Onchain options and the case for Derive

Transcript

We're kind of one of the only teams that's equipped to build the sort of product that we're building and the market is just so much bigger. It's more subtle. It's going to take more time. Um, but that's exactly why we're putting so much time into it. Onchain products have been taking off in a big way recently. But why are options finally seeing adoption? How big is the market for these? And what do investors need to know about all of this? Hello and welcome to the Milk Road Show, the podcast that knows that nothing says out of the money like selling your whole portfolio to Ken Griffin before your wedding day. I'm your host, John Gill, and today is Tuesday, August 4th, and today we are joined by Nick Forester.

Nick is the co-founder and CEO of Derive, formerly LRA and the leading onchain crypto options platform that he has been building since 2021. Nick is a former equity options trader from Sescuana with a mathematics degree who is working hard to bring traditional marketmaking expertise to decentralized finance. Nick is going to share a ton of alpha with us today about onchain derivatives, products, and options. So, if that all sounds good to you, make sure you like and subscribe. Share this episode with somebody who's going to enjoy it. A reminder that our podcast today is free and that would not be possible without our wonderful partners at Securitize the Regulated Rails for tokenization. So keep an ear out for more information about them later on in the show. But for now, welcome to the Milk Road Show, Nick Forester. How are you sir?

>> Hey, John. Doing well. Thanks so much for having me on. >> I'm really excited to talk to you. I want to start with the basics. Dive has been around for a long time, but what is Derive and what are the products you all offer? Just lay out the basics for our audience so everybody's on the same page. Yeah, derive is the largest onchain options exchange. Um, so the way it works, we support trading for uh options, uh, perpetuals, spot and a borrow market all within the same risk engine. Um, the predominant uh markets on derive right now um particularly for options are bitcoin, ethereum and hype.

We also have markets uh listed for you know some of the other altcoins like uh Salana and Zcash uh and recently just listed um gold or XAT markets for the first time. So we've been at it for as you mentioned in the intro like 5 years. We have an architecture that settles and has you know strong guarantees on cryptographic guarantees on chain um as well as like some off-chain components for for auto matching. Um so that's kind of it from top to bottom. >> Okay. I saw on Twitter you described this in a different way. So I wanted to ask you about this. You said we are building the infinite payoff factory.

Any payoff any asset 247. I thought that was a really uh sizzly way to describe this. Uh but what do you all mean by that and how do you differentiate yourselves from other players like a derivet um who are also offering options like talk to me about that? Yeah. So I think um the reason we're on chain um in the first place and and the reason we got got started in 2021, we wanted to be the largest liquidity source for options on chain. The reason is uh you can create any payoff for yield generation hedging or speculation out of a different combination of calls and puts.

They're kind of like these money legos like in the purest sense that you can recombine, repackage and build at an institutional scale for any of those use cases. Um, so you put those money Legos in a programmable environment like the blockchain, it just makes a ton of sense to, you know, expand the TAM of the whole product and like really create new and interesting and efficient um, kind of products, business lines on top of it. And that's where the infinite payoff factory comes from. Uh because they are like in some ways um, payoff complete as a financial primitive and within this risk engine, you can build any of those products. That's what we're trying to do is manufacture those payoffs in a way that like no one else kind of can. You can't do it with the per stex. You can't do it with just a borrow market. Um it

requires this level of granularity and specificity uh and some of the other properties that options have to really get to that vision. Um and so we're we're getting closer than we've ever been um to realizing that vision. I think it's all kind of coming together now. Why do you think it is that you have such a dominant market share of the onchain options space? Because is it just because most people are not trading options? Is it because most people are doing this on, you know, centralized competitors like Coinbase and Derivet? What what's giving you the dominance here? And how are you defending that market share?

