The State Of Crypto Derivatives With Shiliang Tang and Josh Lim

You can also think about all these different types of things that exist in crypto as all of them having some sort of optionality embedded in them. And if you can manage a book correctly across all these different instruments, and by the way, not just in crypto, there's iBitOptions now, there's MicroStrategy options, there's Coinbase options, things like that. Throw it on a book, manage it in an intelligent way. That's how a lot of dealers make money.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. Explore the gas-free ecosystem at scale.space/ecosystem and follow their journey on X @skale_network. Thanks to SKALE for making today's episode possible. I wanted to take a moment to tell you about Focal by FalconX, the AI-powered insights engine built for institutional crypto. By leveraging AI, Focal empowers institutional investors to to streamline research, anticipate market shifts, and make sharper investment decisions.

You'll hear more about Focal later in the show.

Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice, or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed.

All right, everyone, welcome back to Empire. Very excited about this one. We are in person at the new Blockworks studio. We have Josh Lim and we have Shilang joining us. For those who don't know, these are probably the two best people in the world to be talking crypto options, crypto derivatives. Shilang was a prop trader at UBS and Merrill, CIO of Ledger Prime. Josh was at Galaxy, Genesis. I'm sure I'm forgetting some of the backstory, but these two guys went on to found Arbalos, Arbelos recently sold to FalconX and they're doing some cool stuff at FalconX. I'll let them share the story. So Josh, Shilling, welcome to the show.

Thanks for having us.

Yeah, likewise.

Yeah.

Yeah. You guys like the new studio?

It's beautiful. Yeah.

Good. Got to plug it. Got to plug it. So reminder, go buy your tickets to Permissionless. So Josh, I thought it'd be interesting to hear, I mean, you guys were at the heart of the last cycle. Uh, you were Genesis, Shilling Ledger Prime, which then sold to FTX. Uh, so I would say you guys were in the heart of the last cycle and then the heart of the the blowup, I think, with FTX. And then Genesis was obviously providing a lot of leverage. I would love to just hear your guys' story of like just that journey coming out of 2022 bear market, how you guys started to found like founded Arbelos and the journey to, yeah, selling, selling the business.

Yeah, for sure. I think we've obviously told this story a lot to one-on-one, you know, with investors and things like that. But I think, yeah, this is probably the first time we've kind of talked about it publicly on a podcast. We were both kind of in front row seats for the chaos of 2022. Shlomo more in a buy-side seat and myself more in a sell-side seat. And we took a lot of lessons coming out of it. I think we were both kind of privileged to have a lot of connections in the space and just having been a trading counterparty to a lot of the major hedge funds, asset managers, even protocols in the space. What we saw coming out of 2022 was just a proliferation of correlated risk across the board. At the end of the day, it didn't really matter if you thought you were running a lending book with different kind of credits in that book or if you thought you were running market risk or if you thought you were running the basis trade. Everything boiled down to just market beta in a sort of a correlation one environment on the downside. And so, that was kind of a big flaw with the market structure in the last cycle. It was just very, very concentrated in a couple of large books. And the types of risks were also very correlated without a lot of— even across different dealing desks, everyone had the same counterparties, the same types of loans, the same types of structures, trading structures and things like that. So yeah, we thought about it a lot in terms of just what would— need to change to support the next leg of growth in crypto, to bring in more institutional counterparties that are coming in from TradFi. And frankly, we started Arvulus without really having the full picture of knowing that there would be this ETF launch with Trump coming back into power and sort of reshaping the regulatory landscape here. But all of the things that we thought might play out kind of actually did in a very short time frame. Yeah, I think the main things that we were betting on are basically there's going to be a huge demand for more transparency and trust in the ecosystem. What does that mean? That means working with counterparties that are more highly regulated or operate on-chain in a sort of auditable way. There is still a need for centralized dealing counterparties in our industry that can provide flexibility and sort of creativity and structuring know-how for different types of trading strategies or hedging structures and things like that. But also those entities need to have a lot of integrity in terms of how they implement counterparty credit diligence and how they sort of enforce margin rules and things like that. Those were kind of the key things that came out of DeFi last cycle. DeFi was very, very well insulated from a lot of those issues because of those rules. The rules were so stringently enforced and they have to be because they're encoded into different lending protocols and things like that. So that's kind of what we thought. I was like, we needed to build some new firm that could operate sort of like a DeFi protocol but with the flexibility and the creativity to offer bilateral trading in CeFi. So that was the genesis of Arbalest.

Shane, can you— I know you guys are more private individuals. I feel like you guys don't go on too many podcasts and stuff, but I haven't really heard the story from your view of just, I mean, selling. And I mean, the bear market was tough for everybody, but for you guys, I can't even imagine what it was like going through that. Can you maybe on the more personal side, like, what was it like going through this?

Yeah, so, you know, the origin of kind of the tie-up with FTX was Ledger Prime at the time. The genesis of Ledger Prime was part of a holding company called Ledger Holdings, which also owned LedgerX, a CFTC-regulated derivatives exchange. It was kind of the first, you know, actually licensed derivatives exchange from 2017.

Was this Juthika's?

Yeah, Juthika and Paul.

Yeah, yeah, yeah.

So it's, I mean, consider that they actually got a license through that early is kind of a miracle in retrospect, given, you know, where we are today and how much hoops we've jumped through. But as a result of that, FTX, you know, wanted to acquire the holdco for the LedgerX license, right, which would have enabled to directly clear in the US as well as serve retail in the US. And so we were part of the acquisition there. Obviously, we continue to run the business independently with our own LPs. But obviously in '22, because we're wholly owned by FTX, as a result, they're kind of collapsed. We were part of the unwind and subsequent bankruptcy. And I think Um, Josh mentioned a lot of great points in regards to just, you know, serving counterparties and, and the state of the market. Uh, I think what I kind of noticed was, um, especially running like a quant market-neutral fund, and just how many other funds, even though they were market-neutral or quantitative, also collapsed as a result of FTX. Um, in retrospect, you kind of look back at the market and realize that, you know, a lot of the high returns, like, despite, you know, even if you were, call it market-neutral, delta-neutral, a lot of the returns really was just kind of, you know, masked as counterparty or credit risk, right, or regulatory risk. Uh, like if there was no risk from a platform or regulatory or anything, like the returns probably would be like, in theory, the expected return would be lower, right, because, you know, traditional market participants will be able to come to the market and kind of squeeze those returns out. Um, so in retrospect, a lot of market-neutral funds, you know, collapsed as a result of, you know, counterparty and exchanges, etc. Um, and so I think, you know, coming out of the other end, uh, there's two ways to fix it, right? One is kind of top-down, you know, we create a new firm, enforce, um, the proper, like, procedures and, and rules in place in terms of how we guide ourselves to serve our counterparties, right? Uh, but I think also there's a solution from an infrastructure perspective as well, right? And I think the two sides need to converge where there's kind of a subjective way where we enforce it ourselves, but then you build these kind of DeFi primitives and rails that really kind of are binding and enforce it from the bottom up. And I think that was kind of the genesis of Arbalest, but also everything else is currently being built within crypto as well, right? It's all these kind of like DeFi prime brokers or DeFi rails that are trying to enforce that from like a guy.

Yeah. Josh mentioned it was all one, one trade back then. And maybe at the time we didn't realize it, like everyone was doing different strategies.

Is it—

so the market's obviously developed back and the market's back and Bitcoin's at an all-time high and that kind of stuff.

Is it still—

when you look at it, the market, is it still all one big trade?

