Ethereum, Composability and Creating Options w/ Dan Ugolini (Rysk Finance)

Transcript

[Music] thank you hello and welcome back to the strangewater podcast whether you're new to the Pod or have been following for a while thank you for tuning in we've got a really great conversation for you today a few weeks ago I met Dan ugolini from risk Finance while moderating a panel discussion on options I've never been a big options guy well I think their ability to express a wide variety of views on the market is interesting my eyes statically is over the moment we begin talking about Greek letters

But Here Lies one of the most exciting Parts about working in crypto even though I had very little interest in the mechanics or actually trading options I found myself more and more fascinated by the larger conversation about building on ethereum specifically the way Dan spoke about composability in building smart programmable options set my mind racing on what it means to build on the world computer the following conversation is one of the best most nuanced conversations I've had about the peculiarities of building on ethereum in a long time we cover the power of composability to

unleash a community's creativity the differences between developing in web 2 versus web3 first principles on integrating third-party protocols and so much more again I am not an options person but I am an etherean and after this conversation I can confidently say that very few people get it from the finance to the computer science and everything in between better than Dan one more thing before we begin please do not take Financial advice from this or any podcast ethereum will change the world one day but you can easily lose all of your

money between now and then all right enough of me let's bring on Dan Dan thank you so much for joining the podcast great to have you yeah no thanks for having me that's gonna be exciting so great to be here yeah so before we start getting like real big brain and talk about like the future of um finance and composability and all that stuff like I we got to start with um what brought you here and what brought you into crypto and you know I'm like a huge believer that you don't find yourself on the outside of like the Global Financial system without you know a story or a reason so Dan what brought you to crypto yeah let's start with that that's actually a good point so I started my career also an investment banking so you

know like real Financial stuff and I was working in the m a corporate banking so you know very institutional and to be honest I loved Finance per se like as a you know the way of actually financing projects and stuff like that what I didn't like it was all the bureaucracy so I started was like 2012 or 2013 something like that so right after you know the big crisis and the world job was like you bureaucracy like everything was an internal committee and stuff like that and so I quit that and I wanted to work in something more you know exciting if if I can call it that way even though you know I love Finance per se and I started to actually learn programming because I wanted to work in Tech and I

was like I if I work in Tech I need to have an understanding of what's going on behind the product right so I started to learn coding take some time off and I actually moved to Berlin back then and um that was actually the first time what I heard about ethereum uh I remember like going through meetups and gnostics team for example was I think one of the first one in Berlin I'm talking about like 2016 2015. um and so I was like oh this is actually exciting I knew about Bitcoin already and I found Bitcoin you know super cool and whatever but I couldn't find anything exciting except buying it and you know holding it and waiting for price to go out like this was pretty much everything about Bitcoin for me it's like I never

paid a friend with Bitcoin or something like that um but when ethereum came out I was like oh this is actually exciting because you know we can build products and stuff um so back then I was actually working on my own project and it wasn't crypto related not even you know not even Finance I was doing online education software as a service um I have my own company and so in the spare time I was always you know excited about crypto so the job was working on my staff building a lot of like backhand and full stack work but in the meantime looking into you know crypto and at the beginning like even with ethereum I got pretty excited you know the Ico area I was like okay this is getting like something interesting if

you can call it that way but yeah I don't really know you know what's going on and I remember like most of this SEO I was like okay this is just a good way to lose a lot of money that's that's what is going on right but I remember actually finding some nice projects back then um and I was okay this is actually interesting like the first one obviously was Ave um it land it wasn't even outed back then I'd say I remember like going in 2019 for example to some hackathons I remember one organized by consensus one in Paris meeting you know like all those OG teams and I was like this is actually exciting because there is you know utilization of what we build in years like this is a new Financial system I remember like speaking with stani and uh it was like

we are building open finance it was anyone called D5 back then during this time when um like 2016-2017 area era when you're like really starting to realize there's something here um you know as you said your background is like real finance and then like learning computer science when you are seeing these New Primitives and like talking to Stanley and stuff like what what was like getting you like really pumped was it about like open finance and like this new like Paradigm was it about distributed computing and like where computer science was going like what did you was it just about the people and like the smartest people in the world were gathered around this like what did you see back then that like allowed you to take the plunge yeah no I

mean back then again like at the beginning I was more skeptical because I couldn't find like a you know a utilization of those you know icos whatever but when it was like 2018 2019 like this idea of open finance I mean I still remember literally stani being on stage and talking about open finance I was like wait this is actually pretty cool because myself at the sagathon I can basically build a product on top of you know Ave or Midland back then and they can create you know a new Financial product and I was like this is actually very exciting because I didn't mention that but one of the first project that I made myself when I was learning coding it was actually a payment system uh so the idea was I want to pay back my friends after a trip

right super simple and I was in Italy back then and there is no way that you can build at least like in 2012 2013 when I was you know starting to get excited about coding to build a product Financial product like it wasn't it was completely closed system there is no way that you can send money to someone else I mean it was possible then you could just raise like five billion dollars and be called stripe yeah yeah exactly or I remember looking in Italy and I think I was talking about like 2013 2014 and they'll say oh yeah you need the banking license I was like okay that's interesting I was like you know five million banking lies and so when I was looking you know like at this open presentation of say wow this is actually pretty exciting like in in American I

can build a product I can also use you know those Primitives and they can actually create a landing market and everything on top of what we have so that was probably the main thing that excited me the most and the second one is like I don't have to ask to anyone I can just gotta build it it's like that was simple as that right and so that was probably the the trick that was like okay this is interesting this is like a very new paradigm and what we're building in the space uh so that was like the excitement phase yeah well I we did not plan this um this is supposed to be a talk about composability and it turns out the thing that got you excited was composability and like um you know censorship resistance so we'll get there in a little bit but um please just