>> Doged persistence. Um it's something that like we believe in the uh we believe in the thesis. It's a very difficult problem. Options are the last vertical always to mature in fi in financial markets. They require kind of like some degree of sophistication from the people who are holding assets for an asset to become like a liquid options market. You need people coming in trying to like, you know, generate yields by selling options. Um, you can sell calls or sell puts. So, take a view like I think this, you know, I think Bitcoin's going to 100K, but not above it. I don't think Bitcoin is going to go lower than 40k this year and I'm happy to buy it if it does and I'm going to earn money in like 5 10 20% in USD terms um in the meantime while I express that view. But

to even express that sort of view, you kind of need to hold Bitcoin for longer than like a week or two weeks. And for a lot of crypto markets history and particularly in the last five years, um most of the hot trading activity has been concentrated around coins that you know kind of last for two to four weeks. it's just not enough time um for those sorts of flows to develop and it makes options liquidity difficult to build. Um so for us we've you know struggled with that at times but in the last year it's become a lot better um as other sources of yield in crypto have died out or dried up. So like the basis trade 15 20% market neutral yield is difficult to compete with if you're selling options.

um other sort of things like TVL deals around new token launches that were debuting at a billion dollars with $10 of revenue a day. Um like that kind of stuff. Again, much more attractive place for capital to go, but ultimately a sign of like market immaturity, those sorts of markets. It was part of the sort of speculative development that got crypto to where it is, but it's no longer going to dominate the next five years. Um and so that's where options really start to take over is hey, you can actually like you have to take some risk, financial risk. You have to have a market view. Um, but if you have those two things, you can manufacture any, you know, any yield profile, any hedging profile, or you can take a bet and get, you know, a ton of leverage on it. Um, if you're

correct. And often, and most often in finance, when you're specific about the trade you want to put on and express it specifically, you get more money. Um, and that's kind of what options allow you to do. >> Hi everyone, this is John. Listen, our Milk Road Pro analysts nailed this AI bull market. They had dozens of calls pay off in a big way for our community. If you want to see how our entire team of analysts are positioning for the crypto bull market that's going to come after this bare market finally ends, you can join us now at Milkroad Pro. It's just a dollar. Link is in the description. You'll get access to all of our analyst trades, their watch list, and see how they're navigating this in their portfolios and get access to ask us questions in Discord anytime, day or night. It's just a dollar. Links in the

description. Milk Road Pro. Join now. I'll see you there. I'm really curious to go back to where you started that answer, which is this dogged persistence about options and onchain options in particular. I'm really curious. You've been building this since 2021. In the meantime, there's been a huge explosion in popularity of things like prediction markets of perpetual futures contracts. Why haven't you pivoted to go after one of these other um you know large markets that have gotten a lot of retail attention? Why have you stayed so doggedly persistent and focused on options on chain? because I think like the opportunity I'll admit like I thought the opportunity was going to be you kind of on us a little quicker than than what it was uh when we started in 2021 but at the same time I can see the opportunity um kind of I think in I

think we see it in a different way to most other participants in the market. It's not just like the the value of being on chain is not just sort of rag arbing and allowing for intense speculation and speculation is useful for financial markets. It creates liquidity. Um but I think we can we're now particularly with the advent of like highquality assets tokenized coming on chain RWAS we can now offer a genuinely better product than what exists offchain um with the stack that we've built for options because of how programmable and accessible kind of like the liquidity that derive generates is you can imagine a world where as I said like you have distribution for yield generating structured products that are tailor made

to local jurisdictions that you a developer in Thailand can spin up in you know two or three hours of work if not like you know 30 minutes of work now with clawed code you can imagine a world in which you know hedges are extremely precisely tailored and delivered at the exact time that they're needed whether it's for like you know a stable coin that's collateralized in in Bitcoin or um a variety of like whatever hedging use case you have you can then source that options liquidity on demand in a very precise specific way and get the exact hedge you need 24/7 in real time programmatically. I think AI is tailwind that benefits all of these things and I think options are like the only

instrument that can fill that role. Prediction markets are great. They are predominantly in terms of the financial aspect like so far being adopted for sports. PERBs are fantastic speculative instruments, but again, the market is finding out in real time. Um, that there are more there's more to onchain finance and finance generally than having a view and expressing it, you know, kind of simply in in in a one two-day period. And I think there's room for all three of them. I think at the same time, we're kind of one of the only teams that's equipped to build the sort of product that we're building. And the market is just so much bigger. It's more subtle.

