Zhiming Yang: Orbit Markets – Crypto Derivatives and Structured Products. Ep. 535

Transcript

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one hey guys welcome welcome to Epic Center I am Maher Roy and today I catching up with shiming Yang who is one of the co-founders of orbit markets orbit markets I think is the market leader in the field of Structured Products uh based on crypto assets so I'm really interested to explore what this space represents and where it could go hi welcome to the show Jimmy thank you very much for the invitation it's great pleasure to be here so Jimmy tell us about your background story and how you ended up being involved in the crypto space yeah sure yeah so um actually I

think I I came to crypto relatively late compared to most people I think uh so we started actually in 202 end of 2021 the beginning of 2022 so about about two years ago actually it's been two years I didn't realize it's time time fles um and before crypto I I was working in uh in traditional Finance so I worked in at at investment Banks uh for the all of my career before so uh I was at uh I started my career in London with BMP parabas and then I I worked at Deutsche Bank for over uh 12 years uh trading FX currencies derivatives and before leaving Deutsche Bank I was running the FX derivatives trading business uh for

APAC so um what does it mean to lead the FX derivatives trading business what is the FX derivatives trading business at an investment Bank yeah sure so at investment Banks you have uh what Investment Bank is very broad term right so everybody here is like Goldman saac JP Morgan dut Bank these are investment Banks they have one side of the business which consists of um merger acquisition Le getting the company listed you know that's like the corporate finance part of things there's another part so in a sense you can think of it like primary Market or or if you want like if you want to if you more familiar with crypto then like getting a

token listed on Exchange or like a financing Etc a project there's another side of the investment banking which is the what we call like secondary market so something's already listed it's already trading so then you have the whole the whole the sales and trading business that actually help clients uh put on a trade or whether it's for hedging or whether it's for speculation or whether it's for investment so we provide those products to the clients and the clients of investment Banks can be funds hedge funds trading desk High networks individuals companies corporates uh all sort of different clients and then we provide these

investment Solutions or products to them for them to trade and then so what I do as a Trader or as running as the as someone running the desk is that we have obviously a team of Traders we have quants we have also middle office back office doing the operations so we have actually every day we a client wants to trade a certain product a certain or certain Solutions so we have to actually have make the price so we have to actually calculate the fair price of this product show it to the client if client wants to trade then the trade is done and then we need to start managing the risk managing the risk of those trades and then we obviously want to make make

money as well for the bank so um that's what we used to do on the on at the Sal side we call Sal side at at investment Max so now what we do in crypto is we try to basically replicate this same sales and trading business model from traditional Finance to crypto and that's what we do actually so at Obi markets we offer uh mostly we are focusing on options and derivatives so we offer derivatives products and solutions to our clients uh some of them for example use our Structured Products to hedge their uh crypto Holdings L for example a miner that they keep producing uh BTC right

every day and then they actually want to hedge the the risk of price falling or fluctuations so we customize and and make B spoke structures uh for them well we also have some of the funds who wants to actually buy tokens accumulate certain tokens and then we have like structur solutions to help them buy the tokens at a price that is better than the spot price so can I think of it like as a as a as a crypto investor I'm used to the idea of yeah going to an exchange and like buying this coin or that coin and usually I'm I'm I'm interacting with the exchange or the matching algo of the

exchange quite directly but sometimes I might go to kind of like an OTC desk and to the OTC desk there's a human on the other side and and I essentially say hey that's what I have that's what I want can you can you make the make the trade for me and like this this Trader on the other side um will essentially figure out how to price it and will offer offer me a a price for then OTC price for for what I want but then you could imagine that that OTC desk could get even more sophisticated where it no longer becomes about just selling or and buying something but it's like hey I want to I

I have this asset and I want to combine it with some kind of derivative and the and the combined thing um is is is the trade I want and then the OTC desk is able to do this complex combinations and then as soon as you get into the field of complex com combinations it will happen that okay I will have to put some asset as collateral with that OTC desk and so collateral management will also enter which may not be part of just like a simple trade so as you imagine like this OTC desks becoming more and more complex more and more capable they would start to resemble what kind of an investment Bank does on

the trading side for its clients today is is that correct way of seeing seeing it yeah absolutely what you just described is is is true for crypto but is also very true for cry for traditional Finance So In traditional Finance you also have this exchange uh Market venues and also the OTC side The Exchange is also very very important part of traditional Finance you have most of the stocks for example trading on exchanges but it has also so limitations right so the exchange can only list standardized products you have like standardized the payoff standardized maturity strikes Etc but then what if I want something more customized or what if I want something

more as you said more complex right so in that case you actually even in traditional Finance you have to go to OTC desk OTC desk in traditional Finance are typically uh big Banks big investment Banks so you go to them for for various Reon one you want to execute a large amount of trade so if you do this on Exchange you will actually move the market probably against you right so you want to go to Investment Bank who can actually manage this better for you the execution for you or you go to a do go to an investment bank because you actually want something more bepoke like not available on the exchange so something exotic or more complex so you go to them and they are able to offer this to you and they will manage the

