Perps & Predictions: How Crypto Will Transform TradFi Derivatives | DAS London 2025 | Day 1 | Invest
Summary
Crypto Market Dynamics: The discussion highlighted the largest liquidation event in crypto history, emphasizing the challenges faced by centralized exchanges (CEXs) like Binance, which experienced significant downtime, while decentralized finance (DeFi) platforms like Hyperlid performed smoothly.
DeFi vs. CEXs: There is a growing trend of decentralized exchanges (DEXs) gaining market share from CEXs, with DeFi protocols becoming more seasoned and trusted, indicating a future where both systems coexist and complement each other.
Perpetuals and Prediction Markets: The panel discussed the evolution of perpetuals and prediction markets, noting that while perpetuals have become a staple in crypto trading, prediction markets are still developing, with sports betting seen as a significant growth area.
Regulatory Landscape: The conversation touched on the regulatory challenges and opportunities for prediction markets and perpetuals, suggesting that regulation will play a crucial role in their growth, especially in achieving global liquidity pools.
Innovation in Trading Products: There is a focus on the potential for equity perpetuals to surpass traditional equity options in popularity, driven by the simplicity and leverage they offer compared to traditional financial products.
Market Structure and User Behavior: The panelists discussed how market structures in crypto differ from traditional finance, with a focus on speculation rather than hedging, and how this influences the development and adoption of trading products.
Future Outlook: The panelists expressed optimism about the continued growth of both perpetuals and prediction markets, driven by increased institutional participation and the development of new distribution channels.
Transcript
Thank you all for coming. I'm Bukachu. I'm an analyst at Blockworks Research. And today I'm going to be the moderator for the panel pers and predictions. How will crypto transform stratfight derivatives with hash keshi monteo and Alexia Teodor. Before we get started, would you guys like to give an introduction of yourselves? >> I'm a management partner at Dragonfly. We're crypto investment fund. We invest in a lot of things at our per and prediction markets. >> Very good. >> Hi everyone. I'm Min and I'm the managing partner of Ethereal Ventures. You know, work quite a bit of a seed. We're early stage crypto investment fund. Uh we have a global mandate focusing mostly on preed and seed opportunities and we are set up by the former investment team of consensus. >> Hi everyone, I'm Alexia. I'm looking after Kraken derivatives uh at Kraken. >> Very good. Um to get us started, we had a very very eventful Friday. How do you guys think sexes and dexes handled um the liquidations and the events? >> Not great is think is the main answer. Not great. So uh for those of you who are maybe peacefully sleeping, you don't own any um any derivatives. Friday was the largest liquidation event in crypto history. Um huge huge amounts of capital that was that got um liquidated on chain and offchain on centralized exchanges. I think the the standoff failure probably of the day was Binance. Binance was down for you know almost over an hour. Um they had huge uh massive DPEGs. I think you saw um Atom went to like one you know less than a cent. Uh you saw some of their assets DPEG massively. They had two LSTs and then they had this idiosyncratic event where Athena which was or USD which was trading pretty close to a dollar on B on by bit I think buy it went down to like 95 cents on curve it was like at a dollar and then on Binance it wicked down had basically a flash crash on Binance at like 68 cents. So nobody could get in and out of Binance. Binance of course is the largest venue in the world for derivatives and so it's it's kind of the market. It's like 50% market share in derivatives. Um so that was really really bad. Defi on the other hand performed very well. So if you look of course you know the the spot was all fine but the um uh if you look at um Hyperlid Hyperlid performed fairly well. There were some API issues but for the most part everything was very orderly. Everything was up through the through the period of the market carnage. Um they actually liquidated huge amounts completely transparently which is also very interesting because there's a lot of stats going around that hyperlquid liquidated more than Binance. It's almost certainly not true, but it's just that the way they report their liquidations is reflective of reality. Whereas Binance, they they report only on I think it's like a second by second basis. Meaning that if there's multiple liquidations in a single second, they only report one, >> which is very weird, but that's the way that it works. Um, and then lastly, the lending facilities on chain were all beautiful. So, a morpho, everything was liquidated uh completely without a hitch. No bad debt anywhere that you saw in like the old school v1 defi. So overall mixed record, but these are these are how you learn. You know, crypto kind of it performs out in public and through these stress tests it gets better. And I I think that's the same lesson this time. >> Perfect. Um, and how do you guys see sexes versus dexes, the competition shape up over the next year? We've seen dexes increasingly gain market share. Do you think it continues? Well, I mean, I think if you look at spec specifically for like pers, right? I think like sexes are still at 97 98% of like the the volume that we're seeing, but >> not not true anymore with Aster, >> but not like that's changing very quickly though. I mean, depends how you classify volume sometimes. >> Depends. Volume is in the eye of the whole. >> Yeah, absolutely. Um and I think you know you with hyperlquin and all that that's certainly like you know slowly slowly getting chipped away which I think is really interesting. I think ultimately you know the the global market is um is a big one. If you look at sort of trady I think you have like dominance that's regional. It doesn't necessarily make sense like you know I think a lot of the market structures that we're seeing we're used to in trading in crypto just doesn't make sense to sustain. Um so you're just going to get a lot of options for like you know uh different people and the when users have more options I think it's better for them and as uh said like defi protocols are getting seasoned um and people are trusting them more and that's really cool to see because a lot of these like you know people have been working hard on them for the last seven eight years >> and and I think you would you would continue seeing the upward trend on the dexes that we are seeing in the past in the past year it's impossible to ignore that's where innovation happens that's where things come in first and then but on the other hand you would keep on seeing sexes keep on the regulation they have the fiat um on ram rails coming in so I think one would complement the other without one taking over or vice versa so I think you you need both and you we would probably be seeing more of that 10% climbing up um in the past in the next year >> yeah I mean if you look at the the story for DeFi has been when DeFi first started if you look back like 2018 2019 um even Before Defi summer, DeFi was mostly an experiment and it was, you know, small dollars relative to what was happening in CFI and it started from a base of like, you know, basis points of what was happening in in in the the the centralized exchange space and that number has mostly just been monotonically increasing. Um, it obviously shot up during periods of time when there's a lot of onchain volume. Uh but what we're seeing now with this new generation of exchanges, if you look at things like Hyperlquid, things like lighter, um to some extent Aster, although Aster obviously has a lot of question marks around it with accusations that they're faking their volume or they're sort of, you know, you can't actually tell what the real volume is just by looking on chain. But with a lot of these exchanges, what you're seeing is that they're getting a lot better really fast. And a lot of that if you if you just look at the V1 of perpetuals on chain, right, the DYDX white paper came out in 2018. I remember the DYDX white I think it was actually December of 2017 when the DYDX white paper came out and that was the first shot at what it would look like to do derivatives on chain. And DIYXV1 was a piece of It was an awful product. It was totally unusable. I mean the same thing is very much true if you look at prediction markets, right? Prediction markets old idea. prediction markets are in the in the Ethereum white paper. Um, which was like 2014 that that was written. Um, and it took a long time for either of these products to really work, right? So like DDX white paper 2018, it really took till like 2024 for Hyperlid to make per scale that was actually competitive with centralized exchanges. Same thing with prediction markets. Prediction markets, Augur was the first real prediction market. I remember I used Augur. It was horrible. an absolutely unusable product. Um, and it really took until Poly Market really in like 2024 to have the liquidity and the trading experience and the UX to be good enough and the on-ramps to be good enough to actually be a consumer product. And so I think the lesson for for looking at the the competition between DeFi and CFI is that DeFi starts off looking like a toy. It starts off just completely unbearably bad and over time it takes a seasoning like you put it for it to become more liquid, more usable, to have the on-ramps better, to have the UX better, to dial in the mechanics that you need to do this in a decentralized way. Um, but it always eventually can get to the point of being competitive and then it has the the advantage that like look, Hyperlid had no downtime. >> Binance was down for two hours. Hyperl zero downtime, zero mistakes. It was it was programmatic because it's a blockchain. No blockchains went down on Friday. Ethereum did not go down. Salana did not go down. Nothing went down. Uh it was decentralized exchanges that ended up having the instability on Friday. >> And I think it's times like this where, you know, protocols also realize what people care about. So now there's this whole, you know, like CFI type execution and DeFi settlement. And that's allowed protocols to sort of reduce fees, like improve latency um a lot. And ultimately like you know that just takes a lot of experimentation to sort of get all the infrastructure piece in place and figure out what people care about there. You don't need to put every single thing on chain. >> That's a great point. And like if you look at RFQ systems which is becoming more and more how spot is happening on chain. >> These RFQ systems you know we used to think okay well it's DeFi if everything is onchain and there's no offchain component. Whereas with these RFQ systems, it's literally like a market maker that like, you know, has an office in London that is filling the orders, you know, and like they're probably hedging it on Kraken or on Coinbase or whatever, you know, Binance, whatever. Um, and these markets are one the the two are blending into each other, right? You look at Hyperlid, for example, Hyperlid is creating USDH, their stable coin, which is issued by Bridge, which is a centralized company, right? Right. I mean, it's literally fiat back stable coin that's now going to be the canonical stable coin for a decentralized exchange. Um, you know, same