It's going to take more time. Um, but that's exactly why we're putting so much time into it. um because those kind of like that expertise and those network effects I think compound a lot harder. It's a lot harder to spin up an options exchange than it is I think a per market. Um and I think most people operating a per market would would agree with that. >> Okay. So the the per barrier to entry is is lower. The options market needs maturation to get there. Um, you kind of answered this a little bit, but I want to hear you kind of like crystallize this idea for me in terms of why would a user, a trader, an investor of any kind, um, prefer to use options to express a thesis in the market versus a perpetual versus spot? Can you just give me some more specificity on that? And are you

looking for a specific type of user or customer that you have in mind there that fits that profile? Just walk me through a little bit of that. >> Yeah, so few reasons. If you're someone who is trading on pers um and you're sort of you have a view on a you have a most of the time people put a trade on they have an idea in their head of what they they think is about to happen in the market. If you're going long like a Bitcoin p you might think you know Bitcoin's at 65K today like you might think I think Bitcoin's going to 75K at some point in the next you know I think it's going to 75K in the next two or three weeks and I want to get long. You can express that via per. Um, if you do, you might want 10x leverage, right? So,

you pull the slider up, you you do 10x leverage long on your per um, and you you get into a long position. And that's great. If Bitcoin does go up to 75K, you're making a lot of money on your 10x leverage long. The problem is if you know Trump decides to bomb Iran tomorrow um and Bitcoin dips down 10% over the next two or three days and then rallies back, you get taken out of your position um on on a liquidation. Um so you don't actually you can't actually express that thesis. It's very much path dependent.

Um whereas with an option you can just buy you know a sort of and if you want to do more leverage than that you're in especially big trouble right if you go 20 50x it's just anything can take you out of your position any random market move and and the probability that you get taken out is is super high with an option what you you sort of give up by you you can be specific about it you can say hey I'm going to buy the 70,000 strike call you can actually get way more leverage depending on which strike you select and it expires in two weeks. So, you've got two weeks for this bet to come to come off and if it doesn't, you're you're out of your entire premium.

That's the trade-off, right? Like you lose your entire premium I if the market stays flat. Whereas in the per if you don't get scam work down or you don't get liquidated on the way down, you're kind of flat. Um but if you do have a trading opinion, you think you're correct, you can get more leverage. Um you can get paid more. Uh and you are not path dependent in the way that you would be with a per. And that's just for speculation. There's a whole category other categories of users around yield generation which you just can't do with pers. Like if the basis isn't on if you're not if if the natural per rate isn't 10 12% you're not getting any yield out of like 99% of assets. With options again you can sell the volatility inherent within the the asset

kind of like selling insurance. Uh, and you can get paid, you know, depending on what risk you take, anywhere between like five to 30% if not higher in stable coin terms on that asset. Um, at an institutional size, it's just not a payoff that really can be replicated in per unless you're kind of scal gamma scalping the PES and trading in and out, which 99% of market participants aren't equipped to do. So, there's a whole host of like use cases that you just can't access with PEPS. Even for speculative ones, um, as I said, if you're more specific generally with your with how you express a trading opinion, you generally can make more money.

>> Gotcha. Okay. So, I'm hearing you say there's granularity that's offered, there's specificity, but there's a lot of things about how you can configure this that differentiates this from other products. Um, that that makes sense there. I appreciate that. I'm curious if you see more adoption or demand for this in a bull market versus a bare market. Is it roughly consistent? Is it sort of agnostic to to what the market trends are and and like yeah what what kind of demand do you see in those different market environments for onchain options? >> Yeah, I think to some extent historically it's been more counteryclical. So we do better in a bare market than um a bull in some ways.

It's the trends that I described, right? Like the basis trade and all of those sort of TVL yield deals that were prominent in crypto take off in a bull market because everyone's flushed with cash and all these teams can incentivize these programs that are unsustainable. Like that sort of stuff crowds out like longer term um you know riskier but like sustainable products like options. Whereas in a bare market like you have all these funds that have mandates of trying to make Bitcoin plus seven or eight percent or Ethereum plus 5% um or just some level of you know delta neutral yield and they can't find it.

