Variational Wants to Build the Robinhood of Onchain Trading

Transcript

Bankless Nation. I'm here with Lucas Sherman and Justin Brown. Lucas is the co-founder and CEO of Variational. Justin, head of product at Variational. Lucas, Justin, welcome to the show. >> Thanks so much for having us. >> Yeah, thank you. >> Variational has certainly been crescendoing on the timeline in terms of just excitement and hype, especially with the recent announcement of your guys' incoming airdrop, the the TGE announcement. Uh, this is really the first time we've done a deep dive on variational on the podcast. We've covered it in the newsletter on the website. So I think we ke need to just start with some basics. The way that I start explaining variational to people is like you start start talking about the perk platforms lighter hyperlquid and then I feel like we're like 75% of the way there to explain what

variational is, but the last 25%'s kind of hard. So maybe you guys can pick up the thread from there. Lucas, how do you explain what's unique and special and different about variational? >> Yeah, you're right, David. The 75% of it is it's a platform to trade derivatives like per and uh we do compete in the onchain trading space like hyperlquid like light or like a lot of other great teams. But the last 25% there is doing some pretty heavy lifting. Uh the biggest difference between variational and other platforms is we're a broker-like model, not an exchange. We don't have order books um on our platform. We take the other side of the trade and hedge it against aggregated global liquidity. This allows some really unique things like zero fee trading, like hundreds of listings and crypto per. Most importantly and most recently, it allows our dominance in the

RWBA space on two key fronts. Uh number one is that we're not rebuilding liquidity on chain in thin order books. We hedge directly onto Tradfy Rails. So our liquidity for our RWBA listings is proximal to or we like to call it is equal to Tradfy on chain. And that's a really fantastic thing. The second biggest difference is this what this >> double down on the or the the brokerage because that's I think it's a really important point that I want to say more more than just once. Let's just double click on it. So, a traditional exchange has an order book. People come in and place trades. That's not what a brokerage model is. Can you really just like let's really zoom in on the brokerage idea and how that's different.

>> Yeah. So, in a an exchange, as you said, you have external market makers providing levels in an order book, and then retail traders come in, trade on the top of the book, and get filled against an external party. On a broker-like model, there's two different ways of doing it where what we'd best describe as a principal brokerage, which means our goal is to aggregate liquidity. When you trade on variational variational system takes the other side of the trade the user is always what we call then the taker and our system is what we call the maker and we're aggregating global liquidity from crypto exchanges from decentralized exchanges and most importantly for RDBs as I was saying from off-chain sources from traditional finance itself and that becomes our hedging likes right so in other words we aggregate and port this liquidity into our own trading system

and show that to the user so most platforms are constrained by the depths of their books right how many market makers they can incentivize to rebuild that liquidity and that's important especially for RWAS where you have trillions and trillions of dollars of daily volume and liquidity depth in traditional markets but the onchain order books are still quite thin right for us it's not a problem right we're aggregating routing directly to trady which means that in RWAs we're able to show order magnitude better uh spreads and execution costs than competing platforms and not just that but also you'll very quickly see us list not just six swaps but hundreds right and really bring that tradfi liquidity onchain for a wide a variety of instruments since we can now aggregate directly.

>> So with an order book a traditional exchange you have people trading against people any to any right and with variational it's anyone to variational. So variational is the counterparty and usually in the exchange context that's actually like a boogeyman like you don't want to be trading against uh somebody in the order books who's actually like Alamita with FTX but you guys are doing the inverse of this where it's like that's actually the product that you guys are offering and uh the value of the product is the ability to source liquidity from everywhere else in the world and so you're competing with Coinbases you're competing with hyperlids and the way that you're doing that is you're just offering better execution because you're aggregating liquidity elsewhere.

>> Exactly correct with uh one or two things I want to clarify around the edges. Number one, we see ourselves competing longer term actually against Robin Hood interactive brokers and these other broker-l like platforms. Exchanges are still a key piece of financial infrastructure, right? For example, I like to say we don't compete directly with Hyperlid. In many cases, we've historically traded an hedge there. We're not a price discovery venue. The key piece that we left out when we're describing these order books and these highfrequency traders on those levels is that that's an important part of financial ecosystem where those institutions are trading against each other really really fast figuring out what the fair value of something is. But just like Robin Hood or Interactive Brokers and others, um those are liquidity aggregators, right? When you're trading on Robin Hood, your order is getting routed to other dealers and

eventually to other exchanges downstream. Ours works quite the same way. uh but again we're able to offer the benefits of liquidity aggregation the benefits of trady liquidity onchain zerofree trading and beyond. So this makes a lot more sense for retail traders but I just want to point out that exchanges are still an important part of this ecosystem and we see ourselves more long-term competing on the brokerage side which I actually do think is the best model for retail trading in particular. So why is this model better or when is this model better as in when when would it make more sense for somebody to go straight to hyperlquid and when would it make sense for somebody to come to variational and and trade on variational? I think the institutions that be tra should be trading on exchanges are high frequency traders are individuals who need that order book

liquidity right um so that's market making firms that's much larger institutions that are running u maker style strategies and beyond and again let's use this comparable who's trading on NY and NASDAQ and CME group and CBOE you have your you know jumps and jans and HRTs of the world and then you have you know maybe some bank trading firms and prime brokerages and so on but for retail traders where are they trading well they're trading for you know the best execution and also the ease of use of a broker-l like platform like an interactive brokers or Schwab or Robin Hood and and so on and I see it quite similarly right so again exchanges have a place here and for institutional and HFT and some other types of use cases they're certainly going to remain the the best place to trade because that's a natural fit but they're an