risk themselves so they will rely on their quantitative models they will rely on their um they will manage the the the product together with their other products so to achieve efficiency so at the moment in crypto is the same thing crypto Market started with very basic simple products which is spot which exist in every Financial market and if you look at the evolution of any Financial Market gradually moves up in terms of sophistication and complexity sophisticated products complex product doesn't mean they are necessarily better product I'm not saying that but they are probably they they they are there to fit your particular view your particular demand your particular budget Etc it

just gives you more options if you want like exchange you can think exchange more like a fast food restaurants go to McDonald's you can just choose whatever you want it's all standardized you just buy food you want and then if you want OTC Das is more like fine dining restaurant you go there you want like personalized dishes you want eat this and that and they will make it like specifically for you like like they have dedicated service tailor tailor made products for you right so in that case you can trade things that exactly as you want for example I think Bitcoin is going to go up uh to 45,000 in the next few weeks but it will not exceed 50,000 right so then if you have this

particular view is almost impossible to to do this uh using is impossible to do this using spot or PBS or fures and even with vanilla options you can't achieve this if you have such a particular view but you can do this using exotic options right so that we we call like for example barrier options so that trade will you start make money if spot goes up above 45,000 but it will knock out it will just disappear if it spot goes above 50,000 and then you will be you will buy this option really cheaply because it has this additional condition of knockout so this is not something that you can buy from the exchange so you have to go to OTC desk which can provide this product to

you yeah uh that's that's really interesting so yeah you can basically like create new kinds of options that are not available on a any public options market and then you can also like combine these options with like trades and make make even more sufficient products could you could you give us like some historical examples of this industry in in the investment banking world like examples where um I mean there might be a story of somebody that did something like this and either made money or lost money and the story is well known in the industry and would give us an idea of how it works you have some some stories like

that yeah yeah plenty of those uh kind of stories and obviously a lot of people some people made money some people lost money that's just like uh any Financial Market options itself I think it's uh I think I I I can't remember when it was invented but it was invented probably late like 70s or in the 80s in the in the US Stock Market then there's this famous like black shows formula has um got invented and then suddenly this becomes a very very popular product because all the banks suddenly have the tools have the quantitive models the price of risk manage it and suddenly becomes really popular and now if I I I if I remember correctly last year there was a big boom in the US Stock Market

and options volume actually surpassed the volume of uh spot stocks right a lot of uh investors buying this like a zero day to mature zero day to expiry so basically same day expiry options to um to basically take like a betting I don't know like a very high leverage short-term betting right so option Market grow uh from zero to now the probably the biggest um Financial products at least in traditional markets uh over the last um I think 40 years and then over the last 20 years there's all this very um uh all this like rabid development around even more

sophisticated structure products uh initially all led by French French engineering Engineers with very great like great math skill and then they invented all the new models to price all this really self sced stuff right so uh people making money from these products uh plenty of examples uh you have a lot of like very sophisticated hedge funds for example they they trade Val options but they also want to trade very specific payoff uh the example I said earlier for example uh you want have this like for example uh you want uh you you think that the underline will go up but you will not actually exceed the certain level so you actually add a

knockout barrier so then the the product becomes really cheap right maybe is only like one third or quarter of the price if you buy compared to a vanilla option but then you achieve the same return in the end right so you your return your your return will be four times three times or four times more if you do a exotic options um there are also plenty of um structure product that went well uh there are many that we didn't go well but many went well as well for example in Switzerland uh there's a very popular structur products called mbrc so multibarrier reverse convertible uh there are every day there are like 4,000 different nbrc listed on Swiss exchange

for example there's very popular product linked to different underlines like stocks indices or Commodities um surely over over over years um there are investors who made money but also there are times where where you know the underlines went down and then investors lost money uh I think structural products they they they don't mean that they will help you make money more often than you know than than simple products that that's definitely not true but also at the same time I don't think they're necessarily more dangerous either because in the end of the day your your risk is similar your risk is you are long or short underlying right it's just

that the payoff got like changed just twied um so yeah it really depends on the on the on your use case right some of the companies for example they use some of the hedging Solutions and then achieve the really good results so they just uh systematically hedge their uh Financial exposures or their receivables for example and then they definitely achieved better Financial results than if they did not hedge at all so for me like the flagship story of the this Structured Products Market as an entrepreneur was it's like this story I've heard of Mark Cuban so he's he's like this entrepreneur that

appears these days on Shark Tank or used to appear on Shark Tank and then there was this uh TV series called Silicon Valley and then there was a billionaire in that uh billionaire character in that uh TV series called Rus haniman and that character is kind of modeled on Mark Cuban but the Mark Cuban story was like uh he he made a sort of like a million dollars or like couple of million dollars in one startup and sold that startup in 1989 and retired like at the age of I don't know 27 or 28 he was like I'm I'm going to retire and then uh 1991 the um he he he somehow comes

