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Insilico Terminal Podcast Episode 18 - World Markets
64 Plays6 days ago
In this episode, we’re joined by Lucas and Hersch to dive deep into World Markets, a new fully on-chain “prime DEX” aiming to bring spot, perps, and lending together under a single, unified risk engine. Lucas explains the core insight behind building everything on-chain: atomic state, transparent risk, and capital efficiency that simply isn’t possible with hybrid or centralized architectures. We explore why traditional exchanges behave more like casinos than markets, how World Markets avoids ADLs through bilateral counterparty risk, and why circuit breakers, universal margin, and order-book–based lending matter. The conversation covers MegaETH vs Monad, listing philosophy, basis trades, funding efficiency, and the long-term vision for building a real exchange - not just another venue to gamble on leverage.
00:00 Intro, project episode disclaimer, introducing Lucas and Hersch from World Markets
04:00 Founders’ backgrounds, Lucas’ Amber Group exit, TradFi experience and crypto crossover
08:30 Core thesis, why fully on-chain exchanges matter, state sync, risk calculation, EVM choice
14:00 Product vision, combining spot, perps and lending into one unified on-chain venue
20:30 Universal margin system, atomic risk engine, levered basis trade example
30:45 Risk management philosophy, circuit breakers, handling extreme volatility and dislocations
42:00 Exchange design tradeoffs, no ADLs, bilateral counterparty risk, transparency vs CEXs
59:49 Token plans, points program, incentives, launch timing and closing thoughts
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Transcript
Introduction to InSilico Terminal
00:00:03
Speaker
you
00:00:12
Speaker
Welcome to and new episode of the InSilico Terminal podcast. Today we are having another project on the podcast with us, so not a trade or anything, but we're talking about a project. And just like a quick disclaimer, like like I did last time, this is not like an endorsement or ah an announcement of integration or whatever. I just like to switch it up sometimes and talk about some different things.
What is the Prime Dex by WCM?
00:00:37
Speaker
as well and um I guess I can give it over to our guests today to introduce themselves and what they are working on.
00:00:47
Speaker
Nice. and Hey everybody. So my name's Lucas. I'm one of the founders of WCM which is a ah kind of and a unique a new on-chain application.
00:01:01
Speaker
We call it a Prime Dex. So it's spotlighting perps fully on-chain. um And combining these markets with an intelligent risk engine unlocks um arbitrage opportunities and ah basically, you know, more capital efficiency.
Deployment on MegaEath and its Benefits
00:01:20
Speaker
It's deployed on MegaEath, it's deployed on Chain, enabled by MegaEath, you know, throughput speed and transaction costs, which, you know, would not be possible on another blockchain to run this kind of application.
00:01:34
Speaker
um That's like the kind of basic of the application.
Rebranding to World Markets and Leadership
00:01:41
Speaker
Yeah. And me, um just a dog at WCM, which is has now rebranded to World Markets per recent announcement. And I'm just trying to help out the team ah with my sort of expertise and in the space and whatnot. Just trying to like help them like sort of like find a narrative, right?
00:02:00
Speaker
and try to make sure like ah what we're building is sort of like actually has a use case. Right. So yeah, that's pretty much a and and And I know like people all know, but like, oh my God, Hirsh is a dumb ass. Right. He's a retard. Why is he here? ah Sometimes I'm not that stupid. Yeah. Sometimes I'm not that stupid, but yeah, that's pretty much it.
00:02:22
Speaker
So you you you renamed the project to World? ah Sort of, yeah. so Yeah, it's ah it's it's sort of like a very sort of recent change. um ah Kevin and i and Lucas, Kevin, who's our other co-founder, we didn't align on um the name per se. We were like WCM, right?
00:02:42
Speaker
ah We're not a big fan of like sort like abbreviated forms, right, for world capital markets. And we're like, let's just drop capital, right? Let's make it world markets. Sort of like it's easier to roll right off the tongue.
00:02:55
Speaker
And yeah, that's pretty much it. So world for short. Yeah, it was a world, but like then again, ah world, tweet we tried looking for the the Twitter at and it's always taken. So we're like, oh, can't do that.
00:03:08
Speaker
I see, I see. So you're going to like backgrounds and then can't talk about the business? Yeah, that that sounds good to me. that's Okay.
Lucas's Entrepreneurial Journey
00:03:17
Speaker
um Yeah, so I started my first crypto company in 2017.
00:03:21
Speaker
um I was a co-founder and CTO of that business. um We sold the business to Amber Group in 2021. And out that business was known for...
00:03:34
Speaker
um or had expertise in securities regulations. So we were regulated um out of Western Europe, so under method two um to operate a securities exchange as an MPF license.
00:03:47
Speaker
And least our knowledge was the largest Ethereum code base up until 2021 when we sold it to the AMBER Group. um Those are derivatives so and had some very, um you know, fairly complex math and matching engine to kind of match cross markets.
State and Risk Calculations in Trading
00:04:05
Speaker
And then essentially from that business, we had a really counterintuitive insight. um which was that there's this relationship between state and risk calculations.
00:04:21
Speaker
So you need, you know, intuitively, ah when you calculate risk Each variable is dependent on all other variables. So it's kind of a combinatorial problem, depending on, you know, for most risk calculations.