infrastructure play we are direct facing to retail we want to own the incline and provide the best user experience so I really don't see longterm if I keep building the product well and we keep working hard at it um why a user would might want to trade on one exchange directly rather than use our platform to face aggregated liquidity simultaneously and then as I'm really going to double down on the benefits of our liquidity model aggregating directly from trady right like that's really where we have a zero to one moment happening right here with RWA per swaps on variational um we're doing something that no other platform in the space can by bringing that liquidity directly on chain I cut you off to really drill down into going into the brokerage model is the was the second thing exactly what you just said about porting into tradi liquidity Yeah,

exactly. Exactly. Um, so this broker model is particularly powerful when it comes to asking that question, you know, how long will it take and to what degree can we even effectively rebuild these levels of liquidity on chain and these onchain order books. There's great teams and frankly again very big fan of the hyperlquid team and others who have really paved the way there. Um, but for us I I think there's two, three, five, you know, even beyond trillion dollars of daily liquidity in many of these markets in the US, in Korea, Japan and and beyond. And I just think the right model here just like traditional finance works is brokerage and routing to where the liquidity is rather than trying to reinvent the wheel. Um so I think this is one of the biggest advantages that rational has is our dominance in this space. And I was about to say one other

piece which was pur versus swaps. I'd like to dig into that a little bit. Um swap is a new type of instrument that we're introducing. It's a type of bilateral instrument. So it's not possible to be listed on an exchange. This is how the biggest uh hedge funds and trading firms in the world trade is through swaps. And we're opening this type of instrument which trades very much like a perp but better um to retail traders. And that's something we can uniquely do because we're brokerage. We can issue the other side of that swap leg. But the benefit to the retail user is you can still get the same great leverage and ease of exposure as a perk. It trades one to one with the underlying but now it has a flat funding rate, right? We call it a carry cost and kind of the swaps land. And we can also list

hundreds that hedge exclusively onto traditional finance rails because swaps is how the biggest firms in the world trade. So this is a really fascinating thing we're doing on the brokerage side as well is introducing a completely new type of instrument, a new way to trade, which is essentially what we think as better perp. >> Can you break down the swap? Because when you when I you say the word swap, I'm like, yeah, like you swap, I go and I swap my tokens, that's a trade to me. I don't think that's what you're talking about. Uh what is a swap? >> Yeah, correct. Correct. So it's it's funny in crypto, unfortunately, we have this overloading of the term like AMM swaps and spot markets and so on, but a swap in traditional finance means a derivative quite similar to a perk, right? a linear derivative on an

underlying. You can write a swap on anything. And you might have seen remember those uh Wall Street movies like the big short and margin call and so one where you have guys trading total return swaps and interest rate swaps and credit default swaps, right? Swap is just a it's a type of linear derivative. But going one step further for us, what does it mean? Well, it's perp like instrument and that it has leverage and you can long and short, right? And trade linear on any underlying. Uh but the benefits versus per are number one you have a predictable carry cost or predictable funding rate that's much flatter. Number two is it aligns with the way the largest institutions trade.

So when we're hedging against that trady liquidity we can map it one to one and really bring that on chain. And number three is um again for a swap like it matches the trady level execution. So we can do things like paying dividends and really aligning with what you'd expect holding these things on traditional brokerage. So I think that's a fantastic kind of innovation that we've brought into the ecosystem and our goal kind of more closely stated is to really give these tools to retail that so far have been uh gatekept for the largest institutions the largest trading firms facing prime brokers like Goldman Sachs and Morgan Stanley and UBS and so on.

We're bringing that type of trading efficiency and experience to a retail audience. But for ease of explanation, it's like a per but better. >> Yeah. And I'll I'll add it's not the swap product isn't, you know, a theoretical product that we're working on. It's actually live today that users can go test out and see what the benefits actually are. So, uh we post some of these stats pretty regularly, but about 1/5if of the cost as your most liquid um onchain venue for getting access to a market like US 100 for example, compared to the perp that would be listed on places like Trade XYZ, maybe Binance, Bybit, etc. And then funding to Lucas's point is bounded at I think just sub 5% now for US 100 as the prime example. So extremely liquid multi-million dollar order sizes totally

reasonable with sub one basis point um spread and then for funding sub 5% basically kept. >> I want to cut in before we get too deep into technical mumbo jumbo cuz I know great audience we have with with bank lists many guys are really sophisticated many guys are following from the higher level perspective >> probably the limits. Yeah >> exactly and I was going to say fundamentally why does why does spread matter? Why does these buzzwords like liquidity and bringing tradain matter? This is a cost to users, right? There's there's two costs you're paying when you're trading. One is fees, which we don't have any, and the other is spread, right? So, the execution cost. And the more illquid an order book is or a trading platform is, the more you're crossing that huge cost when you enter and exit a trade, and that really adds

up. So, for us, we want to give that quality of trading experience you'd expect from an interactive brokers and a Schwab and a Robin Hood. Whereas a retail trader, I don't even think I don't even care about the order book and T-wapping and all these complex terms. I just want to know I'm getting great execution right against as much global liquidity as possible and that's really what we're doing here is reducing cost for traders and it's a meaningful difference right even for small trades is as Justin was saying you know five to 10 times more liquid and I think we'll see an even bigger difference as we list more things >> some of the ways I've heard variational described is as a a portal to tradi liquidity you know it's a crypto it's a crypto brokerage an onchain brokerage and you can deposit stable coins and

that's how you get your account And you can do all the things you'd expect in a brokerage except what you guys are doing is you guys are a, you know, quote portal to try to find liquidity. That's one of your guys's competitive edges. We're in this world of tokenized real world assets, tokenized stocks. Things are coming on chain. The industry has been waiting for this for a very long time. It's finally seemingly here. Yet still to this day, you can you can go to like unis swap or you go down to coin gecko and you can type in Nvidia and you'll get like seven different offers and not any one of them is dominant like the winner of the liquidity of like a tokenized real world assets.

