Crypto Derivatives: What's Next?

Transcript

all right well good morning everybody uh good morning good evening depending on where you are in the world i still see people coming online um thanks to everybody panelists and members for uh joining our panel on crypto derivatives we've had a lot of interest in this panel so i'm really excited that there is so much interest and partly i think it's because of the timing and also because the caliber and of the panelists that we have we have really some of the premier practitioners in crypto derivatives uh here on this panel so let me um start with a a background here and then i'll introduce the panelists and then we'll move to questions we have about an hour maybe an hour five minutes something like that but we'll we'll move along uh just being

conscious of folks times um i do have written on my notes one big disclaimer this is not uh legal or financial advice so uh it's for educational purposes only obviously but we're here gonna we're going to be talking about crypto derivatives here and i'll just kind of set the stage because it's a complex topic derivatives themselves uh or are daunting to many people uh this is a fairly crypto savvy audience but may not be a derivative savvy audience in a way because it is a specialist area so first of all what are uh derivatives anyway what are they and i'll let the panelists can talk more about it but at super high level it's a contract based upon it's a secondary contract really based

secondary security based upon a primary security that's the underlying security and uh examples are things that we've all heard about swaps options futures forwards things like that uh there are two types that you you can use derivatives in two ways you can use them to mitigate risk uh in a hedging type situation or you can use them to assume risk and with the expectation of hope of making a profit within derivatives there are two types there's the lock type which is a binding obligation uh to to basically for the underlying asset uh these are swaps futures and forwards and then there are options where there's not a binding obligation this is probably the one that people know the most uh most common because of the stock options

where you have the right but not the obligation to buy or sell the underlying uh contract so how are uh derivatives actually traded so they're actually traded either generally two ways they're either traded on an exchange like a futures exchange or an options exchange in the uh crypto world there are a number of exchanges focused on that and and we'll go through some of them the other way derivatives are traded crypto drives are traded are through what's called otc over the counter which is a bespoke type of transaction where it's not an exchange but there's a party-to-party direct transaction and um that's also uh growing um in in size and complexity uh and we'll talk more about that as well so where does one trade

crypto derivatives if you're interested in trading cryptograms where we do it there are aside from the otc uh aspect which i just mentioned you can either trade crypto derivatives on a centralized exchange and the number of them out there sort of dare a bit finance these are some of the large ones um but they're about 10 or 20 that are fairly well known the other way is through a decentralized exchange of dex uh which is called and in a dex uh it's basically uh more well i guess the word says decentralized david cisco uh from um vega um can talk a little bit more about that because that's that's one of their main focus areas within crypto derivatives there's a lot of interest in trading d5 type uh instruments such as ave

and luna things like that and so that's another area where where this is growing rapidly one thing is that this is a very heavily regulated area uh it's complex uh in fact the regulation is probably just catching up it's probably a little bit behind i'm a u.s securities lawyer and one of the things is that a lot of these exchanges are not operating in the us and specifically do not uh claim do not that they do not target u.s investors and do not allow you to invest if you're a us citizen or a uh logging in from the u.s and that's where the u.s securities laws apply and that's where it's heavily regulated from a global perspective and specifically from a u.s perspective well one of two last couple of points uh

we talked a lot about otc contracts uh is the agreements are the main contracts that are basically used uh in this space and this is very interesting area because these is their contracts are from 20 30 years ago and they were never really set up for uh crypto derivatives and and that's what people are using today but whether it's right whether it needs to be modified or not i think to catch up so how big is this market uh my research when i did the research uh there was a report from token insight that mentioned the third quarter this latest statistic i have was 2.7 trillion dollars based on data from 42 exchanges and that was a 160 percent increase from the previous year and the otc interest uh trading was

it's hard to determine because it's it's private but it's probably as large if not larger the other thing that's timely about this webinar is that large institutions are coming into the space uh i will point to uh an article from goldman news report from goldman sachs which reported earlier this week they traded um a low tc transaction with galaxy digital which was uh what they call a bitcoin non-deliverable option and so uh i we don't at least the we're supposed to talk much and go into further detail about the size of mentioned but uh goldman sachs was quoted as saying is this sparks an important development uh for the asset class and so um

this will clearly uh you know things like an institution like goldman sachs getting into this space will clearly mark a new chapter uh and this will propel the space forward the last thing i'll talk about is an executive order uh which uh president biden uh uh released uh maybe a week or two ago uh in cover specifically this uh this aspect of crypto derivatives but in general the scope of that executive order uh asked several federal agencies u.s federal agents to study the crypto space um i wrote an article about about that it's on the cva website if anyone's interested in that um let's move on to uh our panelists um i'll give a quick you know intro to them

and then i'll let them uh talk more specifically about themselves so uh i'll introduce myself i'm chanting surpray i'm a corporate securities lawyer based out of silicon valley uh i have a general corporate experience venture capital experience uh in the last five years or so i've been doing more crypto and i'm licensed to the us uk india and uh i have law degrees from oxford and colombia and let's move to uh peace for uh arleigh dilem and let me know if i'm not pronouncing it correct yeah well done i don't have the complicated name on this panel so so great thank you so you started with

