Crypto is Ready for Onchain Options | Nick Forster, CEO of Derive

0:00Biglication, I'm here with Nick Forcer. He's the co-founder and CEO of Derived, Derived is the largest on-chain options exchange on Serium. Nick, welcome to the show. Hey David, thanks for having me on. Nick, I want to kind of get to just some very basic questions about crypto and options. Mainly, options really haven't come online in the crypto sense in ways that the perpetual has or in ways that if we extrapolated to from how much tradfied loves options, the options in crypto don't really meet that level of popularity in the crypto industry. And I want to know why. Why haven't options grown as large in crypto as we would have otherwise expected? Yeah, it's a great question. I think to some extent it's the natural evolution of all financial markets. Options are always the last vertical to mature. You kind of need to anchor the market. Some of these bigger, slower moving institutional players, really trying to

1:02unyield on their assets, whether it's equities in the equity market or in crypto on Bitcoin and ETH, or you need structural hedgers. So things like airlines hedging their jet fuel costs or farmers hedging the price of their crop before harvest. Those are the big repeat flows. Just take a while to emerge in a new industry, a new asset class. And for options, you know, in crypto, speculation is dominated and options are good for speculation, but to really serve that use case, they need those guys in the market selling options, creating a competitive two-way marketplace first. I mean, it's just taken a long time for that to happen, but now it really is starting to accelerate. And what options do really well, and it's a criticism people give them often is like there are just so many of them. There's so many choices in different strikes and expires and it's like kind of the point. It's the same reason prediction markets are beginning to take off. They give you this level of control and granularity and ability to express lots of different opinions about the market. And when typically you can do that in a more precise and defined way, you can make more

2:06money on your trading opinion when you're correct. So I expect options to continue. They've started to really grow as a market share in crypto. I expect that to really kick on over the next couple of years. So your answer is that really there needs to be a pretty rich diversity of market participants in order for the options markets to grow. And maybe that stands in contrast to the perpetual as an instrument where really you just need two market participants. You mean people to LP, you need people to lend to the people going longer short, and then you need people going longer short. And the simplicity is maybe what allowed the perpetual to grow so fast. Options on the other hand has a wider variety of a need of different participants doing different things to create the double coincidence of wants. And a lot of them in order for the options market to really manifest. Is that correct? Yeah, that's really, really well said. And I think to date in crypto, again, if you think about the assets that have been popular or available in the market,

3:07you know, we've got this new recent wave of tokenized equities and commodities that's bringing like big useful assets on chain. But to date, we've had Bitcoin, Ethereum, maybe a couple other coins, but a lot of the coins that have done perpetrating those meme coins or whatever it is, they lost for two or three weeks before people move on to the next thing. And this is not enough time for that market and that coincidence of wants to develop. But now, as I said, you've got this, you know, more and more high quality crypto tokens that are emerging with longer term, more sophisticated holder basis, like hype is kind of the most recent one that's had a breakout options market over the last year for that reason. And then also you have, you know, all of these quality assets out of UAs, equities, commodities being issued and available and tokenized on chain. And I think those two trends are really, really good for the emergence of options markets and those coincidences of wants across the board. Okay, so your primary answer, your first answer as to why options haven't come on chain yet is just a market structure one. The market structure for options is complex, it needs to

4:12be rich, it needs to be liquid. It takes time for these pieces to come together. What about technical constraints, technically speaking, what has inhibited options from coming on chain up to this point? Couple things. So one, we've been doing this for five years now. We started with like an AMM architecture back in 2021 on an L2. We've been kind of at the forefront, I think, of scaling and sort of blockchain technology since that time. Now we've kind of come to this model which we think is the right structure, which involves, you know, like an off chain, order book and integrated RFQ for price matching and price discovery and all of these different instruments and load latency and written in Rust and very high performance. But the on chain components, the critical pieces, self-custodial, portfolio, margin, clearing and settlement is all happening in smart contracts. And now the systems are good enough to support all of that at like the level of like the institutional level that is kind of expected by a lot of traders and now competing with centralized exchanges just on merit alone. The tech is finally good enough

5:16on that front. And I think on the other front, it just takes time to like really build out all of the stack. It's like a very difficult problem to solve to build liquidity. And I do think I guess one final reason for why options haven't been that successful is again, like the most liquid value in the market for a long time was derivative and they've done a great job. They did a great job of building a great business, but like never really managed to switch up their user interface or really go after like a broader audience other than like the big institutional OTC desk. And I think we're now on the cost of, you know, we are kind of liquid enough for the very first time to start making a push it, you know, a more broader audience for options too. Is there an appetite conversation as well? I know we talked about like that we need more market participants who are interested in options to come online obviously, but has just the appetite, the typical investor base in the crypto market, the crypto industry just have they just not been interested in options or is it really just a lack of a venue that has prevented them from having