It is still unclear how we really achieve the vision that we want where we have very liquid tokenized real world assets because we have you know 17 competing standards and not really one has won out and I think maybe that's the problem statement that you guys are saying is like actually we've got a solution for this it's not a competing tokenized real world asset but it is real world assets that are highly liquid and isn't that kind of the point that you want anyways talk about your guys's um penetration into this market with your guys' different strategy.

>> Yeah, absolutely. Um I I totally share your sentiment. Tokenized real world assets as a spot tokenization has a place. It's entirely unclear what the winner is. There's so many different models to get that trady liquidity on chain for those and none of them are doing too well so far, but we expect greatness and expect more from that ecosystem. But my thought is I want to add one piece to our description of variational as a bridge from Trafi to onchain and as a broker. It's derivatives, right? We think derivatives are some of the best ways to trade for most traders, right? When you're looking for that leverage, you're looking for the ability to both long and short and to your point David, you're looking for one place where you can deposit USDC balance and trade hundreds of different assets, soon thousands on variational.

That is the model that we're going for and I think just like PES have really dominated both in crypto and even RWA so far led by Hyperlquid, right? Derivatives are are the right solution here for most traders. Um, so you know, I think there's a lot of great things happening, even partnerships happening right now with some big firms in the DTCC and others for um, RWA issuance and these wrap tokens and so on and so forth and those will continue to get better. But for traders, right, traders who want that leverage, who want the ability to long and short, and who want the ease of use of one account, that's absolutely what we're going for. We're bringing trades, two perks to one platform where you can get exposure to as many things as you want. Our vision is that, you know, variational is the gateway to global

markets, right? You can put USDC in one platform and you can trade a portfolio not just of hundreds not just of thousands but longer term. We want, you know, 5,000, 10,000 different global markets, all with liquidity coming directly from the most liquid sources in the world, Chad 5, so to speak, right? And all with the ease of use of one platform, just in the same way we we love platforms like Robin Hood and others where they made it so simple, right? So easy to use. Like that's our vision. >> I want to know uh the kind of the composition of the variational team like what are you guys uniquely good at because this seems like a hard challenge. You guys are building a derivatives platform which is already we're now we're talking math. you're doing it in the onchain context and so there's always the blockchain

engineering constraint which is always kind of dubious. I'm glad I'm just a podcaster so I don't have to worry about people's assets. You guys do. You guys also have to do quant stuff and port to try liquidity. There seems to be a lot of moving parts that require some pretty hefty challenges. So talk to me about the team composition at variational like what what are you guys the best at? >> Yeah, let me let me give you a few thoughts and I'll let Justin fill in some more blanks. um we are the best at the pretty much the three pillars that you mentioned with one key advantage that I I'll get back to. Number one is Edward and I um are co-founders of variational. We come from about 10 years in the crypto space. Started out in the quant hedge fund area, went uh FX and

moved to crypto uh ran that in New York for some time. Spent a lot of time like pitching traders very like traditional type business model that was acquired by one of the largest uh broker dealers in the space and then we ran a $250 billion book of flow u building out their electronic marketmaking system. their single dealer platform all the types of technology and infrastructure that's quite relevant to what we do today at a very large scale where variational has a very similar founding story to hyperlquid actually where we were a prop trading firm active on all different eras of uh D5 protocols whether it was like dydxv34 and lyra and zeta and all these up through even hyperlquid itself was one of our biggest wins when we were integrating early on so you know this is why I can incredibly say we're big fans

you know we're big fans and even early supporters of the ecosystem but That's also where we saw the kind of lack in the ecosystem of someone trying out this broker-l like model and that's how we started approaching it. But our team's backgrounds come from great other tradey firms like Jane Street, like IMC, like myself and Ed, having spent more than 10 years in the space doing pretty much this exact same business, high frequency trading and market making. And really later, especially with the help of Justin and kind of building out more of a product team and UX team, we also tried to expand the org and being experts in building the best uh retail platform, the best UX for retail to trade. The final one I want to double down on, uh, David, which you asked very keenly about, is the Trafy connectivity.

Look, you know, doing these partnerships with Trady players, some of the largest in New York, Chicago, and Amsterdam and beyond. Um, it's hard on the commercial side, it's hard on the, let's call it on boarding, compliance, and regulation side, and understanding and speaking their language, how to get these partnerships in place, but it's also hard on the tech side. And we came from that um you know for a long portion of our careers was been facing these bigger dealers and banks and so on OTC on their antiquated you know fixed standards and all the infrastructure you need to face. So we consider that another big competitive advantage is the fact that we've built this and done this for years and years and years the market making side of the infrastructure in crypto.