thing with Athena. Athena has reserves sitting at custodians um and has, you know, they have positions on Binance and on OKX and whatever. Um, so all of these thing and you know, even with a A has uh, you know, they they've got these um, RWA markets that you have to be KYC in order to use. So I think what you're seeing also is this melding between the two where it's not quite DeFi is here, CFI is here, right? Even with Kraken, Kraken, you guys now have an L2. Coinbase has uh they the morpho integration. All this stuff is becoming one big market. >> Exactly. >> Which is always, I think, what what it was supposed to be. >> Yep. >> Yeah. Um we mentioned perpetuals and prediction markets getting better and better. One thing that hasn't gotten much better is options. >> We're still not using options a lot um in crypto, I think, both on the dexes and the sexes. Why do you guys think that is? >> Yeah, it's it's an interesting question. We keep also debating in in Ken as well. Um I think if we if we take a step back to see what's the expectation here that there is a lot of expectation when we look into traditional finance markets. So in traditional finance markets you see options taking up multiples of volumes when it comes to derivatives. Um they are a lot more interesting products to trade. You can trade on volatility on um on speculation. So you can do a lot more things that you can do with futures which is just a delta one product. Uh but we don't see this in crypto. in crypto it's roughly 3% of the of the derivative space. So it really doesn't trade as um as much. So why is that? There are many theories, right? I think the the one I mostly believe in is that pers are so much better. There isn't a per product in traditional finance that um that does that for the retail client. So pers are simple. You capture the speculative angle of derivatives and it's very easy to trade it in and out. uh no expirations and much more predictable funding rates coming in. So I think that's a main main use case that it's been taken out of options and because you don't we we have also not seen anyone nailing down the user experience as well for the retail client. So you you log into exchanges and you see they're built for makers not for takers. So then that takes out that flow element which institutional clients need and it's back to that chicken and egg situation. no flow, no institutional demand either. And and I think one more point here is that the flow of options is too concentrated on a few exchanges which are offshore and that also doesn't bring in that um institutional um demand. So once we see more regulated exchanges bringing in or taking off for options, then you probably see more institutional demand coming in. >> Perfect. Um, one thing you mentioned there is that perpetuals are uh what we really like in crypto. Um, one question I've been thinking about is tokenization versus propification like instead of bringing some of these real world assets on chain, wouldn't it make more sense to just launch perpetuals markets for this? Um, do you guys think this makes sense or do you think that propification is stupid and we should just focus on tokenization? So you know if you think about say tokenizing equity at least on day one like in my opinion you have a worse product because you have worse liquidity and it's tougher to trade like you will have you know other benefits from that tokenization you can use it as you know collateral for getting a loan where it might be more more difficult and you can cross margin into crypto all of that um I'm not sure how big that market is whereas I think when you say do an equity pretty it's just you know such an elegant expression of leverage and also you know with the continuous sort of price function you can use that for hedging in such better ways I think related to like you know the question of options like I actually think if you look at like Robin Hood why there was such an explosion of options and people look at that with crypto why hasn't that happened I'm like well I think it's because like there's no equity perks yet you know it's just a like by far better product I think it's one of the best inventions of crypto and you know there's certainly some challenges es with stuff like equity perpetuals that are leading people to focus on tokenization first like you know there's um you know for a lot of equities you have a lot of discrete price jumps so you have to figure out how to deal with like stuff like corporate actions like dividends and whatnot you don't really have that in crypto right now uh but I do think with a lot of experimentation you'll be able to solve that there was a lot of regulation was preventing that experimentation and now I think that those hurdles have been alleviated somewhat um and there are a lot of great minds in crypto trying to look at that. One example I can like you know that kind of gives me hope that I think equity pers and the challenges of it can be solved quite quickly is we've somehow figured out uh you know how to do per uh pre-launch like tokens and they're working decently well right and that is a pretty big problem with like not having an oracle for that um and I think there's demand like you know volumes are still relatively small but I think it'll grow quickly and I think we'll probably see equity per develop quite a lot in the next few years. I I I think that's definitely going to develop much faster. It's much easier to see per purpification of traditional assets because it's so much easier to list. But then it goes down also to the initial point of um how reliable is that oracle to make sure that you keep on valuing and keep on managing that risk in a reliable way. When things like the Friday event happens, you don't you don't hit that. So there is a balance to be struck on both. But yeah, I I agree. Yeah, I think it's also worth elaborating like why would you not want a perp >> um so one I I do think market structure is path dependent. I don't think there's like one optimal market structure that everybody is going to evolve towards. Um if you look at like okay so this this weekend we saw one of the largest auto deleveraging events is often abbreviated ADL. Um, and automatic deleveraging is basically when the market is moving so aggressively in a perp because a perp is a, you know, it's basically you put money in a pot and two people are betting. I'm betting one way, you're betting the other way, and whoever wins gets the money in the pot. But sometimes the P&L is so big that the money in the pot cannot cover it. And when that happens, what happens is what's called auto deleveraging, which is that there there's just not enough money to go around and we're not going to be able to liquidate uh anybody uh efficiently. So, we just basically have to kick people out of the bet and say, "Sorry, you're out. You're you're no longer in this market." And um that happened. It's a very very rare event, but it happened across almost every single exchange that does PERS on Friday. Now, uh that kind of thing doesn't happen with futures, right? Futures don't work that way. And with um you know, if you think about some of the largest markets in the world, whether on you know, interest rates or um you know, commodities, they're mostly dated features, right? And there's some data features as well like OKX I think has very large data features market in crypto. Um but they're relatively small in large part because in crypto people don't worry so much about the downside. They care a lot more about the upside, right? And that's not true for a lot of these instruments because in traditional finance the reason why these instruments arose was not speculation. The reason why these instruments arose was hedging and risk management. Right? It's basically the allocation of risk to people who are better able to absorb that risk. In crypto there are there are not many natural hedggers of risk, >> right? There are people who maybe are um you know moving uh risk around because they're a market maker and they need to hedge over here over there. Um but there's not people who are like yeah you know my business is exposed to um you know lumber costs and so I'm going to go hedge lumber right there's nobody who has that in crypto except maybe miners. That's kind of the only real natural hedgers that we have in crypto. And unfortunately, miners are becoming smaller and smaller as a portion of the total supply because Bitcoin is having and uh of course Ethereum doesn't have mining. So there there there really is not that equivalent in the crypto market. And so if you look at Robin Hood, Robin Hood obviously has enormous options volume kind of as a regulatory arbitrage, right? Like why can't they just go, you know, trade on crazy margin and just get blown out when they trade on, you know, crazy margin ratios? The answer is regulation because Robin is like, "Yeah, we don't trust you to do that. That's insane. Of course, you can't do that. Um, but you can buy options because you, you know, filled in some form that said you're a smart guy and you can trade this on Robin Hood, which like every DJ on Wall Street Bets is doing. And so, this is mostly, I think, a regulatory arb is that options are a weird product. They're very difficult to reason about. Um, most retail doesn't have any idea what they're doing other than that they know that they're taking on enormous leverage when they buy a, you know, very shortdated out-of-the- option. Um, I think crypto has largely solved that problem for speculators is that it's a better product for speculators. But it's not obvious to me that a perp is a better product for somebody who's just naturally hedging because, you know, you can you can end up paying like this huge basis. You don't necessarily know over time what you're paying when you're going into a market. Whereas with the future, you know, the moment you get into the market, you know what you're what you're paying if you're holding a taxree. So that's the that's that's a big difference between those two market structures that I think sometimes goes underappreciated um is that if we were starting over again looking at um you know the corn market I don't know that you look at the corn market and say well clearly they should do pers and we should move corn over into pers. I think these markets are very different because they're composed of very different kinds of players and different kinds of flows. >> Agree. I agree. I think I think it's the fact that crypto doesn't have a lot of it's mostly speculation right now. So the moment you take hedging out of the picture which doesn't exist then you lose a big use case of traditional finance market. Right? So that's that's where we probably see that thesis is evolving differently. >> That makes sense. Um last up on pers we've seen some new perpetuals platforms offer zero maker and taker fees. Um in traditional exchanges we've seen them kind of catch on as well. Do you guys see um within crypto all dexes and sexes to start offering zero maker taker fees or do you guys think it'll just be isolated perpetual platform? >> Well, so um I I assume you're referring to lighter. Yes. >> Um so we're investors in lighter I should caveat. Um so Binance for a while had uh zero uh fees on on BTC. And actually a lot of a lot of exchanges have have had periods of time where they had zero fees uh particularly on spot. Most exchanges that do spot and derivatives derivatives the money maker. They make way more money on derivatives than they make on spot. So spot is often a loss leader or just a way to get people in the door for the