across the HTTP web and it's too early but he's intrigued by it and then this guy starts to eventually build a business which is called broadcast.com so in broadcast.com what he does is okay it's a simple idea it's maybe even a dumb idea it's like radio on the internet like could you go to a website and just listen to the radio on the website that's what it starts and it starts to get some usage as the n as the 90s passed uh broadcast.com booms and then um it gets IPOs and lists on the on the public market I think New York Stock Exchange and it lists and a

few days later the.com bubble crosses a value of a billion dollars like and It ultimately goes to like three or four billion Mark Cuban personally becomes a billionaire in the public markets then uh then Yahoo appears and Yahoo is like we want to buy broadcast.com and so Mar Cuban hashes out this deal with uh deal with Yahoo now in this deal the thing is like he has to go and work for Yahoo for a while after the sale and he gets Yahoo stock in exchange for broadcast.com stock he does he gets some cash but the majority portion is stock and then the stock is illiquid for

3 years and this is now I think 1999 or late 1998 and he's sitting on a billion dollars worth of Yahoo stock that's illiquid that's booming a turn in the Doom bubble and Mark Cuban's like this is going to crash uh but I don't have the yaho shares and so I think he goes to one of the investment Banks and he actually the investment bankers create a structured product specifically for him which behaves like a a caller meaning if the if the yahooo stock falls down in

price below a certain price he will make in three years or whatever that minimum level of uh of of price so if he if he entered into trade with a billion dollars the worst position he can get is maybe you know $950 million but on the other side because this kind of insurance is being provided on the other side if the Yahoo's stop like doubles from a billion to like 2 billion he might only make 50 million of those so it's like so his kind of um payoff is bounded to a range of 950 million to 1.05 billion and he does that kind of um that kind of trade and and the

interesting thing is that the underlying collateral that he has is completely illiquid like is is is like it's like this Yahoo stop and then com bubble does collapse and Mark cuber ends up looking like a genius so so that's that's that's like the first point in my life where I read that story and was like oh wow like you could if you have like some asset in which there's constraints or you have an interesting view about the future like X will happen but not y then you could convert that view into a a trade in the in the markets essentially that's what like the structure products allow yeah so what you mentioned like a

cola is a very popular structure obviously using uh vanilla simple vanill is a very simple combination of any options you buy you sell a coal to cap your upside at the same time you buy a put to protect your downside right which is uh very very popular for this type of uh hedging purposes uh in your particular case obviously I I'm not very familiar this uh story I don't know depending on the exact agreement he had with Yahoo like she may or may not be actually allowed to do this well you know like in most of the these days like investment agreement or like merger and Acquisitions when you uh when you you get the shares or you get some equities

in a different company and then there's usually a vesting schedule right and then before your shares actually get vested you uh you can't you're not allowed to hedge it as you are not allowed to short it sell it in any form so so I'm not very sure about the exact agreement he had with Jau uh but then these days these kind of things are especially in traditional Finance I think is U uh people like check it very uh closely yeah yeah yeah so I'm just checking the internet like the story is genuine he hedged 1.4 billion in Yahoo's stock yeah maybe she's allow he was allowed to do that but yeah I think usually when you're your your Shares are

locked when your all your tokens are locked they are locked for a reason right T day and then if you start selling it through other ways other means um that basically defeats defeats the purpose of locking it or although vesting schedule so I don't know yeah but good for him good for him he he he managed to manag to hedge his positions very successfully and at the right timing right and I mean that's what the internet says now I don't know the details but you can find the story on the on the internet like the listeners can find it if they want to see yeah yeah yeah so I mean so on a similar way like maybe maybe like let's kind of think of

a recent crypto Market event right like I mean the recent crypto Market event is kind of like okay the ETF will get approved or not this Bitcoin ETF will get approved or not and now there's like increased speculation about whether there's be an ethereum ETF or not so like yeah could you give us some examples of Structured Products around the um around the Bitcoin ETF right like the Kinds of Kinds of exposures people could have constructed before or before the event with with orbit yeah so now there are two big things well there were three now there are two so we have the BTC ETF that is already done then we have the Haring

coming as well then we have the eth ETF news so these are the that could be the Catalyst that triggers um a next the next leg up so we've seen actually a lot of interest from our clients to uh to buy tokens uh in actually more towards the out coins so the the the general theme that we have observed is like a lot of buy interest in large uh layer one tokens right Solana obviously is a is a star and then we also have seen people buying cardano ax the other part the other uh area where a lot of buy interests is is uh