We've integrated with as many D5 platforms as you can name and we take a lot of cues from that in terms of how we engineered our own platform. But the final piece bringing it all together is that trady background right? to the relationships, the connectivity, the knowledge. Like that's how we're actually pulling off being the bridge between Tradfy and onchain. Justin, I'll let you add anything that I missed there. >> Yeah. No, I would just say we've also really looked to our user base and our community for talent. Uh so I actually was an early user variational. I met Lucas in Singapore about a year ago now and then since joined the team and we've also hired a number of our traders, users, community members, etc. um which has given us a really interesting perspective on what we can bring to this crypto trader cohort. Although now as we

look to next year, we're actually looking at sort of expanding beyond this cryptoc you could say of maybe 30,000 to 100,000 active traders and expanding beyond that. Uh so one of the things we're looking at is like FOMO for inspiration and how they've crossed the chasm here and gotten out of the crypto bubble. And I think that's going to be the real next chapter of how we approach hiring going forward. Yeah, Justin, I do want to ask you about product, but let me tie off this section with with Lucas real quick. Uh, Lucas, it sounds like you have exactly the team that you need to produce the product that you want. Uh, but that's also one thing. The other thing is uh organ organization and leadership and operations, which is that's the ball balls in your court.

What history do you have as as an entrepreneur? What's your background? What's your lore? >> Yeah. Um, well, I have some deep lore, which I I think we can get into if you want to go on the personal side, but let's just say I actually come from a research background. Uh I was a physics researcher and then robotics researcher for better part of a decade before I got into quant finance. There's some fun stories about how and why I made the pivot for another time and maybe some beers. Um but suffice to say uh once we started out in quant as I was saying um I've run now funds and teams of various sizes. We raised a few rounds in the GP that first fund in New York that I was mentioning. That's where I really started my career in finance working the entire time with Edward my co-founder.

So we go back more than a decade now. that was acquired by digital currency group as I was alluding to earlier. Ran a very large team at Genesis. So when we joined it was probably 50 to 100 people at Genesis and DCG. By the time we left it was 250 plus and uh built out a massive engineering work there as well. Ed led the quant research team. Um as it relates to variational uh we studied lean and I think this is one of our driving factors. One thing I was left unsaid David but to give you a direct answer we're just under 25 people right now and expanding. I like to say fast by our standards but slow by you know traditional startup standards like we hire very senior and you know very strong backgrounds and I think that's part of our ethos that's shared from the

prop trading background like with hyperlid we want a really high performing tight and lean team um so you know I I manage orgs at various sizes we've raised many many many rounds of capital and run books frankly even much larger than variational is um in our career myself and Ed but we're very comfortable kind of scaling out this team in that direction I've I've been trading crypto for almost a decade and I've used so many different wallets, exchanges, aggregators or frontends and I'm basically always looking for the same thing, just one interface with a deep liquidity across a bunch of chains and assets where I can access markets like per earn yield trade confidentially and still control all of my funds. And I've never really found it and I'm just always switching wallets, juggling gas fees or getting eaten by slippage. But near.com feels fundamentally different

to me. I can do anything I want from any chain and keep all of my activity confidential. crypto tokenized assets, per payments. I can even earn yield confidentially. One account over 30 chains confidential by default. It's the way that crypto ought to work and it's powered by Near, which has moved over $30 billion crosschain, uses postquantum signatures, and has run over 5 years on mainet with zero downtime. Near.com is the best way to be onchain and be in control. Get 20% of your trading fees back on near.com using the Bankless link in the show notes, not investment advice. Banklist Nation, we've built something for you. Introducing the bankless MCP. Chat GBT and Claude are great at a lot of things, but ask them anything beyond the basics of crypto about protocol mechanics, tokconomics,

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and all of a sudden your crypto queries to your AI LLM whatever you use will get a thousand times better. So go check it out. There is a link in the show notes and once you become a banklist premium member, you can hop into the bank list discord and let me know how you like it. Some exciting news, we are launching a new podcast to help people figure out the crypto cycle, how to navigate it. The best crypto cycle investor I know, his name is Michael Nato. He runs the DeFi Report. This is the guy that sent me a sell alert before the 1010 price drop happened. His cycle analysis has been absolutely on point. I've been following him for years and this year we started recording weekly podcast episodes. Each one we get into his portfolio, what he's holding, the market structure, entry targets, fair market

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some of the philosophy or sentiments that you have around this sector of crypto product around trading venues and and how you take that work to to variational. >> Yeah, absolutely. Okay, so this year has been really interesting for variational because I would say we've really been doing our best just to catch up with the rest of the market. Our growth at the start of this year and through the last two quarters has been exceptional and honestly a little bit unexpected, but um and so as a result of that, we've really been trying to catch up and get feature parody with the other perpetual exchanges. I do think now we're starting to get get to a point where we're almost there, but through the rest of the year, we're really trying to round out the core features. So over the next few months, uh we're actually still in

private beta right now. We'll be going public mainet very shortly. Uh we'll be launching our trading API after that. Right now actually it's all manual users click trading in our app directly whereas most exchanges most of their volume actually comes through their trading API. So we expect um a big boom in users and also targeting a different user base that way. And then in addition we have other things like we're trying to incorporate privy and fun. We want to make it easier to onboard um people that don't know how to use a private key, people that aren't familiar with stable coins, people that don't want to manage a wallet. Uh we think that's probably where this space is headed. We've seen a lot of pick up with FOMO. I know you've done a lot of coverage with what's been happening there. And I think like FOMO