I mean, I think right now this has always been true about crypto, right? The trade is sort of understanding the flows of retail capital and kind of what is the next rotation. I think what's different about this cycle is money is pretty bifurcated between what is crypto proper, like on-chain, versus what is in equities and sort of tradfi market instruments that can sit outside of crypto but still have market exposure to crypto. And those pools of capital are very distinct and don't often mix, right? If you think about the ETF as a way for capital to get into crypto, it generally comes in and it stays in that box. I mean, sure, there's redemptions and things like that, but once it's deployed into crypto, or let's say even Bitcoin that goes into MicroStrategy, that's just going to stay in that box forever and it doesn't really come out. It doesn't come to play in alts and other things like last cycle. There's other elements of last cycle that were particularly unique, like the proliferation of just unsecured lending, right?

Unsecured lending through the forms of Genesis, BlockFi, Celsius, Nexo, and folks like that.

Through CeFi lenders, which allowed for a lot more leverage. I think a lot of the rally in altcoins in the previous cycle, the 2020 to 2022 cycle, was driven by a lot of those lending facilities and the availability of credit that allowed these things to sustain very high valuations effectively. There wasn't necessarily as much sell pressure when you could borrow against it or people could borrow more cash to leverage into it. Yeah. And also, I guess one other thing is there is now a lot more focus on fundamental value, right? So there's a lot more concentration. Bitcoin dominance is mid-60s, right? There's a lot more focus on things that have durability that are going to be survivors of this cycle and next cycle. And, um, store value narrative is a very strong one. Um, but you can also see just sort of this, this winnowing effect of just winners become very dominant, become like, you know, $10, $20, $30 billion protocols, and then everything else just sort of is a slow bleed. Like all these alts, right? If you look at any chart, it's very painful for a lot of people who are kind of token-selecting investors.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, SKALE allows for limitless scalability and has already saved its 50 million users over $11 billion in gas fees. SKALE's high throughput, zero transaction costs, and powerful Web3 infrastructure make it the ideal platform for gaming, AI, and other high-throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X @skale_network. That's Skale spelled with a K. Thanks to Skale for making today's episode possible. As always, investments in blockchain technology involve risk. Terms and conditions apply.

So I want to do kind of a state of the market and I want to just get your guys' take. I mean, there's all these interesting things happening in the derivatives market. Deribit just sold, obviously. You guys are doing some interesting stuff at FalconX, Hyperliquid. Like there's all these very interesting elements in the market. Before we do that, I am an idiot when it comes to the derivatives market and just trading. I'm not an active trader and stuff like that. Can one of you guys just explain the derivatives market, um, including like what are the different types of things that are being traded, like forwards or options or swaps or perps, things like that. And then, uh, also importantly, what are the different types of funds that are in the market? Like, Shiling, I think you guys are—

or you, you—

I don't know if you currently do it, but run or have run a delta-neutral fund. How is that different than some of the liquid funds, which is different than the dynamics of the VC fund? So there's these two big questions The different types of derivatives, the different types of funds, and then we can get into, I think, state of the market.

Makes sense. Yeah. Well, derivatives is just as a category, it's instruments, financial instruments that have referenced some other asset, usually a spot asset like Bitcoin, the price of Bitcoin in dollars. You can write a call option on this thing, which means you get an asymmetric payout, which if Bitcoin goes up, you make money, you make a lot more money, and if it goes down, you don't lose money. So that's the very basic building block of any kind of option structure is that sort of asymmetric payout. You can also trade things that are purely linear. Everyone's familiar with perps that trade on Binance or OKX. Perps are linear instruments that have some sort of embedded funding rate. So to keep that position open, you have to pay an ongoing cost. And so the sort of two main levers in pricing these, any kind of derivative is the forward price. So it's sort of like how much will it cost you to hold a position open for a certain period of time? And then the other element, if it's nonlinear, if it's sort of like an asymmetric payout, is the price of optionality. So it's the implied volatility is what people call it. And it's just sort of where does the market price risk? How does the market value— where does it think that an asset can move in the next X number of days? If the market thinks that Bitcoin can move a lot because there's a bunch of catalysts on the calendar like tariffs and Fed meeting and maybe potential large buy from MicroStrategy, things like that, then the range of outcomes for a Bitcoin price is very wide. And so implied volatility is going to be high and the price of options will be similarly very high. And the implied volatility is just a way to sort of normalize that idea. It's like you look at 'Cause you can trade derivatives on kind of anything, right? Like anything, any maturity, any strike. You could buy a $110,000 strike call on Bitcoin, but you could also buy like a $200,000 strike call on Bitcoin if that's your price target. And so to normalize all these things, you sort of back out like this idea of how much is the market pricing into the volatility at each of these strikes. So that's a basic idea. I'd say this, Shelling and I have been in this market for a long time. I think we actually met each other and sort of started doing business together because of the options market. And now more than ever, it's become this huge growth area in crypto. Everyone is sort of thinking about all the dealers in the space. Everyone kind of wants to grow their businesses. This is sort of a key growth area. It used to be you could just, when I was at Galaxy and Genesis, you could just start a very vanilla business where you just sold options and you trade with one hedge fund that's looking to get a long exposure into a catalyst and then you trade with a yield fund that's looking to sell it an option just to collect some premium. Now it's much more complex. So to your question, it's like, what are people doing? It's really everything you could do in TradFi and more. A good example would be there are agreements that people execute when they get listed on exchanges, right? So like a new token launches on an exchange, you might enter into agreement with a market maker where they provide liquidity on your token on these centralized exchanges in exchange for some kind of right. So an option effectively on the token. And a lot of things that happen in crypto have this sort of embedded optionality. You can also think about things like AMM pools. AMM pools have that sort of non-linearity of if you put in $100 of USDT and $100 of Bitcoin, wrapped Bitcoin in a pool, depending on the price of Bitcoin, your exposure is going to change on each of those assets. So you can also think about all these different types of things that exist in crypto as all of them having some sort of optionality embedded in them. And if you can manage a book correctly across all these different instruments, and by the way, not just in crypto, there's like iBit options now, right? There's MicroStrategy options, there's Coinbase options, things like that. Throw it on a book, manage it in an intelligent way. That's how a lot of dealers make money.

Yeah. And before we get into funds filling, why have perps taken off? Why are perps so dominant? Because you said, you know, now in crypto we have everything else that TradFi has. I actually think we have more than what TradFi has because of the perps market. So maybe you can touch on perps for a second.

Yeah, I mean, perps are just the easiest and sort of the lowest friction way for people to get access to crypto. The reason I think originally they existed is because crypto is a fully funded product set. So originally when people wanted to buy Bitcoin, they had to go and send a wire to Coinbase and then wait a couple days for it to hit and then use those dollars once it hit the exchange to buy Bitcoin spot. There was clearly a need to actually get pre-funding and leverage before cash hits. And this existed even in the very early days with things like BitMEX. And then beyond, once we got into kind of the post-ICO bubble in 2018 and sort of the next cycle, it became much more of a way to get leverage for retail users across all of the different assets that trade. You want kind of one easy place to take risk, and that place was often Binance Perps, right? So it's easy, it's linear, it's very easy to understand how to trade it. Funding rates are not very straightforward, but it's sort of an afterthought for a lot of people when they put on the risk, right? It's just like the price is going to go up either 20% or it's not going to do anything, and my funding cost is, let's say, you know, whatever, half a percent. So it doesn't really matter.

I'm not thinking about my 1% that I'm paying is, uh, you know, minuscule compared to the 10x return I make on my 40x.

And that's, you know, that's changing, right? Like, that convexity profile of crypto is no longer as much there in this asset class.

So, well, we'll get back to that in a sec. Should I— do you want to talk?

And I would quickly add that, like, you know, um, yeah, with like perpetuals, there's no like expiration. You don't have to worry about strike risk, roll risk, and all these things. It makes it a lot easier, right? And perpetuals as a primitive has existed previously even with like CFDs, basically, right? Um, just illegal in the US, but I wouldn't be surprised with the current administration that perpetuals as a concept does become legal in the US in some form, and we might see perpetuals in other asset classes outside of crypto soon.

