@ElNachoCrypto

here's a question by question summary of @GwartyGwart's interview with @variational_lvs from @variational_io, with additional context added to help readers where i felt necessary lucas talks about his quant background, the variational broker model, olp, rwas, swaps and more enjoy ----------------------------------------------------- 1. quick intro to your background, the hedge fund you sold, prop shop days and starting uni at 12 lucas started quant finance and crypto in new york with co-founder @edward_yu_var. they met at columbia, ran qu capital (fx then crypto market-neutral), folded into genesis trading doing $250b volume, then ran their own prop shop doing otc options and early defi first uni classes at age 12 in math and cs, focused on math physics gpu computing and robotics before quant trading context info: prop (short for proprietary): trading with your own money to make a profit, rather than handling clients' money or just matching other people's trades. a prop shop is a firm that does this as its business (variational was one before launching the platform) when lucas says variational runs 'a prop shop on the other side,' he means olp uses variational's own capital to take the other side of your trade and hedge it for a small profit, rather than acting as a neutral exchange: a venue that just matches buyers with sellers and collects a fee, without ever taking a position itself (like hyperliquid's order book) ----------------------------------------------------- 2. what did one of the first market-neutral crypto hedge funds actually look like in practice? buy-side systematic mid-frequency strategies (minutes to a day or two). none of the data connectivity research infra or otc desks existed so they built everything in-house. that tech stack made them an acquisition target. research factory hunting alphas then production monitoring and computerized execution across dozens of signals context info: alpha: a trading signal or edge that reliably predicts price moves and makes money. quant funds hunt for these constantly because 'alpha decays' (an edge stops working once markets adjusts), so you always need to monitor and research for new ones ----------------------------------------------------- 3. what did a typical day look like running the quant fund? research side: a research factory hunting alphas, building the pipeline from idea to signal, mid-frequency horizons of minutes to a day or two production side: engineering systems for execution portfolio management and monitoring across dozens if not hundreds of signals, because alpha decays. mid and back office (compliance ops fundraising) set aside ----------------------------------------------------- 4. overview of variational and where it differs / finds a unique niche? broker-like model not an exchange. no order book, users trade via rfq on variational omni, with in-house olp taking the other side of every trade. sources liquidity from tradfi and bridges it onchain for execution quality that mirrors traditional brokerages. zero fees, massive listing universe, and institutional otc options onchain coming later via variational pro context info: order book cex (hyperliquid): a public marketplace where you're matched against other traders. no one on the other side = no trade broker (variational): a middleman that quotes you one price, takes the other side itself, then hedges elsewhere because olp sources its own liquidity, it can list markets without waiting for traders to show up (sidestepping the cold start problem) and captures the full spread instead of leaking it to external market makers, which funds hundreds of listings, zero fees, and user rewards ----------------------------------------------------- 5. how does olp work in practice and how is it different from payment for order flow? user takes an all-in price against olp (a single quoted number that already includes every cost of the trade). olp takes the other side then hedges itself across cexs, dexs or dealers. makes money on the tiny spread between what it charges and the hedging cost. not pfof (no passing the order straight through for a rebate). same idea for rwas but hedging deeper into tradfi venues context info: spread: the small gap between the price olp charges you and the price it pays to hedge. that gap is its profit, tiny per trade but it adds up across huge volume ('pennies in front of the steamroller') pfof (payment for order flow): the robinhood model. pass a retail order straight to a market maker and collect a rebate for it ----------------------------------------------------- 6. for rwa perps like tesla, how do you actually hedge when there is no direct perp counterpart? great question. non-fungibility problem exists. even crypto perps have different indexes and funding. for rwas the hedging leg might be a swap, trs, cfd or futures. core quant problem olp solves is connecting as broadly as possible and modeling the differences so retail still gets the most aggregated liquidity context info: basis: the price/funding gap between two venues trading 'the same' thing. why two btc perps aren't actually interchangeable trs = total return swap: synthetic exposure to an asset's full return (price + dividends) without holding it, in exchange for a financing fee ----------------------------------------------------- 7. what does plugging into nasdaq/cme etc actually look like in practice versus binance apis? completely different ballgame. equinix data centers fixed apis collocated servers networking configs that take days to weeks. institutional partners often cannot face onchain directly took two