6:19options? What can you say about the appetite of the typical crypto market participant up to like, you know, this year, for example, there was a step change on October 10 last year, the 10 10 crash. So we had like very little interest across the board up until 10 10. I think what 10 10 did was showcase a couple of things. One was it like it obviously the obvious point is that perps are very path dependent and you can do everything right and be dealt to neutral and manage your risk and yet still get blown out on like a scam work to the downside. And a lot of people lost a lot of money doing that options, you know, you lose in other ways and options you put a bet on, you buy an option, you have to get the timing right? Otherwise, if you don't, you're going to lose your whole premium. But at least you've kind of locked into that bet. Whereas with perps, you can be very right on everything and still have like a bad print on a work and get liquidated if you're using leverage and people found that out on 10 10 and started looking for other forms of leverage. And that's when they started to think on the speculation side of things, okay, we're going to look to maybe trade options and use them for that. I think on the other side, there's this whole like

7:25really you use options for three things. Speculation is clearly one of them. Hedging is one of them because you can sort of buy insurance and buy downside. And then yield generation, you can sell options on your asset and ring yield out of any asset, not just USDC but stocks and whatever by selling the volatility and expressing that view. I think the other thing that happened on 10 10 was it was the death knell for two big sources of yield in crypto. The first was the basis trade, like it was already on the decline and this truly killed it where the leverage in the industry got wiped and those rates got reset. And there were a lot of like hedge funds, family offices, liquid funds that had built their entire like four-year trajectory and like track record on earning, you know, 10 to 15% delta neutral. And that went up in in flames on 10 10. And the second was it crushed a ton of token valuations across the space. And there were a lot of teams kind of playing this game where you would sell tokens, pre-TGE and get TVL into your protocol and make it look like you had traction and you could sort of promise investors some sort of a yield in your

8:26own native token on that and hedge it out with OTC markets or some of the Pendle pre-market point stuff, not the Pendle, anything to do with it. It was just like a function of people were using that as the venue to clear. And so that got wiped out too because all the valuations got crushed. So at that point you have this like, you know, kind of really nice beginning of like an inflection point for options where the speculators started looking into it. And also on the yield generation side it was kind of the only place you could unyield in crypto and it kind of has been sustainably really for the last year at institutional scale. And those trends have been a tailwind and a turning point in the market. That's fascinating. I was not ready for the idea that 10 10 that was a tailwind for options. Can we go into why that's true? What about the market structure of a perpetual does an option buffer against? Like what are it? What are options strength against the perpetual? And why was 10 10 10 so illustrative about the strength of an option and the risk of a perpetual?

9:31Yeah, I'll give you an example. And like, pups are great. Like you can use them for lots of things. They're just not the solution to everything. And I think that's been a lot of people's opinion in crypto today is that you have pups. Why do I need anything else? I'll give you an example from a trade that went up on derived yesterday. And it was a user buying the Ethereum March 2027 expiring. So we got about six months from time of recording. Was the they were buying the 5,000 calls and selling the 7,000 calls. So that's a 5,000 7,000 call spread expiring march. He has put down $300,000 worth of premiums. If ETH goes to 7K by March, that call spread will pay out about $20 million. Which is about like, you know, you could look at it as like a 66X payout on the original 300 grand in capital with ETH at like 2500. Now if you were to try and like get 66X leverage on a perp, let's use a thousand dollars as the example because it's easier to work with the 300,000, but it's the same thing scaled up. You do like a thousand dollars at 66X leverage

10:33at 10% funding. You get a $66,000 position on ETH. It does a negative 1.5% drawdown from the current spot, which we might have just seen in the last 10 minutes before recording this. You getting instantly liquidated. And that's at 66X leverage, which is like, you know, kind of reckless and big. You also have the double beat of the funding rate is, you know, typically around 10% to these things. After a year on $66,000, that's, you know, $6600 in funding, which is six times as much margin as you're putting down. You just can't express that view in any way, shape or form using the perps. And so like, we're starting to find users beginning to express those like leverage speculative bets using options versus perps. And I think the other thing to note is on 1010, right? Like people weren't doing 66X leverage. They were doing, you know, 1.5X leverage or 1.25X leverage. And you can get those big dislocations on a given exchange where it's like a one touch on the liquidation. It's not some T-warp.