Those opportunities are gone. So options you know you start to have to compete in in kind of like down the risk curve so to speak on the financial product stand. So we we tend to do better. Um I would say we will like we will be better positioned for a bull market this time around though than we ever have been. Um we have a you know a new version coming out in you know the next couple months and that will make it I I think like we've never tried to attract retail traders directly. Um reason being is like I think step one is is creating uh you know that liquid infinite payoff factory environment and what we want is for other teams to come and build on top of us offer that experience to their users get these options integrated and then have them distribute them because

we're not so good at like Tik Tok marketing and growth hacking and things like that. Um we are good at manufacturing like you know complicated derivatives at scale in a in a secure way with a 5year track record. We think there's like a natural harmony and equilibrium between those two business models and approaches. >> Gotcha. Okay. You you alluded to something that I'm gonna try to bait you into leaking some alpha on uh which is derive V3. There's a rumor that this is going to be launched sometime in Q3. I don't know if a date has been published yet. Um but is there anything more you want to tell us about what's coming in V3 and and what to expect there?

>> No date yet. Um, but I would say it's it is the final form of like what we've been building towards for the last 5 and a half years. And that idea of the infinite payoff factory. So, not just it's not just enough, which I think we've done with V2, to like build liquid onchain options markets. You need a way to distribute them and make them as programmable as possible. And I think V3 is going to be the most integrable programmable exchange in the world on or offchain. I think the types of products um people can build on derived v3 are like truly gamechanging and they do actually start to really use the benefits of being on chain um to make the experience better than you know owning an option in a Robin Hood account or an interactive brokers account. I think the the TAM as well for you know

what we can access with um RWA markets that are coming up and scaling on chain combined with this kind of highly programmable integraable risk engine which does options per portfolio margin um with spot and uh and uh a borrow lend as well. It really is the full suite of tools. Um, and you know, we've had a lot of interest in kind of teams that have been building very unique and different and interesting things on top of that. And that really is what V3 is all about.

I can't get too much into the details of like specifically, you know, some specifics of it. But, um, it it I think is I'm super super excited about it. I think it it feels really good to um kind of have this platform now. I think it's it's a stack that is just going to be very very difficult to replicate both from a technical perspective but also from you know the integrations that we have coming up and already integrated and all of that kind of like unsexy work that's been going on for multiple years now um behind the scenes it it all it all adds up. It's not you know it's death by a thousand cuts in some ways.

>> Yeah. Well, it sounds like it's life by a thousand cuts at this point. True. Yeah, I'm going to keep >> I'm going to keep trying to trick you into leaking some alpha on this, but uh for now I want to ask about something else that you guys have recent recently launched um which is options on X AUT, which I believe is Tether's tokenized gold product. And if I'm not mistaken, I believe this is the first RWA options um market you guys have launched on Derive. And I'm curious why you decided to start with tokenized gold and just what the the product launch experience has been like with that. What's the response you've seen? Tell us about this. Yeah, I think like tokenized gold is is one of those markets that um is proven to have a lot of traction in some of the

perexes. Um there are a lot of holders that has like a ton of TVL on chain as well. And I think for me, we've always been built from day one to be a fintech and we want to start tackling the the traditional markets too over time. Um I think that is it's the you know we're not kind of like here to just trade Bitcoin and ETH endlessly um for years and years like we want this to be the backend almost like the strive for derivatives for um you know global fintexs and neo banks and um you know retail trading applications and whatnot and I think that's what B3 achieves. So listing all of these markets is paramount to like kind of achieving that penetration and accessing those new um those new markets globally. Um, and with XAT, it was kind of the obvious first

choice. Um, we worked a little bit with Tether on on some of the the go to market launch. Um, it's still early days. It only launched properly like a week ago. You can come and trade and uh win a physical some physical gold if if if you uh you know, if you do well. Um, but over time, right, that's going to look like vaults on on gold options and um yield generating strategies for gold and um you know, more integrations into into different trading frontends and whatnot. But uh excited to have that one live. I think it's kind of like a watershed moment for us um stepping over that threshold of of just being a crypto exchange.

