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Hey guys, welcome to Epicentre. I'm Maher Roy and today I'm catching up with Shiming Yang, who is one of the Co founders of Orbit Markets, Orbit Markets. I think he's the market leader in the field of structured products 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 there.
So Jimmy, tell us about your background story and how you ended up being involved in the crypto space. Yeah, sure. Yeah. So actually I think I, I came to crypto relatively late compared to most people I think so we started actually in 2022, end of 2021, the beginning of 2022, so about about two years ago. Actually it's been 2 years. I didn't realize it's time time
flies. And before crypto I I was working in traditional finance, so I worked in at at investment banks for the all of my career before. So I was at I started my career in London with BNP Paribas and then I I worked at Deutsche Bank for over 12 years trading FX, currencies, derivatives and before leaving Deutsche Bank I was running the FX derivatives trading business. For APAC. So what does it mean to leave the FX derivatives trading business?
What is the FX derivatives trading business at an investment bank? Yeah, sure. So at the investment banks, you have what investment bank is very broad term, right. So everybody here is like Goldman Sachs, JP Morgan, Deutsche Bank. These are the investment banks. They have one side of the business which consists of merger, acquisition, getting the company listed. You know, that's like the corporate finance part of things.
There's the another part. So in a sense you can think of it like primary markets or or if you want, like if you want to actually if you're more familiar with crypto, then it's like getting a token listed on exchange or like a financing, etcetera, a project. There is 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 now you have the whole, the whole, the sales and trading business that actually help clients put on the 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 net worth individuals, companies, corporates, 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 as run it as the as someone running the desk is that we have obviously a team of traders, we have quants, we have also meet office, back office
doing the operations. So we have actually everyday 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 that's what we used to do on the on the at the sell side we call it sell 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 OB markets we offer mostly we are focusing on options and derivatives. So we offer derivatives products and solutions to our clients.
Some of them for example use our structure products to hedge their crypto holdings law for example a minor that they keep producing 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 bespoke structures for them. Well, we also have some of the funds who wants to actually buy tokens, accumulate certain tokens and then we have like structure solutions to help them buy the tokens at the 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 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 your 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 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 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 combinations, it will happen that OK, 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 for traditional finance. So in traditional finance you also have this exchange, 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 all the exchanges. But it has also limitations,
right? So the exchange can only list the standardized, the products you have like standardized the payoff, standardized maturities, strikes, etcetera. 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 big banks, big in investment banks. So you go to them for for various reasons.
One, you want to execute the 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 manages better for you, the execution for you or you go to go to an investment bank because you actually want something more bespoke like not available on the exchange, so something
exotic or more 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, they will manage the, the, the product together with the other products so to achieve efficiency. So at the moment in crypto is
the same thing. Crypto market started with the various basic simple products which is spot which exists 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 etcetera. 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 or standardize you just buy food you want.
And then if you want to OTC that is more like a 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 are 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 to 45,000 to the next few weeks, but it will not exceed 50,000, right.
So then if you have this particular view, it's almost impossible to to do this using is it impossible to do this using spot or perps or futures? 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 Barry options. So that trade will you start make money if spot goes up above 45,000 but it will knockout it will just disappear if it's spot
goes above 50,000. And then you will be you will buy this option really cheaply because it has this additional condition on knockout. So this is that's something that you can buy from the exchange. So you have to go to OTC desk which can provide this product to you. Yeah, that's that's really interesting. So, yeah, you can basically like create new kinds of options that are not available on any public options market.
And then you can also like combine these options with like trades that make make even more sophisticated products. Could you, could you give us like some historical examples of this industry in in the investment banking world, like examples where 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 will give us an idea of how it works. You have some some stories like
that. Yeah, yeah, plenty of those kind of stories and obviously a lot of people, some people made money, some people lost money. That's just like any financial market options itself. I think it's I think he, I I I can't remember when he was invented by 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 as got invented and then suddenly this becomes a very, very popular product because all the banks suddenly have the tools, have the quantity models, the price of risk managed 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 spot stocks, right.
A lot of investors buying this like a zero day to mature, zero day to expiry. So basically same day expiry options to to basically take like a betting now now like a very high leverage short term betting right. So options market grow from zero to now the probably the biggest financial products at least in traditional markets over the
last I think 40 years. And then over the last 20 years there's all this very all these like rapid development around even more sophisticated structure products initially all led by French, French engineering engineers with a very great like great math skills. And then they invented all the new models to price all this really stuff, scheduled stuff, right. So people making money from these products, plenty of
examples. You have a lot of like very sophisticated hedge funds for example they they trade venue options but they also want to trade very specific payoff. The example I said earlier for example, you won't have this like for example you want you, you think that the on the line 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, but maybe it's only like 1/3 or quarter of the price if you buy it 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 4 * 3 times or four times more if you do exotic options. There are also plenty of structure product that went well. There are many that didn't go well, but many went well as well.