them already uh yeah already anyway orli is the senior director for institutional markets at ripple uh for apac and mina she was previously in singapore over 12 years now she's in in dubai now ripple uh is known company in the space for their payments uh infrastructure platform and also for their xrp orderly has a finance and tech background and a lot of fx experience she's also an engineer with degrees from telecom sued paris virginia tech and insead and she choose french clearly but let me let me keep going through the panelists and i'll come back to you and you can talk more about yourself and your company anything i missed we will uh we will next go to david

siska and uh we have a lot of you know math science type people david's actually a phd from in math from university of edinburgh he's currently i think also an academic at the university of edinburgh aside from being a co-founder of vega protocol which is a decentralized exchange for derivatives trading uh he's the head of quant he wrote the paper uh so all um very impressive uh background he also has an ms from imperial college so the two imperial college folks on this webinar next uh i'll introduce gordon grant so gordon grant uh i love the name gordon grant it sounds like a superhero it's like peter parker

so he may be happy doing something else we don't know about right one when i when i was born you know it was by design absolutely um so gordon is a vp at genesis trading in quant research and trading he was a previously director of derivatives at nwi management genesis is very well known it's a premier crypto trading and asset company as well as a prime brokerage and uh gordon has a ba in economics from princeton but we we won't hold that again okay jonathan jonathan mathai is uh head of products and revenue at g20 group where he's also a co-founder g20 group is a quantitative trading and advisory

firm with expertise in market making liquidity provision and derivatives jonathan has a master's in engineering from imperial college and an mba from cass business school um g20 is uh my headquarters but he's is in zurich uh although currently in barcelona at avalanche um there we have one more uh panelist which i don't see on here uh maybe he'll join later i'll just say a quick word about it um uh nikki maybe we can you can email him on the side and ask him to join please but he's had him in sales uh if he had coinbase in london he was previously founder of a

digital dealer uh he was an md at jp morgan and he uh is a cfa and has an aerospace aerospace engineering degree and is an mba from columbia business school so with that uh we have the basic introductions but i want to go back through maybe in the same order that we had uh talked about to everybody else but if you could please you know give more background about yourself anything i missed the more you'd like to talk about and also about your company how does it play in crypto drives and what kind of crypto does your company support offer trade et cetera so rlu please perfect thank you shantanu for the introduction a very thorough introduction so rashentanu said i'm a

senior director for repo for the initial markets team so before i forget we are hiring in our team so feel free to reach out if you if you're interested so what do we do in the team so basically i'm responsible for apac and me now and we are looking to manage and expand xrp liquidity and utility uh looking at different new use cases including uh derivatives including uh dfi so we can talk further about that in terms of uh career i was in tech before with the ibm as an i.t architect in paris and then i got into a crypto in the two derivatives first like uh 15 years ago adding effect structuring for deutsche

bank on the asset side of the business so very good years in terms of uh therapy space for effects in apac especially like what we call the back-to-back trade with corporate clients like exporters like uh in taiwan and china so exciting years that got me into derivatives in structuring and and then uh with the with ripple and before that with the bank of new york getting effect services sales so looking forward to discussion today thank you thank you yeah that's right what what does a ripple do specifically in crypto derivatives is there yeah trade opera product what are you guys doing that we'll just combine the first two questions yeah yeah so basically it's

mostly about uh managing liquidity xrp liquidity and uh and utility and looking what can be done in the in the derivative space and uh as we're gonna discuss later today like when you look at the volatility curve for example in option it's very much focused on like a short-term btc and ethereum and what can we do as a team to expand and bootstrap that liquidity develop like a vault curve on xrp for example and enabling uh players like exchanges institutional client to to help develop that volatility curve yeah okay so your uh audience is institutional essentially uh yeah when

we talk about that yes it's mostly like on the additional side uh yeah okay great um david could you please uh answer your personal background and about your company yeah thank you shantanu for for the introduction so as as you said you know i've done a phd in mathematics and unlike many people who do that sort of thing maths or physics i then ended up working as a quant in an investment bank uh bnp paribas in fact the fixed income desk and i started in 2007 so it was an interesting time you know a lot of things there changing a lot of things had to change i've been i've been there as i want for three years so i saw the i saw the crisis from the inside i i got a bit

disillusioned because you know while everyone in investment banking was doing pretty well well apart from my friend who went to lehman's a week before they went bankrupt but then you know everyone was basically fine while on the main street you know there there was a lot of suffering and job losses and so i got a bit disillusioned and thought well you know maybe i don't want to be doing that and i i miss doing mathematics a bit so i went back to academic mathematics and have been doing that full time till one of my former colleagues from bnp paribas contacted me you know and told me that there are these guys who want to start a decentralized derivatives exchange and they they're looking for a quon and i i've been with

vegas since then and and i've not looked back it was uh it was you know it is extremely exciting i that when i started vega i was completely new to the world of blockchain and you know it was over three years ago so ethereum then wasn't known by everyone yet and and and it's it's very exciting so a bit more about vega sort of we got together uh barney and ramsey are are the founders and there are a couple of other people sort of from the technology and and finance world and and we started asking the question you know what what would it take to build a premier you know derivatives trading venue that could be

as good and better as as what's available in traditional finance and it would be decentralized and permissionless so so uh permission list for us is important you know censorship resistant community driven and and we started looking at the available technology and you know few things became clear relatively quickly you know ethereum is is amazing general purpose blockchain but for building trading platform on top of ethereum you you have a number of obstacles for instance you know front running is built in and we see that now you know not only can you pay more to be to front run other transactions if you

