Rho Protocol: Unveiling Crypto's Hidden Rates Market

Transcript

Okay, we're moving on to the next. Please help me welcome up here, Alec or Alex Ripken, excuse me, of Row Protocol to discuss unveiling crypto's hidden rates market. Please help me welcome him. Thanks everybody. Can you hear me? Yeah, thank you. All right, so I'm Alex. I'm the founder of RO Labs. We are the developer of Ro Protocol. The easiest way to describe us is crypto's first native rates market. So, we're going to talk about a couple of things now before we get to the most interesting stuff.

I'll just talk a little bit. I think majority of people would be familiar with RA trading as a concept. I'll talk a little bit about what does it have to do with crypto and what are we doing in this ecosystem and then we'll just go through a couple of case studies and hopefully by the end of it we'll have some time for any questions. Let's see how we go about that. So first of all, if you've never encountered rates as an asset class, that wouldn't be surprising even for some of the financial industry professionals. Uh it happens to be one of the largest asset classes, definitely the largest one by open interest. Funny numbers for open interest. As you can see, we're talking $500 trillion kind of thing. Obviously, there are some obvious reasons for that. Uh rate derivatives

are the easiest way to either manage your rates risk and everybody now knows that whether you are a bond manager at Pimco or you have a mortgage you are affected by the rate fluctuations. That's why everybody is so keen on uh Fed announcements and the rest of it. So interest rate derivatives is the way to manage that risk and is also a way to profit from any fluctuations in rates quite handsomely. So pretty much every hedge fund in the world trades rates. uh it's predominantly traded by professionals so not a lot of retail investors know about it and that's predominantly the factor of the loan horizon when the rates met in traditional finance right so typically tread fire rates treasury rates have some volatility about every decade and

most of the other time just lie flat it's very different than crypto as we can see and so the participation in that market is also very different here from from our experience having been running this product for about a So what do we got in crypto? Uh we got our own families of rates that uh I guess one of the key messages today is going to be whether you know that or not or or not you're actually trading rates already. So whether you're holding a burp for example you happen to be running the funding risk whichever side of the burp you're on. So perpetual futures obviously is the for the time being the only real derivative asset class in crypto that matters and round about what we got right now about uh 130

billion in open interest right now in major exchanges between centralized and decentralized and more than a billion paid out in funding payments every month and that's the rather conservative estimates actually we we we went quite low with it we think the real number is much higher um and you also got staking uh staking is getting bigger and bigger. So now we have about 300 billion in assets stake that includes Ethereum, Salana, a bunch of others. Again, we're talking about a staking rate being another rate that can be traded, managed, hedged against, and so on and so forth. And we used to have centralized lending markets in crypto before 2022. Now they're picking up again. We're still not quite at the peak uh where we used to be, but nevertheless

uh there is no doubt that credit markets and crypto are going to have to exist and and go back to the full swing. So, uh just going through a couple of examples. I'll go through a couple of examples of trades, right? The two main use cases for rates trading anywhere in crypto including is basically hedging and speculative forprofit trading. So we're going to have an example from each starting from something like this. So let's imagine you're a trader on something like DYDX. We took centraliz decentralized exchange specifically it's a little bit smaller but picking up you know with hyperlx vertex and the rest of the guys picking up the volumes and derivatives trading. But even on centralized exchanges the volatility of

the funding rate is incredible. So again, we're talking about even on Binance, uh you can see the funding rate on Bitcoin going from plus 50% to minus 20%. Over 72 hours and that is as as you can see on the right, right? So this is dydx rate. This is a chart for the past week, I believe. Yeah, 21st 21st of May. And that's what happens with it. Uh the number there is relatively low for the 1 hour rate but we're basically talking about plus minus 50% on that chart annualized. If you're a long per that's your hurdle rate so you make 50% you hold a position for a year you're actually flat. If you happen to be a basis trader for example you're a short

per you you've been making 20% now you're suddenly paying 20%. That's not great. So uh we're taking a scenario of a trade uh 100k USDC trade on DYDX at 5x leverage quite normal and we're holding it for about 30 days right at the moment when we took this snapshot the funding was as you can see negative which means if you're alone you're actually receiving funding right so we're looking on the left uh during these 30 days you will make 180 USDC on funding payments alone uh that comes on top of our assumed estimated 2% monthly increase in the

price of the asset of two grand. So in total you're making 2180 which is a very decent annualized return on your equity of 20,000 right because you did it in 5x leverage. Now, unfortunately, that's probably not going to stay that way throughout the holding period because the average rate across the exchanges and DYDX is not an exception. Is about one basis point every eight hours, which is kind of a standard clamp rate on Binances of this world. So, chances are it's going to go back up and you're probably going to be at round about plus 10 11% annualized. What does it mean for your position? Suddenly, instead of making 180 bucks on funding, you're losing 900 bucks in funding.