real competition which is on derivatives. So having zero fees is not atypical for exchanges uh especially that are getting off the ground. Lighter is very very early um you know it's pre pre uh token and pre-TGE. Um now that being said lighter uh it's worth noting when they were in private beta they had zero fees for everybody. uh now they open to public beta it's zero fees for retail or for normal traders click traders but if you want API access uh which is more for like market makers and institutions uh there are fees so I think where lighter is evolving too is more similar to like Robin Hood so Robin Hood has uh they have they have zero fees obviously for retail zero commission trading and which is you know now more and more of the consumer brokerages were pushed by Robin Hood to go toward the zero commission trading model um but they make their money by basically auctioning off their flow which is juicy retail flow to market makers and this is called payment for order flow pee off which there was a lot of halu about it when uh there was the whole GameStop saga so I think where lighter is moving is probably more in that direction which is that you know this retail purpose flow is attractive flow market makers want to serve it and so you can charge the market makers who are serving that flow who need API access and are trading not by clicking buttons on an interface but by using APIs programmatically you can charge them and basically price discriminate, which is really what you where you want to be living at the end of the day is charge the charge the um the smart money and bring the uninformed flow in and allow them to trade as attractively as possible. >> Perfect. Um for prediction markets, um >> no, I I'm curious what Kraken has to say about that >> for Yes. I mean, I don't know. I kind of disagree with you on one part in in the sense that the retail client that comes in, they're not as um fees sensitive, right? So a client that comes in to trade pers or any other market for that matter, they're not as fees sensitive as a market maker or an institutional client that tries to cross margin or tries to do portfolio margining either within an exchange or with outside of the exchange. So seeing zero fees on both taker and maker side, I think it just creates a bit of a disorderly market in that in the sense that there's no revenue generated and that brings in more uh deals with the big market makers just to cover on the fact that you don't get your fees and rebates out of um out of the retail flow that's coming in your books. So I think I think there is a balance to be had there. Yes, you can use it as a promotional tool for sure to bring in your clients, but if you want to run a central limit order book, I think you need you need to have that balance, especially with rebates being given out to market makers in crypto to bring in the flow and reward the people who make the markets in your order books a bit differently. >> Well, so I think the so what what fundamentally is the difference between pee off, paying for order flow and just traditional charging fees in an exchange. Um the answer is transactional pricing versus value based pricing. Mhm. >> When you're when you're just charging fees on makers and takers, right? Then basically it's just, you know, whatever the market will bear with respect to fees for everybody. Everybody pays the same fees no matter how smart you are and how dumb you are, etc. Um or obviously there's, you know, you get discounts when you're uh market maker or and or or rebates and or if you're a big trader, you trade more, you get lower fees, etc. But ignore all that. Let's pretend everyone's paying the same fee. with pee off with pay for orderflow what's happening is that the market makers of course are making a lot of money >> because they're trading against people who are not very good at trading and really what you want more than just okay I want a flat fee from everyone I want some of the profits that the market makers are making right and if you're just charging a flat fee on every transaction you can't really reach into the profits they're making right if you look at Jump uh or or even bigger than Jump uh um Jane Street right Jane Street had I think the most legendary quarter in trading industry what was it they made like 10 billion or something crazy amount of money they're making mostly I guess in India on retails retail trading options right um if you're just charging you know the Indian stock exchange or whatever is charging uh you know some basis points on every trade they're making almost nothing compared to what Jane Street's making but if you auction off the flow and Jane Street is bidding in that auction to say I want to trade against this uh you know this Indian retail and they're just doing random stuff they're just punting into crazy you know out of the money options um then as an exchange you can capture a lot more of the profit that's being generated on your platform through value based pricing instead of transaction based pricing that's why I think payment for order flow is more attractive to exchanges in the limit >> if you have a lot of uninformed flow on your platform um now there's ways you can do it badly but I do think that's why Robin Hood has moved in that in that direction and why I think more and more exchanges over time are going to move in that direction >> fair yes agree on that >> perfect Um, prediction markets still have relatively low volume compared to perpetual products. Um, where do you guys see the next level of volume for prediction markets coming from? Is it sports books? Is it anything else? >> I I mean I think I think yes, they do have low volumes for sure, but um again if we look at where prediction markets were last year, we see tremendous growth in the last in the last year, right? So, Kalia I think estimating um 50 billion um annualized volumes which was a lot which is a huge growth from where they were last year. So, it's definitely not something to ignore and that's I would say I don't think there is any other asset class that appeals to more um to more use cases than prediction markets. You can appeal from um I don't know a Taylor Swift enthusiasm to a macroeconomist, right? So there is definitely a lot to be had in prediction markets and um and it's something that we would keep on seeing growing both in the US which is currently where it's predominantly based but also uh globally again we we've seen ICE and Poly Market partnering up signaling a strong institutional um demand coming in there and also Kali announcing uh global expansion in more than 100 countries. So that's definitely something that we would be seeing but yeah curious to hear from you as well. >> Well so we're investors in poly market so I obviously've known the team for a very long time. Um I think the one obvious answer is sports betting. So if you look at KHI Khi went from relatively low base of sports betting to now over 80% of their uh trading volume is in is in sports. Um you can see now there's a poly market uh app floating around that's going to be like largely driven by sports betting because that's where a lot of retail engages. The the thing to understand about prediction markets is that prediction markets are very analogous to something like Airbnb where Airbnb is I used to work at Airbnb. Airbnb is a weird company because it was basically a company that created a new consumer behavior. People did not stay in each other's houses before Airbnb, right? You stayed in your friends houses maybe, but you did not pay a stranger to stay in their house. So, it created a new kind of consumer behavior and a new wellspring of demand where none existed before. Right? In the same way, there was nothing that Poly Market was competing with to get people to bet on whether or not Taylor Swift was going to get engaged, right? That's a new consumer behavior. And whenever you have a business that's that is predicated on creating a new consumer behavior, it's a it's an uphill battle in the beginning, but when it grows, it grows like crazy. And that's kind of what you saw with Poly Market is that like Poly Market was around in the 2020 election. >> Yeah. >> Um but it was the numbers were way smaller. Now that before 2024 almost every time the poly market had any meaningful numbers it was either the election or the world cup besides that it was basically a ghost town almost nothing happening volumes are tiny tiny tiny compared to the kind of numbers that we see today only after the 2024 election has the trading volume and the engagement on poly market been basically consistent in terms of the number of traders and the amount of engagement that you're seeing which looks very much like what happened to something like Airbnb which is that before it's like nothing nothing nothing boom now thish behavior is normalized and once the behavior is normalized it just starts spreading through society and I think that's what we're going to start seeing with poly market with the integration into ice you see it now with khi and sports betting with Robin Hood is that these distribution partners and the distribution channels I think it was just it was just yesterday that um some footballer was talking about poly market that went super viral um you guys know what I'm talking about somebody somebody probably knows what I'm talking about um there was some somebody mentioned oh check the poly market yesterday in like some big interview uh and it went super viral so like that the the the way in which it's seeping into popular culture that's like a one-way ratchet that's only going to continue over time as prediction markets just become normalized in everyday life. >> Yeah. So so I think it's the breath of instrument right where you're going to be attracting the interest from but also in distribution. So now I think we only see two brokers offering it uh Weeull and Robin Hood but I think the more brokers are out there that will be offering then you increase your distribution channels whilst you increase the breadth of the offering and then that's how it exponentially probably will grow in the future. The the other thing too is that you know a lot of poly market right now is built off of retail trading and so you know sports banning obviously is a retail thing and then um even you know the markets that you see today many of them like you know Taylor Swift or you know this or that who's going to who's going to you know is President Trump going to say this word in the speech these are obviously retail type markets but some of the biggest markets on poly market are really about macroeconomic events right so one of the one of the most important markets right now is about the government shutdown which is when is the government shutdown going to end? And a lot of Wall Street analysts are looking at the poly market on when is the government shutdown going to end as an input into their models to price equities to price uh you know commodities everything everything you know these big markets really really matter for that kind of stuff. So I think what you will see through the brokers is Wall Street coming in and starting to participate on these markets again, not just to bet on them themselves, but to hedge their risk. >> And that's where a lot of these markets are going to get really, really big, right? These macroeconomic markets and geopolitical markets is where I think you're going to see the Wall Street engagement be the highest. >> And I think if you look at, you know, this is something that Wall Street's been doing for a long time. Like if you look at Fed funds