really there's a lot we can take inspiration from. Their onboarding process is incredible. And if we could replicate that in a mobile app for our users, uh, I think we could really expand out of this crypto cohort and start targeting, you know, people that have never traded per before, people that have never used crypto before, etc. So that'll be a big focus over the next few months for us. When we talk about future parody and like a lot of the work Justin's doing, we have to your question earlier like amazing technical fundamentals in a completely different business model we're we're building on, right? We talked about swaps and we talked about the broker-like model and all the benefits of that. This is like the core of the protocol and we think we've done that exceptionally well. So we are building product from a position of strength but we're quite upfront with

ourselves about like what are the reasons people are using variational. They're using it for tradi liquidity on chain. They're using it for the innovation we've had with the broker-l like model with swaps and beyond. But we want to wrap that in as great of a UX as possible. I think there's very few people who are using variational as a just the most exceptional user experience in terms of place to trade. So a lot of Justin's job and what he's mentioning there is marrying like an exceptional quality of UX and real differentiation of new ideas like porting some ideas from FOMO and others to variational and taking this model that we think from a barebones let's call it tech perspective is far and away better than traditional brokerages right because they're derivatives because they're accessing to global markets and with the same liquidity asy like that's

the base we're building on with privy and fun and beyond Justin's alluding to we're building this model not just to compete with hyper liquid and lighter and others and again we see them in many ways as collaborators We're competing longer term with Pula in Indonesia, with Grow in India, with Interactive Brokers, longer term, let's say, with Robin Hood in the US. Like that's the market and that's why the UX has to be the UX has to be exceptional and allow for onboarding net users from out of crypto into our our platform. What are the the big like uh user consumer archetypes that you guys are really going after? I can name a few just to get the conversation rolling, but I don't know if I'm correct or not.

There's, you know, the average crypto trader, crypto consumer who's got like a $10,000 portfolio on variational. They have plenty of wealth elsewhere, but they have a $10,000 account on variational. Maybe that's one. There are maybe the the mega whales who are have a huge portfolio and they are putting and they do a ton of volume. There's maybe a few other people. What are the the archetypes that you guys are really going for to to move the needle here that the most approximate archetypes you guys are going for? I like to always talk about business models in terms of crawling and walking and running. And it's funny that variational is so huge now in our crawling stage, right? But we we're crawling when we call it like taking those first few users that are DeFi native, right? And to Justin's

point, to sign up for variational right now, you need an invite code, you need a crypto wallet, you need arbitrum USDC, right? And we're talking to a crypto audience here, a bankless audience and beyond. Of course, >> everyone who just heard that was like, "Oh, I know all of those things." >> Exactly. Exactly. And that's why that's that core set of early adopter users that first 30,000 100,000. But how many daily trading users does hyperlquid or even lighter and others and us have versus Robin Hood versus Interactive Brokers versus Pulan Indonesia or Futu in Hong Kong, right? It's actually infantestimally small if you compare those DAU numbers. So the real answer to your question is yes. You know, there's some whales, there's crypto traders and so on, coming from D5 platforms coming from centralized exchanges, but we're building a product that is so fantastic

on kind of what we're offering swaps and tradi execution and derivatives on global markets in one platform that we're building this to be competitive with traditional retail brokers, right? And there's a a wide kind of chasm to cross there as we go into I call that walking mode. And then the running mode is uh being at full scale as I said versus say an IB and a Robin Hood. Um, but what I think we've gotten right is the technical underpinnings, is the partnerships, is the trady liquidity on chain. And the tailwind of this whole ecosystem is it is better to trade on chain. It is better to trade with one click sign up with instant settlement on USDC with one USDC balance collateralizing your entire portfolio.

Like that's fantastic. Um, but where we're still working on is a lot of the UX pieces. So our early users are very much the cohorts you just described. They're traders that might be in Asia, might be in various parts of Europe, might be some in South America and other growing areas for us. Um, they're certainly familiar with crypto platforms, whether they're onchain or coming from a centralized exchange. You know, there's some who are small accounts or some who are big accounts. I think both see massive benefits in our access to global markets and the quality of execution we have. Um, of course, you know, bigger accounts and bigger guys feel this in the spreads and the order sizes um more, you know, acutely. Uh but fundamentally like our goal is always to broaden that set and I think of course onchain trading as an entire industry is

growing rapidly. Crypto exchanges and so on are growing rapidly but I I really want to eventually be pulling users in and I shouldn't even say eventually very near-term pulling users in from traditional brokerage platforms as well and that's where we see the next exponential phase of our growth. >> Yeah. One thing I'll add there is there's a narrative that we firmly believe in that pers are just better outright better than options for many reasons, but one of the core pieces is that they're just easier to understand than options. And while I think that's true, I don't think that's yet been applied to the fullest level. If you look at Robin Hood's options product in their app, it is very simple, very easy to understand. But when you compare to that to existing per offerings and um that includes ours as well, it's really an advanced platform. I would say you

have to manage your liquidation price. You have to know about isolated verse cross margin. You have to know about funding rates etc. I think there's a lot of work that we can do to actually deliver on the promise that pers really are better and easier to understand two options. Right now it really is a product that caters to I would say a very knowledgeable audience base this you know crypto cohort of 100,000 or so 200,000 or so daily per users. >> I want to learn about how variational actually uses the chain. My intuition tells me that you guys are pretty onchain light as in you don't have a huge footprint. There's not a lot of state there. Uh what are the actual blockchain components that go into variational the product?