continue with like your journey to 2023 so you're walking around you see Stanley he's like convincing you that like all you need to do is get interested and then you can build Finance like how just bring us from 2019 to here yeah 2019 two years 2020 that's the biggest point in time um I still at my company was working with you know Webster education and software um but covet star said there is a lockdown I was in Milan the worst place ever so I couldn't even leave my house like I had police in front of it I was like okay let me find something to do right now and so I found I was using a lot of D5 back then and um I started to get pretty

excited about open the options protocol um and so I got in contact with the team and I was like yeah I like your product I had a couple of feedback you know like kind of a contributor at the beginning and then we became kind of very you know friends and and close and so at some point they were like hey you have time because apparently there is this huge lockdown you want to help us out you have experience you know in startups and everything and so I started to basically work with um kind of part-time at the beginning um very early on I'm talking like opinion they just launched the first V1 and it was like you know March or April 2020 something like that and so that was the big moment when I actually started to be you know way way more involved not

just as a user but more like on building and so on and after that uh after open some token end of 2021 basically um I was on the opening discard and I found few people that had you know eventually became my co-founders in the future and we started to bring some ideas for an hackathon and the deal was to build something on top of open so back again to composibility and the deal with how can we build some sort of like liquidity layer on top of this primitive that it was the options uh salmon right so open was a settlement layer for options so you can create any option using that protocol back then and I was like okay let's try to build something

on top of a like similar to an amm and there was he started like an academic project and actually became risk and since then we full-time on on it so again composability that was the trigger at the beginning like I met those people and we done an hackathon to build something on top of open and use their compost ability so again that's what brings me to the space I guess yeah very cool again did not plan this but um so before we get to risk um so I I think for like people in this industry who don't have experience with real Finance like Finance is this like monolith in which like all Financial things happen and just like if you're a farmer you grow food like if you're a financer you do Finance right financier

and so for us that like have done real Finance like oh my God like Finance is so varied in variety right you said you were working on M A like I used to be working on Treasury management like uh the idea look especially for m a you were not like messing with options on a day-to-day basis like that's just not what M A is and so can you talk a little bit about like what Drew you to like first open but then like really like realize like that this whole Space is like something that is worth your time yeah yeah that's a good question that's um as you said like options is something that you really don't use when you work in you know Finance in

terms of like Corporate Finance or you know as you said Treasury and so on the closest like example of when I would use options at um Anheuser-Busch for treasury management is like we wouldn't use options but we would use Futures to like lock in production costs or something but point is it's like it's like options are just like outside of the realm of like business operations M A like all these kinds of things so I just yeah how did you get there for me the closest thing to option was like stock options right it's not even like yeah they just say something they give you like when you join a company especially uh when you do you know startups and so on but the thing for me it's like about options when I studied at University I got pretty excited about them but I wasn't probably like I'm a

bad Trader uh that's something like I'm honestly in saying that's like definitely not a good Trader or let's say that they're Traders better than myself for sure and so when I got excited about option I was like okay I'm not gonna trade them anyway um so it's excitement it's good to see like how the pricing moves and all the variables the Greeks but you actually don't use it unless you trade them right but when I found the open I was like oh wait it's actually getting interesting because I can work with options um understand them but I don't have to trade them right so I can build something on top of it and even if I'm a bad Trader it's like I can play with it and so I got very excited because working on building a protocol um is actually makes you like you have

to understand a lot about the instrument you have to understand how people use it you have to understand like everything behind all the risk and you know what's what could go wrong but even if you're a bad Trader as myself um you can still work on it because again you don't have to trade um but you have to basically build something for people to actually trade right um and so when I started to basically create this liquidity layer on top of of open actually like trading was involved so because at the end of the game like when you try to add the liquidity you have to make a lot of risk management for example you don't want people to lose money query providers so again you to understand a lot about trading risk and everything but that was probably on

a second level the first level that actually made me like Angels was like options are cool and that's the best way for me to get into it because again I probably I'm not enjoying trading a lot in my life like in my daily life I do like trading sometimes I do like trading at options sometimes but building option is actually way more exciting for me because probably I'm more on the building side so again that's what made me actually go very deep into options and everything and that's how we build risk um by the way we have very good traders in our team as well uh we've done a trading comp I work on one the trading competition so we have very good trades so don't worry about it I'm the guy making sure everything works but I'm not

the trader I I have been wondering who the number the winner of that trading comp was but now I know so it was our quad but we didn't give a price because it was like yo you're from the team like we cannot give you price so it was our quad yeah Hey listen all I have to say is like you're more honest than like 99 of people in crypto because it's always your own Quant that wins the competition it's just no one ever tells you that yeah yeah it is sure I mean the thing is that we also tried the for example we didn't tell them like when we release new product or something so we didn't want him to win anyone so I was honest with him I was like yo you really won actually you're good I mean we did everything to make sure you couldn't win

but yeah it won yeah all right we'll get to the create the trading comp in a sec because like there's a lot of interesting stuff to pick apart there but um while we're still doing this slow roll so um you're at open and like you're realizing like you're contributing you're seeing what options are in D5 which like spoiler alert like man like whatever's there is not great and like the reason it's not great is because like pricing is just so shot to that like it's not even worth buying and so can you talk a little like totally hear you that the origin story of risk is like oh like hackathon like build a liquidity layer on open and but just like taking a step back during this time before you start risk whether

you're looking at open Lyra dope dopex um like any the entire ecosystem dare a bit maybe even the entire ecosystem of um crypto options like what are some of like the real like challenges and like things you are saying that need to be overcome before this goes from like you know far out on the Innovation curve and like something that's coming to like a real tool that like Traders can trade like hedgers can hedge um that kind of stuff yeah yeah that's um that's one of the you know biggest question and probably had this challenge that we face in you know on a daily basis and uh when we started risk was basically based on the essay we figured it out where the