futures, like people are making bets on Fed decisions at the end of the day. And Wall Street would love more of these markets. they've actually tried to create these markets in the last like you know uh 1015 years after the GFC like you know I think there was a time where they were trying to create a market on like um the jobs report and the problem is a lot of these markets you know in the context of tradfire are really expensive to bootstrap and you have a chicken or egg problem because if it's expensive to do if there's no activity there's no traders no one wants to trade there whereas I think what the interesting thing that you know we've come up with this new primitive is you can actually um you bootstrap new markets. You can probably use AI and LLMs to also like, you know, help with that further. Um, so there's going to be a lot of like interesting macro indicators that people can bet on and like, you know, we'll reference as we saw in the election. Um, and it's also really cool, I think, new social behavior as we see in South Park, right? So, um, that's I think that's something that's really going to grow like and we probably shouldn't compare it to financial markets per se because like prediction markets to me it's like, you know, it's an expression of a bet and then you're trying to financialize something that's actually not financial. Like you I don't think you're going to see someone do like, you know, like $100 million level like bet on a Chelsea and Arsenal match like anytime soon like they do on Bitcoin like every single day. So it's just fundamentally different things and like you know I think it's going to grow exponentially in the years to come. >> And how do you guys see regulation play out for prediction markets over the next few years? >> I think that's what's going to be key on the growth of prediction markets because if you if you see what happened with per example it took a lot of time for regulators to understand them to regulate them and to establish a strong um a strong regime around them. And only when you see strong regime then you kind of see the institutional adoption coming in. So the how would the kalshi and poly market bring those um prediction markets into more regulated um markets? Would it be an event regulated as a derivative? Would it be a sport bet regulated as uh under gambling regulations? I think that's where we would probably see um the the big debate with regulators and these key players trying to influence them the regulation around them. Uh and depending where that lands then you would see those distribution channels growing on the areas where you see more demand coming in. Um but at the moment I believe that events and and derivatives kind of fit those better with the sports books coming in and adapting them more than the other way around. Well, I'm I'm certainly not a regulation expert, so I wouldn't presume to know, but uh you know, at least in the US, we are now effectively a government run by crypto bros. So that puts us in a weird situation that probably at least for the next three years, it's you know, all systems go for prediction markets. Uh Khi's Khi and um Poly Market have both made friends in high places. Uh now that being said, the sports betting lobby is very upset uh about Khi in particular because Khi has now got these, you know, they got these uh sports contracts that they're offering to Americans and they claim that this is not this is not cool. You can't do this. This is, you know, we we went and got these state-by-state licenses and you're doing this under some, you know, national license as a CFTC regulated uh uh exchange. And um I don't know where that's going, but it does seem like for whatever reason now the crypto lobby in the US is like the strongest lobbyist seemingly it's like stronger than the banks somehow. Um so like the banks are really upset about the Genius Act and everybody's like shut up. You know, it's it's over. You lost. Um, so I don't I don't really know where this is going, but it does seem like uh the prediction markets, they have a lot of allies and there's a lot of belief that look um maybe the uh the sports betting guys are going to be upset that prediction markets are now um you know basically coming in and eating their lunch, but at the end of the day the innovation and the the the the positive externalities of prediction markets are so strong and so obvious to people, right? It's like some of these things it's kind of torture to explain why this is important to have. for friction markets. Everybody gets it. >> Yes. >> After this last election, everybody gets why these are valuable and why you want them to exist and to get out of their way. >> But that's exactly why regulators cannot ignore them, right? So you cannot live under the radar and just offer them um to clients without having a specific regime to offer them. So I think that's uh that's why regulators would probably try to understand them a bit more and regulate them. But where you want to land if you are one of those m markets is you want a global liquidity pool, right? You don't want to see fragmentation happening differently in Europe, differently in US and differently in other sides of the world because that's where this breaks. You want to have global liquidity where the market makers and all the institutional clients come in and offer it unified across across the world. So hopefully there's going to be some consensus around it. >> Yeah, I mean I think de facto that is not where we're going. So right now it looks like you know so Poly Market they have their global you know sort of onchain product that's on Polygon. Um, Khi only has this regulated USfacing product, but Khi is, you know, sort of an open secret now that Khi is going to be launching a crypto native product and Poly Market of course getting CTF licensed and obviously the onchain product has global users which, you know, you're not it's not KYC AML. So to the extent that that product is going to continue existing, that's going to be the offshore product, then there's going to be the onore product and vice versa for KHI. So my guess is that that's where we're going is that there's going to be this global unified liquidity that you can trade on chain and there's going to be this onshore that brokers and you know all these people and Wall Street is going to be directly flows on. >> Yeah. Exactly. And there may be some hedging between the two that keeps prices in line for markets that are that are interesting to both. But it seems like international and US onshore are probably going to be two separate magisteria >> which is similar to what we are seeing with per right you see the onchain happening regardless of what's happening around the regulation. But then you see Europe dictating onshore venues for you to to run your per US also trying to understand how to access those global liquidity pools that you have um in Europe and rest of the world to offer them in in the US without breaking and fragmenting your liquidity. So yes for sure. Yeah, >> I think that's >> but like if you look at, you know, if you look in um for DeFi, one can make the argument going back to PES that the existence of something like Hyperlid where anybody in the world with a mobile phone can decide I'm trading PES today. Um that makes it very difficult for regulation writ large to really have that much of an effect where if if you're trying to do investor protection type regulation and say, "Hey, I don't want you taking on too much leverage because that's just socially harmful." um well you know some guy in you know whatever you know very regulated venue in France or whatever it is can just say I don't care I'm gonna go on hyper liquid I'm gonna lever up 50x and just you know get liquidated in in 5 seconds and now for poly market I think that argument is less true because of the fact that the kind of liquidity and the kind of traders that are available in the polygon onchain market are so materially different than the kind of traders and the kind of liquidity that's going to be available if you plug into NY um that's this is a totally different universe. Uh and the kind of products that are going to get traded at the scale that they're going to get traded are just totally different. Now that being said, again, as long as there's a unified market or as long as there's a market, there's somebody who can unify that market, right? If there's liquidity on the regulated onchain or sorry, the regulated off-chain polymarket venue, then somebody at least one person can basically play arbitrage between the two and match the liquidity from one venue to the other. And so I do think what you will see even if only the onshore uh venue has all these big you know kind of traditional players uh doing real size and providing real liquidity there that will get matched onto the onchain venue the same way that you know RFQ systems that exist in in DeFi spot they play this bridge where even if the liquidity is not there that person even you know if they're let's say a firm here in in London they can play the middleman and give you Binance level liquidity on chain just by basically playing a a go-between And so I think you'll see the same thing happen with liquid with the prediction markets onchain will become massively more liquid because of the offchain liquidity. >> Perfect. Um we have just under two minutes. I want to ask each of you for a prediction or a hot take for either prediction markets or perpetuals. I'll let you guys decide on who wants to go first >> or I can pick if you really want me. >> You should pick. >> Yeah. >> Alex, let's go. I can start. So yeah, I think prediction markets as I said would definitely we would be seeing a lot more happening in prediction markets in the next year. Already they're making a lot of noise already they're making friends in high places. So I think that's definitely um an area where we should be looking out especially as more distribution channels get unlocked in the various sides of of the world. So for sure a big growth trend coming in there. Um per I think are already well established. We have been working very closely with regulators globally to ensure that there is uh less fragmentation when it comes to regulating per so I'm very bullish on on that adoption that will come from institutional clients especially on onore venues as well um bigger and more regulated institutional clients will be coming in which would bring that flow that we would see with options and structure products start to getting off in in the sense that we've been looking for. So that's that's my take. >> Yeah. Um I think in terms of per I would say like equity per could eclipse the retail like you know equity options market in the next three years is my prediction and maybe on prediction markets um I think you know we talk a lot about regulation. I actually think one of the bigger challenges is getting an app through the app store for like broad distribution if you really want to go through those mainstream sports betting um you know sort of use cases. So would love to see it. I think that's how you really build a brand and Poly Markets has built a strong brand there. >> Boy, I don't know that I have any hot takes. Uh I think I kind of exhausted them already. But uh I main thing is I'm I'm pretty I'm pretty bullish on both. Um I think probably not that much is going to change. You're just going to see both of those grow. They're just going to keep going up. >> Perfect. Um, fantastic guys. Thank you so much for participating in this panel. This was fantastic. >> Thank you so much. >> Thanks everybody.