Again, not great. And the funding and and the P&L impact of that funding payments is basically almost having your gains on that trade. And that's at 30 days holding period. Right? Again, your annualized ROE is dropping by half. Not great. The point of this slide is basically funding matters because when you look at it as one basis point person kind of number of hours it doesn't really attract your attention quite often. Uh typically retail investors tend to discover that funding matters uh hardway institutions are a little bit smarter but I guess this is pretty illustrative. What can you do with raw?

We're doing a quick calculation. This is our uh lovely interface on the left and uh you just make a simple trade. you go long as well, the same 100k notional and you're basically hedged. Uh the quick calculation on the right tells you that very cheaply paying about two basis points for the trade and very capital efficiently. So there is a minimum capital outlay. It's a even in tread fight, it's a super capital efficient class of assets. In the same scenario, you're uh down to something like $80 80 USDC that you have to pay in funding instead of 900. Right?

So again, we're talking about going from uh 200, we had 2,180 and now we're at 250, but that's pretty much uh guaranteed impact of funding on your PML. From my standpoint, it's a kind of a no-brainer. So again, back to the original point, the rates matter, and even if you don't know that, if you're not doing that directly, you're trading rate mate. So you got to do something about it. You got to be aware of that. Second example is more of a speculative trade and we took a very simple scenario. We actually have a a blog post and a bunch of other things on it. Uh this is a speculative trade. We're looking at the spread between funding rates on Binance and OKX

for Bitcoin if I remember correctly. Yeah, Bitcoin per uh it's a very simple idea. uh funding tends to be mean reverting and typically there is a spread between the exchanges. Binance and OKX treat funding differently but there is always a kind of an observable observable pattern of uh the difference the spread between those two rates. Normally it sits at something about plus 2% sometimes to plus 5. At the moment when we looked at that it was at minus three. And the idea is what if it goes back down which is quite likely which is the observed behavior. So what can we do about it? Basically this is the setup of your trade. Uh in the top right corner

actually we left there's going to be too many QR codes on this presentation but this is one of them which leads you to the that blog post on that trade but it's discussed in in in more detail but essentially you go quick long short B and so X trade. Uh again very capital efficient. you need about $1,000 to of collateral to run this trade and the spread actually ended up shifting by about 7%. So going back to that normal range of plus 2 plus 5 in about 22 days after which we closed the trade making about 21% in it in 22 days.

Yeah. And that is how the speculative trading it's quasi nondirectional quasi market neutral. Uh there are plenty of trades like that. Curve trades, exchange spread bats, a bunch of other things you can do. Or if you happen to have a view where the rates are going to go in general in in the crypto market, that's the cheapest way and the the easiest way to exploit it using a single venue. We also got an LP vault that is a product we launched recently. Uh just left it out there. It earns some pretty decent uh returns to the LP investors.

has currently reached it cap its cap quite quickly after we launched it in about 72 hours but keep an eye on it. We're now taking signups for the wait list. Uh we're launching a bunch of new products. We'll need more liquidity. So that one is going to open up again. That is it. If we have any questions from the audience, happy to answer that. Sir, you're trading against an LP LP pool essentially. It's set up as a DEX. It's all fully on chain. the collateralization ratios you got on our states p stats page and everything. So you're you're not taking a particular account risk. You're trading against liquidity.

Do we have any other questions? We do have a few minutes actually. Would that be the first? You were the first one actually. It's well done. You get a gold star. Thank you. Um any other questions? Um everything's lived. Everything Everything's live audited. Audit reports are open source, all available. You can scan up. Trading out there and check our landing page with audit reports and the rest of it or start trading right now. It's about I think 100 bucks notional for the time being, which is equals about $2 of minimum collateral. I think no particular minimums.

All right. Thank you very much. Thank you so much. [Applause]