You think perps will come to just the traditional capital markets world?

I could see that, definitely. Yeah. But yeah, going to funds, I would say broadly there's kind of two categories, right? There's kind of your venture and then there's your liquid, right? Within liquid, Um, there's probably 3-ish categories. There's your quant market-neutral delta-neutral funds, um, usually like systematic algorithmic. Um, there's, uh, your directional kind of like discretionary or your kind of systematic stat-arc discretionary funds. Um, uh, and then there's kind of a third perimeter that's emerging where, uh, I would call it like on-chain asset management, right, where you kind of have DeFi-based, using like DeFi rails to do a lot of like traditional hedge fund strategies, right? Ledger Prime previously and currently Eminence generally offers a couple of categories, right? One is just your quantitative market-neutral fund. I think that's pretty easy to sell. You know, we are trading crypto, but honestly, we could be trading anything with, you know, that's inefficient, right? And our selling proposition is highly inefficient asset class with a lot of opportunities compared to like traditional stocks and other assets. I think in the longer term, what will ultimately happen with crypto funds and strategies is it's going to be like any other asset class, right? You're going to find crypto as a pod or as a vertical or a strategy within like the Millenniums, the Citadels, etc. of the world. And You know, right now, historically, you've had these like directionally long-biased funds that, you know, 2017, 2018, 2021 had done well, but I think this previous cycle have done not as well, right? And I think as traditional institutions enter the space, as fundamentals start to matter more, I think crypto begins to trade more like a traditional, like almost like a long-short kind of equities-like product in a lot of these traditional funds. So I think we as a fund position ourselves to start touching non-crypto assets as well. We're starting to touch like MSTR or derivatives of these crypto-native equity companies. And I think ultimately, it's going to be one, as Josh mentioned, like one pool of capital. And crypto itself is not just going to be crypto, crypto, but actually like crypto on than various traditional rails and platforms.

Where's the most inefficiency? Actually, which part of the crypto markets would you say are efficient now? Like Bitcoin, like you can, maybe you can argue Bitcoin's an efficient market now. I don't know if you'd say that or not, but how far out on the risk spectrum do you have to push to find the inefficient markets in crypto? Or where are you? Just tell me about how you think about inefficiency in the crypto markets now.

Yeah, I think you know, back in '17, '18, like, it was inefficient in terms of just like centralized exchanges, right? You could like buy something on Bitstamp, sell on Coinbase, like, wait like 15 minutes, and the price would still be like very different. You can, you know, arbitrage. And now that really doesn't really exist, right? You might be able to find that on DeFi, right? DeFi in some ways, given just the numerous L1 chains that are launching, like cross-chain arbitrage still kind of exists. Cross-DeFi/CeFi arbitrage exists to a certain extent. So there are inefficiencies there. I think also just defining what the threshold of inefficiency is. As the space gets more regulated, as platforms and counterparty and credit risk decreases, I also think from an allocator perspective, the expected return or hurdle rates for allocators also comes down as well. And so inefficiencies isn't necessarily like 30%, 40%, 50%. Anymore, but, you know, more so, you know, starts to resemble like more traditional kinds of returns for at least like quantitative and market neutral type of funds, which are more like in the teens, right? Which, yes, it's more competitive, but, you know, this brings comfort and more capital to the space. And so everyone's kind of playing with like a larger pie, right? Yeah.

Now I feel like we maybe have our base set below us right now. Josh, you want to give us a little state of the market? You had a post back in maybe mid-May where you were saying like, look, quick observations from all-time high, like crypto led by BTC inflows from corporate treasury buyers has room to go higher. Macro outlook beyond Bitcoin is less rosy, but Bitcoin likely to benefit from bond market turbulence catching up to gold's Q1 move. You had a long thread on that. You know, that was about a month ago. Curious to get your current take, you know, state of the market.

Yeah. Yeah. I mean, I think the most exciting thing right now is that there are a lot of rotation trades happening between L1s, and a lot of it is being driven by the fact that so much capital has— there's like these, we talked about this earlier, there's these different domains where capital can exist, whether it's in equities or in crypto. And actually, to your earlier question about where are the most inefficient parts of crypto today, I mean, it might actually be in the equity space, right? Like all these new pipes and SPAC deals that are happening and the stocks move pretty dramatically wherever things get announced there. But yeah, I mean, to your point, we can isolate 3 different things that are happening immediately right now. There's this sort of public markets, there's vehicles like Circle IPO, there's a bunch of fundraisers happening around these sort of private deals in public stocks. They're all being used to fund corporate treasury purchases. We've all seen a couple of these major ones, Bitcoin, ETH, Solana. There's going to be more and more of these, I think, in the pipeline. What we're seeing is there's a lot of money coming out of both TradFi pockets and crypto pockets to fund these new vehicles. In crypto, proper, there's things like the Plasma sort of—

That's a new word, by the way, crypto proper.

Crypto proper. It's like where we all live. Crypto Jason Yanowitz. Yeah, it's like not the TradFi people, but us. There's like the Plasma TVL deal, right? Like they filled like $500 million in what, 3, 4 minutes?

What's the real story with that deal?

Well, the way it works is you commit stablecoins into a vault that unlocks when mainnet launches for Plasma. Plasma is a chain that is intended to support Tether transfers. If you pre-commit to it, you will receive at the end basically a call option. This is another one of these things. You get a call option to buy into the Plasma tokens, which are called XPL tokens, at a $500 million valuation. I think based on comps, what people think about what this type of network could come out at, it's probably, depends on your assumptions, but let's say like 3, 4x or something like that, probably more. So that's the upside for locking up your tokens. And this is exactly what we were talking about earlier is pricing derivatives. It's pricing how much is the cost of capital over that window of time versus what is the value of this option that I'm getting. And yeah, now everything in crypto is like that. It's like that risk-reward analysis and you have to model everything out. I mean, it used to be, right? Well, last cycle, people would just do these deals and there would be so much upside in these deals that you really wouldn't have to model it out that much. You'd be like, well, I just know like this is—

Right. If I can angel into this thing or do the series A pre-token 6 months before the token goes live, they're doing a TGE, Auto 5x, auto 10x, honestly.

Yeah, the convexity and the sort of, because you have access and you know nobody else has access, it's pretty obvious. The opportunity is pretty obvious and the narrative is pretty obvious, all that kind of stuff. Now it's like, all right, this is a $500 million deal and it's open to the public on fair, entirely equal footing for everyone. So now it's incredibly efficient. Money just comes in very quickly. There are no real backroom deals or anything like that. It's just everyone gets the same terms. Another good example of this would be this raise around Pump.fund. So that's happening right now. That is a liquidity drain for the entire ecosystem as well because people are reallocating from other assets in their portfolio to deploy into this. There haven't really been any meaningful announced details yet, but it's one of these things that we see a lot. Like basically between ETH and SOL and a bunch of these newer L1s that are launching, people are constantly kind of rotating, trying to figure out what the next catalyst is. So it's incredibly efficient now as a market.

Yeah.

So you're saying it's incredibly efficient, right? So, okay, let's talk more about these liquidity drains. So the liquidity drains were probably You've got the public, the, what, what do we want to call 'em? SPACs, PIPEs, meme stocks, whatever you want to call 'em. So that, that's one bucket of liquidity where capital, and by liquidity drain, I think you mean like you've got capital allocated and then you're moving that capital into these new buckets. So it's draining all the, draining all the capital. So you've got those things, you've got the pumped up fund, billion dollar raise or whatever the details are. You've got Plasma TVL, $500 million. You could probably bucket Circle in there, right? I think people are longing Circle stock. As you can see by the charts, it's up like 4x. What are the other, I guess, two-part question and shall I take this too? But A, any other liquidity drains that you guys see either now or coming up? And then B, what is the impact that this has on the entire rest of the market? I mean, we just said 4 assets, there's 4,000 other ones. What does this do to the rest of the market?