>> What is the overall strategy you have around RWAS? Because tokenization is like a huge meta narrative in the space in the industry right now. There's a lot of new products being launched, a lot of capital going in this direction. Um what's the strategy for derive when it comes to RWA? Yeah, we want to be integrated um and providing yield percentage dollar yield on RWAS um at scale. And I think if you think through like okay I have a like a tokenized stock or an index or you know take a tokenized stock right tokenized Apple onchain what can you do with it? you can maybe post it as collateral um and trade per that's kind of useful that is useful um but it's not like kind of

gamechanging you can you can trade with it um maybe you can lend it out and I think like I don't know how familiar most people would be with the yields that you get from lending out your stock but it is typically five basis points um like 05% per year or less if anything if you get anything like certainly that's the rate in traditional finance There is no way to generate yield on top of those holdings really in any meaningful way at scale or at any scale with you know most tokenized assets, most RWAs, anything that isn't really like a stable coin. Um, and that's where we come in, right? Like that is exactly where options come in and structured products. That's why that industry is

massive in traditional finance. There's trillions of dollars of assets that kind of get like collateralized and used to trade structured products. It's just a market that's kind of out of sight. It happens at the top levels of you know private wealth and in you know um investment bank you know kind of at investment banking desks and um they route directly through to market makers and a lot of it happens OTC um we can make those strategies and products like accessible easy to use and easy to understand crucially like I'm certainly not going to be here um trying to get people to put you know their assets or money into products they don't understand or don't understand the risks like it's about giving them the suite of tools to like look at the risk and take a trading view and say, "Hey, like I

think Apple stock isn't going to go down more than 20% or 10% in the next 3 4 months. I'm willing to take that opinion and get paid um to, you know, to kind of like commit myself to buying if it drops more than 10%." And that's effectively what selling a put is. And there's a, you know, I'm giving the simplest examples here. There's a million different structures and configurations you can make out of this. Like I think Apple stock is going to stay in this very specific range. I think it's not going to move but you know more than five plus or minus 5% or I think it's going to move exactly 10% up but no more than 15. Like those sorts of like granular fine-tuned views are perfect for generating yield um and giving that you know it's a it's a way I think we're

probably like the only team that can generate that yield um at scale onchain with RWA. So I think we have a direct route and interesting go to market around that. Um it's certainly not just going to be throw up a market and hope people will clip trade it. Um, I think you have to do better in 2026 to to really start to compete with some of these more established um, fintech players. >> Real world assets like funds, treasuries, and private credit are still running on rails built decades ago. Gated, paperwork heavy, slow to settle. Everyone's talking about tokenizing them, but far fewer can actually do it and do it without cutting regulatory corners. Securitize can. It's the SEC regulated infrastructure bringing real world assets on chain. Nine years in, native tokenization, not wrapped, backed by Black Rockck, Morgan Stanley, and

Kathy Woods Arch Invest, and chosen by the New York Stock Exchange, Van, BNY, and Apollo to do it at scale. It's the regulated bridge between traditional finance and crypto. Tokenize the world at milkroad.com/securitize. I I like the aspiration towards better things and better experiences and not just trying to trap retail. So, thank you for that. Uh Nick, I want to get your thoughts on something that I've been thinking about a lot and that the Ethereum community has been talking about a lot, which is this um movement to migrate back to the Ethereum L1. Derive, as I understand it, is um in the Ethereum, the EVM ecosystem, but you are an L2 um that is built on the the OP, the optimistic roll-up stack. Um and I'm curious your thoughts on this. Do you

think it is important to have this migration back to the L1? Do you think that L2s still fit a role in the ecosystem? and and how do you think about that in terms of what's best for your users, your customers, and for derive itself? >> Yeah, I think um the current version that's live is on an app chain. It was state-of-the-art back in 2023 when we designed and built it and kind of launched it, uh which was December 2023, but we were designing it really from like February, March 2023. But the problem with that is you have to force everybody like everything you do is kind of custom. It's a custom bridge. It's a custom like onboarding flow to make it feel like a you know seamless like it's a great experience for click traders at the moment but it's not so good for