if you're a miner in fact you can include your transactions in in the block and basically there are arbitrage opportunity opportunities for miners so so we spot it fairly early on that you know you probably don't want to build on top of ethereum another reason being that you know it's back then it was purely proof of work it was a bit slow you didn't have finality or all sorts of things so very early on we started building our own blockchain the other thing was that for derivatives you know if you trade spot the trade happens and that's basically it you know assets change hands and that's it both parties walk away but with derivatives i i like to tell

people it's like trading promises and so then you need to hold people to account you know you have to make sure that they actually have the means to deliver on the promate on their promise or ideally there is a high probability that they have the means to deliver on their promise because otherwise you have to over collateralize everything so anyway if you want any kind of risk management running on blockchain you can't do it on ethereum because it will cost millions and millions of dollars in gas so so you can't do that so vega is currently you know its own layer one it's it's a blockchains that's special specifically purpose built for for trading derivatives we're running restricted mainnet and

we're very very close to launch the first alpha main net where trading will be happening and if you want to find out more you know check out the website come and play on testnet and you can see more about vega it's it's you know it's there you guys have a uh is it a token as well as a uh an exchange decentralized exchange yes so we are so so there are layer one running on proof of stake in fact they're built on top of tendermint but they're not part of the cosmos ecosystem and so there there is a vega token which which is used for the proof of stake and once trading happens

part of the trading fee from the platform will go towards the vega token holder so so that's the sort of tokenomics of the token in in a nutshell we are bridged to ethereum so because we're layer one there there are no you know native assets on on our blockchain so at the moment they're bridged on ethereum so you can provide settlement in any of the erc20 tokens that live on ethereum or you can settle in eve itself and we will be building bridges to other chains that carry value intrinsically okay sounds great uh thanks for that so uh i guess i can't remember who was gordon or jonathan but but gordon why don't you go

uh since i have seen your name there sure of course so just uh by way of a very brief background as you said i was a portfolio manager at a large macro fund for about 10 years running a volatility book focused on interest rate foreign exchange uh commodity and equity index derivatives as well as emerging market fixed income derivatives so um i have a fairly core traditional financial background and got into crypto in 2013 by random chance has happened to most people and have been in the space since then um genesis as you have well alluded pretty much does everything in crypto and crypto derivatives um there are lots of competing claims about who is the

biggest and so forth and it's not worth making this a marketing exercise but suffice it to say we are substantially involved in every kind of uh linear and non-linear derivatives transaction for cryptocurrency including the kinds that have recently been mentioned in the press releases about goldman and uh and its counterparty with whom we are routinely engaged in business and rfqs as would be expected um i think uh it's it's quite timely that has mentioned uh something like ripple derivatives where they are seeking to build liquidity and understand a volatility surface there and that is what genesis does right so we regularly make markets and transact in things like xrp derivatives both linear and non-linear with a wide

variety of over-the-counter counterparties while also being active on virtually every major exchange that that exists for the jurisdictions of course in which it's possible to do so um i think as uh as david has said this is quite an interesting time as we move from a more decentralized world which is occupied by the cmes and derivatives of the world into one which is increasingly decentralized with the presence of not only vega but other participants like ripple um older protocols like hejik which actually still functions quite well and is more like the the vega model and some of the newcomers like psi options who are doing a wonderful job with um with their user interface and sort of aggregation of all these decentralized

options vaults we can expect this landscape to continue to evolve there are a number of unsolved challenges within the decentralized exchange marketplace such as um managing and permanent loss as well as accounting for the things that david has again referred to right derivatives are contingent claims contingent claims have both you know a sort of a market related component and a credit risk component to them and disintermediating that in a decentralized way requires innovative applications of the technology that is being written in real time and i think that's really quite exciting um sort of walking back and looking at this entire universe comprehensively you know it's it's interesting for me to go full

circle from a macro portfolio manager perspective into crypto when you couldn't talk to people about it without being looked at as a you know enthusiast to now the same kinds of institutional money uh such as i helped manage and where i worked for quite a while are now coming into this space and we are seeing that in in the growth of volumes the depth the complexity of the markets and the risk appetite that is being deployed both on centralized and decentralized exchanges and that really um speaks to the nexus at which genesis sits as a as i think a leading participant i i carefully use the word a ins d whether um that is you know debatable or not but really we are focused

at serving a client base within this sector and silo as it exists but also where it is going to be um and you know projects like uh like david's like vega like ribbon like psyops um you know and others that are coming on down the line um are making this really the place i think where cutting edge talent will be and cutting edge resources in terms of quant development red computer science and eventually machine learning so um you know from my perspective tremendously exciting and looking forward to getting the rest of the questions thank you um and you and genesis you will you deal with institutions as well as uh high net worth individuals so that's it right

okay that's correct so we do we deal with any qualified person in the sense of legal or natural um and um you know of course our own department can speak to what that is but it's a it's a very diverse swath of um you know hundreds of principal counterparties across borrowing and lending for which we have a significant book and that has an effect on our derivatives business as well and then you get into our spot and of course our options in linear non-linear um business okay great uh jonathan could you please uh give us any more details about your background and also about g20 yeah so yeah i'd like to reiterate some of the sentiment that i've heard here already it's a super exciting time here in the crypto derivative space and um from our side in g20 we're a similar