For example in Switzerland there's a very popular structure products called MBRC, so multi barrier reverse convertible. They are every day they are like 4000 different MBRC listed on Swiss exchange for example. There's very popular product and linked to different underlines like stocks, indices or commodities. Surely over over over the years there are investors who made money but also there are times where you know the underlines went down and then investors
lost money. I think structured products they they they don't mean that they will help you make money more often than you know than than simple products but that's definitely not true. But also at the same time I don't think they are necessarily more dangerous either because in the end of the day your your risk is similar. Your risk is you are long or short on the line right. It's just that the payoff got like changed, adjusted, tweaked.
So yeah, it's 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 systematically hedge their 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 TVC, it's called Silicon Valley. And then there was a billionaire in that billionaire character in that the TVC is called Ruse Hanuman. And that character is kind of modeled on Mark Cuban. But the Mark Cuban story was
like he he made a sort of like $1,000,000 or like couple of $1,000,000 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 1991 the 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 OK, 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 website? That's what he starts and it starts to get some usage as the 90s past broadcast.com booms and then 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 like 3 or 4 billion mark.
Cuban personally becomes a billionaire in the public markets. Then then Yahoo appears and Yahoo is like we want to buy broadcast.com and so Mark Cuban hashes out this deal with 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
three 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 ton in the.com bubble. And Mark Cuban's like this is going to crash, but I don't have the Yahoo 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 Yahoo stock falls down in price below a certain price he will make in three years or whatever that minimum level of 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 stock night double S from a billion to like 2 billion, he might only make 50 million of those. So it's like, so his kind of payoff is bounded to a range of 950 million to 1.05 billion and he does that kind of 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 stock and then the outcome bubble does collapse and mark you what ends
up looking like a genius. So, so that's that's that's like the first point in my life when 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 colour is a very popular structure, obviously using vanilla, simple vanilla options. It's a very simple combination of vanilla options.
You buy, you sell a coal to cap you upside at the same time you buy a put to protect your downside, right, which is very, very popular for this type of hedging purposes in your particular case, obviously I I'm not very familiar with this 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.
While you know like in most of the these days like investment agreement or like merger and acquisitions when you 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 got vested you you can't you're not allowed to hedge it as you are not allowed to shorten sell it in any form so.
So I'm not very sure about the exact agreement he had with Yahoo. But then these days these kind of things especially in traditional finance, I think is people like check it very closely, yeah. Yeah, yeah. So I'm just checking the Internet like this story is genuine. He hedged 1.4 billion in Yahoo stock. Yeah, maybe she's allowed. He was allowed to do that.
But yeah, I think usually when your your your shares are locked, when your all your tokens are locked, they're locked for a reason, right today. And then you should start selling it through other ways, other means 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 like he he managed to manage 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 in 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, OK, 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 been Ethereum ETF or not. So like, yeah, could you give us some examples of structured products around the how, around the Bitcoin ETF and 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, that there were three, now there are two. So we have the BTCETF that is already done. Then we have the hub incoming as well.
Then we have the BTHETF news. So these are the that that could be the catalyst that triggers a next, the next leg up. So we've seen actually a lot of interest from our clients to to buy tokens in actually more towards the outcoins. So the the general thing that we have observed is like a lot of buy interest in large layer one tokens, right.
Solana obviously is a is a star and then we also have seen people buying Cardano RX. The other part, the other area where a lot of buying trusts is, is the some of the L2 tokens and that's like optimism and Arbitron and then we also see some of the interest in newer L1 tokens as well. So how to actually, how to position yourself actually into these events? I think one very classical structure of products is called accumulator. So as the name says, accumulator is actually helping you to
accumulate a certain underlying. So this product is not invented for crypto, it's not specific crypto. It has existed in traditional finance for many, many years. People use it to buy shares like Tesla shares, Amazon shares and now we have actually basically replicated in crypto and then 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 accumulator structure then you can buy Solana tokens 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 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 knockout barrier, then the trade will will be terminated, meaning that your game will be limited, right, Because you you if the spot goes up a lot then you stop buying. So your game is actually limited, but but you're on the other side, if the spot goes down below 75, then you still have to buy, and you have to actually buy more Solana at 75. So this is obviously creating an asymmetrical 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 the big discount, OK. So this obviously has risk where it doesn't come without risk. So the risk is that if the price goes down a lot, you still have to buy 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 OK to buy the AT at the 75, then it's fine, they can because they will just be buying 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 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 going to 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 law, you you run a law only fund and this is actually a very good strategy for your fund. Right. So if like somebody has the view that 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 structure products is really that you can, you can do trade that exactly fits your precise views.