issues back then and we're talking like a market that was also very early and it's like how can we you know make this product in a sense that we're gonna fix those problems right um one of the main one when it comes to options in crypto uh specifically so not just if I'm talking about crypto in general it's was the use case right so one thing about like using option you mentioned some of the use case like the main one is actually obvious you want to get leverage or speculate on something and you can get like very good leverage with options the other one is edging right so those are like probably the two main ones there are more but let's say those are the two main ones on the edging set

yeah yeah structure product is definitely but even on the structure product you have one goal at the end like you couldn't fall in one of those categories like you could protect or the you know you can basically create a structured product that is a super teacher but yeah let's say you know edging and speculation the two main ones and then let's say like income generation for a third category but when it comes to edging um crypto it's a very weird industry when it comes to that and we saw that by results right like look at what happened in last year and we realized that no one was actually edging no one was doing risk management like not even the big players right so obviously the I'm not saying that everyone is not there but

I'm saying it's one of those industry where it's way more profitable to just be Delta one and means that you've just gone along any asset like get thousands of Leverage and wait for the price to go up that's how like most of the you know people and funds and so on made money in this space or and so that's one of the things like who's gonna use actually those problems when it comes to edging and right now because of the actors that we had and everything it was challenging to find those use case um and so one thing I guess if we believe that crypto is going to mature as an industry and we're gonna get more institutionals and we're gonna get more you know Advanced Traders Pension funds like all this you know actors making real volumes real

money uh an options Market will be needed because options are still a very good instrument especially when it comes for you know hmm protection so if you look at the volumes right now like in even in you know something like that a bit that is doing like 95 of the volumes when it comes to crypto options um they still have this target market that is mostly you know crypto market makers or you know crypto let's call it hedge fund so it's still limited to you know disclosed industry but again if we believe that this industry is going to grow and I definitely believe that myself and being here for a long time we believe the option space should be there so that's one thing about um you know when it comes to crypto

option but when it comes to speculation so not just edging like you know we said that everyone wants to get leverage and and everything something very interesting about crypto crypto Market to me it's how Perpetual became so popular when it comes to leverage versus options for example so you know FTX was doing you know Perpetual but we have a lot of them in defy GMX it's definitely the big one like owl actually was better for options Trader sorry for crypto Traders they want to get speculation to actually use a Perpetual instead of using options right just to help like the people at home who aren't like didn't have Trad fire experience before this like a

Perpetual is actually called a Perpetual Futures Contract and it does not exist in the real world like it it was invented by like Arthur Hayes and I forget which um exchange is his but like this is what what Dan is trying to say here is that like something weird happened in crypto where like the normal tool by which everyone does the exact same behavior was not created instead we created this like very custom thing that really didn't exist before to do that same behavior and so um anyway I'll let you continue from there yeah no that's correct I mean in traditional Finance we didn't have this Perpetual future so if we are like no one was using it but everyone was mostly using options or just Futures right so the thing about

Perpetual features is they made this type of Leverage trading very easy like when you trade a Perpetual there is basically nothing that you have to do except of choosing what is your liquidation price at some point that leverage you're gonna get right so you say okay I don't get Liquidator at this price that's the max leverage I can get right um so you basically just move one variables at the end of the game but when you trade options you have a lot of variables right you need to trade and choose the strike price choose the expert um you need to understand all those grades and and so on so that's also like something very interesting to me it's like I'll oversimplified was trading even though Perpetual if you do them in

a professional way like if you talk with any professional Trader or you you know more institutional no one likes per special in the sense they're very expensive especially when it comes to defy they um doesn't let you you know play a lot with different variables and when you're a professional you like viables right you like to play whatever you like to find so that's something also very interesting when it comes to option space in crypto it seems that right now what Traders want is like something that is very I wouldn't say basic but like simple like you don't have to move a lot of Leverage sorry a lot of variables but with options again I will I still believe that it

requires education they requires people to actually better understand what's going on it requires people to you know play if that's a good term like with with options because they're advantages that can give you similar benefit like you can get leverage and so on it's just a matter of people now in this space are preferring other instruments so that's definitely the biggest challenge how can we make options in a way where it's easy for everyone to understand it's easy for Traders to use it's you know there is liquidity because one thing about even perpetuals like liquidity is concentrated most of the time especially when it comes to D5 so you have liquidity but when it comes to option there's a lot of fragmentation a

lot of instruments so a lot of issues and back to your original question like what are the main challenges this is definitely one um educate make sure that people understand the advantage that everyone a big one I I like I totally hear you and just to um like sum up I think everything you're saying it's like one Edge like people we just need to get smarter which like I can say that about basically everything in this space but two it sounds like what you're saying is that today options just aren't sorry crypto options just aren't capable of expressing the same views and the same positions that um traditional options are and like that's the Gap that so like forget liquidity forget education they're just like not expressive enough

and like I think that's what you're saying an opportunity you saw no that's absolutely correct um and one thing to add on there like what I've realized talking with Traders most of the time encryptos always about their action like people trade their actuality mark it up or mark it down there is not much more people want to trade it's like okay Market's gonna go up or down this is that right very short term with option you have a different dimension you're playing volatility right so that's something that in in this market I don't think we're there yet but that doesn't mean that people don't want it it means it's just a matter of you know time and again education and so on but in traditional Finance look at what happened with Robinhood and GameStop and everything

everyone was trading options back then it became one of the most popular instruments in the U.S it's like trading options and so again I really believe it's a matter of time and making sure we you know educate and make them appealing to this you know Global audience and more you know average user as well yeah yeah cool so um let's talk about risk you are with your buddies in the open chat realizing like oh there's an opportunity to run this hackathon maybe do some liquidity can you talk a little bit about like um how that hackathon project turned into a protocol or company or whatever you guys are calling it yeah yeah the back then opened at um settlement layer

