Building the Infrastructure for Onchain Volatility Markets

Transcript

[applause] Hi all, I'm Dan from Risk. I'm the co-founder of Risk and Risk. We are building the infrastructure for the onchain volatility markets. So I been in the last five or six years basically building options and being obsessed with building options and there is some revelation that I think we figured it out in this industry that is pretty much this uh options don't work in DeFi. So every time I talk to someone in the last three or four years I'm like I'm building an options protocol and the first reaction yeah but people don't want options options don't work in DeFi.

Why you even building this? So the thing is I actually tend to agree with them. After years of building I realized that they were right. They're not crazy people. And the reason why options are very hard to work especially in defy is that there are different challenges that we you know we need to face and in product like for example the order book exchanges. So we've seen product like hyperlid they have an order book is great attract a lot of liquidity. But when it comes to actually options the the challenge is completely different. Now you are targeting very professional traders. It's very hard to bootstrap liquidity and I can give you a very simple example like when you have a per market on BTC you have one order

book. When you have options market on BTC you need an order book for each strike price each expert each um um you know asset and uh so boots and call. So you basically have hundreds of order book and what happened in reality is like you can only have a few very liquid order books but anything else actually happens to not be liquid enough and the cost of the liquidity is very high. So most of the order book exchanges didn't work in the past we also done options vault. Options vault was a way to package options into a strategy that it was yield generated. So the thing it was working is that you as a user you deposit an asset and the vault is running a strategy for you. Those strategies were very systematic back

then and at the end of the g the day basically what happened was like they were just losing money because too systematic very easy uh to to front run and eventually most of them they ended up dying. There is a third alternative out there. It's not purely defy but it's basically how people do options most of the time those days. It's OTC trade. So you go to an option desk and you're like hey I would like to do a trade. Give me a price. If you agree on the price you do the trade. So basically that happens in a very nondi way. It's mostly like what happens in thread five. We have a zero transparency is gated. It's a manual process. So we as risk we built a product as well into this industry. This was our V1

three or four years ago was very beautiful UI at least in my opinion but still very complex. And what happened is we tried we failed. um we were targeting options traders and the reality is options traders are sophisticated and so they ended up not using the product. So we have no users, no TVL. We ended up not having to run away. So pretty hard. But there is something that we learned about it. And what we learned is that the focus on the option is basically somehow wrong. So what I'm trying to say here is volatility and options product are one of the most used in thread five. But the options is not the product. The product is what you can get out of those

options. And the reasons to use options are different one one is purely speculation and most of the users they do that right now with perpetuals is very easier to use or they do that for example with the prediction market right so if you want to speculate and you think I don't know market is going to go go up or down you're not going to use options they're too complex you're going to use something else but there is a a second use case of option which is the most interesting for us and no one is was actually targeting that which is you can generate income out of option strategies and that's something that you're not doing with um with a purple or you're not doing that with a prediction market. And so our full thesis was can we create a product that is purely DeFi where people

can actually generate income out of it. So instead of targeting traders or you know users that want to get some speculation, we are targeting anyone that actually hold certain asset and they want to earn an income out of those asset. So what we ended up doing is like we re basically started to rethink everything from scratch and instead of focusing on exchange we focusing on making actually as a primitive. Now we created a primitive to generate income out of those strategies we designed that all the product is designed for one very specific use case and trying to do that really well. So we use an NFQ system to get the best price. The sellment is on chain. The collater is on chain. We try to basically reduce the counterparty

risk and we all the position are fully collateralized. There is no liquidation. So our idea was we are building into the fi. We want the benefit of the fi of our product. So this is what we've done like we made it composable. We don't do any repothetication. We believe that the asset should be the collateral and as a collateral should be safe. It should be there. No one should be able to touch it. We designed that to be completely on chain and the idea is to enable volatility markets potentially on any on any asset. So we redesign entirely the UI and you know I show before our our product was very complex with all the strike prices expertise put calls and all of that we redesigned that in a very simple way. So

in this case this is a cover call instrument. We made that in a way where the user goes to the UI and it's like what price are you willing to sell Ethereum on a certain date in this case you know 53 days from now July 31st um you choose a strike among the one that we suggest so the price of Ethereum was 1.6 when I took the screenshot you can be like okay the price is I'm I'm willing to sell at 2.2 this is how much I'm going to get. Um there is an RFQ system. So we send this to option desk traders whatever they price the options on a two seconds auction. The best price is shown and we and we as a you know as a protocol we facilitate the transaction meaning that the counterparty sending USD and as soon

as the user send the collateral the collateral goes into the smart contract not to the counterparty. So in this way all collateral is locked full transparency. Um users they can see that the collateral at any point in time and no one else can use it. Now this is what happened in the last basically few years. Um so as you can see this is just a TVL chart and obviously all the up and downs are by design. So every time you see the chart dropping is because we settle or the protocol settles the positions every Friday. So we send money back to the user. the user receives the you know the collateral back uh in a very simple way but overall you can see a trend that is growing and uh you know as a builder is it's very exciting to think that every