Perps & Predictions: How Crypto Will Transform TradFi Derivatives | DAS London 2025 | Day 1 | Invest
Summary
Transcript
Thank you all for coming. I'm Bukachu. I'm an analyst at Blockworks Research. And today I'm going to be the moderator for the panel pers and predictions. How will crypto transform stratfight derivatives with hash keshi monteo and Alexia Teodor. Before we get started, would you guys like to give an introduction of yourselves? >> I'm a management partner at Dragonfly. We're crypto investment fund. We invest in a lot of things at our per and prediction markets. >> Very good. >> Hi everyone. I'm Min and I'm the managing partner of Ethereal Ventures. You know, work quite a bit of a seed. We're early stage crypto investment fund. Uh we have a global mandate focusing mostly on preed and seed opportunities and we are set up by the former investment team of consensus. >> Hi everyone, I'm Alexia. I'm looking after Kraken derivatives uh at Kraken. >> Very good. Um to get us started, we had a very very eventful Friday. How do you guys think sexes and dexes handled um the liquidations and the events? >> Not great is think is the main answer. Not great. So uh for those of you who are maybe peacefully sleeping, you don't own any um any derivatives. Friday was the largest liquidation event in crypto history. Um huge huge amounts of capital that was that got um liquidated on chain and offchain on centralized exchanges. I think the the standoff failure probably of the day was Binance. Binance was down for you know almost over an hour. Um they had huge uh massive DPEGs. I think you saw um Atom went to like one you know less than a cent. Uh you saw some of their assets DPEG massively. They had two LSTs and then they had this idiosyncratic event where Athena which was or USD which was trading pretty close to a dollar on B on by bit I think buy it went down to like 95 cents on curve it was like at a dollar and then on Binance it wicked down had basically a flash crash on Binance at like 68 cents. So nobody could get in and out of Binance. Binance of course is the largest venue in the world for derivatives and so it's it's kind of the market. It's like 50% market share in derivatives. Um so that was really really bad. Defi on the other hand performed very well. So if you look of course you know the the spot was all fine but the um uh if you look at um Hyperlid Hyperlid performed fairly well. There were some API issues but for the most part everything was very orderly. Everything was up through the through the period of the market carnage. Um they actually liquidated huge amounts completely transparently which is also very interesting because there's a lot of stats going around that hyperlquid liquidated more than Binance. It's almost certainly not true, but it's just that the way they report their liquidations is reflective of reality. Whereas Binance, they they report only on I think it's like a second by second basis. Meaning that if there's multiple liquidations in a single second, they only report one, >> which is very weird, but that's the way that it works. Um, and then lastly, the lending facilities on chain were all beautiful. So, a morpho, everything was liquidated uh completely without a hitch. No bad debt anywhere that you saw in like the old school v1 defi. So overall mixed record, but these are these are how you learn. You know, crypto kind of it performs out in public and through these stress tests it gets better. And I I think that's the same lesson this time. >> Perfect. Um, and how do you guys see sexes versus dexes, the competition shape up over the next year? We've seen dexes increasingly gain market share. Do you think it continues? Well, I mean, I think if you look at spec specifically for like pers, right? I think like sexes are still at 97 98% of like the the volume that we're seeing, but >> not not true anymore with Aster, >> but not like that's changing very quickly though. I mean, depends how you classify volume sometimes. >> Depends. Volume is in the eye of the whole. >> Yeah, absolutely. Um and I think you know you with hyperlquin and all that that's certainly like you know slowly slowly getting chipped away which I think is really interesting. I think ultimately you know the the global market is um is a big one. If you look at sort of trady I think you have like dominance that's regional. It doesn't necessarily make sense like you know I think a lot of the market structures that we're seeing we're used to in trading in crypto just doesn't make sense to sustain. Um so you're just going to get a lot of options for like you know uh different people and the when users have more options I think it's better for them and as uh said like defi protocols are getting seasoned um and people are trusting them more and that's really cool to see because a lot of these like you know people have been working hard on them for the last seven eight years >> and and I think you would you would continue seeing the upward trend on the dexes that we are seeing in the past in the past year it's impossible to ignore that's where innovation happens that's where things come in first and then but on the other hand you would keep on seeing sexes keep on the regulation they have the fiat um on ram rails coming in so I think one would complement the other without one taking over or vice versa so I think you you need both and you we would probably be seeing more of that 10% climbing up um in the past in the next year >> yeah I mean if you look at the the story for DeFi has been when DeFi first started if you look back like 2018 2019 um even Before Defi summer, DeFi was mostly an experiment and it was, you know, small dollars relative to what was happening in CFI and it started from a base of like, you know, basis points of what was happening in in in the the the centralized exchange space and that number has mostly just been monotonically increasing. Um, it obviously shot up during periods of time when there's a lot of onchain volume. Uh but what we're seeing now with this new generation of exchanges, if you look at things like Hyperlquid, things like lighter, um to some extent Aster, although Aster obviously has a lot of question marks around it with accusations that they're faking their volume or they're sort of, you know, you can't actually tell what the real volume is just by looking on chain. But with a lot of these exchanges, what you're seeing is that they're getting a lot better really fast. And a lot of that if you if you just look at the V1 of perpetuals on chain, right, the DYDX white paper came out in 2018. I remember the DYDX white I think it was actually December of 2017 when the DYDX white paper came out and that was the first shot at what it would look like to do derivatives on chain. And DIYXV1 was a piece of It was an awful product. It was totally unusable. I mean the same thing is very much true if you look at prediction markets, right? Prediction markets old idea. prediction markets are in the in the Ethereum white paper. Um, which was like 2014 that that was written. Um, and it took a long time for either of these products to really work, right? So like DDX white paper 2018, it really took till like 2024 for Hyperlid to make per scale that was actually competitive with centralized exchanges. Same thing with prediction markets. Prediction markets, Augur was the first real prediction market. I remember I used Augur. It was horrible. an absolutely unusable product. Um, and it really took until Poly Market really in like 2024 to have the liquidity and the trading experience and the UX to be good enough and the on-ramps to be good enough to actually be a consumer product. And so I think the lesson for for looking at the the competition between DeFi and CFI is that DeFi starts off looking like a toy. It starts off just completely unbearably bad and over time it takes a seasoning like you put it for it to become more liquid, more usable, to have the on-ramps better, to have the UX better, to dial in the mechanics that you need to do this in a decentralized way. Um, but it always eventually can get to the point of being competitive and then it has the the advantage that like look, Hyperlid had no downtime. >> Binance was down for two hours. Hyperl zero downtime, zero mistakes. It was it was programmatic because it's a blockchain. No blockchains went down on Friday. Ethereum did not go down. Salana did not go down. Nothing went down. Uh it was decentralized exchanges that ended up having the instability on Friday. >> And I think it's times like this where, you know, protocols also realize what people care about. So now there's this whole, you know, like CFI type execution and DeFi settlement. And that's allowed protocols to sort of reduce fees, like improve latency um a lot. And ultimately like you know that just takes a lot of experimentation to sort of get all the infrastructure piece in place and figure out what people care about there. You don't need to put every single thing on chain. >> That's a great point. And like if you look at RFQ systems which is becoming more and more how spot is happening on chain. >> These RFQ systems you know we used to think okay well it's DeFi if everything is onchain and there's no offchain component. Whereas with these RFQ systems, it's literally like a market maker that like, you know, has an office in London that is filling the orders, you know, and like they're probably hedging it on Kraken or on Coinbase or whatever, you know, Binance, whatever. Um, and these markets are one the the two are blending into each other, right? You look at Hyperlid, for example, Hyperlid is creating USDH, their stable coin, which is issued by Bridge, which is a centralized company, right? Right. I mean, it's literally fiat back stable coin that's now going to be the canonical stable coin for a decentralized exchange. Um, you know, same thing with Athena. Athena has reserves sitting at custodians um and has, you know, they have positions on Binance and on OKX and whatever. Um, so all of these thing and you know, even with a A has uh, you know, they they've got these um, RWA markets that you have to be KYC in order to use. So I think what you're seeing also is this melding between the two where it's not quite DeFi is here, CFI is here, right? Even with Kraken, Kraken, you guys now have an L2. Coinbase has uh they the morpho integration. All this stuff is becoming one big market. >> Exactly. >> Which is always, I think, what what it was supposed to be. >> Yep. >> Yeah. Um we mentioned perpetuals and prediction markets getting better and better. One thing that hasn't gotten much better is options. >> We're still not using options a lot um in crypto, I think, both on the dexes and the sexes. Why do you guys think that is? >> Yeah, it's it's an interesting question. We keep also debating in in Ken as well. Um I think if we if we take a step back to see what's the expectation here that there is a lot of expectation when we look into traditional finance markets. So in traditional finance markets you see options taking up multiples of volumes when it comes to derivatives. Um they are a lot more interesting products to trade. You