right so and this is probably gonna be very interesting when we talk about composibility but the way the protocol was built was to be composable so the idea was everyone can create an option so the protocol was I wouldn't say simple because it's actually pretty complex but was simple for anyone to create an option right so you can say I want to create an option market so I want to create an options Market on it you can use open and you create an options Market on it right and then obviously you need counterparty for that trade so you can say I want to sell an option you can create this option but then you need someone to buy it right so you can do this in very different ways and uh back then open at an order book system I

think it was built on top of 0x again compostability right so protocol and then 0x another you know protocol I call it about composability so it was an order book built on top of Xerox so to trade you need to post a limit order right so you say Okay I want to sell this option for ten dollar whatever the main issue with that it's when you are talking about options options have Express you have Putin calls and you have multiple strikes right so if you think it does this way you have a lot of different products because each product is kind of independent right so to have a market that is liquid enough you need an infrastructure in terms of Traders market makers that it has to be huge because everyone is supposed you

know those limit orders and and so on and back then it was on mainnet end of 2021 gas was crazy eye everything was on Chase it was like basically yeah it was like crazy like it's definitely like the market like the the protocol itself was great but creating a market on top was very challenging so one thing we we wanted to do is that we can learn from other protocols like similar to UNI Swap and try to create this sort of amm right so the idea originally was how can we build a pool on top of this protocol where actually anyone can trade and the counterparty will be this full and this pool gonna trade multiple products and so on so you we can concentrate all the liquidity

into one single pool like similar to what units was doing um the problem obviously you cannot use uniswell with options or like traditional IMM because options are again very interesting instrument they have an X3 so if you try to see the pool like unit swap put in options and you know let's say usdc or whatever um you're gonna probably end up losing a lot of money because uh you know when it goes to expert one of the choices like especially the options might be worth zero if you start off the money so you know if you're selling you're losing a lot of money so you need to build something specific for that so that was the original idea I was like okay let's try to build this you know liquidity pool simmer 20mm specifically for options so that was like how we we

started out of the hackathon and that was end of 2021 I think that the academic was even simpler than this it wasn't like a real amm or something but let's start from you know it was an hackathon we wanted to get something that um and since then we basically keep building the protocol so we're talking we started to actually work like full time I think it was February 2020 sure something like that so it's like over a year now yeah right before industry and that um but something that was possible back then to build something we were building it was also because Leia 2 were coming so it wasn't even possible before because when you wanted to trade options

especially pricing options is very like computational intensive and so we couldn't really do that with ethereum mainnet again back to gas and everything but we could do that with you know arbitrome or optimism back then and so February 2022 it was or we already have some layer choose there I remember talking with arbitrum a lot um and was like okay now we can actually build this because of the infrastructure we have and so this always reminds me like how early everything it is in this industry because again it wouldn't be possible to build it before I mean Layer Two just from like limitation so again like options Market um there are a lot of challenges but again we basically started to build not

even a year ago because before there was an actually even possible what we're trying to do and so yeah since then we've been working we had enough that we launched that it was like you know very basic just to test everything out and we launched like September last year uh yeah September uh we learned a lot we figured it out like something that we definitely need to change um so we improved that and then we basically released this new product that it's you know on the trading competition that I was talking to you a few months ago so it's a very slow process please maybe slow for crypto but come on we didn't have a product a year ago in traditional world you have four more

years before it's even a real thing that's real yeah that's true like compared to web show it's slow like I'm coming for web show right you don't need all that you don't really care about like I mean you care about security but not them so it's different like you can really ship multiple products yeah that's incredibly interesting you know this is the first moment I'm having this thought but like okay so you go from like web one to web 2 and development speed like increases tremendously right yes more tools more Frameworks like more if just everything and then you go from web 2 to web3 and everything slows down and it's not because there's less two there is less tooling but it's not because of that it's basically because we've realized that in web 2 if you make a mistake you literally just reboot the

server in web3 if you make a mistake you lose hundreds of millions of dollars and um I don't know there's something profound in there it is absolutely like I remember when I was doing web share we were releasing every Friday something new I had it was like easy instead and I remember you know like Fred and I you release something you're going to hope that everything is not gonna break because you want to go out and bring with your friend right but that was the mood um you know but with web3 it's absolutely the opposite like until you are 100 sure that you have coverage on everything that's there like you have multiple audits you have a bad Bounty out you it's like you know release um and so it's way slower process for sure yeah interesting I don't know maybe we'll talk about that more if not it's a

good Insight um so okay so now that we're like in Risk can you like help me understand what is risk as a like complete holistic system what is like the code that you guys have built what are like the things you're drawing in from other protocols like what is the risk stack look like yeah yeah so let me give you an idea on overall race right so we have one product right now um that is called Dynamic Edge involved so as the name saying it is about whatever you want but it's let's say it's this liquidity pool that we have so this is equity pool on one side we have liquidity providers and that deposit

stable car in usdc for now probably more in the future so the depositable going into this pool and this pool as I said before basically access an amm so a market maker for options on the other side we have options Traders right and when I say Traders it's not just people it's not just like they don't expect like a guy trading options we also have other protocols and this that goes back to composability we have more you know some like institutional and so on but protocols is actually a big one so what they do it's they can trade options and this bull or dynamic Edge involved as we call it dhv is the

counterparty for their trades so let's make a simple example let's say I want to buy an option A call option one month's expert strike whatever um what you can do when you buy this option you basically can get a quote from the dhv so dhb is going to say okay I should not buy this option then this price I'm will be able to give you and when you do the trade as a user you pay a premium right because you buying the option and we use the liquidity into the dhb so the the deposit that USC from liquidity providers we use them as collateral to Mint and sell this option right so now there is a call option let's say this call option has a thousand dollar as

