate to work with a few regulators uh because while I was when I was at that C5 company, uh you know, including regulators in Singapore especially because back then 2021, a lot of um you know, companies are applying for the PSA, the payment uh license, and also the CMS capital market service license. And uh actually, we were the first one of the first company that got a CMS license with a mandate that we can run a crypto fund. That was insanely um back then it was insanely advanced.

I would say to this day, I'm still very very impressed uh how the MAS in Singapore, you know, uh communicate with the participants. Back then, it was really like a the feedback loop was so quick. Like on daily basis, we'll have meeting, and they will uh listen to what we want to do in terms of the crypto fund, and you know, the fundraising, and who are target users, and things like that. But then, of course, the FTX happened, and a lot of things got uh taken back. Um and recently, we've been, you know, after that, I've been I was working with, you know, SFC because Hong Kong, they were uh pushing this uh virtual asset service uh like licensing, and a lot of companies got um I would just say burned out, um but they didn't really have a clear business model if they have to 100 100% Sorry, comply with the regular's requirements because that means you can only uh provide your uh product to professional investors, I say, to begin with, and that's very very difficult.

So, because I'm based out of Hong Hong and the regulators I can see they're um you know, because they want to attract more talents to Hong Kong, they have a really good talents program, by the way, if anyone's interested relocating to Hong Kong. And the government has been providing some a lot of subsidy and things like that. But to be honest, it's going to be not as fast as people would expect. There are some you know, Hong Kong dollar stable coin flagship project that they are discussing. But I I I I don't know when it's going to be in a place that people can actually start using Hong Kong dollar stable coin as the US dollar stable coin.

And on the US side, I was I was we were once applying for the money transmitter license, but that was be also before FTX. And recently, of course, like a recent very recently, yesterday, we know that you know, the the SECs and then the regulators in the US is going to hold like crypto gatherings. So, we're very very excited at the outcome of it, and also the clarification that they're giving to securities. Because in futures, to be very very honest, we didn't know as a DeFi protocol how to navigate the regulatory framework in the US before. So, we had to block the US IP as a last resort measure.

A lot of the DeFi protocols are doing the same. So, now we're very happy to see the Wells notice been dropped against Uniswap. And yeah, very hopeful in general. Yeah. Yeah, on the opposite, Coinbase doesn't have to block US IP.

So, what do you think about the regulations here and the globally? I think centralized exchanges have their own challenges in terms of regulations. If you look at why does why do countries come up with these regulations, it's because that any of the centralized exchanges, if they were to ever go belly up, they want to make sure that the citizens' uh funds are safe and secure, and they do not have to go through these multiple hops to get their funds. Um different countries have thought this differently. Canada uh has come with a regulation saying that 80% of their uh country's citizens assets have to be completely segregated uh from any other assets uh that are being maintained by the central exchange.

For example, US or any other countries like Singapore. And then uh MiCA, which is Europe, uh wants to do 100% segregation. Uh the challenges here is that when you have $10 in multiple bank accounts, you have uh you have to move these funds between these different bank accounts to be able to move $100 in one transaction. Uh the more segregated these funds are, the harder it is for the central exchanges to be able to uh serve the withdrawals in a much faster capacity. Uh There are a couple of patterns uh generally in in in this um regulatory world.

Uh you can think of it as a LEGO blocks that you can build and start. Uh for example, one of them is segregation. Uh it could be a configurable factor of 80% or 100% depending on what the country is. Uh and Singapore hasn't come up with one yet. And then you have um gas prices, gas fees to be paid for those transactions.

Where does that come from? At the same time, how are you reporting these transactions? How are you reporting this uh ownership of assets on a uh a certain cadence? Uh at any point of time, you won't be able to say that you're 80% or 100% fully segregated because if I say that uh right now any central exchange is 80% segregating the Canada's assets, then someone would from Canada would send it to a customer in US and they're out completely out of uh compliance. So, you have to look at it in a larger period of time over 4 hours or 8 hours or some cadence that makes more sense.

Um And then you have to report these at a regular cadence. At the same time, you have to also uh deal with the AML anti-money laundering practices and everything. Make sure the countries have been informed when something like that happens. Work with the regulators uh uh to make sure that it doesn't happen one more uh more more often. Yeah.

Yeah, thank you for sharing all the insights. And we're not going to end the panel without talking about the future, right? So, what's your future What do you think about the future of uh liquidity on both like, you know, centralized way and decentralized way because we're seeing a lot of transactions happening more on chain right now. And yeah, do you want to share first, Benny? Sure.

Um so, we started building SynFutures because we really understand or and we really believe the notion of open finance. And over the years, uh we really see how the communities in like where their countries, you know, central financial system does not really work as they expected or they don't really have a performance financial system benefit from DeFi. And um you know, users from Argentina, from Brazil, from Turkey uh on daily basis, they just convert their whatever they gain from their local uh job and into USDT or USDC into like stable coins and participate on chain. Um and for us, it's really just um onboarding the next not I'm not going to say next billion, but for us like a for DeFi protocol, uh if we can help onboard the next 100 million um you know, uh users on chain and make them understand how does the you know, liquidity works, the yield works, and um you know, so that nobody uh ever has to be scammed, rugged, or you know, uh their assets doesn't have to be working in a black box. So, we're very excited for that.

I actually think that one doesn't replace the other. There's going to be both coexisting in the future. I believe if you start with decentralized exchanges and then now a lot of things are on chain considering the transactions are a lot more cheaper. And in the the next few couple of years is going to be a lot more DeFi and then eventually there will be a some kind of a consensus between a DeFi and a central C 5 and they'll both coexist together. We will be looking at the smart contracts and a lot of tokens being supported in terms of a DeFi and then we'll be looking at the central exchanges for the deep liquidity and to be able to custody these assets for the longer term.

Yeah, thank you for sharing and thank you for joining the panel today Wanni and Ragiv. A round of applause for them. Thank you very much. Thanks. Thanks Chucky.

Thank you. We are the