11:37It's, you know, your path dependent. And if the exchange infrastructure, the liquidity is shaky. You can get ADL'd, even if you have, maybe you have a long on one alt and a short on another or a long Bitcoin shorty. You have, you know, correlation hedge. Doesn't matter. You're getting wiped out and on the last. And I think that's what a lot of people found out. So obviously the example I gave was extreme. You can't really replicate that path with perps, but that scales into, you know, the shorter dated logo leverage stock too. Would you say that is accurate that a perpetual as an instrument is better for longer tail assets on shorter term timeframes. And options are better for fatter tail assets on longer term timeframes. And like what I'm really getting out of that story is that, you know, going leverage long on a perpetual exposes you to a number of risks beyond just the price of the asset, you know, platform risk, contagion risk. You said path dependency risk where with an option, I can have an extreme option, something very, very high out on the risk.

12:42But I won't be liquidated on my way there. I will only be liquidated at the date of experee, which is by design. And that's not true with a perpetual perpetual. You could be directionally correct, but still get liquidated on the way there. And so just bluntly, perpetuals are better for longer tail assets in shorter term timeframes. And options are better for fatter tail assets on longer term timeframes. Would you say that that's a fair summary? Yeah, I mean, I would even argue that you can still speculate better on the short term with options too. Again, they're more precise. They're still less path dependent. You can get a lot more leverage out of them. People don't quite realize that. They are a little more complicated. And my, I'm not out here advocating people do that. Like you need to have an opinion. And I think you should just consult and see whether like what is the best way to express it. And the trade off to be very explicit around options is you have to be right within the time frame. The bull case for a purpose in my example is if the price of Ethereum never moves for six months, you get your money

13:44back in the per case minus the funding. Whereas in options case, you're losing it if it doesn't go beyond five. You get a 4,500 each and you still would expire at zero. So, you know, there are like trade-offs here, but it's about like the bet that you make and kind of making sure that you know that you're expressing in the best way possible. So options and perps are just so frequently placed ahead to head with each other. Like perps bulls will tell you that like options are obsolete. You know, perps are the cool new thing. Just like options are for boomers. They're for tradify. Like we found this cool new thing called the perp and it's going to replace everything. And like, directionally, both of these instruments allow you to take a small amount of capital and get an outsize amount of return if you are correct. So, directionally, the form factor is like congruence. Is it fair to say options of verse perps? Is it really verse? Like how much verse is it versus it just being just these are two different instruments that actually don't

14:45conflict with each other. Do you have an opinion on this? That's the thing. They're completely complimentary. And we support options and perps. Like portfolio, margined and cross-moderned underribe. Like you need them both in different spots. And perps are great as I say, great instruments. You're not going to hear me arguing against perps at any point in time. But you need options also. Because I would say perps are more of a blunt instrument that's simple to use. You have a leverage slider that good for price discovery and short date of speculation. Options are much more like a Swiss army knife. The reason we started driving the first place was because you can create any payoff structure imaginable for hedging yield generation or speculation out of a different combination of calls and puts. And so you put them into a programmable environment for capital. And you've kind of got like it's like the perfect form factor for like the on-chain economy in my opinion because they're so malleable and flexible and programmable. And that was the thesis we started with five years ago. The thesis we still believe today.

15:46And I do think that something perps can't replicate. And I think they go hand in hand. Perps for like quick price discovery, pre-market stuff, excellent for speculation, options for you know like almost everything else, structured products, yield generation, fine-tuned hedging speculation. And I think the whole thing really comes together and the vision for what we've been trying to build is the infinite payoff factory. You can really build any trade on any asset 24-7 in a programmable way. And that's what we've been setting up for this whole time. And finally starting getting close to realizing that vision I think. How do you like this comparison? In crypto, the AMM really beat out the order book on chain as like the in the first and maybe even to this day the iteration of just like liquidity and dexas. The AMM really found resonance with like the nature of a blockchain. It was really good for long-tail liquidity. It was really good for centralizing liquidity in one single place whereas like the on-chain order book is just there's more moving parts. It's harder to bootstrap liquidity. You need more sophisticated actors to do

16:52market making but me as like a retail less sophisticated you know trader. I'm not doing order book management. I'm buying and selling into the liquidity. And that kind of seems to be like an order book seems to be more like an options platform whereas the perpetual seems to be more like AMM where it's so much more passive and simple and accessible. And maybe that's why it just kind of got bootstrapped in the crypto context first. How do you like this comparison where like order books are more like options and AMMs are more like perpetuals? I don't hate that at first, Paul. Actually, I kind of like it. I would say it's definitely true that you know pubs are one it's great to unify liquidity. It's one instrument per asset. It is certainly easier to market make and that's why it's easier to spin up like new pub taxes and in theory and get liquid. And they both have their roles to play. I do think if I had to sort of draw the distinction. I do think AMMs as someone