the uh some of the L2 tokens and uh that's like optimism and arbitrum uh and then we also see some of the interest in newer um Alan talk as well so how to actually how to position yourself actually into these events um I think one one very classical uh structure products is called accumulator so as the name says accumulator is actually helping you to accumulate a certain underline so this product is not invented for crypto it's not specific crypto has existed in traditional Finance for many many years people use it to buy shares like Tesla shares Amazon shares and now uh we have

actually basically replicated in crypto and you can use the same structure to buy tokens and it gives you a discount versus the current spot for example Solana spot is at 100 if you use accumulat structure then you can buy Sol token at for example 75 so it's a big discount how do we achieve the discount is always there's no free lunch right we're not like just giving money free money away to people so it's achieved through uh this engineering of the structure products it's achieved through two things one is this there's a knockout The Knockout feature so if Solana price goes up above a certain barrier knock knockout barrier then the

trade will ter will be terminated meaning that your gain will be limited right because you you if the spot goes up a low then you stop buying so your gain is actually limited right but you're on the other side if the spot goes down below 75 then you you still have to buy and you have to actually buy more SOL at 75 so this is obviously creating an ASM metrical payoff right is obviously asymmetrical your your gain is limited your loss is actually doubled or unlimited in a way and because of this you get to buy the token at a big discount oh okay so this obviously has

risk it doesn't come without risk so the risk is that if the price goes a lot you still have to buy at the same price right but then this is this strategy could be very good for those who really want to buy Solana at if they are you know if they are comfortable and they are okay to buy at uh at the 75 then it's fine they can because they will just be buying at 75 especially for those who are you know ready to buy Solana at the car is about 100 so why not why not you know give give yourself a chance to buy a 75 right so it really depends on use case right so if you are purely speculative like I'm just like

GNA speculate then maybe this product is not necessary for you but if you have this accumulation mandate you just have to buy for example you have a la you run a long only fund then this is actually a very good strategy for your fund right so if like somebody has the view that so Solana will be amazing right like a crypto bull market is coming it's going to go from 100 to 500 and like this like there's 80% chance that will happen and then there's like 20% chance that it's going to stay range bound like between like I don't know 60 and 120 that's their view right like so if if somebody is coming with that

mindset then this person could say well I don't believe Solana can go lower than 60 and if I need to buy more at 75 I'm willing to buy a lot more at 75 but in exchange for accepting the obligation that if it falls below 75 they will need to buy a lot more they can instead of buying at 100 they might be able to buy at 80 or or 85 or however the contract is is structured so essentially because this individual has a individual or even firm this could be an entire firm it could be a central bank for for for all that matters right like because there's a certain view

that the odds of Solana falling to less than 60 in the next X or Y months is is very low because they have that view they can sort of like monetize that view or try to monetize that view in the form of like this kind of structure like that's the that's the essential idea yeah so I think the idea of Structured Products is really that you can you can do trade that exactly fits your precise views for example just now your view is that S price will stay around here it will not really fall massively below 75 it may stay here then that's perfect you just keep buying a 75 through the structure so most of our

clients who traded accumulator last year all performed very well right because the spot is going up gradually slowly and then they just keep accumulating at at the discount if your view is that Sol will jump to 500 next month that's fine there's there there there will be a different product for you right so we've seen clients buying a very low Delta option so you can buy basically a one month maybe 200 strike Solana cuse for for virtually nothing like maybe just you know like uh a few like maybe a few basis points a very small price and then uh if you're right then you can make a huge return right but obviously the chance the likelihood

of you uh winning is also very low right but if you have like a really strong view that this token will just shoot To The Moon next month then you can also you should also try options because if you buy options you will only spend a very tiny amount of Premium because you this this option will be like super cheap because the core strike is very very far weight and then if you are wrong you just lose you know the premium which is very cheap but if you're right you can get huge profit you if you do this using um using curbs or using Futures you have a lot of risk right what if it doesn't go up and if it goes down then you will lose a lot of money right so I think that's where options

actually be uh comes in quite uh useful for some of the investors with very specific Market views so previously in this call you mentioned like the case of like miners being being users and could you like give an example of how cryptocurrency miners could could be users of orbit products sure like uh we we have clients for some of the clients are even listed uh miners uh and then they again the idea of hedging like for miners is uh actually also from tra inspired from traditional Finance in traditional Finance you have like the oil producer you have the gold miners they also have

this exact demand for hedging their production or their inventory of oil or gold so we basically use very safe similar structures for the miners they can use like very simple structure as you actually earlier mentioned like a colum you can sell a Coe option on bitcoin price and then you buy a put right and this way you are you know like you your your risk is actually uh limited within this range right because your upside is kept you are giving up some of your upside gains at the same time you are you are protected on the downside as well this is very simple structure obviously but then we also have other type of structures that helps