anyone building integration structure products front ends like uh the kind of stuff that really makes this idea of an infinite payoff factory commercially viable and because of that it it is like you know the velocity of the types of products we can launch and um you know kind of the growth of the the exchange and then you know the network itself is is constrained um it takes it's just all these little layers of friction for people to come on in and on board um that really shouldn't exist. And I think at the same time now Ethereum has come a long way and some of the zero knowledge technology has has certainly come a long way in the last 3 four years kind of quietly if anything it was super hyped three four years ago but it's it's now like very much out of the hype cycle but

um it's actually you know great tech now. Um and so that that has matured enough where you can build um like a a globally competitive exchange that settles to the L1. We haven't made a final call on this, but I will say that like it is hard to match Ethereum in terms of you know a attractive settlement venue for a sufficiently you know a business of sufficient scale. Um if you're thinking through the trade-offs kind of like if you're in my seat and you're like okay well we have this you know um leading onchain options protocol. uh we have big ambitions, but at the same time like you know there's all these corporate chains like do we take our whole stack and kind of like create a core dependency or create a

potential competitor that's like you know a couple clicks away. Um I I think the answer is it's just very it's very tricky to to want to do that if you have that degree of ambition. Um there might be sort sort of limited things you can do with corporate chains or other chains or other L2s. um particularly if it's just like product lines or whatnot or you have an application that can be splintered but to me we are our number one product is liquidity and liquidity is best when it's unified. Um and so like the idea of fragmenting it uh and taking multiple instances of of derive and splitting it across chains also doesn't make much sense to me. So, we're very much a make a bet, stick to it kind of team. And um there really isn't a

more attractive venue uh that I can see right now than than the L1. >> Well, if I was going to make a bet, it I'd say it sounds like you're going to end up back on Ethereum. So, I I'll leave that there. And I'm looking forward to more news on that, Nick. Um I I do want to unpack something you just said, which you said our number one product is liquidity, and that's best when it's aggregated, not fragmented. And I'm curious your thoughts about what is the biggest driver for mass adoption of something like onchain um options trading. Is it the user experience? Is it the security of something like an Ethereum? Is it just the liquidity itself? How do you think about that in terms of prioritizing what to focus on?

>> Yeah. Um it it really is kind of a thousand small things. Like we view ourselves as the best options exchange in the world and like that's what we're striving towards. Um like we're not there today, right? Like obviously we're not uh uh doing the trillions in volume that the best offsees would, but that's what we're we're shooting for. It's not like okay, we're just going to be the best on chain and like only try and shoot for the onchain market. Um I think we are listing markets faster than kind of like anybody on or offchain. We are soon going to have these novel use cases built on top of us. So again, the vaults um like the generalizable programmable vaults with strict controls over what strategies, you know, what like a specific vault can do. So you you can

actually kind of have this trustless uh vault layer that you know isn't going to pick you off or have a nefarious vault operator take your money or whatever. It's all transparent and uh enforced with smart contracts. Like these are kind of extremely cool new use cases that just bring in new people um in into options generally and allow them to access the liquidity and you know the benefits of trading options that you you know kind of really can't unless you take the time to to to really understand it which you know for a lot of people is just too much time. They are complicated instruments if you want to price them from the ground up. Um that's one way to read it. The other way to sort of I I think with us over time as I said we're

trying to build a just a straight up better experience and the thing that we do have by being on chain as well as programmability is like this verifiability of the state of the system and the collateral in the system the margin you know you're getting treated the exact same as everybody else and derive because the margin rules are you know transparent and written on chain they're enforced on chain um and the collateral is there too so you can verify if you know there's no like possible way to have a bunch of collateral exit uh the the the risk engine it is enforced with smart contracts and if there was some way of doing that like it would be instantly verifiable by the world um and that is a underrated property I I do think like even with FTX in the memory of most

crypto participants um people don't realize that even in the traditional system this is still a problem it's no guarantee that just because you're like regulated in a big jurisdiction even the US like that you're not going to blow up. There were a ton of blowups as recently as 2012 2011 like as MF Global like and the ton around the financial crisis and we just haven't seen it in the last 10 years because financial markets have been up only. Um so these things become really important again at like a big scale particularly when things get a little hairier. Um sorry that was a bit of a tangent but I think that is like an underrated thing about some of these onchain systems that everybody's building.

