Variational Pro Discussion w/ @variational_lvs and @andyyy

Nice. Thank you so much for joining. Yeah, I guess we can jump right into it. For those who don't know, you've been missing out for sure, but Andy is one of the hosts of the roll-up, which is one of crypto's my personal favorite shows. They do lots of live stuff podcasts as well. I think Lucas was on it a couple months ago to discuss our series A. So you guys have had a chance to chat before. Then Lucas, of course, is the founder and CEO of Variational. So I've been looking forward to this conversation all week. But yeah, Andy, the floor is yours. Please feel free to take it away. Alrighty. Well, Lucas, I think everyone here knows you. So I don't think we need too much of an introduction, but everyone knows Variational likely as well. And trading perps on chain. Some of us get liquidated on 10X or more. If you listen to Jez's rule, anything over 8X is negative EV. I'm more of a 2 to 3X guy myself. But I've been known to get to the DJ inside of sliding that leverage bar. That being said, what we're talking about today is more of the institutional side. Lucas, and I think this is where the combination of the tokenization super cycle as I'm calling it, mix with just this broader secular trend of institutional finance is kind of coming together. So Lucas, maybe you could just talk to us about the institutional angle for Variational Pro, what that product is and why you're excited about it. Yeah, let's start with a just a couple definitions as you so graciously pointed out. Omnies become on the retail side like a fantastic venue for trading perps and swaps on traditional market underlines, on crypto underlines, on hundreds of different things at this point. But there's a much bigger market out there, which is institutional derivatives. It's the question of not how does retail trade linear, like what you're just mentioning and either at 2 or 3X leverage or 10X or if you're feeling DG and 50X. But these interesting more complex products, like options and structured products and credit default swaps and interest rate swaps and so on. I think a little known fact, I mean it's known to me and kind of the team that comes from very tradifiable backgrounds, but a little bit less talked about in crypto circles is that the space of institutional derivatives is orders and orders and orders of magnitude larger than the retail derivatives market. And that's true, not just in crypto, but it's also true in tradfine or broadly. Some of the most largely traded markets in the world to the tune of hundreds of trillions of dollars are credit instruments and interest rate derivatives and effects derivatives and all sorts of other fun products. So just to start off with a quick kind of basic classification, Omni, which is our current product is for retail, Pro is for this massive space of institutional derivatives trading and is primarily targeted at institutions who currently are trading in these super manual flows. So I'm looking forward to diving into like who exactly it's built for, how exactly it works, but in a fundamental way of thinking about a disirational pro is for these really huge markets of institutions trading against each other. Yeah, and I mean, I think perps as a concept for legacy finance, if you will, has grown significantly but still a massive education gap. Obviously here at the roll up, we hope to kind of, I guess perps pill are the largest allocators, asset managers, banks, et cetera. I think just generally they're going to see this medium of trading as a way to, you know, edge overnight, edge on the weekends, trade on the weekends, et cetera. And so I think the secular trend is in your favor. So building an institutional product for them specifically makes sense, which kind of answers about who is this built for. But I guess like to get people excited, man, I, you know, perps are less than 1% of global derivatives volume. And this is something that I just, you know, I'm a big perps maxi, you know, just across the board on Shane perps, I like them, I want them to win. And what I think people are misunderstanding about this asset in variational and in some other exchanges as well as probably this medium is that it's still so small. How big are we talking about this institutional derivatives market, crypto, tradify? We need these people to trade. What are these firms trade? And am I right? Like are we still less than 1% of global derivatives volume, you know, as we stand today? Yeah, you're absolutely correct. Let me give you a few numbers to contextualize why we're so excited about pro in addition to kind of the perps side for retail. You know, just one stat I found when I was doing a little bit of research over the last, you know, a few weeks and I've been doing a lot of these meetings in Singapore is that the total outstanding like OTC derivatives, what's called them product set. And this isn't daily turnover. That's an even bigger number that I'll get back to. But this is just the open interest is just shy of $1 quadrillion. So that sounds like a crazy, crazy number, right? But to give you more specifically, you know, this