collateral we got the thousand dollar from the you know liquidity deposited and now the user is buying let's say for a hundred dollars so what happened is the liquidity pool now has exposure so it sold one of this call option and it collected the top you know 100 from the trader as a as a premium right so that's something very simple that is happening there obviously there is also selling side so you as a Trader you can sell the option in this case you collateralize the option yourself so you're gonna put this a thousand dollar as collateral and the pool is buying from your eyes so we use the deposited usdc to actually pay the premium to your right

so how the business model is working on this now there is a bid and ask right or buy and sell quality whatever you want so let's say we buy from a hundred dollar from the first user like when I say we are means like the dhb is buying from a hundred dollar and is selling for you know basically um for higher price so it's selling for let's say 105 right so what happened in this case is like the dhv collected five dollar that's the spread so basically those five dollar is the amount that is going to liquidity providers because that deposit liquid into this so this is like a very let's say if the market was efficient

everything was perfect that would be the deal scenario right you have one buyer one seller they both trade the same option uh the exposure for the pool is actually zero because one by one selling you collect the spread you make money everyone is happy this is like you know something that would be perfect obviously the reality is absolutely different because sometimes you have more buyable than seller sometimes you have the pool that is actually exposed towards a single instrument right so here it comes a lot of the compostability um component of the dhv because what we built for the dhv we have the idea that if you are one of the liquidity provider there should be like no risk or

absolutely lowest risk for them right that's like if you think about Casino that's the bank so you don't want to you know you don't wanna make risk with those people you don't want to make risk with those liquidity that's the bank at the casino right so we blame Blackjack and you want to make sure that you get return out of it so let's say this is the case I told you before where everyone is buying so the pool at this point is short and they sold a lot of calls what happened in this case if the price of it is going up um the pool could have a loss because when the price goes up you know the call could be in the money it means that there will be a loss for those liquidity providers

so what the bolt is doing is as a mechanism that try to Edge the position so this engine happens in a lot of different way the main one is price on this option in basically a more expensive so we incentivize people to sell because price is high so that's the first thing you do again this works if there is an efficient market a lot of Arbitrage and so on just to Let's unpack each one of these so when you're what you're saying there is in the first line of defense is the um sorry what is it the dhv dhv dynamic Edge involved yeah yeah the dhv okay says like oh my god I've just noticed I have exposure the first thing I'm going to do is try to

like eliminate that exposure by either buying or selling the opposite thing um at like a discount or a premium so that like yes I might have to pay a little bit about but my exposures are netted to zero is that right pretty much yeah so basically saying you know we mentioned the option that it was was worth 100 right so what we do now is like we try to sell this option for 150 let's say something like that so if you are a seller you're gonna be like oh this is a very interesting price let me basically sell it for you know let me um yeah basically sell for when I say sell like from the trading side so you're gonna basically sell for 150 so they both decide you know trying to do that and uh so we have this mechanism

where actually you reduce your exposure but you generate money out of the volumes because that's how the again the dhv is making money right it's making money spread multiplied by volume so if they turn nowhere the turnover is the lowest that's the best so you don't want to have an inventory so that's how you know we we try to do as a first thing so you create an Arbitrage opportunity that is so high that someone is going to capture it right but again this might not be always the case so the other call it like you know risk management mechanism is you trade in this case ethereum um so for example if the main issue of the world is beat price going up

what you're gonna do you're gonna long e try because in this case if it price is going up you're gonna make money or profit from it going up right so options have this concept of Delta and I'm pretty sure audience are a lot of times about you know built and neutrality and stuff like that it's sometimes a buzzword but what you do basically like every option as it's on Delta right Delta it could be a different number so what we do is like we check the exposure of the pool when I say Wheels like actually an automated process there so the pool at that time is exposed by X Delta so we basically Buy ethereum in this case for compensate that amount of Delta so we bring the exposure of the

pole back to Delta zero in that case and so how do we trade it yeah that's you know about composibility so we can trade the hit on uniswap so it's a fully automated process fully you know permissionless and so on it's like you know the the pool is like okay our Delta right now is very high we need to rebalance Delta let me go to you know uni swap trade buy submit for example or we can use other instruments as well for example perpetuals as we mentioned before because if you want to short the market you can basically short using a Perpetual so for example the volt is going to GMX it's open in a short position it's showing it in that case and will balance the delt of the poor eye so at the end of the game there is

all this mechanism where again as a liquidity provider the volt is edging for them in a way where it's trying to be close to Delta zero so that's why I was saying like delta neutral is sometimes a buzzword for example we don't use it because it's not delta neutral per se because we just rebalance Delta all the you know the time is moving so when Delta is like you know 0.1 0.2 0.3 let's say we put it back to zero right and then it might go to this minus zero one minus and we put it back to zero again so it's always try to rebalance in this Delta obviously hygiene has a cost so every time we Edge we basically reducing what could be you know the final profit for the liquidity providers

to have you know lower risk so it is not a free move and it's risky to a no risky but like it's inconvenient to etch too often because if you edge to off and you're gonna basically not have any returns you just basically have a loss because you're aging too much so it's always like yeah so it's always like finding a good balance between you know etching not too often but edging when it's the right time and that's probably one of the again Challenge and that we have right now and we have a Quantum working on how often should we age and so on because that's actually one of the critical components of such a product okay got it and so from the um again

just looking at the structure um the options that you guys are issuing and sorry that the um that risk is issued yeah yeah is that are those risk options are those open options like what what are The Primitives yeah so those are like that's an evolution of the open option um so we um open wasn't deployed on arbitrum back then so we basically forked it in a official way let's say um I mean open was aware of it and they suggested we made some changes and we'd apply to arbitrim so effectively still the open protocol it's an improved open protocol because we made some changes in