miners actually sell their tokens on the regular basis at a price that is better than the than the spot price right so um for example one of the product is called Target Redemption forward which is from traditional Finance where you can actually sell your for example right now the the Bitcoin is at 42,000 you can sell uh Bitcoin at let's say 47,000 every week you can sell 477,000 and then if if the spot is below 47,000 you sell 47,000 if it's above you still have to sell at 47,000 and then you just count the number of times where you make money so so if this week is

below 47,000 you count one time and then the next week if it's below 47 you count two to two times and then when this count reach let's say five times this trade will terminate so basically if the spot stays at 42,000 every week for next five weeks then you just keep selling at 47,000 and then the trade will expire the trade will will terminate right but then if the spot goes above 45,000 the count will not ACR because the count will stop it count only if it's below right so it will not stop and then you will still have to sell at 47,000 so all these structural products in a way is trying to create an asymmetric uh payoff right and then because if you you accept

this asymmetric payoff then you will be compensated with a better strike than the current spot so in this Bitcoin case it's almost like if the market is kind of range bound like going up going down and it like and it's it's crossing the 47 barrier many times that's the case that might be bad all these type of trades right your view has to be have you need to have a bit of wrench bound view you need to think that the spot will stay around here it can go up a bit can go down a bit that's fine but then if your view is that spot will let's say if your view is that Bitcoin will go to 100,000 next next month then obviously you

shouldn't hedge you shouldn't do any hedge right you should just hold long and you should probably increase your loan position right and if your but if your view is that you will stay in this range around like below 47,000 U up and down slightly then then that's yeah then these products can be useful so there there's no like there's no product that will you know be the perfect product that will that guarantee to make you money that doesn't exist so you always need to have your views so we we we have like miness client who you know have a good size of the market you know they they they they put on some Hedges uh when they think the market is like popish so then uh for example before the ETF news right there their

clients uh selling uhit Bitcoins uh back then like that then yeah all these trades went pretty well because now the Bitcoin price has come off right so on your website I saw a a product that that felt really cool which is kind of like the uh hedging Unis swap V3 impermanent loss right so maybe to provide some background uh when you provide liquidity to Unis swap pools or maybe not just unisa but similar mechanisms like Joe or Trader Joe's on Avalanche or something amm then uh then there are these cases in which so the essential idea is if I'm if I'm supplying two assets eth and

USD my best case is that e does not move against the USD the more these assets move against each other the worse my performance could be compared to like maybe just holding uh those pair of assets 50/50 or something like that and so like the quantification of how much worse my position is in a in an amm compared to what would what what I would have achieved just by holding them 50/50 is like this called this impermanent loss and and you have a product to hedge that like so could you explain how it how it works yeah so as you just explained so

uh you swap or this like y farming was really popular right in in 20 especially in 2022 or last year still a little bit uh but the all the liquidity providers they face a big problem right so initially they just look at the yield but then they realize there's a there's a cost the cost is actually iner the loss right so you basically have equation on one side you earn the fees from the protocol from Unis swap on the other side you will lose inut loss so how do you actually hedge it so the imput La as you said is actually at least for UNIS swap is deterministic there's a formula there's actually a a deterministic mathematical formula that calculates the Imp loss if you know the

initial spot level and the final spot level then you know exactly how much is the inut loss right so for us we actually when we start to look at it we realize that this is deterministic so is actually just an option or derivative in a way is not a normal derivative but it is an exotic derivative with a very special formula but in the end of the day is a Formula the payoff is depending only on the final price and the initial price so we by that time we're already build our model to you know like run all the multicol simulations and then you

know so that we can actually price uh any payoff so not just like the regular European Val option payoff or the Futures payoff we can price any payoff you we write me a mass formula that depends on the final uh price I can actually calculate the expected value of that formula as of today right so then in the end we realize that okay it's nothing but just exotic for ex option so then we actually can price this option offer it to clients and then we have the theoretical value of this option so the clients basically they can pay us at upfront premium let's say 1% is a nonn fixed cost 1% and then at the end we

will reimburse this clients the actual the actual inut loss and how do we H it right we we obviously not just taking the the other side and do nothing that uh is not what we do so we actually have to hedge it so we hedge it as if it was option right it is actually an option so we will decompose the risk into the the Grits right the Delta Vega and all these risk and then we will hedge this risk accordingly using PBS the options Etc so we we have this basically a very quantitative and scientific framework for us to decompose the imput loss risk and then to hedge it uh in the

market yeah that's really cool so the essential thing is if somebody wants to provision liquidity to a pool and they expect the fees that they earn from provisioning liquidity are going to be high higher than probably like the market expects and they're willing to give us some of the give up some of these fees in order to protect against the impermanent loss so if you have a pool where the essential structure of it is is there's two assets you expect volatility between those two assets right like you expect one of those assets to move quite a lot against the other asset so there's underlying volatility but you also expect a lot of fees to occur then probably for such a user is like giving up some portion of