For example, just now your view is that Solana price will stay around here. You 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 the at the discount. If your view is that Solana 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 cores for for virtually nothing like maybe just you know like a few like maybe a few basis points, a very small price and then if you're right then you can make a huge return, right. But obviously the chance, the likelihood of you winning is
also very low, right. But if you have like a really strong view that this talker will just shoot the moon next month, then you can also, you should also try options. Because if you buy options you will always spend a very tiny amount of premium because you this this option would be like super cheap because the core strike is very very far away and then if you're 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 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 comes in. Quite useful for some of the investors with very specific market views.
So previously in this call you mentioned like the case of like minors being being users and could you like give an example of how cryptocurrency minors could could be users of Orbit products? Sure. Like we we have clients for some of the clients are even listed miners and then they again the idea of hedging like for miners is actually also from 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, gold. So we basically used very say similar structures for the miners. They can use like very simple structure as you actually earlier mentioned like a color, you can sell a core 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 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 the price that is better than the than the spot price, right.
So for example, one of the products called Target Redemption Forward which is from traditional finance where you can actually sell your for example, right now the the Bitcoin that 42,000, you can sell Bitcoin at let's say 47,000 Every week you can sell 47, seven thousand 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 that you count 2 two times and then when this count reach let's say five times, this trade will terminate. So basically the 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 be able to terminate right? But then if the spot goes above 47,000, the count will not accrue because the count will stop.
It cuts 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 structure products in a way is trying to create an asymmetric 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 range bound view. You need to think that the spot will stay around here. You can go up a bit, you 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 now and then you should probably increase your long position, right. And if your but if your view is that you will stay in this range around the like below 47,000 up and down slightly then then that's yeah then these products can be useful.
So there's there's no like there's no product that will you know be the perfect product that will that guaranteed to make you money that doesn't exist. So you always need to have your views. So we we we have like minus client who you know have a good size of the market. You know they they they they put on some hedges when they think
the market is like top ish. So then for example before the ETF news right their their clients selling bitcoins 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 hedging UNISWAP V3 impermanent
loss, right. So maybe to provide some background, when you provide liquidity to UNISWAP pools or maybe not just UNISWAP but similar mechanisms like Joe or Trader Joe's or Avalanche or something AMM. Then then there are these cases in which. So the essential idea is if I'm if I'm supplying 2 assets ETH and USD, my best case is that ETH 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 those pair of assets 5050 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 have what I would have achieved just by holding them 5050 is like this called this imponent 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 your swap or this like yield farming was really popular right in in 20, especially in 20 and two or last year, still a little bit, but the all the liquid providers, they face a big problem, right. So initially they just look at the yield, but then they realize there is a, there's a cost, the cost is actually implemented
loss, right. So you basically have a question on one side, you earn the fees from the protocol from UNISWAP, on the other side you will lose implement loss. So how do you actually hedge it? So the implement loss, as you said, is actually, at least for UNISWAP, is deterministic. There's a formula, there's actually a deterministic mathematical formula that calculates the implement loss.
If you know the initial spot level and the final spot level, then you know exactly how much is the implement loss, right? So for us we actually when we start to look at it, we realize that this is deterministic. So it's 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 did build our model to you know like run all the Monte Carlo simulations and then you know, so that we can actually price any payoff. So not just like the regular European value option payoff or the futures payoff, we can price any payoff. You write me a math formula that depends on the final price. I can actually calculate expected value of that formula as of today, right. So then in the end we realize that OK, it's nothing but just
exotic exotic option. So there 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 an upfront premium, let's say 1% is unknown fixed cost 1%. And then at the end we will reimburse this clients the actual, the actual input, the loss and how do we hedge it, right. We we obviously not just taking the the other side and do nothing that 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 Greeks, right, the delta Vega and all these risk and then we will hedge this risk accordingly using Perps, the options etcetera. So we we have this basically a very quantitative and scientific framework for us to decompose the implement loss risk and then to hedge it 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 assets. So there's underlying volatility, but you also expect a lot of fees to occur.
Then probably for such a user, it's like giving up some portion of their 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 are usually correlated. So which means it is very interesting, right. So if a pool is generating a lot of fees, usually the underlying asset underlying pair is also a very volatile pair, right. So so and and in the end of the day there's no free lunch as I
said earlier, right. So you you on one side, you have the expected fees, so you you kind of do a research, you do estimation, you you kind of OK, I expect to receive maybe 15% annualized 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%.