>> No. Yeah. I just I think it's really helpful commentary and it's nice to hear your thoughts on all of these things. Um I I want to spend you know I have a lot more questions I could get to but I do want to spend some time specifically talking about the token um derive and uh I wonder if you could just talk me through how all of this all the the things that you're building the things you're launching the trading activity all this stuff how does this involve the token directly how does this drive value there and just tell me a little bit about the role that plays in the ecosystem. Yeah. So, um, the derived token, it's actually been live, we used to be Lyra, it used to be the Lyra token kind of like on and off since, uh, December 2021. Um, so it's it's very

much like an established part of the ecosystem and has been for some time. Um, the token like the kind of like protocol, the economics are controlled by token holder votes. Um, so currently 35% of the fees generated net fees generated by the protocol go to like buybacks. 65% the other 65% go to the onchain insurance fund which backs stops like the protocol itself in in the event of like any shortfalls um which is again verifiable uh and monitorable onchain. We've never raised as like a core contributor group money into an equity entity. Um it's always been like one instrument within the derive ecosystem.

I've written a couple of blogs about it. We've had like a block works token transparency framework publish with derive as well. Uh it's something I felt very strongly about really since day one. um and somewhat uh you know really been vocal about getting behind um over time. I do think like anyone who's trying to have it both ways with token uh and equity just inevitably even with the best of intentions which sometimes there are sometimes there's not. It gets you into sticky situations. >> Uh Nick, I've always appreciated how token and crypto aligned you are and uh so I appreciate that. I want to drill down a little bit more on that answer.

You said you're doing buybacks of the token and then you have an insurance fund. Talk to me a little bit about what happens to that capital in both of those buckets like what what what triggers an unlock of the insurance fund and when you're doing the buybacks, are you just burning those tokens or what happens there? >> Those tokens, the buyback, they're just sitting there. We haven't determined and like it will be up to governments to determine whether that changes or whether those tokens move. Um the insurance fund is is is kind of the same. It's it's being used for as I said like buffering the you know potential draw downs or you know worst case scenarios and it kind of promotes confidence and health and you know confidence in the derived exchange itself. We don't have the ability to get a government bailout um in you know

extreme market moves like it's the kind of thing that's the last sort of buffer against ADL and those sorts of mechanisms. So it's important to have that um for you know like as like a base for growth. Yeah, that's kind of like it for now for the token. It's been the MMO for a little while. Um, it may change, but again, that that would be up to governance and and we do have like real governance. I I know people often think it's a bit of a meme and it can be in crypto, but like we've had some major proposals go uh different ways based on the reaction of community and the governance in our history. Um, and I I imagine that would still be true today.

Is there anything in the coming V3 upgrade that relates at all to what might be done with that buyback treasury that's being built or is that still like like you said up to governance and and TBD still? >> Yeah, it's still TBD um up to governance. I think people can think a lot about this stuff to if I'm being completely candid like I think people can overengineer this stuff a lot like really with like the token stuff like I get it's important um because of how many uh people in crypto have kind of taken advantage of having a token and uh to me the my approach my philosophy and what I try and take to governance is just ensuring at the highest level that we are all aligned anyone who's involved

in derive is aligned there's no like mal incentives. Um, and that sometimes causes bad things, right? Like I there's a whole saga which we don't have to get into here from like last year where we were really on the brink in terms of like for a variety of reasons. Um, and we've architected this comeback over the last year where we've grown 10x and things like that, but the seeds of that were diluting the token 33% actually because we'd been around for four years. The market cap is like 15 million. we just didn't have the resources to one retain a team or two like attract any meaningful liquidity to the the protocol and um sometimes you have to kind of cut off an arm to to save a leg and we did that um we minted 33% of the tokens there were a lot of