Yeah, maybe take the second part. Um, I, I think like what one is, you know, what you're seeing the public markets in many ways it's kind of similar to like what we've seen in crypto like ICOs and what you said earlier about, oh, you get in the ICO price and you know you're going to make money because like the rush right now is you getting at the nav price for like these like treasuries basically, right? And you know that, well, you assume that it's going to trade at a premium to nav, uh, like SBT or some of these other ones. And the game in some ways isn't like different, right? Like if you're kind of someone that can subscribe directly and get in and out, you know, it's trading at like 5, 6x. Right.

There's a fight right now to get into these things. Yeah, it's almost—

now we'll see, like, once money on them in the short term, once it actually like registers and, you know, unlocks and sells, like, I'm sure the premiums are going to collapse, right? But, you know, some of them are still like, even after the unlock, basically are holding up to, you know, their premiums, right? So In that sense, the game hasn't changed too much. It just kind of rotated to a public platform. And the second thing I'll say is, even this morning, Fetch.ai announced this— there was this public vehicle that announced a $500 million intention to basically create a Fetch.ai public vehicle. And so even though it's perhaps different pools of capital and different vehicles, that money ultimately does hopefully like make its way to crypto in the sense that it is supposed to like buy, like, you know, fetch like tokens. Or other vehicles that are popping up are intended to buy Ethereum or other like crypto-native tokens. So, you know, even though it is, it is different, um, it does support like crypto valuations. And like we've been complaining, you know, this cycle that there is no alt season, right? Like there hasn't been an alt season But maybe this is something that does trigger, you know, certain parts of the ecosystem, like an alt season to coins that the market deems as, you know, fundamentally valuable enough for traditional public money and capital to actually, you know, back and get behind.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security. SKALE allows for limitless scalability and has already saved its 50 million users over $11 billion in gas fees. SKALE's high throughput, zero transaction costs, and powerful Web3 infrastructure make it the ideal platform for gaming, AI, and other high-throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X @skale_network. That's Skale spelled with a K. Thanks to Skale for making today's episode possible. As always, investments in blockchain technology involve risk. Terms and conditions apply.

I think I followed, but just to double-check, the— you're saying the alts that could run are the alts that the traditional capital markets would deem good enough for like a public vehicle like this? So then if you're a token or you're a team with the token, the number one thing that you should be trying to do right now, in your opinion, it sounds like, is to go create one of these public vehicles.

Yeah.

I mean, I wouldn't put it that way. I would put it as your number one goal should be build a product with utility, right? That has durability and appeal to long-term investors.

If you're the CFO of one of these teams, the number one tool should not be go get listed on Binance. I mean, the old things, right?

Sure.

Go get listed on Binance, go get the KOLs on YouTube. You know, there's all these games right now. The game is go create a treasury company. Is that right?

Effectively, yeah. I mean, there's still like— now we spend our days talking to like bankers and lawyers and stuff like that, right? But there's, there's a lot of nuances now that you have. There's complexities to think about, like how long does it take for shares to get registered? Because you need it to be registered before they're tradable in the secondary market. There's questions like, what are the things that are allowed to be in a public vehicle? Can you put things that look like securities in a public vehicle and have it be majority that one asset?

Or it's like a DeFi token, like you actually accumulate the necessary tokens to put into a vehicle via DeFi rails, probably not.

All these things have also operating businesses attached to them and those things need to continue to operate in order for these listings and share registrations to become valid. There's a big focus, and this is actually a good thing, the big focus is you buy a large amount of some asset and you actually have to deploy those assets to productive use. Which means you might stake them or run a validator, run a node, operate the network, actually create value for the network and for your users and for other people in the ecosystem. It could also be things like how do you generate value as one of these corporate treasury vehicles? You could source tokens at a discount from people who have locked tokens.

Those are the recent deals I've been seeing is you're basically you're not actively buying. You're almost a buyer of last resort, right? So you're, you know, actually, I was with one of the funds who's doing a lot of these. I was like, you know, kind of being the mid-curve guy, being like, yeah, super risky, whatever, they're going to blow up. And he's like, well, not if you do this structure where you're essentially buying. It sounds like you're sitting there waiting for VCs who maybe want to like lock in a return. You're saying, look, if you want to sell it at a 50% discount, I'll take that off your hands. And then you're essentially That's an almost an auto 2x. Uh, so yeah. Um, what, what is the risk as you guys see it in these structures?

Um, well, definitely like counterparty, like credit risk, right? Like essentially can, because these are usually locked for 6, 12, 36 months, right? Um, if they're not like smart contract, uh, unlocked, then there's potentially like counterparty credit, like legal risks with this, right? Um, a lot of the funds are doing this also from a yield.

What, what is that? Say more about the credit risk.

Um, well, like these are legal contracts, but like, or from the foundations, right? But like, in theory, if it's not actually, you know, coming out unlocked from like a predetermined, like, smart contract, and you require a foundation or a company or something to actually send you the tokens in the future, potentially, like, they might not deliver the actual, like, tokens as they say they will in, you know, a year or two years or three years, right? So there's counterparty risk with some of these discounted treasury deals depending on who you're buying them from. If you're buying it directly from Jason Yanowitz, probably less so. If you're buying it just from a random early whale or investor, he or she could literally just disappear in theory. So the structure of how it's done, like, are you delivering upfront the premium for the tokens? Is it kind of held in tri-party, etc.? I think it does help mitigate that in a certain way, but it's definitely not risk-free from a counterparty perspective. And then The second risk is funds like ours that are doing these deals from a delta-neutral perspective, right? Sometimes we'll buy discounted and then we'll just hedge it with perps and lock in the difference and kind of make this yield. In some ways, you're kind of just naked short on the exchange, right? And so let's say the token goes up in price 50% or 100% or more, your short requires more and more collateral. To maintain basically that hedge. And so you run the risk of getting like actually liquidated on the short leg, for example, if, you know, the token continues to like appreciate before you actually get—

you have to keep adding more and more and more collateral and then you might run. Okay. So after Three Arrows blew up, Su and Kyle gave an interview on Bloomberg on the GBTC trade. And if you guys were— I don't know if you guys I don't remember that interview, but they defended their strategy and they said it was impossible to predict. The reason that they blew up is not because they did anything wrong. It's because it was impossible to predict that so many other people would follow them into the trade. So the trade got too big essentially. Is there any similarities with Kyle and Sue saying, look, we were just doing this trade. We didn't realize this trade would grow in size by 100x. Any similarities with that in 2021 and maybe you could replace Sue and Kyle with maybe Saylor or someone else here. Any similarities or different, different structure?

I mean, I'd say like there's a difference in leverage for sure, right? Like I think you can see the cap structure of MicroStrategy. It's public. See how much debt they have. Their debt-to-equity is far less than, you know, some of these leveraged trades, these basis trades from last cycle. That's one consideration. I mean, the other consideration is that these are companies, right? So they're companies with shareholder rights and governance processes and things like that. And so you could see a situation where some of these companies trade at a discount to their nav, their holdings. But what happens in traditional markets when that happens, right? The companies go out and they sell those assets and they buy back shares.

They just buy back the stock, right?

Yeah. Or somebody else comes in and does a takeover. They just buy the company and then they have majority voting rights and then they liquidate it or something like that.

That's interesting. Cause I don't know if you guys saw what Morpho did the other day, but they came out and there's like, they basically said there's only going to be one token. And there's this problem in tokens where you have no legal rights. You have no claims. You don't know if a company is going to launch a second token. There's all these issues. Right. So I actually wonder if the reason all that investors love these public companies is because you're actually putting the, it's actually the legal framework of a company around the token.