terms of collateral and stuff like that to be a bit more efficient with apply to RB Stream So effective we are still built on top of an open open Primitives So when you buy an option you buy an sc20 um that is called the north organ they represent the options that you're buying and this is all the infrastructure that was built by open so what the dhv is trading is this open basically token that was created by the open virtue protocol yeah and so look like the the low-hanging fruit on like the magic of um of composability is like okay look like you were able to focus on building the um you know like the part of the stack that you're interested in like the

liquidity and the rebalancing and like Risk Management without having to worry about like just like this you know like really basic um you know like erc20 like um you know function interfaces and that kind of stuff and so I think like there's some like really obvious reasons on like how composability like got you to where you are but now that you are where you are and like you can look back um can you just like reflect a little bit on like this is not an opportunity or a request for you to pick on open at all but like can you just look back at your experience of developing a platform on somebody else's technology and how that like either made your experience like much easier and better or like

resulted in some challenges that you maybe didn't foresee yeah I mean it's it's obviously like you know it's always a trade-off when you build on someone else's technology um and obviously every technology is also different like in the case of open for example it's actually we can say it's a sediment layer right so you basically don't rewrite a lot of stuff as you said that you don't want to rewrite um and you use something that is already tested and it was used and one thing about composability there are other protocols we're using as well right so for example to give an idea like ribbon for example was using the same one right so ribbon is not on arbitrim uh right now but let's say ribbon is going to be

on arbitrim we can basically trade each other very easily because we're using the you know the same stack without actually do anything else on top of it right so that's one of the advantage of compostability when you have like some sort of settlement layer let's say that even other Protocols are using that makes the life very easy so I think like composability when it's also standardized it's actually very cool it's not always the case most of the time it's not uh but you know compostability standardized is actually kind of the best but one of the other case of composability for example as I mentioned on the edging side right when we add using uni swap or edging using GMX right so the the building on something like that is actually always not as

straightforward as you can think of um sometimes it requires documentation that it's most of the time is it's not even there because we are trying to get fast we all you know make Innovation very fast so sometimes like we build a new V3 and before we write documentation for other protocols it takes you know weeks and stuff like that sometimes it's hard to test because that's another big issue of this space compared to you know when I was talking web shoot like web shoot testing It's Easy Like You spin off or another server you test it whatever web3 testing is actually not as easy because you start testing on you know it could be a main Network everything seems to work fine but then you integrate on mainnet and everything

is not fine anymore are because you know completely different environments so testing is actually something that it's it's not there yet so like integrating with other protocols especially when you know you also depends on liquidity is also a bet that you're making on someone else like you make some Integrations it takes time like you have your developers you do the audit so there is a cost there is a Time on everything you do and that protocol might be successful the one that you integrating with or it already is like in our case like you know we use uni swap fine but let's say you integrate with another new protocol that seems pretty cool and you know three months from now might be that and so there is

also like this kind of risk on the integration plus when you integrate in something that has liquidity you are relying on their security a lot and let's say there is an exploiter part of your protocol might be exploited as well right so in our case simple scenario let's say that we hatch with again uniswap and the pool is gonna get rained it means uh what we were using you know for example in in our case with unit swap it's actually a bit different because we just swap so you know we're gonna get the other asset but let's say with GMX for example that's a different case right with GMX we see all the position and the position might be worthless at some point um so security is definitely a very big

issue with so many types there are protocol was trained for example from security you know from an exploit and all the protocols on top losing liquidity in a Cascade right so that's definitely one big issue about integration as well um so compostability it is cool but it's always a trade-off I guess for sure so like when you're do you like when you're designing these protocols do you um like look at each opportunity integration like as let me let me rephrase this question so like when I think of risk right like there's you have like Risk in the middle and then you have like the bottom right like this open options layer and then the top which is like essentially the

tools you use for um for edging or risk management and so like when you're talking about like the bottom layer like oh my God that stuff better be locked in and like you better believe in it and you better think that like um it's like the right choice but on the top side like let's say tomorrow you guys just for whatever reason feel like you need Diversified exposure from uniswap and so you decide to add Grail or sorry add Camelot as a DEX that you're swapping collateral in and out of and like you know what maybe it's actually like not that big a deal if well let me say it's a much less big deal for risk if Camelot gets like decimated than if um open does and so

I'm wondering just like when you're constructing these systems like how do you think about not only the Integrations but like given the integration Point how much um like catastrophe can Cascade through that um connection yeah no you are absolutely right so it's not just about the catastrophe that's one thing the other thing is I'll tell you design your protocol because when you build on something like open you have to design your protocol in a way that is gonna build on top of that so if tomorrow you decide to switch from open to something else it's definitely going to change a lot in terms of protocol because you're going to use the token you're going to use that decimals you're going to use basically everything that you have in terms of that structure right and

obviously every protocol as his own um you know black structure so when you build on top you make an even design decision and Engineering decision that if you want you know switch over to something else it will definitely be very expensive in terms of again new building and all that and so on so on that one it's actually one of the biggest decision that you make you want to make sure you don't you know you make it properly you look at all the pros and cons you are you are aware of all the trade-off but on the other case like when you actually use other protocols for example you know to again do you trade or get some liquidity the way we even structure that in our case we have a smart

contract that is called etching reactor so that's the one that we call and actually one of our ideal scenario we want to have integration with as many as possible and we say to the edging reactor look we need to Edge 10 Delta and we need to I don't know long it or short it whatever just look at the protocol with the best price right now to do that and let's do it right so that will be the deal scenario like you want as many as possible Integrations with all of them and to be smart enough to say okay this is the cheapest one to do this edging let's do it with you know it could be GMX could be perennial could be whatever Max or Cam lot or you know all those protocols and so again to go there obviously requires time because you have