restrictions on how those tokens could be used it was done with governance um the community was kind of right behind that and that is the that's the trade-off those are the decisions you have to make when you don't have like an equity entity that you can just raise more money into um and and dilute cap tables and shareholders ers there like it's a very common thing to do um if you did have an equity entity it's not so common in a token holder but we have like a a group of token holders who understand the realities of it and understand that sometimes for growth you need to make those decisions and that is the cost of alignment so anyway that's a big tangent again but my view on this stuff is broadly I care a lot about keeping incentives aligned and trying to make derive the premier venue for you

know onchain options liquidity globally and I think eventually you can drop that onchain component because as I said I think the architecture is superior to how the traditional system works and it will eventually port over to you kind of like this onchain offchain hybrid architecture. Um I think the sort of minut of like exactly how many dollars go into you know X or Y or burning or whatever like I think at the moment um that alignment is there it works uh that can change but it's not something I think about sort of like month in month out. It's more of like a broader view multi-year kind of thing I I I sort of really think about and review that.

Nick, I really think that what stands out to me from this is, you know, you said dogged persistence, but also commitment to ideals and values about how to to operate and and build the protocol. Um, and all that I think is really admirable. And then, you know, it shows the ability and willingness to adapt and do what's necessary to survive and um stay focused on the target. Um, so there's a lot of things to admire about that. So, good for you guys for making it through all this. Um, that would be a great place to end the conversation, but there's one question that I really wanted to ask that I can't skip, which is, what is your strategy for the rise of agent finance and AI and and the the intersection of of crypto and artificial intelligence? This is getting a lot of attention. How are you

thinking about this in terms of derived strategy there? >> Yeah, great question. Um, I'll try and answer it briefly and thank you for for the kind words from before. Um, V3 is that answer, the new version. Um, it is tailor made for integrations and agentic integrations. I think options are best positioned as a category to benefit from the adoption of agentic finance. Why? Two reasons. One, they actually LLM can just translate people's trading opinions into, you know, payoffs and options trades and make that UX so much simpler than it ever has been and they've actually gotten good at that in the last few months for the first time ever. Um, so that barrier to entry to options around complexity for someone who's click trading has gone way down and there's going to be ways of working that

into different UXes to make that accessible from the agentic perspective like directly not just like AI generally. My, you know, I don't claim to be an expert on on this. I don't know exactly what the world's going to look like in 5 years, but my hunch is that like if agents really truly are running finance, which I believe that they will, they are going to prefer precise defined bespoke tailorable instruments to, you know, broad-based blunt instruments like PES. Um I think like expressing payoffs, generating yield, having that full suite of tools make like that whole thesis of programmable finance and you know the inf infinite payoff factory relates so well to agents, right? Like that's what

they're going to prefer. That's my wager on bias, but like it makes so much sense to me that um you know kind of these these agents that are born out of software are going to prefer um you know the most precise way to express a specific opinion. Um, and complexity, I can tell you, is not going to be a barrier for them in making decisions. That I do know. That's about it. That's all I know about, you know, AI. >> Well, we'll see where the market goes. It's going to be interesting to see how all of this plays out. Nick Forser, CEO at Derive, the infinite payoff factory, which is still, I think, one of the most bullish titles I think I've ever heard somebody apply to their project. Uh, thank you so much for being on the Milk Road Show. Where can we send people to

find more of you and your work online? >> Yeah, my Twitter's on on screen. Um, but derive is derivexyz or derive.xyz. Um, and yeah, we'll we'll have a lot coming out. It's going to be a pretty fun end to the year. So, uh, stay tuned. >> Well, we will definitely stay tuned, Nick. Uh, thanks so much for being here. I hope we catch up again soon. >> Thanks for having me on, John. >> And thank you all for joining us. I hope you all learned something today. So, until next time, stay safe, stay educated, stay bullish, and we will see you all on the next episode of the Milkro Show. Thanks for being here, everyone. Bye. Want insights on what's moving crypto markets and how we're trading each event? Subscribe to our channel and join the Milkro Daily and Pro Newsletters and start investing like

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