I think, I think so. Right. Like if you think about it, It's actually a lot easier to operate in crypto as a venture firm that's holding sort of like a promise of upside in the future in terms of either equity or token warrants or something like that than it is to be like a liquid fund where you have to, you're constantly taking operational risk and you're custodying assets that could get hacked. So yeah, I mean, there's something to be said about this sort of simplicity of just having shares in your Robinhood or your Fidelity account.

I've always kind of had the thought that I know there's been a lot of fight about like whether crypto tokens, etc., are like securities or not, but I kind of think like it's not necessarily a bad thing if like all these— a lot of tokens are just deemed securities and just fall under security regulation because I think actually does create a set of rules that everyone can kind of follow by and abide by. And there's a very large pool of capital on the sidelines in the securities markets that historically haven't been able to touch crypto. Because it's been kind of like an undefined asset class and actually are just deemed securities. And that in theory, that pool of capital can actually flow into crypto and participate within the asset class. And maybe that's a pool of capital that's needed to ultimately support like prices and everything else.

How do you— what inning are we at, to use the overused, like, you know, inning 1 through 9 here? What inning are we at specifically with the SPACs? Corporate treasuries. Yeah, the corporate treasuries.

I mean, I think we're early to mid, you know, innings. I think basically, um, there's a pretty healthy pipeline of large deals. Like, we, we think there's only going to be a handful of really credible teams, like operators and, um, you know, the, the bankers and the sort of like investors into these deals. Um, the marquee investors are only going to pick like, let's say, 4 or 5 more of these things. Also, like, there is this phenomenon where there's generally one of these things that's like the chosen one, the blessed sort of vehicle for a particular asset. So for ETH, maybe it's the one where Joe Lubin is on the board or that sort of thing. And so there can't be that many, or there could be, but they just won't necessarily be the one that people have at top of mind to invest into. So the ones that have the sort of brainpower and have this sort of retail reflectivity and meme staying power. Those are the ones that people will allocate into. So maybe there's 4 or 5 more big ones like that on new assets. There's gonna be a lot of small ones, maybe, I don't know, 50, I guess I would say. And then if you want to put sort of— you're asking what are the risks, right? We talked a little bit about the leverage and things like that.

You guys saw the blowup, right, of the last cycle?

What blows this up.

Yeah, yeah.

So we thought about this too. It's just the downside risks are basically there could be sort of fatigue, like fatigue for these like public equity deals and crypto, let's say, flatlines and all these things trade at a small discount to NAV, right? So in that case, like if that happens, then what really needs to support all these assets back to NAV is, you know, more capital coming in. So just stability and price action, more capital to come in, people maybe being able to borrow to sort of put on this trade and hold it until it comes back to par and above. And I think there is a lot of precedent for this. People have seen how the best trade coming out of the last cycle was just buying GBTC at a 40% discount, right? Or even MicroStrategy traded at a discount to NAV coming out of the the bear market. So people are sort of now conditioned to this idea that these types of instruments have beta, like levered beta to Bitcoin or ETH or whatever the underlying asset is. So they can't— I mean, they can trade below nav, but if there's any, you know, people are going to position long these things to capture like upside going back. And then, you know, worst case, they can do some kind of M&A or some kind of like shareholder activism to sort of reduce that. That discount.

My prediction on this is that, yeah, what ends up blowing them up is two things. One is the Bitcoin ones don't, they, it becomes too easy to launch these things. So they, you know, one of the things that you need to do to get these things off the ground is have a marketer and a financial engineer, right? And Saylor's a genius 'cause he's both of them. He's a financial engineer and he's a marketer. But you need like, like Nakamoto has David Bailey, 21 has Jack Mallers, Metaplana has Dylan LeClair. Like you need the marketer, you also need the financial engineers and the folks that are— I'm just seeing some of these fundraisers come in where they don't have a good marketer and the financial people are maybe B-league, not A-league. So they're going to, I think, probably get overleveraged because that'll be the only way that they can compete specifically on the good assets. I'm talking Bitcoin, ETH and stuff like that. So that'll be overleveraged. The other one will be just two like kind of subpar assets. Like, you know, we start pushing past like the top 20, you're looking at like the 30th, 40th, 50th best thing on CoinGecko. Like that's not, that's not a good asset. That should be a public company. I do think what will happen though is there won't be as big of a blowup as, you know, whatever, Three Arrows, stuff like that. Because the A, if you trade below nav, you'll just, you'll, you'll rebuy the shares. But B, I think Saylor will just come in and Like specifically with like the long tail, the Bitcoin ones, Saylor will just buy up the Bitcoin ones.

Yeah. I mean, also just not fraud, right? It's not straight up fraud.

Like it's not fraud. It's not fraud.

There's that too.

Not fraud. That is a good point. Okay. So maybe 4th or 5th inning for these things. 3rd, 4th, 5th inning.

Also, it's like a global asset class. Like you recently, there was that Brazilian like Bitcoin vehicle also, right? So like you're going to, you start to see. These vehicles, not just in the US but also in like large developing countries, a lot of capital, right?

Anywhere that doesn't have a Bitcoin ETF will have one of these.

Yeah, like Korea or Indonesia or something, right? Like these are like already in the works. So yeah.

Um, are you— would you basically fund any one of these that came across your desk that you could get into?

Not, you know, indiscriminately, but yeah, I mean, no, not indiscriminately at all.

Not, not blindly, but, but mostly, I mean, I'm like, if you guys I mean, we were all in the market then, like the 2020, the 2021 angel deals, right? You could almost blindly do those and make money, right? How similar is it?

So, I mean, these things have a much better liquidity profile, like everyone knows, right? So it's like they, depending on what kind of deal it is, if it's a SPAC or a PIPE or something else, like they have shorter windows to liquidity. So It actually mitigates a lot of the risks that you're talking about where it's like you have these long duration or even in some cases was like uncertain duration basis trade and you're trying to capture some premium before it collapses. In this case, it's like, you know it's going to be a short window, even in some cases like a month or so. So that's just inherently a lot less risk for people. Yeah, to your question of just how do we think about these things and invest in them. I think for us, it's like we actually have a different motive here, and I'm speaking more as a sell-side person. Our motive is actually to help provide liquidity to these vehicles and partner with them and work with them on things like custody and staking and things like that. A lot of the times when we do work with these things and we make some kind of strategic investment, it's just purely for alignment on those fronts.

I wanted to take a moment to tell you about Focal by FalconX, the AI-powered insights engine built for institutional crypto. With Focal, you can create charts and generate answers to questions in seconds. Used by over 80 funds with more than $10 billion in assets under management, you'll feel like you have a team of analysts at your fingertips. Ask Focal questions like, what's causing the uptick in liquidation? How much Bitcoin did Michael Saylor buy last year? And what is crypto's correlation to traditional markets? Focal pulls data from trusted sources like CoinGecko, Token Terminal, and The TIE with enterprise-grade privacy and security. Learn more at askfocal.com or check the link in the show notes. Thanks to Focal for making today's episode possible. Ever wish you could access cash without selling your Bitcoin? Ledn, the global leader in Bitcoin-backed lending, makes that possible. Since 2018, they've issued over $9 billion in loans, and not a single satoshi of client funds has ever been lost. Here's what makes a Ledn loan different. With custody loans, collateral is not lent out to generate interest. No credit checks, funds in less than 12 hours, and no monthly payments. Repay whenever you want with zero penalties. And they don't just talk security, they prove it. Ledn offers proof of reserves reports verified by a top accounting firm every 6 months. Ledn is 100% focused on doing one thing better than anyone else: giving Bitcoin holders a secure, transparent way to unlock liquidity without selling.

Click the link in the show notes to find out more.

As always, investments in blockchain technology involve risk. Terms and conditions apply.

Okay. Third, fourth, fifth inning of the corporate stuff. Where are we at in the cycle? And maybe we can get more meta and say, is there even a cycle anymore? To me, it's starting to feel a little, little toppy, but I'm curious how you guys think about it.