player to uh genesis maybe not quite as big but growing as well very quickly um and you know we're involved in um the full life cycle of crypto and participate from market making otc proprietary trading and asset management and so on a little bit about myself and to give you a little bit of context of why the space is so exciting from my perspective so i started my career as a quant in ubs i was i was working on derivatives pricing models volatility surface construction in the fx space the exotics pricing and also analytics and um moving on from that that part of my career i went into the quantitative training strategies area using fx commodity as a primary input for um

directional trades in in risk markets are going long or short carry based upon fx volatility and that's when i really got interested in that in that space of f expo and wanted to further my knowledge on the trading side so moving away from the quant side onto the trading side i started on the emerging markets desk um and uh with a focus on europe and then went on to run that team at ubs for a number of years um after my time at ubs which was about 10 years going through the credit crisis and all the european crisis after that we moved i moved on to g20 and we started very focused on the fx side but then branched out into crypto about four or five years ago and what i find especially great about this is there's

so many people that we've seen from the traditional finance side and now moving over to the crypto side things like gordon mentioned david obviously is from from this space and already as well exactly you know from the fx space in particular we see a lot of synergies a lot of similarities um between how you know volatility is constructed how you think about liquidity um you know the currency aspect of this that you know there are traditional currencies which are uh have these similar sort of issues of about liquidity and about idiosyncratic risks and so on so it's a it's great to be part of this and to see you know the evolution in the crypto space are likely to follow a similar path to what we've seen though high volatility is moving into volatility suppression and and more

liquidity in different areas so uh yeah it's it's a great space to be in where we're at 220 we are um you know like i said very active on on centralized decentralized exchanges futures trading um and and the like yeah so great okay great thank you great so as you can see from all the panelists uh it's quite an amazing background uh super highly qualified and accomplished set of professionals here so uh it's it's uh it's impressive so one last thing is a housekeeping item i wanted to mention is that if we will have a small question q a session at the end and if folks could put their uh questions in the q a chat room

that would be helpful that way i can go through them towards the end unfortunately we won't be able to go directly to the audience members but we can uh if they post the questions then i can read the questions out and we can try and get those answered so the way with the format from now we will have a number of questions and i've divided them up to different panelists kind of based on their backgrounds uh but but if any of them have anything to say they can chime in but we will probably need to move a little bit quick since we're probably halfway through now um let me ask this question to uh to gordon jonathan and david uh specifically because they're they're trading on on a regular basis themselves uh derivatives are our complex financial instruments what we talked about that

they could be used to manage risk and volatility uh that's the hedging as well as to generate income um so let's talk a little bit more about this in further detail the spa the options of futures how do crypto derivatives differ from traditional derivatives so you know traditionally been around for a long time 20 30 40 years uh many people you know buy options uh especially like tesla options the last few years people buying them so that's fairly easy to understand um crypto derivatives first of all rated you can't just do it on your e-trade account or whatever it's it's very different the way you trade it and so how is it different um and how do you manage risk and volatility as well as generate income so

we can start with uh [Music] i guess gordon and then jonathan and then david something like that sure so let's kick it off so crypto derivatives i i think because it is a newer market um you know first things first is pricing convention you know um in most markets if you come from a foreign exchange background then you're always pricing in percentage terms or basis point terms typically in terms of the left-hand side currency right so if you're trading emerging market currency you know dollar turkey dollars or dollar brazil whatever the case may be then you're looking at dollar emotionals and percentages of those if you come from a precious metals or commodities background energy whatever

it is then you're talking in terms of um you know dollars per per unit right your premiums are dollars per ounce most of the time these are all spot settled premiums um although in some cases there are afford premiums and foreign exchange and crypto right those are still being decided so if you are trading a derivative style option you are probably quoting in terms of basis points or you know percentages of the underlying left-hand side unit mean bitcoin or or ether um but if you're trading otc options or trading cme options you're going to be coding in in dollars per unit right so it's it's like the equivalent of flipping from percentage of xau or xag in metals to you know dollars per ounce um and and not only that depending on um

you know what venue you're looking at people tend to think of ford versus spot premiums um and also tend to think of um you know whether the premiums are actually settled immediately or whether they're paid out in the future so you know these are all things that are yet to be standardized may never be standardized right um and uh increasingly as participants start to take a longer and longer duration that's in cryptocurrency volatility which is what we're seeing right now we ourselves have a book that includes option expiries out into 2023 um and we you know regularly transact out the curve there and we are seeing increasing volumes print both on the exchanges in which we're an active participant as

well as with our otc book these are things that start to matter right um you know matter because the vega is substantial but the premiums being transacted or substantial so so that remains to be um you know that that remains to be done in terms of how they're managed well cryptocurrency derivatives from our perspective are managed in the same kind of framework as i would have managed as a portfolio manager at a hedge fund as you know josh lim our global head of derivatives would have managed it in you know his former time at goldman sachs or other uh institutions um the interesting thing of course is that the distribution of returns and the underlying characteristics of these assets don't necessarily conform to the assumptions that go into black trolls models or whatever tools you may