that fee income or maybe all of that fee income in order to protect against that volatility is kind of what your engineering allows exactly so these two things usually correlated so which means this is very interesting right so if a pool is generating a lot of fees usually the underlying asset underline pair is also a very volatile pair right so so and and in theend of day uh there's no free lunch as I said earlier right so you you on one side you have the expected uh fees so you you kind of do a research you do estimation you you kind of okay I expect to receive maybe 15% analized fee from this pool and then on the other

hand I'm willing to maybe Buy protection but then obviously the the price of the production needs to make sense right if like the production cost 20% annualized Then it doesn't make sense so maybe the price is 7% okay then I buy the protection and then I'm left with 8% almost risk-free returns right so this sounds like too good to be true which again it is too good to be true because over time I think Unis swap even though the Unis swap liquidity provision is a completely separate Supply demand system ecosystem on its own on the other hand when we price the protection we are not looking at Unis swap at all right we're not looking at Unis swap the size of the

pool the supply demand we are only using one parameter which is the imply volatility and the implied volatility is decided by uh exchange for example derivates so derit trades options which has the impli volatility so we are talking about two separate completely separate supply and demand markets and systems but surprisingly over time these two markets are converging which means that initially if you expect to earn a lot of fees from Unis Swap and then you buy a protection from us which is based on derate implied Ro initially let's say you you expect there is a bit of

difference between the two and then you can make money like you can you are left with the risk-free returns but over time this return will actually is actually disappear right or at least on the probabilist probabilistic basis on the average right maybe on one trade you can still make money but on average you probably end up with no no uh no return or no expected return at least which means that the market is actually getting efficient right it's getting efficient yeah so yeah I think in the end of the day a lot of the funds who run this liquidity provision or Yi farming strategy realize that is actually very hard actually to make money if you're just looking at the fees

because in the end in the end of day your fees and the impermanent loss will just be the same on average in the end or maybe you are left with a risk risk free rates like if you are talking about dollars you are left you make 5% but you're not making more than that you're not making extra performance compared to that and so I think that this overall yield farming strategies have become less popular over the last one or two years and especially when the funding rate of dollar itself has gone up so much right if you do nothing you just land dollar you'll probably get uh 10 15 20% right so why bother doing all this yield farming and then you still

have to take the impermanent loss yeah that's that's that's really interesting so actually like my curiosity is kind of in all of these examples that we have taken right like uh it might start from actually the Mark Cuban example but it could also be the accumulator or the tarb or this liquidity provisioning example in a sense when I look at the contract between like one of your clients in orbit um the underlying is the price of some asset right it's the price of some asset against some some reference asset could the underlying be the occurrence of an event like could the underlying be for example a bridge

will get hacked it's a binary event or an ETF will get approved and could you can you do create yeah uh derivatives or structures based on like events not prices or is that the role of a predictor ition Market not of Structured Products I mean what you mentioned what you described is like uh buying a lottery right or or or prediction or something like that yeah I mean theoretically is all possible but we need a primary Market of the underlying asset first right so when we do the accumulate when we all do T or do all

these like barrier options we need to be able to hedge the primary risk which is the directional the underlying directional risk when you say uh I want to run this like whether eth uh ETF will be approved um I have nothing to use to hedge my risk apart from taking your taking the other side of you right but but if we can like some of the like a betting house right they can still run this because they try to adjust the the the ratio the odds right to match both sides right they are not taking any risk right they are just like match uh the two sides so it's very different so for

us we still need to have um markets where we can hedge the underlying assets so for example if you have underline if you have a market where people starts to trade um the all of e ETF getting approved then we can create options and structure products on top of that but we still need to have a market where we can hedge our risk first so that means like if you had highly liquid prediction markets on crypto for these events then you could do like these fancy options on top and we could yeah yeah we could but the constraint is more that those highly liquid prediction markets don't exist

today yeah exactly yeah so so right now I think those prediction Market or prediction uh products I think is still more the job of the like the batting betting house right rather than the trading desk so at the start of this interview you mentioned that you kind of like entered the crypto space in the last two years and you founded orbit um co-founded orbit in the last two years and I think like that's an interesting time right um because in this time first Terra went bust but then kind of like this Genesis went bust and this Genesis was um was a huge uh was a huge event because people

actually took counterparty risk against Genesis like when I hold he there is ideally no counterparty but in the case of Genesis products Genesis used to be the counterparty and this huge counterparty went bust and you were also doing a business in which like in many of these products orbit is a counterparty so how was that period like when the market was scared of counterparty risk and yet you were building a business that was based on counterparty risk yeah I think the market is still scared of counterpart risk which is good I think at the beginning of crypto Market people don't are not really aware of this risk but now people are very

aware of this risk and we are also very of this this risk there are many ways to mitigate this risk for example we have signed Isa which is the framework of traditional finance managing the counterparty credit risk and so we have actually signed this with many of our counterparties right so because um then we actually just manage this da daily uh margin uh and the collaterals that I mean that still doesn't remove the counter risk completely but it actually mitigate the risk significantly because your exposure is very limited to mostly just your initial margin and also some