17:56who was building early AMM technology and you know we did okay with it. They do have a fundamental limit on like how good they can get in terms of you know competitiveness in the market in the long run. And I do think that differs from pubs and the pubs are just going to be really really big. I am very bullish on pubs in the long run. And I don't think it's going to be a you know it's going as I said it's going to be box whereas I think I don't really know the latest on the AMMs but my gut feeling is with the uni swap before they do kind of function behind the scenes in terms of like how participants engage with them like how they would similar to an order book. It has to be really actively managed if you want to make money over the long run. Having said that uni swap again for the longest of tail assets when no market makers are going to touch the beginning. It's still great for spinning up you know new pools, new assets, new liquidity which I love. I've been trading crypto for almost a decade and I've used so many different wallets, exchanges, aggregators, different front ends over the years and I'm always kind of looking for

18:57the same thing. Just one interface with deep liquidity across a bunch of chains and assets where I can access all the markets like perps, earn yield, trade confidentially and steal control all my own funds. And I've never really found this experience and I'm always switching wallets, juggling gas fees and just getting eaten by slippage. Near.com is not that. It feels fundamentally different to me. I can do everything I want from any chain and I keep all my activity confidential. I can even earn yield confidentially. It's the way crypto should work. The near.com wallet is powered by near and it's moved over $25 billion cross chain using post quantum signing and has run over five years on main net with zero downtime. Near.com is simply the best way to be on chain and be in control. Get 20% of your trading fees back using the bankless link in the show notes. Not investment advice. Bankless Nation, we've built something for you. Introducing the bankless MCP. Chat GBT and cloud are great at a lot of things but ask them anything beyond the basics of crypto about protocol mechanics, tokenomics or just what happened last week in crypto and the

19:59gaps will start to show. The problem is context. Bankless on the other hand has spent almost a decade building one of the deepest archives of crypto data anywhere. More than 2000 podcast transcripts, 10,000 articles and countless conversations with the people actually building this industry. And now we've structured all of that data into the bankless MCP. So you can go and connect it to your cloud or chat GBT and suddenly your AI can answer your crypto queries with the entire bankless archive behind it. And every new bankless article or episode gets added automatically so the context keeps staying up to date. The bankless MCP is exclusively available to bankless premium subscribers. So you can go to bankless.com, upgrade to premium and connect the MCP in just a few minutes and all of a sudden your crypto queries to your AI LLM, whatever you use will get a thousand times better. So go check it out. There is a link in the show notes and once you become a bankless premium member, you can hop into the bankless discord and let me know how you like it. Some exciting news. We are launching a new podcast to help people figure out the crypto cycle. How to navigate it. The best crypto cycle investor I know, his name is Michael Nado. He runs the DeFi report. This is the guy that sent me a cell alert before the 1010 price drop happened.

21:04His cycle analysis has been absolutely on point. I've been following him for years. And this year we started recording weekly podcast episodes. Each one we get into his portfolio, what he's holding, the market structure, entry targets, fair market value of Bitcoin, ether and where we are in the cycle. There's new episodes that are released every Wednesday. They're 30 minutes, they're short, they're punchy. I think this crypto cycle is harder to navigate than most. So let's do it together. Go subscribe to this podcast. Search the DeFi report. Wherever you get your podcast, YouTube, Apple Spotify or find a link in the show notes. There's a new episode waiting for you now. This was a super educational section. It's from me. I really, really enjoyed this. I want to move on to just the sector, the options sector in crypto. Can you just paint some numbers as to how big options are in crypto? And then is it possible also just to talk about how big options are generally speaking? So we can kind of anchor the size of the crypto industry options market versus what we hope it to be, if we were to extrapolate, like, tradifies options market. Yeah, I think

22:07relative to pubs were in terms of the crypto market. My stats could be slightly off on this, but I think order magnitudes, it's probably correct. We're like 3%, or 4% of the pub market and then tradify they're about the same if not options being slightly bigger. So that's like, you know, 30 or 40x to go to equalize to where we are in tradify. I mean, the absolute numbers are staggering in terms of the amount that options deaths are making on the market maker side. How much volume is going through them? There really wasn't inflection point. I was on a desk at Susquehana in 2019, 2020, 2021. It's kind of at the beginning of that inflection point around, you know, zero commission trading with Robin Hood leading to some early mean like activity on cannabis stocks through to the pandemic. And then finally, like the game stop stuff in in 2021. And that's really when we saw that inflection point. And the numbers just have continued to grow since that. Globally, it is an enormous market, both from a retail perspective,