quarters plus of planning on technical commercial and onboarding sides. requires scale and the right investors. that partner set is a big moat context info: 'cannot face on-chain directly': to 'face' someone in trading means to be the party on the other side of their trade. lucas means the big tradfi institutions can't be a direct counterparty to something onchain, for compliance and operational reasons. so variational can't just plug them in. it has to set up a traditional trading arrangement with them offchain, then connect that back to its onchain platform. this is a big reason onboarding took so long, and part of what makes it hard for competitors to copy re: variational's moat, lucas is referring to the specific group of tradfi institutions variational has managed to sign up as hedging counterparties, and how that is a competitive advantage that's genuinely hard for rivals to replicate ----------------------------------------------------- 8. are you ever caught offside on the prop side while hedging? no. they hedge very aggressively in hft time spans (often milliseconds). run the book extremely flat. market risk is negligible relative to size. philosophy is never counter-trade users. monetised like an 'in-house wintermute' or xtx/virtu/jump/jane by picking up small efficiencies at scale context info: internalising: matching one user's buy against another's sell inside olp, so only the leftover needs hedging externally. the more flow variational has, the more it can net internally, which lowers costs and tightens the prices users see 'running the book flat': holding almost no directional bet at any moment, because every position is hedged. it's how olp earns the spread without gambling on which way the market goes ----------------------------------------------------- 9. talk about the idea that variational is the venue for execution not price discovery? price discovery happens on order books where institutions and hfts match. variational optimizes for retail best execution best price zero fees and maximum listings. broker model aggregates liquidity instead of reconstructing it. for rwas price discovery already lives in tradfi so they import it context info: price discovery: where a fair market price actually gets set (deep order books where big players match), vs. execution, which is just getting retail the best fill on a price set elsewhere. lucas positions variational squarely on the execution side: it doesn't try to discover prices, it imports them via rfq, olp aggregates liquidity from wherever price discovery already happens (crypto venues, and for rwas the tradfi markets themselves) and passes retail one clean all-in price. his argument is these are naturally separate jobs, like brokerages and exchanges in tradfi, and variational's role is to be the best execution layer rather than compete to be the price-setting venue ----------------------------------------------------- 10. can a venue be best for both execution and price discovery? academically maybe possible but directionally the goals diverge. look at tradfi: brokerages and exchanges exist separately for capital efficiency liquidity aggregation versus hyper-optimized matching. robinhood does not care about microsecond matching; nasdaq does not care about retail ux ----------------------------------------------------- 11. broad thoughts on the notion that price discovery can happen on-chain? for pre-ipo or unique assets yes if it is the only liquid venue. for bitcoin no, though he concedes hyperliquid's btc and eth can carry meaningful new flow at times. as more markets go 24x7 and tradfi dealers expand listings the domain of on-chain price discovery shrinks. hyperliquid and trade xyz laid important foundations but it does not have to be the only or even primary place ----------------------------------------------------- 12. benefits and drawbacks of building on arbitrum (or any chain) versus binance or nasdaq? hybrid architecture: olp hedging and tradfi connectivity stay offchain. onchain delivers transparency (solvency and rebalancing visible on arbscan and dune) plus segmentation. every user gets an isolated settlement pool smart contract so capital stays peer-to-peer bilateral. if someone blows up the rest stay safe. gas cost of real-time rebalancing is high but the risk guarantee is strong especially post-ftx context info: segmentation: each user gets their own smart contract holding only their collateral, so pools can't touch each other. if one trader blows up (or even olp itself), everyone else's funds stay walled off, a deliberate contrast to the shared pot setup behind ftx style collapses the tradeoff here is that rebalancing all those isolated pools burns a lot of gas, but lucas argues the safety is worth it ----------------------------------------------------- 13. how does olp differ from hlp or the old glp model? hlp was early bootstrapping for an order-book exchange and by his rough guess is now under 1% of hyperliquid volume ('don't quote me on it'); external market makers take most of the revenue out of the ecosystem. olp is 100% of the other side of every trade forever, hedges externally, and keeps the economics inside. glp was a completely different mechanism design ----------------------------------------------------- 14. can users deposit into olp? not yet. bootstrapped with core equity capital to scale fast and avoid vault complexity. on the future roadmap. excess revenue will be captured into the protocol (as already publicly discussed) for potential token or other uses ----------------------------------------------------- 15. is olp basically a prop amm