of the Gap risk during the day but otherwise your exposure is collateralized with the with the collateral right so that's what traditional Finance use the framework that traditional Finance has adopted to manage the counter risk traditional Finance also learn it after the Leman Brothers uh crisis I mean it existed before but it is really after Leman and the great financial crisis that traditional Banks started to be become more aware of this and then set up all these uh credit risk desk within the bank so the same so we're doing this in crypto we also use this multi-ti wallet solution with some of our counterparties right in traditional Finance you would

actually use a third party custodian Bank to to do this for you right so to stick between the two counter parties and and then people basically send and receive money to one from this custodian so in crypto we have actually a Innovative solution a crypto-based Innovative solution to solve this problem so instead of actually involving a third party there are third parties obviously uh in crypto as well but they are just not financially as as strong as a real custodian in traditional Finance right some of the custodians so instead of actually having to take their criter why not just set up a framework between

the two counter parties directly using the crypto solution so for example we use this multi wallet so we give for example four total Four Keys two keys on each side and then for each transfer in and out we need sorry each transfer out in you don't need approvals but to transfer out of this wallet you need let's say three out of four keys to enable this transfer right so in this case we only need to actually agree between the two cter parties and we don't neither party needs to give the money to a third party and then in that case both party will be exposed to the credit risk of that third party right I

mean if that third party was JP Morgan I'm probably fine but in crypto there's no JP Morgan there's no you know there's no like big banks with trillions of assets so I I I don't necessarily trust a third party more that I trust my counter party directly right so then we actually uh use this solutions with many of our counter parties that again greatly reduced the counterparty concerns and this is something that is actually didn't exist in traditional finance and I think this is a great thing I mean traditional Finance maybe one day will actually also use this to save I don't know millions of costs of using a thirdparty custodian because that third party custodian doesn't do

much more than just you know uh sending the money you send to me to the other party or return the money back to you and you know so this is something that you can do yourself that's that's really interesting right like yeah like somebody like you that's coming in from do Bank maybe this was not the first thing you started off with but you're like okay actually smart contracts can provide utility and removing the custodian and maybe saving you the 40 or 50 basis points on a particular trade and maybe on a single trade that's not so big but then added across all of your clients that might end up kind of in increasing your gross margin of your business that's interesting absolutely

yeah so using like this kind of like smart contract collateral Management Systems um you can address some forms of counterparty risk but not all of them would that be accurate absolutely I I I I think that is in possible to remove counterpart risk completely you do a you do a transaction with someone you have to accept some level of counterparty risk so you mitigate the risk by doing due diligence at the beginning you need to know your counterparty right so then and then you have different ways to mitigate the risk but there's no way I don't think at this stage there's no way to completely remove it without sacrificing efficiency there obviously there there

are ways to to remove it completely but then you will lose other things like efficiency you have to be fully catalized etc etc and then if the whole financial system runs that way if everything has to be fully catalized in financial system the financial system doesn't work right there's no efficiency anymore yeah nothing will will really happen and nothing will move forward so often in crypto at least I come across this mindset that like people want to build protocols for for financial products right like in a sense maybe the classic example is

actually Bitcoin where it's like there there's a thing the Central Bank does and satoshi's question was almost like can just can you just replace that with an algorithm and yes you can but but then of course there has to be a new asset and it has to build liquidity and and it's possible Right but often like you see like defi asking that question often right like so um overnight borrowing markets can you do that and then uh Robert lner asks that question and then comes up with compound where it's like okay it he algorithmization in this in the

Structured Products Market are there parts of it that can be protocolized like that or does it necessarily have to be a human on the other side because like structuring is hard and there is always going to be counterparty risk so do you think protocolization of of the market you are in is is possible or is it intrinsically not possible I think it's possible I think it's possible but it's very far from the current stage I think we are still far from there is possible I think the problem uh we we obviously uh work with some of the defi applications so and also I did some research myself I think

the few issues I think with the defi uh applications right now first of all I think it's the the efficiency I think the the the capital efficiency generally is pretty poor right the traditional Financial uh traditional Financial Industries thrive because of all this Capital efficiency you have the custodian you have Prime Brokers you have all the banks facilitating you know lending borrowing Etc you can rehabitat the assets so it creates a really efficient market here to ensure security and safety everything is fully catalized Etc and then this just is not really viable in the long term so to solve this problem

we need I would say we need a very integrated and Broad framework for all the def application so that you know we can actually integrate not just the one defi on its own but the defi can integrate and be connected with each other and also with exchanges so that your Capital can be reused rehle you know across different venues but this I just don't see how this is happening anytime soon unless some someone is leading this effort to create a big platform where all the different applications get on this platform including exchanges including you know other