23:08as well as like an institutional hedging perspective. A lot of that activity doesn't even show up on the exchange. A lot of that is in OTC bilateral type deals as well. I think the market split is like, 50-50 even. So there's like, there's double the actual amount of reported volume. In terms of like actual role stats, like it's really hard to come up with. It's in the quadrillion's of noional volume. You have deaths from single market makers turning out like three or four billion dollars of profit in a quarter. You're hearing like the sort of Jane streets of the world now. It's just got Gancho and numbers. And it is because of, you know, this broader trend in markets where there are so many people with, you know, money and opinions on the markets and, you know, sort of finance and the value of the stock market has just gone up so much. And all of these trading tools are getting democratized and costs to entry are coming down. And, you know, at some point in the next 10 to 15 years as well, you're going to have this big wealth transfer

24:08from the boomers over to the younger generations. And yeah, I think trading will continue to just have this big tailwind behind it in general. As we know in crypto, the exchange is the first business of crypto, the first business after like producing hard assets. So like after we, you know, built blockchains, rebuilt Bitcoin, we built ether, we built the monies. The next big product in crypto is the exchange. And it's the most lucrative business model in crypto. And then the perpetual again, exchanges love perps because of how lucrative perps are. Like you just take a spot exchange, you ratchet it up by 3x, 5x, 10x. And that's the amount of fees that you get. And so super lucrative industry here like the exchange is just like such a cash cow. How lucrative are options as a product? And like what is that actual fee structure or take rate look like? Can you kind of paint a picture of the economics of options as an exchange?

25:09Yeah, as an exchange, I mean, we do have, I think the lowest fees of like any liquid market place in general. It's like a, you know, basis point structure like on the notional. I think our headline rates are around three basis points for takers, lower from makers as well. On the notional value, it's capped because some options are, you know, very like tail or wingies. So they cost a lot of like not very much money to get a lot of noional exposure like the out of the money, deep out of the money stuff. And those are capped at like a percentage of the premiums. We're confident we have the lowest fees, but the business model in general because they are more specialized because it's harder to build liquidity for. There are stronger network effects around options exchanges, even more so than perps because of how slow moving the anchor, you know, participants are the big institutional traders who are building the market. It's why Deribit had such a, you know, stranglehold on the market despite well-funded attempts from, you know, Binance to sort of muscle in in 2021. And they had more liquid perps Binance,

26:09dear, but it doesn't matter. It's about like that options liquidity network effect. So yeah, there's a lot of, I would say, pricing power at the same time. We are running, you know, derived to try and encourage people to come and build on top of us. And the new version that we have out in a month is going to make it exceptionally easy to do that. We want people to come in and build, you know, retail interfaces on top of us, like structured products using the options, hedging products using the options. And, you know, for the economics, for those sort of integrators can be even better because you can sell people, you know, not just options, but you can sell them like a payoff structure like, hey, you put your Bitcoin in our structure product and you earn 10% on your Bitcoin and it gets converted into cash if Bitcoin goes above, you know, $90,000. That's a covered call. Anything in English language they can charge a, you know, kind of like a commission on that yield or, you know, they can market up how they want if they're a retail facing up too. And, you know, retail, it's, you know, for options and what Robinhood was making on their

27:10options as part of their payment for order flow is zero commission, but they're making buckets on the actual order flow that they were selling to. So a lot of big businesses have been built around this flow. I think it will only continue and we want other teams to come in and try and monetize that themselves. Talk to me about just like the market structure of options in crypto as it stands. You talked about Deribit kind of owning the golden goose of options and, you know, this, this analogy can apply to like spot exchanges too, right? Binance holds the golden goose. It holds the most liquidity. It can monetize the strongest coin base also very dominant in the US market. What's it look like currently today in the options world? Deribit, I think is still number one in terms of volume. Who are the players? Who's dominant? And then also what's your strategy at drive for penetrating into this market? How do you wrestle the golden goose out of the hands of Deribit? Yeah. So Deribit, I think, is still like 70, 75% of the market. They have some well-funded attempts to disrupt them from like the bolishes of the world, maybe buy a bit as well, or growing in,