was as of about a year ago is $850 trillion. Right? So let me compare that to let's say open interest in like Bitcoin derivatives. It depends on what kind of source you're checking, but I ballpark it kind of at that $100 billion range kind of when we're talking about perps markets or something in this vein. So right, like we're actually talking in my view about far far far smaller than 1%. Again, this is open interest not volumes but like OTC derivatives in Tragifi are just mind bogglingly large, right? That like these numbers that get thrown around hundreds of trillions or quadrillions of dollars of open interest. A lot of that's in these rates derivatives, right? So it's actually people trading like, you know, speculating on interest rates and hedges and things like that. FX is a huge portion, right? Like probably a 150 plus trillion. And then there's all sorts of other, you know, insane numbers on turnover. I'll give you one example, right? I'd say FX alone turns over probably 10 trillion a day in that ballpark. And this is all sorts of derivatives, like linear, meaning like, you know, forwards and CFDs and stuff like that. There's also all sorts of interest rate derivatives, all sorts of structured products, all sorts of options. Like the list goes on and on. But indeed, to get people excited, I think the thing that I've said to a lot of institutions over the last like few weeks, but I think we're still early in digesting and thinking about variational road map is that I think Pro will eventually be a much larger business than Omni and it's just simply because in traditional markets, institutional OTC trading is so, so, so big. And bringing even a supportion of that on chain is just hugely exciting. Yeah, yeah, that's a, I mean, look, I think generally, this is where we're at in the industry, right? Like, we're realizing that the term of, let's say just called the DeFi protocols that have existed and have achieved, you know, a certain level of loop of the Lindy effect, which kind of states that as a company protocol, project blockchain exists over time, comes more battle tester just as everyday passes. You know, obviously we've seen a whole, you know, set of exports across the board, but, you know, there's a number of companies and blockchains and protocols that have, you know, never had downtime and have, you know, had had this kind of like a Lindy effect from the protocol level that has allowed them to be in the position for this kind of institutional way. And so the term in my eyes, as you're saying, quite really, right, to me, that's like hard to even register. But we were kind of going on with what we've built on chain for crypto assets. You know, we had a rapid coin on ABE, we had, you know, we were trading crypto on Uniswap and Eradrome and bridging to different chains with crypto assets. That whole time is just like completely re-rated in terms of, okay, like what if we get 5% of global capital markets? You know, what if we get 10%, you know, like the quantity of DeFi, TBL of assets of OI, you know, we're at like a hundred and fifty, 180 billion on any given day, I believe, a DeFi TBL. So in my mind, like that TAM expansion is the most exciting thing for kind of getting people to think bigger, you know, I mean, I've been like notably overly bullish probably on the timeline. I've gotten some, you know, some haters for that, Lucas, it's actually quite funny. It's like, guys, like come on, like we're, we're starting the bull market here, like, you know, let's get excited. And so I think that this TAM is what drives my thesis around companies like variational, spot taxes, lending markets, et cetera. And so I guess the question with that in mind, because I think it's easy to get all bulled up on a thesis. Like the institutions are coming, they're gonna come on shame. They're gonna trade on variational pro. And, you know, all the token holders are just gonna absolutely cook. It's gonna be amazing. But like it's all, it's never that easy, right? And this goes for any spot market, this goes for lending markets, you know, vaults, you know, yield product, you know, it does for all of it. So I guess like in this specific case with derivatives, how do these firms trade? And like do they use exchanges? Do they trade on different platforms? And then like with that knowledge, how do we get them to come on shame? Like I know it's not gonna be easy. It's gonna be a multi-year effort. What does that process even look like with variational pro and just maybe more broadly based on your experience? Yeah, I mean, I think that's the right question to be asking, right, we talk about how big this market is, how exciting it would be to bring even a fraction of an on chain, you know, this like hundreds of trillions of dollars of open interest in all of these institutional derivatives and institutional products. So what does it actually take? Well, I'm here with some good news, which is that they are very willing recipients of new technology. And the reason is quite similar to stablecoins, right? Let's think about just for a detour second, how did stablecoins get adopted, right? What existing technology