be using to price them and and therefore you need to have your own understanding about you know the arithmetic mathematical constructs by which you're deriving prices and setting your hedges right and that's beyond the scope of this discussion but suffice it to say right this is a multi-dimensional um landscape in which you really need to kind of think an end space in terms of how you are managing the risk of these positions um things that don't necessarily matter have come to no longer matter so much in um you know traditional financial derivatives and equities or interest rates or commodities you know your higher order moments you know ball gamma right or uh the vega profile with respect to spot uh or or higher order

moments such as you know your your ball game or profile with respect to your ball or sku whatever the case may be all of a sudden as these markets start to to come alive and particularly when there are moments of high volatility it matters a great deal right um precisely because you know crypto is an asset that has gone up right 100 x right maybe a thousand x in some cases from where it was just a few years ago so the strike topography is not you know it's not euro dollar right where you know you're sitting at the money at one spot one zero zero and the entire locality of your strike topography is is plus or minus three to five percent on another side of spot right that's that's the overnight strike topography right in

bitcoin really you're you're talking about strikes going all the way down to 5000 and strikes going up in some cases to 500 000 right and is is quite similar that requires a different kind of a framework and a different thought process about research um and and so that that is also part of the mix in terms of products and services i'll just wrap it up quickly um you know there are a number of new providers coming into the space in terms of you know portfolio management systems and risk management systems as well as traditional players that are sort of trying to shoehorn crypto in into their platforms i think this space is one to watch um and and expect higher and higher quality um you know caliber providers to get involved okay that sounds great and i think one

of the uh points is that because so much uncertainty or i would say lack of clarity in terms of pricing premium that itself creates a lot of opportunity for players like yourself who obviously can understand the gaps in the market and benefit right that's the arbitrage so yeah clearly right i mean you know goldman sachs does not operate for charity so far as i know except for their their charitable giving of course which they've done much of over the years but the reason they're coming into crypto like many other traditional financial players in my perspective is a recognition that even now with the compression of spreads which we've all seen in the crypto marketplace that this is still a place to do business that is justifiable on a risk-adjusted you know expected return profile right putting

capital into developing a franchise that makes markets and carries you know client-facing risk in cryptocurrency uh particularly cryptocurrency derivatives is justifiable right at a business line level apparently even from an organization like goldman sachs so i think that speaks volumes to you know to this industry and the opportunities that we continue to see and that we have an ongoing dialogue with our client base about okay great thank you i do see some questions in the chat so um keep them coming we'll ask them towards the end uh jonathan could you please comment yeah absolutely yeah so i agree with what that gordon said there actually and just add a few more things on that side so i think one of the the other big differences i guess it's not specific to crypto derivatives for just the crypto

market in general is that it's a 24 7 market uh that's that affects the way you price derivatives and think about volatility in general i think the other thing from a very high level perspective is that it's it's underdeveloped um and there's very limited liquidity or very limited observable liquidity in in in the old coins especially so maybe they're quite a nice that have some volatility let's have some some uh some liquidity on on a few of the exchanges and like early mentioned as well the other the other coins and tokens and projects don't have that much liquidity that's observable so that's kind of uh focused in the overseas a very very fragmented very unclear type of market at the moment and has room for a lot of development i think the other

thing here is that even for bitcoin and ether the the markets trade off on the centralized exchanges these futures and at times last year we saw that these features were pretty at a significant different different price to the underlying and so the gamma profile and the volatility profile is forward volatility or the volatility of that forward or that future which is very different to how you think about it's very similar to how you think about things in emerging markets but very different to how you think of g10 fx or um uh equities so that's that's quite an interesting one i think what's also really great about this is that you know we've seen this this this this kind of move of the last few years since the since the credit crisis of lower

volatility spread compression you know a structured selling of volatility which it hasn't it's no it's not theirs yet in in crypto well not there as it to such an extent encrypted so you see high volatilities and lots of you know different potential there which comes as a result i think gordon mentioned that as well you know it's a very with such high volatile your characteristics your profile of your risk changes a lot as well and then and particularly yeah yeah yeah and particularly on the sku side the dynamics of the way that the calls inputs change relative to each other the prices and change relative to each other is also very dynamic as well so i think that's another another big

thing um yeah so um the other thing i think that's that maybe has has has happened in the last couple of years is the the retail market has been very involved in the in the equity option space uh maybe not so much in the in the fx option space but a lot in the in the equity option space and this really hasn't happened as yet in the crypto space which i guess at some point will happen and when the when the market on the institutional side really develops right yeah i think one thing that's interesting is a lot of people in this space have an fx background because i think it helps directly uh that that uh skill set seems to be really uh transferable to crypto so so that's great

um david do you want to uh can you um ask the question please yeah so just a small comment from me i don't really trade so i cannot you know so you can talk more about the technology uh and uh i was i i was gonna go to that so so to me the biggest difference is sort of your your counterparty in sort of traditional derivatives trading there is always a legal recourse with your counterparty and of course you can trade crypto derivatives that way as well you know you can have a bilateral agreement that you know if you're a big hedge fund you can have a bilateral agreement with someone like goldman's and cover crypto derivatives under under that if you want or if you're a retail guy you can go to

someone like there a bit open an account and then you have sort of some you know legal agreement implied with there a bit but uh with uh fully decentralized uh derivatives protocol of which there are now few on you know few online and running you you're you're pseudonymous you you're just a key on on the blockchain and there is sort of no there is no legal counterparty and and of course that makes certain things you know interesting in in the sense that certain you know certain derivatives will be very difficult to bring on on to blockchain in the sense that you either have to over collateralize them in which case they become uninteresting to trade