28:15okay, X doing some market share. But they're not making like huge headwinds in and we are now to finally. So we went from doing almost nothing like 0.1, 0.15% like a year, a year and a half ago. But we managed to like the product finally got good enough. We, you know, improved our liquidity by orders of magnitude. And I think the big wedge that we had, we think we're like the fastest moving most innovative options exchange. And so we listed hyperliquid options in November last year when hype was like $20 or a lot lower than it was. And suddenly, you know, we were the only venue for hype and hype won on this huge run. And we started getting interest from, you know, big takers who were doing dealing with like OTC desks directly because Deribit hadn't listed hype options. And over time, we started to get more and more takers for our hype options. And we became the most liquid venue globally for it and started to win market share from the OTC desks. And now Deribit, you know, took the only launch it like two, two months ago or something and we're still the dominant majority of hype volume. And we created that network effect around

29:18that market. And that's, you know, kind of the playbook, we're going to be running back for every new asset, both on the crypto front where, you know, we have the most alt markets. I think we're biggest on salon and out too. We're competitive in Bitcoin and each shows now. And then also for RWA's commodities, anything that becomes popular in crypto, which has that sort of like profile I described before with like a sophisticated holder base, a long-term view, and a big market cap, like we're going to list. And we will be able to outcompete and go faster than both Deribit, but also faster than, you know, the OTC, and provide a better experience than a lot of the OTC desks and the bilateral deals that a lot of the big takers are using currently because they don't have an option to go anywhere else. What can you do with on-chain options that you can't with like, trad options? And, you know, it's worthwhile to know that Deribit is a crypto options platform, but it's, it's like centralized. It's trad in the sense that it's a centralized database with, you know, centralized infrastructure. That's not what derives you guys are on-chain. Is there,

30:22what advantage or what option? What can be unlocked with on-chain options that you can't with like a centralized or trad options platform? Yeah, there's a couple of things. I mean, one is the obvious point that like some people really value and predicting crypto, but less so over time, which is it is self-custodial. You can verify the state of the risk engine in the margin in real time, and that has been a problem for some other exchanges all the way up to regulated traditional ones. Like, this is still a problem that people don't quite realize because there hasn't been a blow-up since 2011, I think, but these, you know, even regulated commodities exchanges can go under because of like capital mismanagement, and we have all of our, you know, the state and of the system is verifiable and transparent, and it's, you know, the credit risk is kind of, you can view it entirely by how, and all the rules are written in smart contracts with, you know, the margin and the liquidations and the settlement. I think like, that is a major win for some people, and particularly relative to some of these OTC desks that we're in competition with for some of

31:22the big chunky order flow via RFQ. When you're doing a deal with an OTC desks, you're kind of taking credit or like underwriting that desks solvency and, you know, crypto as long history of those desks blowing up at exactly the time you need them to function. With respect to, like, just raw, like user experience stuff, I think the thing that we get out of the box, and particularly with the new version in V3, you can integrate and build a product on top of derived in hour of work. Even structured product or vaults, like quantitative investment strategies, like vaults, asset manager and vaults with like, you know, really like transparent execution, clear track records, you're going to be able to spin up and deploy those with three clicks on to arrive, like copy trading vaults, things that are just not possible to do, you know, transparent or verifiable way anywhere else, but also like just the ease of integration. You don't have to deal with like five different service providers and on-ramps and off-ramps, like if it's just tokenized, we can interact with it,

32:23list it as collateral and, you know, start to build structured products, you know, other people can start to build structured products and user interfaces. And they know that they can do that on top of us because we are, you know, they can see the open source code, they can see how the exchanges built and the collateral on the system and the solvency, and they don't have to, you know, hack through five or six different service providers onboarding off-ramps, on-ramps, just to be wronged by like terms of use, update from Derribit or another, you know, the body provider. We found people who are building those sorts of products on us who couldn't do it on a centralized venue. And I think that that advantage is only going to sort of continue as more high quality assets come online and our tokenized, we can onboard and interact with them very, technically speaking, how is Derrib actually built? So like if we pop the hood open, and we look into the engine, the engine compartment of Derrib, what do we actually see? What are the components that go into building Derrib? At a high level, as I said before, we have like an

33:24order book and an RFQ product, both of them live written in rust off chain. And then once a price gets matched between parties, so someone wants to buy some options or some perks or whatever it is, it gets sent through to the protocol for margin clearing and settlement. So all of the rules for margin, we have both portfolio margin, which looks at your entire like all of the assets that you have in your account. So maybe some Bitcoin, Spot, some USDC, like a few calls and maybe like a short-per position. You look at all of that and it runs it through 27 different wrist scenarios, like what happens if Spark goes up 20% and volatility goes up 100%, like what is the maximum loss of this portfolio? And it takes the worst-case scenario and that is your margin out of those margin. That's what you have to post. So that's really, really capital-efficient. It's very common in the industry, but not so common in terms of on-chain protocols. And so that's the portfolio margin. Then we have standard like isolated margin, which a lot of users and traders are familiar