Friday it's like okay our TVL dropped let's see if we make it back and what happened is that we have a 90% retention rate so most of the users are keep deploying uh capital back and the reason of that is because we designed this protocol for a very single use case so most of our user that not options trader that never done options trade before but they owns assets so they owns ET or stable coins and they're willing to earn on top of those asset in a very simple way. They understand what's going on. They have the flexibility to decide um you know the they risk profile let's say. So they decide the strike price the expert they you know how much they're going to get. They decide when to open the trade. So they have the max

flexibility but in a full um in a full transparent way. And what we've done, we also kept this in a fully defy. So you have the asset, you just deposit it into the smart contract. There is no bridging needed. There is you you see the collateral at any point on time. You don't have to trust anyone in that process. Um something that happened is that now we also start to have institutions to use it. And um the picture I'm using here is actually yeah, I'm something that I really like. I'm I'm Italian and this is like the Milan stock exchange. And there is you know this statue in front of it which I think is the best representation of what we building here. To me it's like we need to remember the crypto

ethos. So we start institution to use risk but the reason they use risk is not because they do the same that they do in thread but because they can get the benefit of the in our case the main benefit is the full transparency and not credit threat. So they don't have to trust any counterparty. They don't have to send collateral to a counterparty. Like they can run this in a fully DeFi way. So this is something I personally really fight for lately. It's like we are building in DeFi. We are building in the crypto space. We need to make sure that we keep building in this way. And even when it comes to like volatility product options or derivatives there

there are so many shortcuts and compromises that can be taken and but what we believe is like we should not take any of them. The benefit of being on chain is the transparency is reducing counterparty risk is making sure that the collateral is there is making sure that no one can use it. So that's how we design entirely the protocol and that's how we believe that DeFi and specifically when it comes to options and derivatives that should work um in this case. So institutions using risk now they're doing it in a way that they still trade with selected counterparties. They still have full control. They can do that even in a permission way but they're basically getting the benefit of this

infrastructure and they're getting the benefit of this volatility infrastructure on chain. So one interesting aspect of what we've been building lately is you know I show you the product that's a primitive that's a you know as a user you go there you open your position and that's kind of like the beauty of the of the product right now. But what we realize is that we are effectively building an entire new infrastructure for a new type of product. So in the case of institutions, they're building for example they they're running their own structure products using our infrastructure. They can run similar to ATF products on top

of risk today using you know again infrastructure. So what we focused on lately is we are designing an infrastructure for volatility products structure products ETF like they're using you know volatility and and options generation and the way we're doing that is we are using the old benefit of onchain so we remove entirely the counterparty risk we using a netq that is fully on chain so um basically all the counterparties can integrate, they can price, anyone can see the price and our main value of integrating those counterparties into the RFQ is like to create a liquidity layer for those

advanced structure product and options that anyone can plug into it and we are using the set layer that is at this point battle tested, very safe, full transparency, full D5 and we are just deployed on Ethereum um with on Ethereum mainet. We deployed the product literally yesterday. In the next couple of weeks, you're going to see a lot of announcement around that. The reason of that is because of what we believe um the ethos of the product should be. So we see Ethereum as the place where most of the asset are. We see Ethereum as a neutral product and chain that is trusted by

institutions, users and so on. The benefit of what we built as risk is that we can create as I said like an infrastructure for volatility product we can create those on any asset. So the idea is now by building on top of Ethereum we can enable volatility out of any asset that is available on the chain. You can use that as collateral. We're going to launch gold for example um next week but the idea is we can create a volatility market out of anything. So Ethereum is the natural home for what we're building. I'm, you know, personally very excited to to launch on on the chain. We try to do it in the way that we believe Ethereum and DeFi should be, which is like trust

minimize. Um, we removed any trust. We remove any I mentioned this many times, but like it is kind of a big deal. There is no credit risk on using our product. So that's why we believe Ethereum is the right place. Institutions are starting to use it. Users are happy with the with the chain and the safety of the chain. So what's the future looking like? Um as I mentioned volatility is a derivative. As any derivative they should rely on a few pillars to make sure that they are long-term focused and to make sure that they um you know basically not needed to trust in anyone. So we make sure that what we design is

absolutely trust minimized. We don't require any intermediaries. we benefit the max out of the onchain. Uh there should not be a giving up customer of the asset. Those are like all the pillars that we're thinking of. So no counterparty risk full on chain full transparency and most important this should be accessible to anyone. So the full point of what we've done with risk in you know in the last couple of months and what we change about this space in general is like we made our product accessible. Risk is not a product for options sophisticated traders is a product for anyone that holds asset and want to earn on top of it. We are very

transparent on the outcomes. We are very transparent on how to use it. We're very transparent on everything we do. And so accessibility is the wall point of of the what we even building and what we expect all the DeFi products building on you know Ethereum and building in DeFi they should focus on. Thanks. [applause]