were these institutions using? They were using FedWire and Swift, and you had like T plus two settlement and guys manually calling to verify a bank wire transaction, it's just a disaster. So I feel like the stablecoin thesis wrote itself, right? It's just so obvious, it's so easy, like clearly we need a way to move value around 24 by seven. Clearly it would be great to be able to do it on chain. And there was a lot of interest from institutions. It took time as you said Andy, like institutions are slow moving, they need regulation, they need certainty, they need testing of the technology first. But I feel like the thesis wrote itself. And the key thing to understand about variational pro and the reason we're so excited is that this thesis applies just as well to how most institutions globally are trading derivatives right now, which is that it's super manual, it's super inefficient, and it's super risky. And let's unpack what those mean. These types of huge markets, we were just talking about like credit derivatives and structured products and options. A lot of them, especially in Asia, don't trade on exchanges at all. They don't even trade on electronic systems. You have to call like a desk kind of like those old stockbroker movies. Andy, I'm sure you saw the Wolf of Wall Street and the big short and stuff like this. You have to call the desk and ask them, like hey, can you write me this derivative? You know, it's like when that character in the big short was shopping around on Wall Street, having him write those credit default swaps, then they come up with a price kind of just out of thin air, so to speak, right? You're just getting it from one guy at one point in time. Remember margin call, for example, when they were like, you know, selling things down super fast over the phones. And then everything there goes manual, just as manual as all the, you know, types of flows, we were replacing with stable coins right now at all the big banks for, you know, settlement and for margin calls and for the clearing, like kind of the initial opening of the trade. All of this is like overseas ops teams and manual processes and like multiple days worth of waiting, docuScience, I've personally seen in my time in OTC trading. People send a docuScience after doing a trade, if to sign over email and wait another day for them to confirm it before they send you a confirm and a margin request. I mean, this is just, it's like laughable levels of inefficiency. So I'll pause here first to kind of let this land and then I'll talk about how variational pro works, but the key thing to understand is that these are just mind bogglingly massive markets that are also mind bogglingly inefficient and antiquated in the way they currently trade. So there's a lot of push just in the same way we have stablecoins replacing Fedwire and Swift and moving money around. There's a lot of push, a lot of good reasons to use blockchain to bring this into the modern age. Yeah, I mean, I mean, it's so funny. Like we actually have really solid exports right now from the industry 24-7 trading, stablecoins for payments, privacy's being built out and it still feels like there's a lot more to do in the sense of like getting rid of some of the financial and realism that has existed and also just realizing that like the natives are a little bit disillusioned where the institutional allocators are like realizing that this technology is like for the better. So I'm glad to hear through your conversations that that's like it's an education gap or an education conversation, educational conversation, perhaps more than like a sales pitch. You know, I think the technology speaks for itself. So, okay, let me get this straight because this, again, I think there's a lot of nuance here. The, and I don't think that we need to get to deep into like the regulation and the whole legality question, but you know, assuming that we get to variational pro launch which I believe is next year and the CFTC hasn't implemented further perpetual rules. How do institutions actually trade on variational pro? Like is there like a, is it fully baked in into like the KYC AML you know, broker dealer licensing? And I'm sure you can't speak to this too, too much, but I mean, it sounds great, but like there's a lot of legality that you need to get through in the US specifically where the largest allocators are. Obviously Asian capital markets, Europe capital markets, a little bit different, but like what's your thoughts on that front? Yeah, let me give you two answers here. Firstly, to define exactly how variational pro works and then secondly, how it might touch kind of what's called the broader mechanics, legal mechanics. Firstly, just to define how it works because we talked about this is a huge market. We talked about how antiquated it currently trades, meaning people have to call up a bank and get a price manually and then send like docu signs around and everything else. But what does variational pro do? Again, like stable coins, I actually think it's quite simple to describe. I think there's an hell against in that. And essentially what it does is you have an