34:24with where it's just like one position that you have your margin. It's like what most perfect exchanges use. And so you have to make sure you're above your, you know, you post initial margin, you have to stay above your maintenance. And the positions don't offset, you don't get any cross margin or cross collateral. So all of that is written in smart contracts, those rules, like what the margin is. And when a user goes below their margin requirements, there's an on-chain liquidation, which is open for anyone to participate in. What it does is it starts, kicks off like a Dutch auction, which offers your portfolio of assets. So maybe it's like $100,000 worth of assets at a discount to the value. So it'll be auctioned off, you can buy it for like $95,000 in cash. And then that decays out to, you know, like 80% really quickly. And then it goes down to 100%, which point like the on-chain insurance fund, which is funded by fees from trading fees in the protocol, starts to pay out uses to take on the bad debt. And then if that gets blown through,

35:29I'm just going through the whole waterfall now, you get to like 80L rules, which again, are transparent and written up front. So like that is the sort of core of the system. It's been in production now, this version for almost three years. We've seen some pretty crazy market conditions with it. And yet like, you know, we're always very kind of monitoring the risk parameters. The system itself, but it's worked very well in practice. You guys over at Driver are very close to delivering V3 version three of drive on chain, which is V3 bring what is in V3. Yeah, I think it takes us from like what we are now, which is at the moment we're like a L2. There's a lot of custom work and difficulty integrating and building on top of the drive. We're in a bit of a straight jacket. It takes a while to list new collaterals and new markets. We go from all of that until like almost like a Ferrari. Like we think this is going to be the most integratable exchange and protocol and composable protocol in existence. And I think there's a huge opportunity to grow in parallel with our builders and people building on top of drive. Like the margin system is

36:34getting a huge upgrade, allowing for like just more complex portfolios, like more high performance in terms of the margin like industry leading in my opinion as well as like multi asset borrow land. A lot of like technical details around the options exchange, which might be like two in the weeds to really get into here. But the sort of takeaway from it is that we become I think extraordinarily fast, so fast and high performance that we can continue to like really start to innovate on the product front both ourselves and as well as our builders. They're going to have access to like the most complete payoff factory in crypto. You can take and draw on all of these new markets that we're going to be listing on the RWA front as well as existing crypto markets. Route users through the RQ or the order book and start to stand up like these sort of structured products, quantitative investment strategies, which are massive markets and traditional finance, as well as start to build like more retail friendly applications on top of drive. And that is going to be something that like a lot of other exchanges in crypto are kind of

37:38shooting towards over like a one to two-year time horizon. But we've been built natively for it from day one. And so yeah, I think we're in a really, really interesting spot to handle the next wave of growth as well as to deal with kind of like an agent first API and integration experience too, which again we can get into, but it's a whole other can of worms that I don't want to open up just yet. Yeah, I don't know if I'm ready as an interviewer to start saying the words options and agents in the same sentence. So maybe we'll save that for 2027. Nick, let's say options grow, evolve, expand as we expect them to kind of meet parity with like the tradfire world. So like again, as we've stated, options are very loved, used, popular financial instrument. They're like lagging in crypto just because they're complicated and sophisticated, but nonetheless they are they are coming. And in the future, hopefully in the short term future, let's just say that they grow into what you expect them to grow into.

38:41How does that change the market structure in crypto? Like what would be different in this world when options like 10X 100X just like how would that impact the rest of the industry? Well, the first thing is when options markets become liquid volatility actually generally comes down because you get a lot of these option sellers who stuff dealers with like kind of vol and gamma and then they have to hedge that themselves. So you start to see things in markets develop more in a more mature way over time. And I do think that that will happen. At the moment, there are still lots of assets where you can, you know, and like a lot of the OTC desks are doing this or like you know, OTC takers are doing this that selling volatility into the OTC desks and earning yield. And as that becomes more productized, you start to get like, you know, a dampening effect across the industry. I do think like options will become a mandatory offering for a lot of the exchanges. They're going to have to figure out a way to support it. And for a lot of them,