>> Yeah, so we're currently built on arbitum. Um but the answer to your question is we're strong believers that for safety, for the isolation of funds and and even for the observability of the protocol, everything that moves value around has to take place on chain, right? So settlement and clearing and liquidations, movement of realized and unrealized P&L and collateral like that's all happening onchain, that's all happening on arbitrum one. Uh we do a huge amount of transactions to support that, right? Uh it's not a you know vast majority is offchain and we move things around occasionally. We're one of the largest gas spenders in arbitum one. I'd say we're probably in the top five just D5 protocols overall in terms of usage of the chain directly. So if that gives you a mental model, we're heavy users of onchain. Um but by nature of OOLP's

operations, right? For example, as I think you're aware, we talked about directly facing tradi liquidity and hedging, right? We talked about even our ability to hedge on centralized exchanges, which in many cases will have interesting liquidity. We do want to help aggregate for our users when they're trading say crypto per onchain. Like these necessarily have to happen offchain. So we see variational as like a foot in the foot that's really important and the kind of design principle is capital and segregation and smart contracts all the stuff that touches value exists on chain but a lot of our hedging systems and pricing systems and some of the OLP pieces they have a foot in both right and that's a feature not a bug of the platform it's what lets us face uh trady liquidity and aggregate from off exchange sources um so that's that's the mental model of how

we think about it if I went and checked the chain I would only see USDC going in and out of variational, right? Like not if I if I was buying Ether or Uniswap token or arbitum token on variational, I do that in like a derivative fashion, not an actual spot market. And so like it's just USDC and USDC based exchange logic that's being manipulated. So that's really the the bulk of the activity that happens on Arbitum. >> That's absolutely correct. In the future, of course, we're looking at adding multiple different collateral types just like uh you can imagine for any derivatives platform, but we started with USDC and again this design principle of using arbitrum using USDC and beyond because they're great high quality products and we want our traders to be protected. Uh we went through as a prop trading firm FTX collapse and

beyond we've seen the you know hairy things that can happen when you don't have great uh risk segmentation. I want to point out with this opportunity one thing about our our protocol design which is that on our platform David if you open an account and sign up with a wallet and Justin and I have our own accounts all of our capital balances are completely segregated. They're not moving into one hot wallet pool. They're not moving into one elomerated kind of risk system. This is a benefit of this broker-like model is that capital stays onchain observable. There's plenty of tools that track it on arbitrum and it's USDC there right which we consider one of the best and safest you know stable coins holding the peg to the dollar. So that is a really strong set of guarantees. When we talk about the offchain pieces, OOLP and kind of the

systems that collateralize and figure out that smart routing for hedges and so on, that's using OOLP's own capital base. That's using some of our own, you know, capital that we've raised. This does not expose the users directly to that risk. And we think that's a really important thing to emphasize in also terms of how we segregate risk and give a great guarantee to those users that the pieces that touch their capital are happening on chain in an observable way. >> You've uh brought up OOLP. Can we go into what OOLP is and how it functions inside of variational? >> Yep. The simple answer is OOLP is the omni liquidity provider. Um this is the system that as we were describing earlier in our broker-like model uh takes the other side of the trade from the user. The user is always the taker accepting a quote. OOLP is always the

maker offering that liquidity. Um and then it goes and aggregates liquidity from all of our hedging sources intelligently to offer the best price and the best execution. Um OOLP doesn't necessarily just do pass through hedging, right? that would be relatively inefficient. Let's say David, you place an order for 100 BTC long. We can give you a price on that and fill it quite efficiently. Um, right just in one click, but that doesn't necessarily mean that we're passing through a 100 BTC market order onto the order books of say a Binance. Um, but we're aggregating liquidity much like an intelligent market maker would, right? So, we like to joke to a crypto audience, we call it like an in-house orange meter or an in-house oros or an in-house Seleni. Um and then to a you know for example Tradfi audience we'd say we're we're doing the same job as these big

liquidity aggregators dealers and banks internally. Um we do this intelligently right our goal is at any given time just to aggregate liquidity and provide the best execution the best price that we can to our users. Um but OOLP is a real lynch pin of that. It's why we highlight so much of our quant trading backgrounds. This is how we aggregate. It's the intermediary that's doing that work. What are the yields that have been on OOLP in the last like can you give me a sample size of the typical yields? >> Yeah, so I'll frame the question slightly differently. OOLP is one of the main sources of revenue for variational um we have three sources of revenue going forward. We have this uh flow trading, right? The intermediation of the flow is how uh OOLP monetizes. We have um the ability to generate essentially net interest income on

balances, right? And that can take two forms, one on the open interest and then one on the uh USDC on the platform. Um, but suffice to say that's that's the lion share of our revenue that we're monetizing. Um, in a little bit of a similar way to how big trading firms monetize in general, right? We're providing the service of liquidity. We're able to capture some of that spread. Um, fundamentally, right, we we disclose this in our bi-weekly updates amongst many other dashboards that track public stats about creational. this is very very profitable um for the system and that's a great thing for the health of the protocol and the sustainability of the business model is that we're not offering zof trading while generating you know trivial revenue we're capturing the part of the revenue that normally would be captured by those huge market makers we all know how great of a