can trade on volatility on um on speculation. So you can do a lot more things that you can do with futures which is just a delta one product. Uh but we don't see this in crypto. in crypto it's roughly 3% of the of the derivative space. So it really doesn't trade as um as much. So why is that? There are many theories, right? I think the the one I mostly believe in is that pers are so much better. There isn't a per product in traditional finance that um that does that for the retail client. So pers are simple. You capture the speculative angle of derivatives and it's very easy to trade it in and out. uh no expirations and much more predictable funding rates coming in. So I think that's a main main use case that it's been taken out of options and because you don't we we have also not seen anyone nailing down the user experience as well for the retail client. So you you log into exchanges and you see they're built for makers not for takers. So then that takes out that flow element which institutional clients need and it's back to that chicken and egg situation. no flow, no institutional demand either. And and I think one more point here is that the flow of options is too concentrated on a few exchanges which are offshore and that also doesn't bring in that um institutional um demand. So once we see more regulated exchanges bringing in or taking off for options, then you probably see more institutional demand coming in. >> Perfect. Um, one thing you mentioned there is that perpetuals are uh what we really like in crypto. Um, one question I've been thinking about is tokenization versus propification like instead of bringing some of these real world assets on chain, wouldn't it make more sense to just launch perpetuals markets for this? Um, do you guys think this makes sense or do you think that propification is stupid and we should just focus on tokenization? So you know if you think about say tokenizing equity at least on day one like in my opinion you have a worse product because you have worse liquidity and it's tougher to trade like you will have you know other benefits from that tokenization you can use it as you know collateral for getting a loan where it might be more more difficult and you can cross margin into crypto all of that um I'm not sure how big that market is whereas I think when you say do an equity pretty it's just you know such an elegant expression of leverage and also you know with the continuous sort of price function you can use that for hedging in such better ways I think related to like you know the question of options like I actually think if you look at like Robin Hood why there was such an explosion of options and people look at that with crypto why hasn't that happened I'm like well I think it's because like there's no equity perks yet you know it's just a like by far better product I think it's one of the best inventions of crypto and you know there's certainly some challenges es with stuff like equity perpetuals that are leading people to focus on tokenization first like you know there's um you know for a lot of equities you have a lot of discrete price jumps so you have to figure out how to deal with like stuff like corporate actions like dividends and whatnot you don't really have that in crypto right now uh but I do think with a lot of experimentation you'll be able to solve that there was a lot of regulation was preventing that experimentation and now I think that those hurdles have been alleviated somewhat um and there are a lot of great minds in crypto trying to look at that. One example I can like you know that kind of gives me hope that I think equity pers and the challenges of it can be solved quite quickly is we've somehow figured out uh you know how to do per uh pre-launch like tokens and they're working decently well right and that is a pretty big problem with like not having an oracle for that um and I think there's demand like you know volumes are still relatively small but I think it'll grow quickly and I think we'll probably see equity per develop quite a lot in the next few years. I I I think that's definitely going to develop much faster. It's much easier to see per purpification of traditional assets because it's so much easier to list. But then it goes down also to the initial point of um how reliable is that oracle to make sure that you keep on valuing and keep on managing that risk in a reliable way. When things like the Friday event happens, you don't you don't hit that. So there is a balance to be struck on both. But yeah, I I agree. Yeah, I think it's also worth elaborating like why would you not want a perp >> um so one I I do think market structure is path dependent. I don't think there's like one optimal market structure that everybody is going to evolve towards. Um if you look at like okay so this this weekend we saw one of the largest auto deleveraging events is often abbreviated ADL. Um, and automatic deleveraging is basically when the market is moving so aggressively in a perp because a perp is a, you know, it's basically you put money in a pot and two people are betting. I'm betting one way, you're betting the other way, and whoever wins gets the money in the pot. But sometimes the P&L is so big that the money in the pot cannot cover it. And when that happens, what happens is what's called auto deleveraging, which is that there there's just not enough money to go around and we're not going to be able to liquidate uh anybody uh efficiently. So, we just basically have to kick people out of the bet and say, "Sorry, you're out. You're you're no longer in this market." And um that happened. It's a very very rare event, but it happened across almost every single exchange that does PERS on Friday. Now, uh that kind of thing doesn't happen with futures, right? Futures don't work that way. And with um you know, if you think about some of the largest markets in the world, whether on you know, interest rates or um you know, commodities, they're mostly dated features, right? And there's some data features as well like OKX I think has very large data features market in crypto. Um but they're relatively small in large part because in crypto people don't worry so much about the downside. They care a lot more about the upside, right? And that's not true for a lot of these instruments because in traditional finance the reason why these instruments arose was not speculation. The reason why these instruments arose was hedging and risk management. Right? It's basically the allocation of risk to people who are better able to absorb that risk. In crypto there are there are not many natural hedggers of risk, >> right? There are people who maybe are um you know moving uh risk around because they're a market maker and they need to hedge over here over there. Um but there's not people who are like yeah you know my business is exposed to um you know lumber costs and so I'm going to go hedge lumber right there's nobody who has that in crypto except maybe miners. That's kind of the only real natural hedgers that we have in crypto. And unfortunately, miners are becoming smaller and smaller as a portion of the total supply because Bitcoin is having and uh of course Ethereum doesn't have mining. So there there there really is not that equivalent in the crypto market. And so if you look at Robin Hood, Robin Hood obviously has enormous options volume kind of as a regulatory arbitrage, right? Like why can't they just go, you know, trade on crazy margin and just get blown out when they trade on, you know, crazy margin ratios? The answer is regulation because Robin is like, "Yeah, we don't trust you to do that. That's insane. Of course, you can't do that. Um, but you can buy options because you, you know, filled in some form that said you're a smart guy and you can trade this on Robin Hood, which like every DJ on Wall Street Bets is doing. And so, this is mostly, I think, a regulatory arb is that options are a weird product. They're very difficult to reason about. Um, most retail doesn't have any idea what they're doing other than that they know that they're taking on enormous leverage when they buy a, you know, very shortdated out-of-the- option. Um, I think crypto has largely solved that problem for speculators is that it's a better product for speculators. But it's not obvious to me that a perp is a better product for somebody who's just naturally hedging because, you know, you can you can end up paying like this huge basis. You don't necessarily know over time what you're paying when you're going into a market. Whereas with the future, you know, the moment you get into the market, you know what you're what you're paying if you're holding a taxree. So that's the that's that's a big difference between those two market structures that I think sometimes goes underappreciated um is that if we were starting over again looking at um you know the corn market I don't know that you look at the corn market and say well clearly they should do pers and we should move corn over into pers. I think these markets are very different because they're composed of very different kinds of players and different kinds of flows. >> Agree. I agree. I think I think it's the fact that crypto doesn't have a lot of it's mostly speculation right now. So the moment you take hedging out of the picture which doesn't exist then you lose a big use case of traditional finance market. Right? So that's that's where we probably see that thesis is evolving differently. >> That makes sense. Um last up on pers we've seen some new perpetuals platforms offer zero maker and taker fees. Um in traditional exchanges we've seen them kind of catch on as well. Do you guys see um within crypto all dexes and sexes to start offering zero maker taker fees or do you guys think it'll just be isolated perpetual platform? >> Well, so um I I assume you're referring to lighter. Yes. >> Um so we're investors in lighter I should caveat. Um so Binance for a while had uh zero uh fees on on BTC. And actually a lot of a lot of exchanges have have had periods of time where they had zero fees uh particularly on spot. Most exchanges that do spot and derivatives derivatives the money maker. They make way more money on derivatives than they make on spot. So spot is often a loss leader or just a way to get people in the door for the real competition which is on derivatives. So having zero fees is not atypical for exchanges uh especially that are getting off the ground. Lighter is very very early um you know it's pre pre uh token and pre-TGE. Um now that being said lighter uh it's worth noting when they were in private beta they had zero fees for everybody. uh now they open to public beta it's zero fees for retail or for normal traders click traders but if you want API access uh which is more for like market makers and institutions uh there are fees so I think where lighter is evolving too is more similar to like Robin Hood so Robin Hood has uh they have they have zero fees obviously for retail zero commission trading and which is you know now more and more of the consumer brokerages were pushed by Robin Hood to go toward the zero commission trading model um but they make their money by basically