39:42it's going to be very difficult to build themselves. It's really hard to retrofit a perp risk engine to add options. And I think a lot of teams are finding this out at the moment. You kind of have to start from day one with the options cross margin with the perps for a variety of technical reasons. So I would expect to see a lot of white labeling, a lot of integrations. Obviously, that's our thesis. We stand to benefit from that. That's kind of what we want to play into. But you guys are doing the defymole thesis. You guys are trying to do defymole. Exactly. And we think options are kind of perfect for that. I think we're going to see a lot of options as a back, back ended into both like just a trading experience. But also, you know, you can imagine options. Our options integrated into like a neo bank offering where again, it's like you can earn 8% annually back tested with this options covered cold spread selling strategy with the maximum defined drawdown of like 1% in a given week or a given month. And like these sorts of offerings are at the moment limited to like the highest sort of private wealth, high net worth kind of individuals and the massive markets behind the scenes. We think to marketizing them,

40:46bringing them out in the open, making them transparent, reducing the fees, making all of that more competitive is going to be a huge market that serves users, particularly for things like tokenized stocks, which you can't really do much for them at the moment. Like you can land, you can borrow against them. That's useful, but you can't really earn yields. There's not too much to do, you know, depend like new or different unless you're kind of accessing them internationally for the first time. And we think options are the perfect building, you know, playground for for those sorts of use cases too. So I would expect to see options defymoleaded, structured products to really come up. And then a variety of new, you know, strategy, aval curators, integrators, starting to incorporate them. And also, you know, it can enable some more fun use cases, which we haven't seen in a long time. So like crypto native stablecoins that are over collateralized in Bitcoin and Eek, you can have hedgers embedded via the options to protect against massive downsides and big works that could potentially blow up lending, you know, lending protocols. We want to be integrated with them and start to become like kind of the risk absorption

41:47engine for a lot of those different hedging flows. And you can really capture that with options. With the success of options, it's like, and all of the volume that options bring, doesn't that also mean that number must go up in the sense that if there's a very rich options market, you know, BTC has all of these dated options, you know, three months out, six months out, two years out, you know, so does ETH. So does like all of the assets. Doesn't that mean that like more market makers, more market participants need to get their hands on the assets in the first place in order to create that volume? And so if like volume 100 X's wouldn't that imply that all of these assets that have volume and liquidity in the options world have gone up in price because people needed to buy the asset in the first place to create that volume. Like is large volume associated with number go up? It can be. It's not necessarily. So not when the markets get created, but we saw, I mean, I saw that, you know, when I was at SIG,

42:51Ocargost, if you remember them, they blew up. The guy was like buying just insane amounts of like the big text stocks at the time. He was single handedly moving the NASDAQ with his options trades. And it was forcing all of the market is buying calls, calls spreads out of the money calls both on single names like Microsoft and Google as well as, you know, CRM and some of the, you know, the more SaaS kind of stocks. And then also buying NASDAQ options and it was pushing the whole index up because dealers had to scramble on like the gamma squeeze kind of concept that a lot of people are familiar with for game stock and whatnot. But this was happening at the level of the entire US stock market. And it is, you know, you can really have a big outside impact if you have size, going into these options and the markets do do that. But at the end of the day markets are weighing machines, right? So like what goes up must come back down. If someone's putting that impact in and you know, the fundamentals on coming up with it, it does kind of go down. But it does reduce, you know, spreads trading execution quality, reduces volatility in the market over time.

43:54And that makes everything tighter as well. So it generally improves the liquidity across the board and makes it more investable for some people and they can put these edges on. So in that sense, yes. But like I think the overall impact is, you know, a little more muted than that. Okay. Okay. But nonetheless, a rich, healthy options market does create a healthier market structure, which makes the market itself more palatable, more accessible, more interesting to a wider set of market participants. And that's bullish. Absolutely. Yeah. Cool. All right. Options are bullish. Nick, Nick, thanks for coming on the show. What should listeners know about a derive in the short term? You guys, like I said, we have the three coming. If they want to learn more about derive or if there's anywhere you want to point them to, where should they go? Yeah. Twitter is at derive XYZ and then derive. XYZ is the site. And you can pretty much find everything about what we're doing. That we've published everything. And we do some analysis and market updates and things like that,

44:59too. So hopefully that's helpful and useful for some of your listeners. Cool. Nick will get all the stuff. All that stuff in the show. No, thanks for coming on the show today. Thanks for having me on this. Great. Banklessation. Y'all know the deal. Crypto is risky, but not risky enough. The institutions have landed. So we are going even further west. This is the frontier. It's not for everyone, but we are glad you're with us on the bankless journey. Thanks a lot.