to build those Integrations and everything but in that case it's more like some sort of like aggregator if I can call it that way where you just want to look all of them get the best price but on the main layer is actually completely different because you're making a lot of strong decisions so when you decide to build on top of something else like this you know Lego programmable bunny is actually very cool but you make a lot of decisions from an engineering and design perspective uh that you rely on them so it's a very big decision to make yeah well okay so let me just throw this out here and let me and react and have you react to it but um well I just kind of heard you say is that like when you're

thinking about integrating uh other protocols into your protocol you need to like think of it in two different categories one is the like the Integrations that are going to result in fundamental design decisions that are the core of your protocol and the other are like kind of like features or add-ons are nice to have that like don't necessarily like change what you're building and it kind of seems like what you're saying is that for the first category like yeah man you just need to be smart and you need to know what you're doing and you need to make the right decisions but for the second category correct me if I push back if you want but it kind of seems what you're saying is like the solution to to integrating as many protocols as

possible safely is to develop your internal protocols like their Integrations right and like you're basically proxy contract is like so hilarious to me because like except for the fact that you guys wrote it like that to me sounds like a third-party integration you know yeah they safely think is the key like what you said it's like safely so in our case the you know the duty Illusions there is like is this protocol legit it's you know the liquidity it's like we tried to do some obviously we cannot do all it for all of them but you know we look through the all the Trappers we look you know and because obviously you don't want to lose money on on those protocols but if there

is this first step I mean obviously we thought with the team and everything again if you have them competing at some point is actually good so it's it's all about like getting a better price if you have you know the three or four different for each one but on the other you're right like if you can do this safely so once you you know have this due diligence process then if you have more and you have this proxy contract as you call that um that it was that is able to find the best price it's actually good the problem that I also see on the main layer let's say you know the layer zero if you can call it this way uh the delicious there is actually like way higher because even when you want for example two wireless new assets or you know at the beginning

I mentioned that we accept you as the CRI even that decision is actually pretty big because the stable coin that you decide to accept is gonna completely change um you know the product of future because we went through usdc and we know what happened a few months ago with that the pack and yeah it worked out well but still we have like is this the future like do we believe uscc is going to be the you know the big one maybe not we'll see so we're trying to see if there is you know other stable coins and this reminds me to funny story like one protocol um during the Luna crash was selling inputs on Luna and those boots were

collateralized with USD so USD was worth zero Luna was for basically zero so imagine you are imagine you along the spirit you're like oh I made a lot of money but that's not true because collaterals worth zero so that was one of the skates where everyone lost it's like people lost from you know holding this option and so on so again those decisions matters a lot because um even the equilateral you choose it actually is if you buy an option and you want to make sure you get your money if something happens and then the collateral bag that you get and it's worthless because the option the pack that's already stablecoin the fact is actually you know big issue for the protocol so on that level when it comes

to Collateral when it comes to which protocol we use and so on we are like absolutely like you know top due diligence we try to learn you know build the long term which had to go deep into each one because it really matters a lot um on the other ones again it's more like small integration even if we have a loss because there is an exploit it will be limited we're not going to lose all the users money the protocol itself equals a bit you know it could see work potentially you're just gonna lock a loss um because the protocol is insolvent but it's not all the money yeah I not heard that story about the um the Luna options but like now that you say it it's like it's it's so obviously true and so obviously happened that it's

like not even worth talking about but um I is I say it's a funny story but it's actually pretty sad because everyone knows body it's like there is no one that made money out of there yeah let's be explicitly clear like the Luna thing was like a tragedy in the true sense of the word and like and was terrible for our industry and like the only people that made money were like the richest in this industry like who the VCS and like the people who took profit and like the people that lost her like the grandmas that put their money in this app that said that they would give them 20 and all they did was put it into anchor and you know that there was nothing good that came out of like any of what happened but anyway with our last few minutes here

um so I like just to like kind of hammer home composability and like what we're building here so look like I very much believe like once risk is um you know like out there and has real volume and stuff like a very large portion if not like the majority is gonna just be in like people doing DJ and stuff looking for leverage like just you know whatever like that's our industry but like I I don't really care about that I don't think that's interesting like what I find interesting is um I think you said this earlier where like part of like one of the major customers that can't be served today um whether it's because they can't go to DARE a bit or the options like the

resources today are on chain are terrible are Dows right or any uh entity that exists entirely on chain and so like something you said earlier was so powerful to me that like okay when you guys need um you know risk management like you can just easily go to um GMX and just get a perp and like that Nets things out and you know I I guess like with our final few minutes here I would love to just like have you reflect on once we have risk that can provide this like deep like meaningful options Market what does that mean for um like these like incredibly huge protocol treasuries and DOW treasuries

um do you like and and how do you see them engaging with this like technology or this primitive um in a way that like just just makes everything um you know more realistic and more similar to what happens in traffic yeah yeah that's um essentially one of great point because when we started risk um as you said like you know you always try to have a vision like what's going to happen in the next you know five years or 10 years right and that would be I was like who's gonna trade those options and obviously if we believe on this you know D5 World um the main Traders is going to be other protocols when I say protocols as you said like I mean products but I mean treasuries dollars you know like own

chain entities right and so even like for example this complexity of options um to me it's not a big deal because I know there will be other products that try to reduce this complexity in a way that could be a very good ux or a very good product they trade with the dhp as a counterparty and the users that probably doesn't even know right it's just like they trade this product their trading options they don't even know and we already have some cases like that here's a great example which doesn't exist yet but like totally could which is so our friend when moon is like a member of umami Dao and they just came out with this glp Vault and so like what the idea is you're supposed to deposit your collateral and then get like