institutions this is number one number two is I think the user experience is still pretty bad these days with most of the def app definitely not designed or built for institutional uh players they may be okay for retail but for institutions like sometime like yeah we we just don't think that is good enough for usable at all for for our purposes right um for example some of the protocols we make a simple trade of transfers we need so many different approvals and like it just just crazy and then if it's one retail guy it's fine he just approve for himself but as an institution we have our own approval

policies and processes so it becomes really bad the third one and also the most important one I think is the hack risk so the smart contract risk and hack risk so this is the biggest problem right I think um even wellestablished protocols can still get hacked so let alone some new app new protocols so we we can't really be comfortable enough to put our company's money in a for example a new protocol uh what if you get hacked right so I I think I I I don't know I don't have the answer to this question I think the second one probably is probably

probably the easiest to solve but then the hack risk the smart contract risk is kind of inherent to this defi uh growth right I hope like one day there will be better technology better ways to ensure that smart contracts are safe what's what's really interesting as a as a technologist here is when ethereum was being bailed um there were like groups of dissenting technologists that were like we should build smart contracts differently such such that you know the properties of smart contracts can be mathematically proven and and it actually it is possible to build such systems but they

lost out to kind of like this ethereum stack and the solidity where this is kind of hard but maybe like actually now other smart contracts are proliferating more and more we would have those kind of ultra secure mathematically proven systems uh come to fruition someday and maybe actually for the real trillions of dollars of institutional money to come in and do fancy things with kind of smart contracts maybe like that high level of quality assurance is just needed and our industry doesn't have that at at at this stage I mean we kind of pointed out like this that even for you kind of like okay using smart

contracts um the way you do Structured Products in crypto is different from the way deutche bank would do Structured Products with its clients and you're using smart contracts underneath um what are other such differences that that exist in your in on in your industry in like the trfi side of it and the crypto side of it like are there other large differences in the operating environment I think the the business model is essentially the same right the business model and then also in terms of financial products are also similar we do have a few like crypto specific crypto specific products like the AL

protection for example but the overall largely um they are the same um in terms of pricing quantitative models I would say is also quite Sim similar the difference is uh here we try to combine uh the best practice of financial industry and what crypto blockchain has to offer for example uh in traditional finance things settle um t plus two so two days later right but in crypto like you can settle anytime so we for example for all our client and counterparties we settle almost instantaneously right so uh and then we also have this um the margin system the

collateral system that runs 24/7 because the crypto Market is 24/7 so that actually uh greatly reduce the counterparty risk as well because in traditional Finance you send the margin call you have to wait the next day or sometimes and then you wait another two days for them to send the Fiat currencies through the bankr system to hit your account so you actually expose for like two days or or more whereas here we do it in instantaneously we send the we send the valuation or margin report uh immediately and then we can actually exchange the C immediately so that actually reduce the counterparty risk a lot something that uh something for traditional Finance to actually also

uh follow I think in the in the in the future right um and then you mention smart contract we also use some of the smart contract solutions to manage cadal for example and then I think what is more I think if we asking about the difference fundamental difference I think um in crypto uh in in traditional Banks we emphasize a lot on risk cultures compliance and ethics I still think this is quite important like we saw how many things went wrong in crypto over the last two years and how many people uh went to jail right so I think uh what is really good at investment Banks is really emphasize these things we have like compliance training every

other week so this is kind after working traditional for over like 14 years I have this like in my jeans already so we actually really focus on this I think it's good it's good in the long term we've seen that the the industry is changing uh slowly towards this people are becoming more aware of compliance and risks and and ethics so I think that's uh some encouraging changes that we have seen so beyond or bit um any other interesting startups or projects in the in the structure products or yeah um the derivative space in in the crypto industry well I I I I can't really speak

uh a lot about like other uh outside options or structure derivatives uh so focusing on this I think uh it's good that a lot of exchanges are promoting altcoin option so initially we've seen uh there was there's only like BTC e valid options for very long time and now many exchanges new and the existing exchanges are launching altcoin options I think that's very good because we've definitely seen a lot of interest in altcoin options we've also seeing exchanges launching structure products as well so it's all very encouraging uh I think it's great that people push uh promote these products together um is a big piling just we just brought the pie

the size of the High bigger and um and then uh there there will be plenty of opportunities yeah so if you look at for example the trading volume uh spot and perss and Futures have all uh shrunk over the last two years from the peak whereas uh the only the option Market is like the the only that bright spot and op the the volume keeps going up which shouldn't come as a surprise because this is just exactly the same path as uh traditional markets took cool um yeah it was great to talk to you Jimmy any last comments or would you like to tell your our listeners like how they could find you if uh if they are

interested yeah sure I think uh if you can just maybe add add a link to our website uh or our our yeah telegram group something yeah after this and yeah uh happy to share more like about options and then I think uh this is still the early St AG of this option markets in crypto yeah cool and wishing you lots of success in hopefully a bull market to come we did it thank you very much