auctioning off their flow which is juicy retail flow to market makers and this is called payment for order flow pee off which there was a lot of halu about it when uh there was the whole GameStop saga so I think where lighter is moving is probably more in that direction which is that you know this retail purpose flow is attractive flow market makers want to serve it and so you can charge the market makers who are serving that flow who need API access and are trading not by clicking buttons on an interface but by using APIs programmatically you can charge them and basically price discriminate, which is really what you where you want to be living at the end of the day is charge the charge the um the smart money and bring the uninformed flow in and allow them to trade as attractively as possible. >> Perfect. Um for prediction markets, um >> no, I I'm curious what Kraken has to say about that >> for Yes. I mean, I don't know. I kind of disagree with you on one part in in the sense that the retail client that comes in, they're not as um fees sensitive, right? So a client that comes in to trade pers or any other market for that matter, they're not as fees sensitive as a market maker or an institutional client that tries to cross margin or tries to do portfolio margining either within an exchange or with outside of the exchange. So seeing zero fees on both taker and maker side, I think it just creates a bit of a disorderly market in that in the sense that there's no revenue generated and that brings in more uh deals with the big market makers just to cover on the fact that you don't get your fees and rebates out of um out of the retail flow that's coming in your books. So I think I think there is a balance to be had there. Yes, you can use it as a promotional tool for sure to bring in your clients, but if you want to run a central limit order book, I think you need you need to have that balance, especially with rebates being given out to market makers in crypto to bring in the flow and reward the people who make the markets in your order books a bit differently. >> Well, so I think the so what what fundamentally is the difference between pee off, paying for order flow and just traditional charging fees in an exchange. Um the answer is transactional pricing versus value based pricing. Mhm. >> When you're when you're just charging fees on makers and takers, right? Then basically it's just, you know, whatever the market will bear with respect to fees for everybody. Everybody pays the same fees no matter how smart you are and how dumb you are, etc. Um or obviously there's, you know, you get discounts when you're uh market maker or and or or rebates and or if you're a big trader, you trade more, you get lower fees, etc. But ignore all that. Let's pretend everyone's paying the same fee. with pee off with pay for orderflow what's happening is that the market makers of course are making a lot of money >> because they're trading against people who are not very good at trading and really what you want more than just okay I want a flat fee from everyone I want some of the profits that the market makers are making right and if you're just charging a flat fee on every transaction you can't really reach into the profits they're making right if you look at Jump uh or or even bigger than Jump uh um Jane Street right Jane Street had I think the most legendary quarter in trading industry what was it they made like 10 billion or something crazy amount of money they're making mostly I guess in India on retails retail trading options right um if you're just charging you know the Indian stock exchange or whatever is charging uh you know some basis points on every trade they're making almost nothing compared to what Jane Street's making but if you auction off the flow and Jane Street is bidding in that auction to say I want to trade against this uh you know this Indian retail and they're just doing random stuff they're just punting into crazy you know out of the money options um then as an exchange you can capture a lot more of the profit that's being generated on your platform through value based pricing instead of transaction based pricing that's why I think payment for order flow is more attractive to exchanges in the limit >> if you have a lot of uninformed flow on your platform um now there's ways you can do it badly but I do think that's why Robin Hood has moved in that in that direction and why I think more and more exchanges over time are going to move in that direction >> fair yes agree on that >> perfect Um, prediction markets still have relatively low volume compared to perpetual products. Um, where do you guys see the next level of volume for prediction markets coming from? Is it sports books? Is it anything else? >> I I mean I think I think yes, they do have low volumes for sure, but um again if we look at where prediction markets were last year, we see tremendous growth in the last in the last year, right? So, Kalia I think estimating um 50 billion um annualized volumes which was a lot which is a huge growth from where they were last year. So, it's definitely not something to ignore and that's I would say I don't think there is any other asset class that appeals to more um to more use cases than prediction markets. You can appeal from um I don't know a Taylor Swift enthusiasm to a macroeconomist, right? So there is definitely a lot to be had in prediction markets and um and it's something that we would keep on seeing growing both in the US which is currently where it's predominantly based but also uh globally again we we've seen ICE and Poly Market partnering up signaling a strong institutional um demand coming in there and also Kali announcing uh global expansion in more than 100 countries. So that's definitely something that we would be seeing but yeah curious to hear from you as well. >> Well so we're investors in poly market so I obviously've known the team for a very long time. Um I think the one obvious answer is sports betting. So if you look at KHI Khi went from relatively low base of sports betting to now over 80% of their uh trading volume is in is in sports. Um you can see now there's a poly market uh app floating around that's going to be like largely driven by sports betting because that's where a lot of retail engages. The the thing to understand about prediction markets is that prediction markets are very analogous to something like Airbnb where Airbnb is I used to work at Airbnb. Airbnb is a weird company because it was basically a company that created a new consumer behavior. People did not stay in each other's houses before Airbnb, right? You stayed in your friends houses maybe, but you did not pay a stranger to stay in their house. So, it created a new kind of consumer behavior and a new wellspring of demand where none existed before. Right? In the same way, there was nothing that Poly Market was competing with to get people to bet on whether or not Taylor Swift was going to get engaged, right? That's a new consumer behavior. And whenever you have a business that's that is predicated on creating a new consumer behavior, it's a it's an uphill battle in the beginning, but when it grows, it grows like crazy. And that's kind of what you saw with Poly Market is that like Poly Market was around in the 2020 election. >> Yeah. >> Um but it was the numbers were way smaller. Now that before 2024 almost every time the poly market had any meaningful numbers it was either the election or the world cup besides that it was basically a ghost town almost nothing happening volumes are tiny tiny tiny compared to the kind of numbers that we see today only after the 2024 election has the trading volume and the engagement on poly market been basically consistent in terms of the number of traders and the amount of engagement that you're seeing which looks very much like what happened to something like Airbnb which is that before it's like nothing nothing nothing boom now thish behavior is normalized and once the behavior is normalized it just starts spreading through society and I think that's what we're going to start seeing with poly market with the integration into ice you see it now with khi and sports betting with Robin Hood is that these distribution partners and the distribution channels I think it was just it was just yesterday that um some footballer was talking about poly market that went super viral um you guys know what I'm talking about somebody somebody probably knows what I'm talking about um there was some somebody mentioned oh check the poly market yesterday in like some big interview uh and it went super viral so like that the the the way in which it's seeping into popular culture that's like a one-way ratchet that's only going to continue over time as prediction markets just become normalized in everyday life. >> Yeah. So so I think it's the breath of instrument right where you're going to be attracting the interest from but also in distribution. So now I think we only see two brokers offering it uh Weeull and Robin Hood but I think the more brokers are out there that will be offering then you increase your distribution channels whilst you increase the breadth of the offering and then that's how it exponentially probably will grow in the future. The the other thing too is that you know a lot of poly market right now is built off of retail trading and so you know sports banning obviously is a retail thing and then um even you know the markets that you see today many of them like you know Taylor Swift or you know this or that who's going to who's going to you know is President Trump going to say this word in the speech these are obviously retail type markets but some of the biggest markets on poly market are really about macroeconomic events right so one of the one of the most important markets right now is about the government shutdown which is when is the government shutdown going to end? And a lot of Wall Street analysts are looking at the poly market on when is the government shutdown going to end as an input into their models to price equities to price uh you know commodities everything everything you know these big markets really really matter for that kind of stuff. So I think what you will see through the brokers is Wall Street coming in and starting to participate on these markets again, not just to bet on them themselves, but to hedge their risk. >> And that's where a lot of these markets are going to get really, really big, right? These macroeconomic markets and geopolitical markets is where I think you're going to see the Wall Street engagement be the highest. >> And I think if you look at, you know, this is something that Wall Street's been doing for a long time. Like if you look at Fed funds futures, like people are making bets on Fed decisions at the end of the day. And Wall Street would love more of these markets. they've actually tried to create these markets in the last like you know uh 1015 years after the GFC like you know I think there was a time where they were trying to create a market on like um the jobs report and the problem is a lot of these markets you know in the context of tradfire are really expensive to bootstrap