because what are you gaining if you have to over collateralize or they're just that they're just very very difficult to set up and and you know maybe things will be possible if there is a better connection between the real world and and the blockchain world but for instance for now something like credit default swap in a fully decentralized way you know you you either over collateralize and and people will not be interested or or it's not going to happen so the yeah so so the markets have got a long way to go and and there is a lot of innovation you know a lot of conventions to be developed and sort of settled and things like you know options

markets setting up a good options market is is difficult because as exactly as gordon was saying you know the the spot will walk away from you and and what used to be a liquid strike is the liquid liquid strike and then you know the protocol or the exchanges to manage this manage the risk etc which is which is a non-trivial matter okay sounds good and uh we will come back again i haven't forgotten um let's just kind of keep moving on this sort of specific aspect and i'll go backwards now um it's more about technology what's what kind of technology is used in and i i just from my own observations there's heavy use of technology in this space there's heavy use of algorithms so maybe

if you could talk a bit more about the tech and you david and then we'll go backwards to jonathan warden um it is because everybody seems to have a very math and quant background which seems to help so there's a heavy use of formulas and algorithms so in the trading in some way yeah so i mean from from the perspective of vega you know what we need to do is manage the counterparty risk so basically set the margin that on one hand gives enough leverage to make the trading attractive and on the other hand uh you know makes the probability of someone uh causing problems relatively low and for that you need you know whatever you do you need some kind of risk model for you know whatever product you're trading

we are they're basing our margin on something called you know expected shortfall and and the idea is that once we we're at the stage where anyone can create any kind of derivative through you know a derivative payoff language the risk calculations will have to happen through monte carlo simulations because there is you know that there is very little you can do otherwise and so that's that's relatively computationally expensive and that's one reason why we're running on our own chain so that all the simulations run sort of in native code on bare metal and can happen at speed that sort of rivals what's happening in

centralized exchanges and and big big institutions okay great thank you uh jonathan yeah absolutely yeah so like you said that you know algorithms are a much bigger part of crypto right from the outset i think from the traditional finance early days they weren't a big part of the initial fx markets but i think in crypto a lot most firms use algorithms to to trade and have access to liquidity in various different spaces i think that that really stems from the fragmented nature of the markets um and that you know trying to source enough liquidity in a particular edge for example you need to access it in a number of different places at the best price that you can so i think that's definitely one part of

it there are other solutions like paradigm which allow you to rfq anonymously to different people to uh um have a guaranteed settlement against someone who is kyc um and i think also ways of of addressing the fragmentation in general so you know of our technology is being able to identify the best opportunity across different exchanges they're scanning the space you know maybe not in the options space but on the on the perpetual future space and on the various other futures finding the highest yield opportunities or the uh the best yield opportunities or cross-yield opportunities one future against another or a spot against a perp for example i think these are the technology solutions that each individual trading

houses has developed uh internally to solve this okay great that's fascinating that it's uh there's a lot of innovation happening in this space that the algorithms themselves are being developed internally it's not something you can just go buy off the shelf uh it really depends on your own strategy and that's why crypto those trading firms that they uh hire a huge number of fonts really to develop these strategies it's fascinating uh gordon yes yeah there you are okay great thank you yeah anything really about the technology aspect the algorithms things like that yeah i think

you know when you're without james has a big infrastructure yeah without making a dull response to a very appetizing question the answer is yeah a lot in-house right clearly um and and not much off the shelf um i think there will be more more providers off the shelf but the reality is this is very much a build not buy kind of environment um for for the reasons that i previously mentioned and and that's simply a question of on the assumption that talent is being brought in house and and not being outsourced or externalized then of course in-house talent is you know going to be deployed in order to you know find solutions and you know optimal um you know kind of parametrized systems to to get into

these markets and do things that other people simply aren't aware of right so you know i i hesitate to use a truism like those who say don't know and those who who you know know don't say but it certainly is that right um the more people start to talk about you know microstructure dynamics of these markets or the technology that they're used to exploited it may not be very good technology um you know because much of this is proprietary right and and you know the the value that is being created by a franchise like genesis or you know g20 or anybody else's um is the extent to which they you know they have a view about what you need to be doing in these markets how you need to be doing it and how you you can be offering that that menu um to your clients

um and and i i think it's going to be a while yet before um you know we're just simply saying okay listen here's my service right you can you can grab my auto execution algorithmic bot that is going to minimize a permanent loss on you know uh l1 um you know sort of uh linear dexes it's if you had that you probably wouldn't sell it right you you would continue to use that in a way that is going to extract value and i think that the the more you know appetizing thing is it's not so much about what is the tech of course we know we all can't really talk about that it's how much money is being thrown at this right what is the quality of the intellect right i mean david is a

testament to that right this guy's a math phd who doesn't know really much about crypto until three years ago and he's here to solve you know a thorny problem and i think there will be more of that to come um you know that that all being said right there are big names getting into this space who probably at some point will determine that that there is more edge for them in selling the service right they don't want to be um extracting the natural resource they want to be selling the tools to do it right they're going to be levi strauss selling um you know picks and denim as opposed to you know trying to prospect for gold so um there there is a dynamic and probably an inflection point i don't think we're there yet the markets still have plenty of rich opportunity to develop tech um