Yeah, I mean, definitely.

I think the cycle, speaking to earlier, like it's a little different, right? I think like it's clear that Bitcoin has kind of already reached like escape velocity. It's attracting a ton of capital. I think it can definitely continue to just, you know, keep going, whether it's from nation states or corporate treasuries or, um, you know, crypto-native funds, you know, Catify Fund. I think like it's reached that area where it's not necessarily just like another cycle and, you know, then we're gonna have like an altcoin cycle. Like there's way too many coins, uh, now to actually have this like concept of all cycle, all coins will go up indiscriminately like, like previous cycles. The idea that it's like 8th, 9th cycle and everything's going to go down at the same time, I think it's a little different this time, right? It's not going to be some fraud or major collapse, hopefully not, that brings down both alts and ETH and Bitcoin and everything else. So I think Bitcoin to some extent has decoupled from the kind of traditional crypto native markets.

Yeah.

Hmm. Switching gears a little bit from market, what was the impact of the— I'd love to get your guys' take on the Deribit deal and if that's like how that integrates, if you guys think that's going to work really well and you're like, I know you guys compete against, you know, folks like Coinbase, but I'd just love to get your take on the Deribit deal.

Yeah. I mean, I guess we kind of kicked off like this, this series of large acquisition deals. And a lot of it has been either in the kind of the prime brokerage space or the derivatives space, which is great to see.

You guys really were the first.

I think so. Yeah, it's like January of 2025.

Well, we salute you.

Yeah, I mean, I think that the long-term impact is there's going to be more consolidation in these venues. And I think part of it is depending on what vertical you're in, like you might be targeting your crypto-native market participants or you might be, let's say, like CME, you're targeting TradFi institutions, it is almost like a winner-take-all phenomenon happening where if you are the most liquid venue for derivative instruments and most people in the world have collateral with you and are on board with you, then there is really, it is a moat. There's very little reason for market participants to go and take that collateral somewhere else to a new venue and start seating that venue and then start talking to everyone else and be like, hey, will you come to this venue so I can trade with you? That's a very hard cold start problem. So there is this, there's a lot of value in the Deribit franchise and we love the team there and it's a great product. I think from a crypto native perspective, they have a lock on that. Now we are seeing because of the things you mentioned, a lot of people are in the space trying to do everything, right? So everyone has sort of like competitive angles with everyone else. We are seeing a lot of new venues trying to emerge and see if like, hey, can we take market share from this sort of disruptive event in the market, whether it's dealers like us or new exchanges that are launching or launching specifically option products. So we're excited to see that too because there is a lot of innovation, right? There's innovation from the perspective of new instruments, like new types of new types of asset underliers. There's innovation from the perspective of risk management, collateral management, margin rules, and things like that just to make sure that you get the most capital-efficient experience that's safe for all of your users. There's also just differences in how these things are structured. Some of them are designed to be sort of membership-type models where you have a small subset of very large market participants that's driving all the liquidity. And some of them are very sort of like, We just market to retail. Anyone can participate. If you want to participate as a dealer, you can as well. But we're here to kind of service like small people who want to trade options. And I have a lot of thoughts on this. Like, my main thinking is right now in crypto, because of what we talked about in perps earlier, it's very hard for the retail angle in options to break out.

Like, because perps are so dominant. Yeah, it's tough.

It's so much easier to get leverage in perps as a retail user. Right.

And then why would Coinbase pay 2-point-something billion for, you know, Deribit had 80% of the options market and had for a long time, right? So why would they pay?

But Deribit is an institutional exchange, ironically, right? That's like, people don't think about it that way, but it is actually where a lot of the risk gets transferred within a crypto-native world amongst like the large dealing institutions in crypto-native world. A lot of the risk transfers are happening on Deribit, surprisingly.

Say more about that.

Well, they've invested a lot in building out that infrastructure to allow these block trades to happen. A big part of it is a company called Paradigm, which is a technology platform that matches off—

Not Paradigm the fund.

Not the VC firm. Yeah, a technology company that enables two counterparties who have Deribit accounts or they also service other exchanges like Bybit and things like that where you can, you know, you can meet and trade a large block in one shot. So you're not necessarily trading on the order book on Deribit, which if you're trying to do large size, like you're going to move the price dramatically if you try to do on the order book. Yeah.

Why doesn't— I'm surprised FalconX hasn't tried to buy Paradigm.

Yeah. Well, I think like we're as a business, right, we are focused on participating in these markets. So it's, it's, it's harder to—

you don't want to own the platform.

Yeah. It's harder to like be a good partner to all of these venues if we're also running like a competitive—

if you run it. Yes. Okay. That makes sense. So fast forward 3 years. So right now Deribit owns 80% of the options market. They have for a long time. People have tried to compete with them. It's never really worked. 3 years from now, now that Coinbase owns them, will they still own 80% of the market?

80% of the crypto native market, are you saying, or just general like crypto options?

Roughly the numbers I've seen is they own 80% of the crypto options market.

Yeah, I mean, I would say, and we've already seen a trend move a bit, not necessarily because it's taking market share, but I think the pie is expanding, is obviously IBIT options, um, as a percentage of all, call it like options related to crypto being traded. Gaining kind of market share, right? So I do expect at some point, you know, IBIT options volume notionally to surpass crypto, Bitcoin, like Deribit options.

You think just IBIT options alone?

Well, IBIT is basically Bitcoin, right? So like IBIT options volume versus Bitcoin, like Deribit volume, I would expect IBIT to overtake it.

Can we talk about just the ETFs actually for a second? And we had— who was it? We had an episode with Pranav from VanEck and Dave Kalk from Reflexive, and we were talking— they were talking about just the kind of basis trade in the ETFs right now. Can you guys just— I don't know how much— yeah, how deep you guys can go on this, but like ETF basis compression, margin challenges as the ETFs scale, like long-dated vols and forwards. Like, just tell me, tell me your— give me the update on what's happening with ETFs as it relates to the derivatives market.

Um, yeah, you can talk about derivatives. I'll talk about maybe just the basis, but, um, some of our— even our LPs are like very traditional multi-billion dollar funds, uh, and they've been doing kind of the ETF basis trade themselves for many, many months.

Can you remind folks what, what that trade is?

Yeah, so effectively they're, you know, like subscribing and getting exposure to, uh, basically iBit, um, posting that as collateral with their traditional like Prime Brokers, and then using that as collateral to basically do like the CME, um, basis trade where they're selling like CME, uh, futures, right? And so they're collecting that roll down in futures, uh, as yield. And then they're able to do this on highly— in a highly leveraged way where it's, call it like 4 to 6 to even 7x leverage. And so, you know, they're borrowing at, call it, SOFR plus 2% and the CME rate is, you know, maybe 10%, call it, right? And they leverage that maybe, you know, 5, 6, 7 times. Effectively, they can get, you know, in the teens, even like 20% like returns annualized in certain environments, right? So that— this has been done for a while. And, you know, whenever you see like, oh, Millennium owns a billion plus dollars of IBIT or whatever, like basically, like a lot of times they're actually just doing the, uh, like basis trade.

Yeah. That was just a snapshot in time.

Yeah.

That's when I saw, um, I won't call 'em out, but one of the big like ETH influencers, um, was like, this fund just bought $600 million of ETH. And I know they're a delta neutral fund.

Yeah.

And there's like Abraxis or whatever.

Abraxis. Yeah, exactly. So, all right. So ETF, sorry, I interrupted you.

So that's the basis. Yeah.

And then I know Josh wants to talk about like the derivatives effects. Yeah. Options effects.