business you know Jane Street and HRT and Citadel and so on are um in your mental model I want you to think about or at least taking a bit of that um for the protocol level and keeping it verticalized one of our earliest ways we described the platform because like Robin Hood and Citadel built on top of each other, right? So instead of leaking that value out of the ecosystem, we keep it within and that becomes uh indeed yes a return on capital for OOLP's liquidity providers, but more broadly this is the the topline revenue that's also being used towards the token and towards the ecosystem as a whole. Um so I think that's an important piece to understand is that by not giving that out externally like other platforms do, uh we're able to really generate some interesting economics at the protocol level. All of these interesting

economics converts into the conversation around the token which I want to get to. There's a question I missed back in the arbitrum section that I first want to rewind and go to before we get to the token section. Um uh you talked about all all of the just like block space around arbitum that you consume because a lot of the business logic goes on chain. Is it similar when you guys are doing all of that activity? Is it similar to the lighter construct in that like lighter is an audible ZK circuit that you can you know poke at the verifiability of the state of the exchange? Is that kind of the same properties that variational is using arbitrum for or like what is what is the um all of that block space of arbitrum getting burned for?

>> Yeah, not directly. Right. Again, because we're not an order book, we don't have the same types of you know circuits and complexity on chain that um that lighter does. And I think they've done an excellent job with that design and certainly even with verifiability and the speed of their ZK circuits have been fascinating to watch that and as I said earlier like whether it's versus lighter versus hyperlquid and others we see our business model existing alongside these exchanges it's great that they're coming up. I think as these continue to grow and and maybe even um take flow away from traditional exchanges and tradi like we'll continue to aggregate both of them but my thesis is that you know in the near to midterm and frankly even in the long term longer conversation you know trillions and trillions of dollars of liquidity will remain on trad 5 rails right so we want

to be the bridge between the two but to answer your question directly the pieces that's primarily consuming so much gas and so much activity on arbitum is constantly rebalancing we talked about those settlement pools are completely isolated for our users so as David uh your trade goes well and you you know generate some funding rates some additional unrealized P&L maybe some additional positive realized P&L we're constantly moving that capital around um from OOLP from other pools into your pool to balance out and have those exist on on chain for your account let's say Justin trades going poorly sorry Justin um you know as he as he has big net outflows in his funding yeah exactly as he has big net outflows in his funding uh payments maybe and as he realizes negative P&L those are being moved out

of his settlement pool of course um into the OC. It's the execution of the exchange logic to move sometimes very small sometimes very large amounts of USC instantaneously as the state changes correct between all these different you know systems as the state changes and that's how we say you know your capital stays within that pool including your realized P&L your funding almost immediately right and even a portion of your unrealized P&L so we think this is a very interesting guarantee in the architecture and the safety of the system but in order to accomplish that yeah we have to be moving huge amounts of funds around at all given times um in terms of the number of transactions and that's that's a good problem to have but that's simply because we have so many of these pools so many of these users now >> right before we uh this week uh on

Wednesday I believe you guys announced the VAR token V token your guys' TGE um you guys a quote says we plan to finish our points program at the end of Q3 and launch ticker V shortly thereafter so first half or second half of October would you guys say >> yeah let me just uh clarify that or Maybe we can step back. Um, so we had planned to end points at the end of Q3 and launch the token imminently after. Uh, but because of reasons that'll be very clear over the next couple months, we're extending the points program through Q4. Um, and as part of this announcement, we wanted to give back to our community. We've seen the success that Hyperl and Lighter have by doing the same. Hyperl, I believe air dropped

about 31%, lighter about 25%. uh we wanted to make sure that our users were getting the biggest airdrop as a percentage I think in crypto history. Uh so we're targeting a 32% airdrop of the total supply proportional to points holders. Um and so that'll happen at some point in Q4. >> In Q4 and you guys are extending the points program to go into Q4 probably because I think you guys are getting a ton of attention right now and so there's probably a lot of net new people. So you guys are trying to also distribute points to those people as well. Is that sort of the philosophy of extending the program? >> Yeah, I think that's it. That's right.

Um the growth over the last couple months has been wild honestly a little unexpected. Uh we expect that to continue through Q4 and yeah to your point like as we start onboarding more users making it easier to use the app maybe launching mobile launching privy and funds so you don't have to manage a private key and stable coins uh we can now start targeting non-crypto natives and to be able to airdrop to them I think is going to be something that is really unique if we could pull that off. Um yeah, we we definitely want to grow our user base and continue rewarding our existing users. >> Yeah, David, I'll I'll cut in with one thing. Um just to double down on two things. One is that um you know, Hyperlquid showed if you do right by your community, um your community will do right by you. So, you know, I think

doing one of the largest airdrops in crypto history and kind of setting that precedent really puts us in the same ballpark and you know, we want to follow that mental model of doing right by our community. Um you know, I'll release more information and certainly there's going to be more coms from the teams in the coming week. As Justin said, it will become abundantly clear there were some very core motivations to buying a little bit more time here. Um, but we certainly wanted to um, let's just say have the space to land some amazing partnerships, some amazing uh, features and a few other things and get this TG really correct. Um, but it's still very much coming in the near term and you know points we've extended essentially just to you know cover that interval period between now and TG. But it's been fantastic see to see the optimism of the

community. uh we know that the community uh knows that we keep them kind of in the highest regard as our number one priority and I I think that the sizing of the the airdrop and how we're approaching that also shows that. Is there any color you can give me about just the um just the health of the startup you guys have raised in the past? I'm sure you have cash in the bank still uh like the runway that you have the burn. I know these are not you like typical questions but since since the company is transitioning from being like a typical startup to being a tokenized a token company with 100% revenue what sort of color can you give about just like the the runway that you guys have?