you know and generate returns yeah that makes sense right now i think it seems that most of these firms to keep their their cards close to their chest and then they trade in you know prop set up trading or for their clients uh and it's not really available to the you know the general public as a service and so uh clearly if they can make money doing it that's the way they'll do it well great thanks i think that was very uh very um interesting background so let's turn to aurelie um since you're i i i'm you know asking you the question because i think your role uh from what i've seen is a little different it's more institutional uh sales and marketing um and therefore you are directly dealing with with customers on a daily basis yeah unlike some of the

other folks i think who are you know really more trading or more tech oriented and so i think you can give us a good perspective about you know what what do your clients think what are they concerned about at risk i'm just going to throw some issues at the risk settlement insurance custody perception security david mentioned the problem of the counterparty you know in a decentralized exchange i mean who's you know it's a problem who's the counterparty as a lawyer it's all very interesting because you know who do you go and sue which court where do you find these people these visa agreements are 30 years old uh they don't really address the issues so if you could please you know just give your thoughts thank you yeah that many different aspects of the first one that i was talking about is like the

liquidity aspect like how do we build enough liquidity when we look at uh at the futures even that is like very short dated when you go like uh six nine months uh dated it's like a six seven percent spread and when we look at the option it's even worse than that uh it's very like a btc it uh concentrated uh even in terms of platform is very concentrated like for uh uh for future it's gonna be very much like uh by none for option like very much like uh there a bit uh and so and also there's this debate like between executing like otc cfi or defy and so we're seeing some large

institutional like uh private fund like wanting to trade more like being burned on the cfa and willing to go more and defy and even if they pay like a bigger spread they prefer to have that flexibility to to execute on the device so we're seeing a bit of of that trend um good to see the narrative space growing last year we've seen like a milestone of the derivative of crypto derivative going over like a crypto spot in terms of volume uh now a derivative of crypto is like 60 percent of the total trading but there's still a long long way to go and especially coming from the structuring

uh background i'm very eager to see like the option market developing in in crypto for me it has been like taking more time that i would have expected and i think it's coming from a demand aspect so for example in the future it was very much about driven by a retail like willing to wanting to have like a leverage sometimes like crazy 100x leverage and now in the option space i feel it's gonna come like with the the two two angles that i see that the demands gonna come in two options the first one is impermanent loss so we're seeing i i love this uh use case of like edging the impermanent laws that's a big pain point in uh defy

and so when you look at the profile of impermanent loss it's like a straddle so it's like shorting a straddle like not the same notion on the both side but like let's say one by two so when you want to edge your implement loss you're like a longer a straddle uh so we're seeing some companies like doing like a trade like okay i'm gonna add your important impermanent law so i think that's gonna grow especially answering your pain point that's angle number one and angle uh number two for me is like the dovs like a digital option vault so coming again from traditional uh finance like the biggest structured uh lightly structured the

uh trade was like a dcds like a dual currency deposit where people are shorting a covered pool and so we think that in the in the defy space like with the digital option vault uh where people can earn yield from shorting an option again that's not an investment advice and because you're shorting an option to have unlimited risk on the downside so and the the the the the the fact that you would get like a premium from shorting that option uh but you again you're shorting and so unlimited so when we see like when i look at traditional finance like a traditional bank they were making like one trillion dollar of a notional of dcd per week

at the heat of the market and i'm eager to see that lightly structured business getting into uh into uh into a crypto and enabling uh everyone to earn a passive income and yield again like you're shorting an option unlimited downside but those two use cases i feel like the edging and permanent loss and the digital option vault hopefully are going to drive enough demand so that we can see that uh market maturing and seeing like of all the surfaceable curves on the option and so looking forward to seeing that yeah are you are you mainly targeting institutional investors and not

retail uh for what you're uh at a ripple level so all that is more like at a ripple level it's more like a institutional client and so more like we're talking at the payment level like psps and uh uh yeah some more at the institutional level yeah okay let's uh we have about let's say you know eight to ten minutes left so we'll kind of wrap it up i i see some uh some questions here alaska you know there are a bunch of questions here we won't be able to go through all of them but i'll kind of combine them a few of them and see where we can get to and anyone can ask the questions so you know right now i think it seems like how does an average person participate in this i think that's one of the

questions sure if you're an institution uh there are many avenues for you but how does your investor participate in crypto derivatives how does a retail investor you know use derivatives as an instrument to hedge risk can a retail investor do anything in this space basically so any of you can answer that question um well clearly there are venues right for for retail participation encrypted derivatives the advent of options being quoted on the beto um etf that is the futures based bitcoin etf um you know it's out there right so you can trade you can trade those from your e-trade account um clearly you can also trade options on crypto proxy equities like miners um this is not financial

advice but we all know if you just observe them statistically speaking that uh miners like marathon and riot blockchain have a relatively high beta to uh to bitcoin in the crypto complex as does microstrategy given the amount of bitcoin that it holds on its balance sheet this is really more for the north american um you know investor trader that is at a retail level the rest of the world of course has access to crypto derivatives on exchange right um there's no reason you can't trade on um you know derebit if you're sitting in switzerland and watching this or anywhere else in the world and of course finance and many other exchanges are for these products but derebit certainly is is the leader and has a tremendous amount of retail