neutral exposure no price action but then earn APR and like in the background um instead of doing this like really complex like perp management like they could very simply go to risk buy an option and then like all of this is happening without any of the users realizing that there's any hedging any Financial products like Risk GMX it does not matter all you know is like oh it's delta neutral yeah yeah the spoiler here is there actually that's how I met when mon um because we were discussing opportunities to trade with you know uh with their product um so yeah I mean that's that's exactly we already have some protocols threading that way uh they created like principal protected instruments simple one they go

into a state they get the interest from uh deposit into estate and they use their interest to buy options right so if the the buy put and call so if the volatility is going up they actually became more profitable so basically as I you know as a depositor you're giving away your potential interest to avoid your returns if those options ended up being in the money right so this product we already trade with some of them and um that's actually what is happening in the case of treasures the and and Dallas that's um when I started I was like oh this is going to be such huge case for what we did but then I started to talk with a lot of them um and you know we have a treasure

itself for risk so I I know what that meant and people when it comes to treasuries um especially on chain they are extremely I wouldn't say conservative but like they really care about security because you don't want your treasury you know drain because it's on some protocol and so on so everyone is like this is absolutely exciting like I will definitely use it in a sense where I you know for example buy puts let's say your treasury seat you can you know periodically buy some boots basically buying an insurance if the price of it is done you know it's dropping you can still get some money so everyone is definitely interested everyone is interested in structural

product they can use options but everyone is like I need to make sure I'm 100 sure the security it's you know top level because you don't want to lose the money from you know an exploit or something like that from your Treasury and so that's something that I guess as an industry we need to work on like to the point where security is so good everyone is going to be like okay I can trust I'm a freshly I can trust any protocol out there you know or at least the ones that they have in all the security and so on because that's definitely something very big but if we go to the point because again if we don't solve the security issue I don't think Defy is going to be defined

it's like we have bigger problems right um then treasuries are definitely one of the main use case because treasuries are as we mentioned at the beginning like you know pensions fun to me or you know they could be that what the liquidity actually is and those are like the main use case for this type of product um and so I really believe that's going to be a very big opportunity and again the compost ability here is is the key like you are the treasury you want to deposit into something from your multi-cigon you know you're a Dao you have a multi second safe you have a simple integration you can deposit in a multi-seek and you know that's the key of compostability and there is nothing something like that in traditional

Finance at all um so but again we need to definitely work in the security first yeah yeah look I mean I think that um that is what it is right and like you know we're in an industry where we can like reach the point where we've achieved security and everyone agrees that this protocol is like rock solid and then puts in their hundreds of millions of dollars and then Euler gets hacked right and so you're totally right that this is just like a problem that needs to be solved but like it's it's part of what growing pains are and like I don't long term I don't really have any doubt that we'll get there but I think like what I would love to like leave the audience on is this idea that you really just crystallize here at the

end is that like composability is like one of the three magic things about what we're doing here in blockchain right like um censorship resistance composability and I don't know transparency maybe we can decide that later but composability means like so much more than like probably what you guys are thinking you guys the audience are thinking in your head it's not just that like Dan can build a risk on top of open which includes uniswap and like all these different products but it also is about the composability and the Integrations of like Dows to protocols endows to Dows and protocols to um you know like expressive uh Financial

um instruments and that kind of thing and I just think that like one of the ways to truly like be ethereum pilled and build on like what we're doing is to like take this idea of composability and then put it in your head and think like okay if I was just to like Max this out like to a point where it's ridiculous like what would that imply and then like welcome to the conversation yeah I mean that's definitely did the sum up of everything and uh I'm just gonna closely with a very funny story on the trading competition like just to give you anything how beautiful is composability so we have this shredding competition and one guy he was doing an hackathon the first week of the trading card and he built a library for our protocol

um you know open source python library and he then built something basically like some sort of automation using another two place called out on all us uh basic smart contract automation so it created its own product that it was trading during the trading competition completely like fully automated and he made that himself and potentially you know people can deposit into it and this guy I think he won some price as well so at the end it was working and he built basically that out of an hackathon right um so that's the key of compostability everyone with an idea using couple of different tools can actually build another product for a very specific case and you know because I cannot even think of all those use case but people do

um so that's definitely the beauty and it's a small example but I guess that's where we go and where you can use all the other Protocols are all the other tools out there and basically build products for Tao so you can build specific products for a very specific type of Traders or and so on so that's the you know the beauty of as you said like this ethereum ecosystem and that's the reason why we're here I guess yeah man and again when I reach out to you to record this podcast like I just knew that um I want to talk to you about composability because I think that's like what the interesting thing is uh when we're talking about these like real Financial Primitives but um it's just like pretty wild to after sitting through this conversation for an hour to

realize like this composability isn't just about options man it's like it's kind of your story of like how you got involved how you got um interested in risk and how like um You're Building what you are and so um man I just can't wait to um like continue talking to you and learning about um what you're building and like how you're thinking because again man I think I think you get it I think there's like three ways to understand why ethereum is Magic and like you've taught me so much more about that composability one so thank you my friend yeah thanks for inviting me that was a fun one of course and before we head out um can you just uh tell the audience where they can find you where they can find risk yeah um you can find me pretty much on Twitter I guess uh

hopefully if you didn't run out of your quota yeah exactly now we have a quote of it I don't I don't use it Aloha for reading no just kidding I hope I will be in the quad otherwise I'm gonna pay um but yeah you can find me on Twitter um and uh on regarding risk um basically we you know the website is racial finances with the why um you pretty much every you know you can find everything you need there um but just being me if you have any questions or something you'd like to discuss about pretty much everything options D5 composability and uh yeah I love to talk about it so that's the best way awesome man well I will uh definitely be um badgering you on all

sorts of channels um and again man like I think you just get it in a way that um most people don't but like especially the ways that are like financialized conversation around crypto it's just like so brain dead and so not um informed by like real experience and real building and stuff and so um man I just I appreciate this conversation and appreciate meeting people like you so thank you man and uh have a good one thanks a lot you too bye