>> We have raised significant capital has been announced um previously. Um there'll be better information coming on that the coming few weeks as well as as it relates to things uh for pre-TGE preparations. Um we've been immensely profitable uh both as a company operating OOLP and variational in the the past year year and a half as well as um our history as a prop trading firm. Uh so we are very very well capitalized. Um I like to joke you know a we're profitable but b just in the general startup sense uh it became immaterial to measure our runway in terms of years and decades at this point if that gives you if that gives you an indication. Uh it is the first and last question to your

point David of of any good investor. >> Um this is a very well capitalized team. It's a very well capitalized product. Um for example we've been the major depositor of OOLP for quite some time and as we know that has generated substantial revenue. So we are not at all worried about the health uh and economic health of the team and the the lab system and and the overall protocol uh which is again why we can take such a position that says our intention is to move as much of the the value regenerating here into the wider ecosystem such as the token. >> Cool guys. Uh so beyond the token and uh TGE event coming in Q4ish uh what does 2027 have in store for variational? What are your guys' aspirations by the end of

next year? >> Yeah, so we we have big aspirations. I'll give you a few and then Justin can maybe give you a few. But um right like this is a space that's used to exponentials or we should be used to exponentials, right? How long did it take trade XYZ to go from, you know, very early deployer on HIPP3 to one of the main drivers of hyperlquid's growth and certainly you know in the you know billions and even on certain days tens of billions in terms of volume and turnover and open interest and so on. I mean a very short amount of time right about a year. Um we've seen immense adoption of our swaps product that we talked about earlier. We think that this is a better way to trade um for retail trading RWA derivatives on chain and just in general even variational as

you've seen has had immense growth in the last year year and a half. Um, so we very much expect that to not just continue but to accelerate, especially as we list not just six, but dozens and then hundreds of different swaps products as we continue to improve all the product pieces that Justin mentioned. My favorite one which we haven't had that much time to talk about uh today and it probably will have to bookmark for a future banklist podcast uh but is variational pro right. So, I mentioned from our background, we come from institutional trading, OTC trading. Um, there's still a world out there and all the stock broker movies, right? Not of PES and so on, but of options and structured products and block trades and credit default swaps and all these other fun things. There's there's a quadrillion dollars of volume in all

these OTC derivatives that is still being handled by ops teams offshore moving, you know, swift wires around and so on. It's a mess. Um so in 2027 our intention is to launch uh pro which is variational's answer to the uh institutional product side options structured products other types of uh multi-deer platform trading essentially and this is something I'm particularly interested but in the meantime we'll continue growing variational and omni to be the size of some of our large competitors and beyond because I think this whole space is growing I think we're going to be bringing net new users on from traditional brokerages as Justin was saying and we'll grow very much alongside but also in a comparison to as I said some of our competitors it's a it's a better product. This is the best place to trade RWAS and that will be our

main focus. So Justin if I missed anything >> yeah I just distill it down to really three things I think we're mostly thinking about now. The first is improving on the swaps product. Um we're currently just in the early stages of rolling that out. It's already a very popular product for us and and we think that will continue. Um, so we're actually looking at how we can merge swaps and pers. You know, for an asset like US 100, let's say, or Google stock, we may have a swap and a per listed. Uh, but there's possible ways that we can merge those two products as a benefit for users and turn swaps fully 24/7 and give the benefits of swaps to per obviously, as I mentioned before, is a huge focus, seeing how we can onboard normal people, not just your average crypto users. And then as Lucas uh gave

a little bit more info about US Pro specifically, I think we're mostly excited about options which are really heating up in our sector uh the crypto sector. So we've seen derive I think you've covered on the show David as well has done really well. Um and I think there's a lot we can do with options of bringing that TROFI level of liquidity that we see um in the options market onchain which has never been done before yet. And I think our model, which is the broker-like model of aggregating from these different liquidity sources, is actually really interesting, especially for options. Um, so those are the the main things we're focused on right now.

>> Guys, this has been fascinating. I love learning about cool new protocols. Do you guys consider it a protocol? Is it the protocol word the correct word for variational? >> It is for the infrastructure. uh we call it the variational protocol. But I think to be honest, David, this the marketing side of me and certainly of Justin and Max and our growth team just calls it variational nowadays, right? Because >> one key observation as Justin was saying as we move towards onboarding that next few hundred thousand users from Trafi is >> this is just a trading platform, right? And I say just uh right, but crypto is is an infrastructure rail. It's a fantastic one. Onchain, I think, is going to continue to grow. stable coins are excellent but I envision a world where you know people coming over from IB and Futu and Pua and any other

brokers that we can name um don't necessarily know what arbitum SDC is and don't necessarily even know what onchain is but it's just fantastic infrastructure behind a great user experience um so it's it's somewhere between the two variational protocols the tech but variational is the trading platform uh both for retail and in the future for pro and options and beyond and that's going to be fantastic >> amazing guys well this this is I am excited you guys have gotten me excited. So, I hope the best for you guys and you guys' upcoming TGE and also I do hope that the market continues to be the way that it is because I think that's tailwinds behind everyone. So, thanks for coming on today and teaching me and the bankless nation about variational.

>> Awesome. Thanks so much, David, for having us. >> Cheers. >> Bankless Nation, y'all know the deal. Crypto is risky but not risky enough. The institutions have landed, so we are going even further west. This is the frontier. It's not for everyone, but we are glad you were with us on the bankless journey. Thanks a lot. Heat. Heat.