for perps? loose definition yes. one system giving an all-in price via rfq while aggregating and hedging externally is directionally similar. the real innovation is the liquidity aggregation and broker model not the rfq surface itself context info: prop amm: an automated system that quotes you a price and takes the other side of your trade, run by one firm with its own capital and private pricing model (rather than an open pool anyone can join). calling variational 'a prop amm for perps' fits olp loosely, but lucas says it undersells the real edge: aggregating and hedging liquidity out to tradfi, not just quoting a price ----------------------------------------------------- 16. what were loss rebates and are they coming back? if you closed a losing trade you had a chance at an instant usdc refund. way of sharing top-line revenue. sunsetting because lottery mechanics invited sybil farming and did not reach true retail as hoped. future ideas like spread rebates will be more targeted to everyday accounts ----------------------------------------------------- 17. five to ten years from now will retail even know they are trading on variational versus hyperliquid or binance? retail will trade on brokerages. zero fees, huge selection and aggregated liquidity make more sense than facing infrastructure directly. exchanges stay for price discovery and unique instruments. trading terminals are just front-ends; they do not give true aggregation especially for rwas. look at how robinhood schwab and fidelity work today ----------------------------------------------------- 18. people like seeing an order book. can you just show one? rfq is not incompatible with depth. multi-level rfq (common in tradfi) can show how quotes widen with size, and he wouldn't be surprised to see it on variational later this year. streaming rfq already refreshes in real time just like an order book. philosophically the goal is liquidity so deep that most users never need to look at the book context info: multi-level rfq: instead of one price, it shows a ladder of prices, i.e. how your quote worsens as your order gets bigger. that gives you the same view of market depth people like about an order book, just delivered through rfq streaming rfq: quotes refresh live as the market moves, so it's no slower than an order book updating. you're seeing a current price, not filling in a request and waiting ----------------------------------------------------- 19. how do you think about points programs and keeping momentum after incentives end? points are marketing that jump-starts the flywheel and economy of scale (now 1.4b oi and 1b daily volume). they become problematic only if the product is not good. variational’s edge is liquidity aggregation zero fees hundreds of unique listings and swaps. no api and a tightly guarded points formula that rewards organic activity rather than pure volume farming. product quality is what retains users ----------------------------------------------------- 20. what are swaps and why are you excited about them? new instrument alongside perps. aligns the retail leg with the exact tradfi hedging leg so funding can be flattened to a low fixed 4-5% cost of carry. solves weekend and after-hours blow-ups that scare people out of size. keeps usdc collateral and leverage but removes the variable funding pain. better liquidity on hundreds of rwas. perps stay for novel 24x7 listings and basis trades context info: cost of carry: the ongoing cost of holding a position over time. swaps flatten it to a low fixed 4-5% instead of a variable funding rate ----------------------------------------------------- 21. finally, where can people find you? x, the variational discord (team reads it every day) swaps and more features coming soon ----------------------------------------------------- hope you got something out of this naturally, i cannot capture every detail with this summary. it was a great interview and gwart did an excellent job - give it a listen if i made any mistakes here, please feel free to correct me - i am learning gvar

excluding hyperliquid and lighter the reason why i'm not interested in any other emerging derivatives platforms is not because there aren't good projects out there - there are there's just nothing that comes close to @variational_io gvar https://t.co/nUFFxqD5gn

https://t.co/1YVaZVn1Pw

stuff i'm working on rn: -organising/preparing for more spaces with the @variational_io team and v. special guests -og profiles, short and sweet q & as with the biggest names in the var eco -july newsletter en route for those not terminally online, please share any content for consideration below -ideas for more insightful var content, short form and long form -have a cool new collab in the works, hopefully to go live in the near term -hunting for good new things: talking with various builders in the space, just to offer feedback and suggestions. really enjoy this, dms open gvar

you have precisely 1 day and 16 hours to grab your 'truth sayer' badge (w/future perks) from @get_truenorth you'll notice i very rarely talk about other projects, and that is for good reason i narrow my focus to those good new things that: -i have real conviction in -where i've done my research -i believe the builders can deliver -it compliments my own experience/knowledge while i do not regret being so focussed on variational, i feel that true north warrants more of my attention maybe time to get @WillyChuang and @moonshot6666 back on for an update i've been really impressed with how the product is evolving and love experimenting with it give it a try: https://t.co/PZk8aSSgiX gnorth