Yeah. So the sort of long-term impact of more capital going into iBit and CME. And so basically this capital is chasing yield, right? And the capital is— the way the yield is generated is by supplying cash to the market for people who want to take leverage, right? So it's like, why do futures trade above spot price? It's because there's more demand for people who want to go long and they're willing to pay a premium. To go long. So as more and more people deploy into the basis trade, it's, it's, um, balancing off that demand, and so the basis naturally compresses. What does it mean for all of us, right? Um, well, this, this trend is probably still at the early innings if you think about it. Um, a lot of the kind of credit desks out there, um, that were around last cycle, they're much smaller this cycle, right? Like, those credit books were let's say $20 to $40 billion in size last cycle, and now, you know, everyone is maybe running like a billion dollars of size, maybe at most, in crypto-native world. In trad fi, of course, those numbers are increasing, um, as these funds put on the basis trade in billions of dollars of size. Additionally, on that side of things, you're kind of seeing like, um, the trad fi prime brokers willing to, uh, margin against the ETF shares. And so, as that becomes more prevalent, it's basically supplying even more cash into crypto and even reducing the cost of leverage even more. So, I mean, all of these things means the forward basis should really continue to compress, except for situations where there's a lot of short-term demand for leverage. And so, it's like when you get these big spot rallies, just kind of spontaneous, very compressed and large gap moves, higher, all the basis spreads widen out a lot, you know, on Bitcoin, on ETH, on alts.

It does compress like a lot faster.

But yeah, people come in a lot faster and just slam that down.

Is that coming in faster because these are just like, this is not manual, you know, me saying like, oh, this on Binance in 2017 is different than the price on Coinbase. Like, let me manually move this over. These are all just algorithmically traded right now.

I mean, now you can just put into Athena, right? Like, and basically, you know, immediately.

Athena will just do it. Yeah. Yeah.

And then, I mean, the other part of your question is what does it mean for options, right? So it's kind of the same effect, right? Long-term vols in Bitcoin and ETH are at almost like historic lows. The last time they were this low was 2023.

Why is that?

Summer, because it was post-crash and nobody wanted to touch it.

Why is it depressed right now?

Yeah, so right now, like the question that everyone's asking is why we're at all-time highs, which means like we could potentially be in a situation where crypto enters like a price discovery era again. And so that should result in higher volatility. But why is like long-term implied vols at near record lows, which for Bitcoin it would be like in the mid-40s, uh, for 6-month vol and further out? And the answer I think is because of this, like there's a lot of capital now looking to deploy market neutral into crypto and trying to extract yield. And as the basis compresses, they're also looking at things like selling options, so selling longer-dated options on crypto via things like structured products, which are very common in equities. You take some high-vol stock like Tesla or something like that and then you do a structured note where you sell options on Tesla and you generate a coupon, like a steady coupon for doing that. Same thing, people are starting to do more of this on Bitcoin and ETH. So all the long-term vols are compressing because of that.

Interesting. Can we talk about trade ideas?

Yeah.

Actually, before getting into trade ideas, what do you guys think of Hyperliquid? And I guess it could be a trade idea because hype is obviously ripping, but would love to just hear thoughts on Hyperliquid as a platform. And you know, it's been like the first real thing to maybe compete with some of the centralized exchanges. So how do you guys think about Hyperliquid as a platform?

I mean, yeah, I think it's a great user experience.

There's been obviously other platforms like DYDX, Vertex, others that are of similar nature, but obviously we've seen Hyper Liquid be kind of the clear winner, um, this cycle, right? Uh, I think like parts of it is obviously just the technology, you know, Jeff and team comes from like this TradFi world. They understand how like a matching engine should work, uh, how to like control for latency, um, things that like, you know, institutional traders and investors and firms care about. Um, but also I think like they have a like this, this kind of like market-making product, um, as well, right? Whether it's kind of like the HLP or just like internal market, where I think like they've been able to provide liquidity early on internally better than call it like the more, the other platforms, right? And so from the get-go, they were able to provide a better user experience, not just from, you know, the front end, etc., but actually from a liquidity sizing spreads, which is like really, really important for a platform to kind of like bootstrap from like 0 to 1.

I have a dumb question. Why is it Why was it problematic when FTX or Binance or some other firm had internal market makers? Right. Remember, that was always the thing. It's like, oh, they're market making. Like Alameda's market making on the platform. They can just snipe you. Like, why was that so problematic?

But it's—

but now it's a— that was a con. Now it's a pro.

If Hyperliquid has market makers, I think they're doing it in a more transparent fashion. Right. You can kind of see like the positions that they're like trading, that the trades that they're doing, the liquidity they're providing. I mean, obviously, you know, there's still improvements to be made, but I think they're at least doing it in a much more transparent fashion than the historic, like BitMEX's or FTX's market making does. Hmm.

Hmm. You think they sustain as a platform? Do you think they get this? I think I'm assuming you guys would say yes. Do you think that they can be a real competitor to some of the bigger purpose platforms?

Yeah, definitely.

I think so. I mean, it's because so much more activity is on-chain now. It's like people think about how do I hedge my impermanent loss risk, let's say, or some exposure to something that I don't want. It's a lot easier to just go through on-chain venues. We have different parts of the firm at FalconX and some people are exclusively focused on centralized exchanges and some people are exclusively focused on on-chain activities.

That part of the—

it's like they want to keep it self-contained. That kind of makes sense. So yeah, I think there's going to be more just natural secular growth from that, I would say. I think they've really copied the playbook of things like BNB and FTT pretty well too, just sort of the exchange tokens to incentivize early users and build community and everyone sort of made money on the token. It's one of these things where they have like a good buyback model. It's clearly generating revenue because there is like strong user adoption and loyalty. So yeah, it does have seemingly like a lot of staying power and they have a lot of tricks up their sleeves still, right? Like they have a lot of new products launching, new teams building on it. And yeah, that is It's kind of the runaway success of the cycle, I'd say.

Right. Yeah. And it's still a little bit of regulatory arbitrage, right? I think it's become harder and harder to onboard with Binance and OKX and other crypto-native exchanges that historically have been easier. And so Hyperliquid, obviously, you can just plug and play, basically. Right. It's a much better startup experience than having to onboard with the other crypto firms, like platform. Yeah.

Yeah. Okay. Let's talk trade ideas. I want to hear your guys' trade ideas, maybe we can bucket it into more like durable value plays, things that you feel a little more confident on, and then we can push, push out on the risk spectrum.

Durable value.

Josh, how would you think about these?

Yeah, I think a lot of the fundamental guys that we trade with are starting to think about, you know, which tokens have, you know, features that are supportive of long-term value creation. And those features are generally like user bases that are willing to pay fees and obviously create revenue for the protocol. That revenue should be used in some way to buy back tokens or to be distributed in some way to holders. And so all of these things together create an environment where these tokens can accrue value and become an important part of a portfolio that is using real metrics that you would use in TradFi, like price-to-equity ratios and things like that. So yeah, things like, I think the ones that we see a lot these days that people are talking about are more like lending protocols because they're stickier. They're less cyclical from a volume perspective. There's obviously tokens associated with exchanges like hype and things like that, but lending balances and collateral tends to stay on one platform. Things like AAVE, right, obviously has had a huge run-up with ETH. On SOL, it would be something like Kamino. We're seeing things that are more The crossover between CeFi and DeFi, things like Syrup for Maple. These are all things that people are more actively trading and sort of applying a lot of those tradfi financial metrics, ratios, and things like that.

Yeah.

Okay. So on-chain credit bucket would be one.

Yep, that's right.

Still think those have room to run?

I mean, I think so. It's all a matter of people pricing on a relative basis to each other. So it's sort of like people pick the ones that they think are cheap.

Yeah, starting to see, you know, some uncollateralized, like on-chain credit lending as well now, right? Like Wildcat has gotten like pretty good success lending to trading firms, but on a completely uncollateralized basis.

Yeah. Yeah. Wildcat is the winner, Mute. Lawrence is saying SOL versus ETH on a relative basis. How do you think about this trade?