participation in fact many of the things that have happened um in terms of trends both uh secular and cyclical with encrypted derivatives have been driven by retail right um you know this is no secret that after the the eip1559 you know hard fork last summer there was an explosion in ether volatility and skew right in in a way that was really quite extraordinary that was mostly driven by retail and mostly driven by the exhortations of one particular well-known twitter handle um you know promoting very high strike calls on on ether and you know retail surged into that trade and you know paid very high premiums to put that on so it's i wouldn't say it's that retail is in this

space i guess the question would be is you know crypto being a place where folks tend to get emotional about their feelings of their favorite tokens or you know the destruction of the traditional financial systems of planning you know with with decentralized finance how how can people use derivatives sensibly as opposed to an alternative to leverage because leverage is certainly available right you can have 10x leverage on many of these exchanges i think derivatives risk management at a retail level will remain challenging right that's that's not something that that's going to be probably offered uh yet i mean folks like yield street do that for um you know traditional financial

products but um i don't you know i don't i don't see that being out there but the strategies that have worked well for institutional um funds are certainly replicatable by retail right call overwriting as a programmatic strategy which is something that genesis is actively engaged in with our client base and um you know it is something that works equally well for retail particularly when you know call uh skew and outright levels of implied volatility are elevated on higher levels of spot that as was the case last fall that's a sensible um that's that is for some folks can be for some folks a sensible trade to put on again that's not financial advice that is giving you an insight into to the mind of some participants in these markets and

likewise collaring um you know long deltas is also sensible buying puts and selling calls for some folks they believe it is sensible depending on what's going on and and lastly right these decentralized options and vaults that others have talked about is sensible risk managed retail participation to an extent right you know a retail um trader doesn't necessarily have the opportunity to go sell options in size and and manage a yield in a way that would be let's say responsible because they're short gamma short short vega right other other components and that even for these short dated three to five delta options which are the principal consideration of these vaults the vaults offer a way for retail to earn yield um you know by selling

this fall and i think that as a credit risk counterparty reliability component of the vaults is software and clearly there is increasing confidence at least impeded confidence if the signs of notion or anything go by right ribbon again this is all public information ribbon has had 40 000 units of ether options in its faults right the past couple of weeks you know low delta uh obviously and relatively low premium as far as these things are concerned but still it's it's quite significant um so so this is a way right for retail to manage risk and and earn yield and volatility for yield as as was mentioned earlier um you know by by the team is something that we will probably continue to see creep into this space right

institutional money trades volatility for yield in virtually every asset class around the world um and it's been a defining characteristic of new or newer volatility markets like precious metals right where following its wide adoption by institutions as an asset that supposedly had low correlation to other you know traditional sectors like equities or fixed income um you know call over rights on goal is probably one of the greatest yield earning strategies that's been created um you know in the past 10 years and everybody does it from swiss private banks to retail individuals selling calls on gold gld and of course the consequences of that both for realized volatility of gold as well as the ball surface are well in evidence that's not to say the same should or would happen

for bitcoin but certainly indicative of the kind of appetite you could see and is a way for people you know retail to to sensibly manage their risk that's super helpful um there's some cutting-edge stuff i just want to give opportunity for some of the other folks to respond anyone else want to um respond and i think this will be our last question and also provide any last thoughts uh david jonathan or otterly yeah i guess on this space i think um like one was saying i think the uh you know the use cases that we saw from traditional finance are definitely going to flow through so i thought for for derivatives so diversification your generation and hedging and so you know those are the three main areas that we we see and

you know capital efficiency as well these are definitely going to flow through into into this space and and one of the big areas i guess is just just going to be more altcoin options just available to to um to everyone to trade on the centralized exchanges decentralized i think this is going to be a massive massive massive uh growth potential for the next two three four years for sure great we're all in the right space uh david or uh um i'll really any last remarks yeah so uh yes maybe just a small one for me like uh i think that the big big shift on the regulation aspect right we didn't have time to touch on that so there's definitely a big shift like in the

crypto industry and we're seeing uh more and more regulators like talents uh going into a crypto and uh there it is no stranger to that uh a lot of what's happening on the re very good at three aspect is also like uh big players buying like smaller players or acquisition like coinbase like buying fair x in january like a small chicago futures exchange or ftx like buying the derivatives platform ledger x so definitely this big shift happening which is a good healthy grounder for for the development of the spacer great thank you david uh you have the last word yeah so

when it when it comes to decentralized derivatives you know one doesn't have to limit uh oneself to you know options or futures or or whatever on coins and and bitcoin and ethereum right the space is rich enough that it can provide options on other assets like i don't know tesla shares and an apple or whatever because all you need is you know if it's cash settled you you just need a settlement asset and and the price input for the settlement to be trusted and so it can open you know trading and derivatives to retail investors for for things that were previously not available or very expensive and very difficult to to access

okay sounds great well we're just right after uh 10 o'clock and we had an hour allocated i know people have other calls but i want to uh thank everybody uh all the panelists all the audience members from participating was a lot of fun uh you know crypto valley we really enjoy putting these uh these things on um and uh you keep tuned for for future events uh thank you everybody then all right have a good day bye-bye thank you thank you bye