and you have a chicken or egg problem because if it's expensive to do if there's no activity there's no traders no one wants to trade there whereas I think what the interesting thing that you know we've come up with this new primitive is you can actually um you bootstrap new markets. You can probably use AI and LLMs to also like, you know, help with that further. Um, so there's going to be a lot of like interesting macro indicators that people can bet on and like, you know, we'll reference as we saw in the election. Um, and it's also really cool, I think, new social behavior as we see in South Park, right? So, um, that's I think that's something that's really going to grow like and we probably shouldn't compare it to financial markets per se because like prediction markets to me it's like, you know, it's an expression of a bet and then you're trying to financialize something that's actually not financial. Like you I don't think you're going to see someone do like, you know, like $100 million level like bet on a Chelsea and Arsenal match like anytime soon like they do on Bitcoin like every single day. So it's just fundamentally different things and like you know I think it's going to grow exponentially in the years to come. >> And how do you guys see regulation play out for prediction markets over the next few years? >> I think that's what's going to be key on the growth of prediction markets because if you if you see what happened with per example it took a lot of time for regulators to understand them to regulate them and to establish a strong um a strong regime around them. And only when you see strong regime then you kind of see the institutional adoption coming in. So the how would the kalshi and poly market bring those um prediction markets into more regulated um markets? Would it be an event regulated as a derivative? Would it be a sport bet regulated as uh under gambling regulations? I think that's where we would probably see um the the big debate with regulators and these key players trying to influence them the regulation around them. Uh and depending where that lands then you would see those distribution channels growing on the areas where you see more demand coming in. Um but at the moment I believe that events and and derivatives kind of fit those better with the sports books coming in and adapting them more than the other way around. Well, I'm I'm certainly not a regulation expert, so I wouldn't presume to know, but uh you know, at least in the US, we are now effectively a government run by crypto bros. So that puts us in a weird situation that probably at least for the next three years, it's you know, all systems go for prediction markets. Uh Khi's Khi and um Poly Market have both made friends in high places. Uh now that being said, the sports betting lobby is very upset uh about Khi in particular because Khi has now got these, you know, they got these uh sports contracts that they're offering to Americans and they claim that this is not this is not cool. You can't do this. This is, you know, we we went and got these state-by-state licenses and you're doing this under some, you know, national license as a CFTC regulated uh uh exchange. And um I don't know where that's going, but it does seem like for whatever reason now the crypto lobby in the US is like the strongest lobbyist seemingly it's like stronger than the banks somehow. Um so like the banks are really upset about the Genius Act and everybody's like shut up. You know, it's it's over. You lost. Um, so I don't I don't really know where this is going, but it does seem like uh the prediction markets, they have a lot of allies and there's a lot of belief that look um maybe the uh the sports betting guys are going to be upset that prediction markets are now um you know basically coming in and eating their lunch, but at the end of the day the innovation and the the the the positive externalities of prediction markets are so strong and so obvious to people, right? It's like some of these things it's kind of torture to explain why this is important to have. for friction markets. Everybody gets it. >> Yes. >> After this last election, everybody gets why these are valuable and why you want them to exist and to get out of their way. >> But that's exactly why regulators cannot ignore them, right? So you cannot live under the radar and just offer them um to clients without having a specific regime to offer them. So I think that's uh that's why regulators would probably try to understand them a bit more and regulate them. But where you want to land if you are one of those m markets is you want a global liquidity pool, right? You don't want to see fragmentation happening differently in Europe, differently in US and differently in other sides of the world because that's where this breaks. You want to have global liquidity where the market makers and all the institutional clients come in and offer it unified across across the world. So hopefully there's going to be some consensus around it. >> Yeah, I mean I think de facto that is not where we're going. So right now it looks like you know so Poly Market they have their global you know sort of onchain product that's on Polygon. Um, Khi only has this regulated USfacing product, but Khi is, you know, sort of an open secret now that Khi is going to be launching a crypto native product and Poly Market of course getting CTF licensed and obviously the onchain product has global users which, you know, you're not it's not KYC AML. So to the extent that that product is going to continue existing, that's going to be the offshore product, then there's going to be the onore product and vice versa for KHI. So my guess is that that's where we're going is that there's going to be this global unified liquidity that you can trade on chain and there's going to be this onshore that brokers and you know all these people and Wall Street is going to be directly flows on. >> Yeah. Exactly. And there may be some hedging between the two that keeps prices in line for markets that are that are interesting to both. But it seems like international and US onshore are probably going to be two separate magisteria >> which is similar to what we are seeing with per right you see the onchain happening regardless of what's happening around the regulation. But then you see Europe dictating onshore venues for you to to run your per US also trying to understand how to access those global liquidity pools that you have um in Europe and rest of the world to offer them in in the US without breaking and fragmenting your liquidity. So yes for sure. Yeah, >> I think that's >> but like if you look at, you know, if you look in um for DeFi, one can make the argument going back to PES that the existence of something like Hyperlid where anybody in the world with a mobile phone can decide I'm trading PES today. Um that makes it very difficult for regulation writ large to really have that much of an effect where if if you're trying to do investor protection type regulation and say, "Hey, I don't want you taking on too much leverage because that's just socially harmful." um well you know some guy in you know whatever you know very regulated venue in France or whatever it is can just say I don't care I'm gonna go on hyper liquid I'm gonna lever up 50x and just you know get liquidated in in 5 seconds and now for poly market I think that argument is less true because of the fact that the kind of liquidity and the kind of traders that are available in the polygon onchain market are so materially different than the kind of traders and the kind of liquidity that's going to be available if you plug into NY um that's this is a totally different universe. Uh and the kind of products that are going to get traded at the scale that they're going to get traded are just totally different. Now that being said, again, as long as there's a unified market or as long as there's a market, there's somebody who can unify that market, right? If there's liquidity on the regulated onchain or sorry, the regulated off-chain polymarket venue, then somebody at least one person can basically play arbitrage between the two and match the liquidity from one venue to the other. And so I do think what you will see even if only the onshore uh venue has all these big you know kind of traditional players uh doing real size and providing real liquidity there that will get matched onto the onchain venue the same way that you know RFQ systems that exist in in DeFi spot they play this bridge where even if the liquidity is not there that person even you know if they're let's say a firm here in in London they can play the middleman and give you Binance level liquidity on chain just by basically playing a a go-between And so I think you'll see the same thing happen with liquid with the prediction markets onchain will become massively more liquid because of the offchain liquidity. >> Perfect. Um we have just under two minutes. I want to ask each of you for a prediction or a hot take for either prediction markets or perpetuals. I'll let you guys decide on who wants to go first >> or I can pick if you really want me. >> You should pick. >> Yeah. >> Alex, let's go. I can start. So yeah, I think prediction markets as I said would definitely we would be seeing a lot more happening in prediction markets in the next year. Already they're making a lot of noise already they're making friends in high places. So I think that's definitely um an area where we should be looking out especially as more distribution channels get unlocked in the various sides of of the world. So for sure a big growth trend coming in there. Um per I think are already well established. We have been working very closely with regulators globally to ensure that there is uh less fragmentation when it comes to regulating per so I'm very bullish on on that adoption that will come from institutional clients especially on onore venues as well um bigger and more regulated institutional clients will be coming in which would bring that flow that we would see with options and structure products start to getting off in in the sense that we've been looking for. So that's that's my take. >> Yeah. Um I think in terms of per I would say like equity per could eclipse the retail like you know equity options market in the next three years is my prediction and maybe on prediction markets um I think you know we talk a lot about regulation. I actually think one of the bigger challenges is getting an app through the app store for like broad distribution if you really want to go through those mainstream sports betting um you know sort of use cases. So would love to see it. I think that's how you really build a brand and Poly Markets has built a strong brand there. >> Boy, I don't know that I have any hot takes. Uh I think I kind of exhausted them already. But uh I main thing is I'm I'm pretty I'm pretty bullish on both. Um I think probably not that much is going to change. You're just going to see both of those grow. They're just going to keep going up. >> Perfect. Um, fantastic guys. Thank you so much for participating in this panel. This was fantastic. >> Thank you so much. >> Thanks everybody.