OK, 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 UNISWAP, even though the UNISWAP liquid provision is a completely separate supply demand system ecosystem minds own. On the other hand, when we price the protection, we are not looking at UNISWAP at all, right? We're not looking at UNISWAP, the size of the pool, the supply demand.
We are only using one parameter which is the implied volatility. And the implied volatility is decided by exchange. For example terabits, so terabit trays options which has the implied volatility. So we are talking about two separate completely separate supply and demand markets and
systems. But surprisingly all the time these two markets are convergent, which means that initially if you expect to earn a lot of fees from UNISWAP and then you buy a protection from us which is based on derivative implied role. 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 all the time this return will actually is actually disappear, right, Or at least on the 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, 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 decree provision or yield farming strategy realize that it's actually very hard to actually to make money if you're just looking at the fees. Because in the end there in the end of the 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 rate. 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 lend dollar, you'll probably get ten
1520%, right. So why bother doing all this yield farming and then you still have to take the impairment 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 it might start from actually Mark Cuban example, but it could also be the accumulator or the TARP or this liquidity
provisioning example. In a sense, when I look at the contract between like one of your clients in orbit, 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 can you do create, yeah, derivatives or structures based on like events, not prices?
Or is that the role of a prediction market, not of structured? Products, I mean what you mentioned, what you describe is like 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 a TAFE 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 I want to run this like whether ETHETF will be approved, 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, the ratio, the odds right to match both sides, right. They're not taking any risk, right, they're just like a match the two sides.
So it's very different. So for us we still need to have markets where we can hedge the underlying assets. So for if for example if you have underlying, if you have a market where people starts to trade the all of 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 products, I think it's still more the job of the like the betting betting house, right rather than a 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, Co founded Orbit in the last two years. And I think like that's an interesting time, right? Because in this time first Terra went bust, but then kind of like this Genesis went bust and this Genesis was was a huge was a huge event because people actually took counterparty risk against Genesis. Like when I told 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 that market is still scared of counterparty 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 off this, this risk. There are many ways to mitigate this risk. For example, we have signed ESA, which is at the framework of traditional finance, managing the counterparty credit risk. And so we have actually signed this with many of our
counterparties, right? So 'cause then we actually just managed this daily margin and collateral that I mean that still doesn't remove the counterparty 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 the with the with
the collateral, right. So that's what traditional finance use the framework, the traditional finance has adopted to manage the counterpart risk. Traditional finance also learn it after the Lehman Brothers crisis, I mean it existed before, but it is really after Lehman and the great financial crisis that traditional banks started to be become more aware of this and then set up all these credit risk desk within the bank, so the same. So we're doing this in crypto.
We also use this multi stick 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 sit 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, they are third parties obviously in crypto as well, but they are just not financially as strong, as strong as the real custodian in traditional finance right, Some of the custodian. So instead of actually having to take their credit risk, why not just to set up a framework between the two counterparties directly using the crypto solution.
So for example, we use this multi SIG wallet, so we give for example 4 total, 4 keys, 2 keys on each side. And then for each transfer in and out, we need, sorry, each transfer out, 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 quarter 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 than I trust my counter party directly, right. So then we actually use this solutions with many of our counter parties that again greatly reduced the counter party 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 cost of using a third party custodian because that third party custodian doesn't do much more than just you know sending the money you sent to me to the other party or return the money back to you. And, you know, so there's something that you can do yourself. That's that's really interesting, right?
Yeah. Like somebody like you that's coming in from Deutsche Bank, maybe this was not the first thing you started off with, but you're like, OK, actually smart contracts can provide utility in 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 increasing your gross margin of your business. That's interesting. Absolutely, yeah.