Yeah, this one's a hard one because There's two dynamics, right? There's a bunch of new inflows into ETH from institutional capital from the equity deals, the corporate treasuries. There's also these catalysts happening at the foundation and sort of a rethinking of their long-term strategy and all that. And they're clearly doing a lot of investor relations towards TradFi, banks and stuff like that too, business development efforts to get people to deploy things on ETH mainnet, public versus permissioned type activities. And then on Solana, I think the other side of it is Solana has been dominated more recently by meme coin activity, specifically like the pump.fund activity. And a lot of the speculative fervor has migrated to PERP platforms, right? Hyper liquid. So I think on the Solana side of things, they are really thinking hard about how to get exposure to a lot of these things on the Solana ecosystem and maybe think about more utility-driven financial DeFi applications rather than necessarily purely on the meme coin side of things. So yeah, It is sort of a very difficult ratio to trade because of that.

If you were a betting man, Josh, which I know that you are, how would you—

I generally think Solana has probably room to run. It's really pulled back a lot in the last couple days. I think a lot of it has just been people, this rotation trade, people are selling things that they own to get exposure to new things.

Right.

It's all ETFs.

It'll definitely revert.

Yeah.

What is— okay, so we've got— I'm assuming you guys are long hype. So hype, uh, maybe in, in the SOL versus ETH trade, you've got SOL, we've got on-chain credit. Um, what's another basket you guys are excited about?

I think, um, something that we're not like actively trading, but I do think at some point is just the kind of like Circle versus Coinbase, like relative value, right? In terms of like the valuation. Um, obviously like when Coinbase initially IPO'd, it ran up to like $400, insane valuation, same multiple. We're kind of seeing the same thing with Circle, but ultimately it feels like the Circle Coinbase valuation ratio probably is unsustainable, right? Like, you know, if you're taking like— they are linked in some sense, right? And if you're taking kind of, I think, I think like Rob Paddock had a good post about this, but like if you're taking like the— if you strip out like the kind of like Circle business from like Coinbase's valuation, you're left with like 2x net revenue or something for like the Coinbase business. Itself, like everything else, which like doesn't really make sense. Right. And so right now Circle is trading almost like a meme in some ways. Right. But I do think at some point that ratio probably like normalizes.

Yeah. What do you think about these? I mean, Bullish just filed to go public. Gemini just filed. There's probably 5 to 7 other folks that we know that are coming soon. How do you guys think about trading these? Because Circle felt like a big, I mean, well, we won't get into the valuation now, but like, yeah, so, I mean, maybe you just touched on it briefly, but like, all right, I could see the next company going public and nobody cares about the valuation and nobody's looking at the balance sheet or anything or the P&L or anything like that. They just say, okay, Circle just ran up, you know, 4x. I mean, I'm going to catch, I missed that one, catch up trade and catch up trade and chase this next one.

Decent.

I mean, that's like the left bell curve thesis, but how do you guys think about that?

I agree.

I think like I would, you know, from a trader perspective, that's exactly what I would do.

Yeah.

Yeah.

I mean, it would take a lot to knock us off this trend. Like it would take like crypto selling off, you know, 30% or something like that. But right now it's like, it's just people, hot money chasing this, the latest narrative.

It's the CMS hot ball of money's back. It feels like, yeah, the hot ball of money is definitely back and it's in public equities.

Yeah.

And every time one of these things launches and is successful, IPOs and is successful, then there's more money to put into the trade, right?

Yeah, right. Everyone who did Circle now has more money. They want to chase that trade again. What about tokens? I mean, so on-chain, the only tokens you've mentioned so far, maybe we've got SOL, we've got HYPE, we've got on-chain credit, right? Anything else that is interesting?

I mean, I think AI has been a persistent theme, right? So the kind of like picks and shovels play for AI is something like a Worldcoin. So the idea being that, you know, Identity is more and more important in a world where you have less certainty about who's human and who's AI, right? Obviously more of a last cycle project launch, but nowadays just given how often you see Sam Altman and OpenAI in the media and the valuations associated with his businesses, it's sort of like a natural way to get data for it. And like in crypto, there you know, people treat these tokens as effectively equity, right? Just a way to get exposure to the theme. So yeah, I think we're seeing a little bit more of that.

And so you're saying Worldcoin as a proxy for—

as a proxy, basically. That's right. That's right.

Why wouldn't that have run like— why, why, what would change? Because it hasn't run like that so far.

Yeah. I mean, I think it's just there's a ton of supply, you know, like, um, that there will continue to be supply. Yeah, that's right. That's right. I mean, it's, it's, uh, It's something where if it becomes more, they need to actually, if they deliver a lot more against their sort of product roadmap, that could reignite that narrative for them.

What about meme coins?

Yeah.

I mean, I think both of us are pretty bullish on the pump, like upcoming ICO, right? And I can't speak for Josh, but I think us as a firm, we're planning on participating in the you know, pump ICO.

And so do you participate privately? Or like, let's say someone's an Empire listener and they're listening to this, they're like, oh my God, I'm feeling Josh, smart guys. He's bullish on the ICO, on the pump ICO. I want to participate too. Is there a way? What's the— how do they participate in that?

I think there's kind of the venture private and the public deal for the pump offering, right? I think for the public offering, you basically have to KYC through like an exchange. And basically it's like subscribed through the various exchanges that Pump.fund is working with and distributing their tokens. Yeah.

Yeah. Nice. Yeah, memes. I mean, my thought on memes are they're just a levered way to get exposure to the underlying L1 or the gas token. So I think basically that's how most people trade them in my view. We think it's a pretty efficient way to get exposure for funds who like to play different narratives. For SOL, it's like you just pick the top mindshare type memes, things like Fart Coin and SPX. Those are the ones that we see a lot of people just actively get into as a way to— if you think, for instance, SOL is going to be stuck in a range for a while, but you just want leverage without committing a ton of capital to it, then those are the assets you buy. You might sell SOL actually to buy those things because if there is enough move, then you'll get a lot more beta there.

Yeah. Yeah. One of the things that's been interesting about this cycle is that the things that you think would perform well, right? The consensus trades have worked.

Yeah.

Right. It's like, what's, what's gone up? SUI. I mean, everyone knew, like everyone was calling for SUI going up. Like, I feel like if you talk to a lot of crypto natives, like SUI was in their portfolio. Hype has gone up. SOL has gone up. It's like kind of the obvious trades. Do you think this continues?

Yeah, well, I mean, Hype went up and then Hype went down a lot too, right? So it's, I mean, Hype is a little bit of its own beast because it's so reflexive, right? Like people made a lot of money from the airdrop on Hype and they're also trading on Hype because they traded on Hype and now they continue to trade on Hype. And when the market goes down, they have to sell the Hype to put margin on the exchange, right? So there's a very reflexive element there. I think, yeah, to your point about like these trades all working, I think it's just how crypto is, right? It's like basically you need to take a view and you need to hold it over a longer term timeframe. Like if you trade short timeframes, it's very hard to have alpha.

Yeah.

Like long-term alpha.

Yeah. But the diff— I don't think the last cycle was like this because there were the things rotated. There was a new narrative that things would rotate into. Like you would, DeFi summer, you could have, like, I made this mistake. I held a lot of the DeFi summer things. And then the market rotated to NFTs. And if you didn't rotate with that, you were down 90% on your Uni and Aave and stuff like that. And then NFTs, if you didn't rotate out of those into metaverse, right, you missed, then you were down on those too. So yeah, I don't know.

I don't know.

We'll see what happens. Well guys, I know we're at time. This was great. Shilang, Josh, thank you guys. Congrats on the acquisition again. We didn't even talk FalconX, but obviously you guys are doing a bunch of cool stuff. So if people are trading, they should reach out to you guys. And yeah, I appreciate the time.

Thanks, guys. Thanks.