So using like this kind of like smart contract collateral management systems, you can address some forms of counterparty risk, but not all of them. Would that be accurate? Absolutely. I I, I I think that it's impossible to remove counterparty 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 contour party, 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 are ways to to remove it completely, but then you will lose other things like efficiency. You have to be fully collateralized, etcetera,
etcetera. And then if the whole financial system runs that way, if everything has to be fully collateralized 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 that is 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's a 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 defy asking that question often right like so overnight borrowing markets, can you do that And then Robert Leschner asks that question and then comes up with compound where it's like OK if he algorithmizes so overnight borrowing, overnight lending part of it probably and then
that's that's compound. So what do you think like in this, in the structure products on the 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 is
very far from the current stage. I think we are still far from there is possible. I think the problem we we obviously work with some of the D5 applications and also I did some research myself. I think the, the, the few issues I think with the D5 applications right now first of all I think it's the the efficiency, I think the the, the capital efficiency generally pretty poor right. The traditional financial, traditional financial industries thrives because of all these
capital efficiency. You have the custodian, you have prime brokers, you have all the banks facilitating you know lending, borrowing etcetera. You can rehabilitate the assets. So it creates a really efficient market here to ensure security and safety. Everything is fully collateralized etcetera. 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 D fabrication. So that you know we can actually integrate not just the 1D file on its own, but the D files can integrate and be connected with each other and also with exchanges so that your capital can be reused, rehabble 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 DIF applications get on this platform including exchanges including, you know other institutions. This is number 1, #2 is I think the user experience is still pretty bad these days with most of the DIFA app definitely not designed or built for institutional players.
They may be OK for retail but for institutions like sometimes like, yeah, we we just don't think that is good enough for usable at all for our for our purposes right. For example some of the protocols we make a simple trade or transfers we need so many different approvals and the like. It's just it's just crazy And then if it's one retail guy it's fine. He just approved for himself. But as a 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 the hack risk. So this is the biggest problem, right? I think even well established 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 there. For example, a new protocol what if it got hacked, right. So I didn't 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 DEFY growth, right? I hope like one day there will be better technology or better ways to ensure that smart contracts are safe.
What's what's really interesting as a as a technologist here is when it TDM was being built they were like I 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 they actually now they're smart contracts are proliferating more and more. We would have those kind of ultra secure mathematically proven systems 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 this
stage. I mean we kind of pointed out like these that even for you kind of like OK, using smart contracts, the way you do structured products in crypto is different from the way Deutsche Bank would do structured products with its clients and you're using smart contracts underneath. What are other such differences that that exist in your, in, in your industry in like the 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 they are the same in terms of pricing. Quantitative models I would say is also quite similar. The difference is here we try to combine the best practice of financial industry and what's
crypto blockchain has to offer. For example, in traditional finance things settle T + 2, SO two days later, right? But in crypto like you can settle anytime. So we for example, for all our clients and counterparties, we settle almost instantaneously, right? So, and then we also have this, the margin system, the collateral system that runs 24/7 because the crypto market is
24/7. So that actually greatly reduced 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 currency through the banking system to hit your account. So you actually exposed for like 2 days or or or more, whereas here we do it instantaneously, we send the, we send the valuation or margin report immediately and then we can actually exchange the culture
immediately. So that actually reduced the counterparty risk a lot something that something for traditional finance to actually also follow I think in the in the in the future, right. And then you mentioned smart contract, we also use some of the smart contract solutions to
manage collateral for example. And then I think what is most, I think if we you're asking about the difference fundamental difference I think in crypto in 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 went to jail, right. So I think what is really good at investment banks is really emphasize these things we have like compliance training every other week. So this is kind of after working traditionally for over like 14 years, I have this like in my genes 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 the industry is changing slowly
towards this. People are becoming more aware of compliance and risks and and ethics, so I think that's some encouraging changes that we have seen. So beyond orbit any other interesting start-ups or projects in the in the structure products or yeah, derivative space in in the crypto industry? Well, I I I can't really speak a lot about like other outside options or structure derivatives. So focusing on this, I think it's good that a lot of exchanges are promoting outgoing
options. So initially we've seen there was there's only like BKCI if banned options for very long time and now many exchanges new and the existing exchanges are launching outgoing options. I think that's very good because we've definitely seen a lot of interest in outgoing options. We've also seen exchanges launching structure products as well. So it's all very encouraging. I think it's great that people push, promote these products
together. It's a big pie in just we just grow the pie, the size of the pie bigger and and then there there will be plenty of opportunities. Yeah. So if you look at for example, the trading volume, spot and perps and futures have all shrunk over the last two years from the peak. Whereas the only the option market is like the the only that bright spot and the the volume keeps going up, which shouldn't come as a surprise because this is just exactly the same path as
traditional markets took. Cool. Yeah, it was great to talk to you Jimmy. Any last comments? Or would you like to tell your listeners like how they could find you if if they are interested? Yeah, sure. I think if you can just maybe add add a link to our website or our, our, our yeah Telegram group something after this and yeah happy to share more like about options and then I think this is still the early stage of this option markets in crypto,
yeah. Cool. And wishing you loads of success in hopefully a bull market to come. Thank you very much. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google Home or Alexa device, you can tell it. To listen to the latest episode of the Epicenter podcast, go to epicenter.tv/subscribe for a full list of places where you
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