00:04:37
Speaker
That requires the state to be in one place. And if you have a hybrid architecture, which is what we built, um then literally due to like a speed of light, state doesn't synchronize fast enough to calculate risk perfectly.
00:04:51
Speaker
um And so you can still you know build a business and build an exchange, but to have like perfect risk calculations at the limit, you need ah to enforce atomicity.
00:05:03
Speaker
And you could either then build a fully centralized, you could build NASDAQ, right? You know, Binance. um not hyperliquid, fully centralized business, or you could let everything fully on chain.
00:05:16
Speaker
um And so that was very counterintuitive because as an engineer, you would never really expect to put like the matching engine on chain. ah And so that was in 2022, you know, that we kind of had that concept in mind.
Choosing EVM for Prototyping
00:05:29
Speaker
um And then ah basically had the thesis that and blockchains would get very fast and very cheap, really in particular, like the EVM would get very fast and very cheap.
00:05:44
Speaker
um were We have very strong preferences for the EVM over the SVM due to just kind of how it's built. um We think it's like a much more intelligent design. Solidity, not so much, but the EVM is pretty good and comparison.
00:05:58
Speaker
um And so we're able to kind of start um you know doing research and prototyping and thinking about ah you know how to build it.
00:06:10
Speaker
ah very early because we knew that the execution environment would persist or at least that was sort of the thesis. um And then when MegaEath came out, we were like, okay, now's the time to really... I mean, we actually looked at Monad. where We spent quite a lot of time um understanding the Monad ecosystem and and the fact um we were there first, believe or not. And then we learned about MegaEath. We were like, you know this is just better in like literally every dimension.
00:06:36
Speaker
um except for, I guess, capital raising. Mono raised a heck of a lot of money. um But decided ultimately, you know, the mega eco was a really good fit. And, um you know, and and started working on the, you know, properly like working on the business.
Insights into Hedge Fund and Global Trading Strategies
00:06:55
Speaker
That's the brief, entry yeah, sort of the brief story in history. And the other thing that's, I would say, are kind of important is, so, or maybe this is a bit, you know,
00:07:08
Speaker
of like, yeah, so in some additional context. So we also started a hedge fund ah which trades in CeFi and DeFi.
00:07:18
Speaker
i would say we're we're probably, we' maybe not the biggest, but within the fun world, ah pretty close to like the biggest power users is on chain. And i was really, a lot of people ask like, you know, why we're working on this instead of like, you know, why not just just work on the hash file and then, like, why do this at all?
00:07:40
Speaker
ah I was like super, super against building another exchange because I know how hard it is um and like the likelihood of success. And so our internal threshold to like when work on this was first, I so like there were lots there are lots of problems on chain. Like if you're trading in crypto,
00:08:02
Speaker
i you're basically getting fucked. Either you're getting fucked on the centralized systems and we can talk about like you know how that all works. Or you're avoiding centralized crypto and you're in DeFi, but like, you know, Morpho, you give it a dollar, gives you 75 cents.
00:08:20
Speaker
That is not a useful, especially useful product, right? For finance. And so you really, there's just a kind of perfect lack of um basic functionality and like, you know, kind of.
00:08:34
Speaker
Connecting us between markets and it's all siloed, etc, etc. So. The problems are really obvious, um but, you know, let's have somebody else work on those hard problems and, you know, we'll just trade and and make money.
00:08:49
Speaker
So even that like wasn't, you know, the fact that we kind of had a solution to these problems was not sufficient to launch the business. Where it became like where it was like, okay, we need to run this business was ah I think we we know like 90 to 95% of market.
00:09:09
Speaker
So I know almost every single trading team that trades on chain, um partially because of our history and partially because the nature of the hedge fund is we ah we don't build internal strategies. We can, but that's not our focus.
00:09:23
Speaker
We actually speak to like every trading team on Earth for crypto. and So you're not just like aware of all of the teams, but you're actually in in contact with them? or Yeah, like we ah decide, I do diligence their strategies and we decide whether to give them money.
00:09:40
Speaker
We're a multi-manager hedge fund, similar to like a fundif fund to fund. So literally, you know, the business is built around sourcing every trading team in the world ah that that that touches crypto, understanding their trading in, you know, very granular detail.
00:09:58
Speaker
and then investing in the best teams. And when we invest in the best teams, they trade in our account. So we see every single trade. right So that's on the hedge fund side. Then there's obviously prop trading, which is a lot of like you know now who knows who. And we've been doing this since 2017. So you know we we know most of the teams.
00:10:16
Speaker
And protocols want to speak to us. And you know i most I know most of the protocol founders, one having been around, but Two, because if you're a protocol, you want clients, right?
00:10:28
Speaker
Like, who better to talk to than, you know, i found a fund to fund, right? If you want institutional clients. And what became obvious was that not only were there these major issues, like that was self-evident, but nobody was even working on
Issues with Centralized Exchanges
00:10:45
Speaker
a real solution. Mm-hmm.
00:10:48
Speaker
That was the threshold for us to want to work on this business. Was that like, if we don't solve it, actually, like, it's going to be two to three years at least before somebody has a credible solution to the problem.
00:11:01
Speaker
The problem being like capital efficiency here, basically, right? Yeah, the problem being if you, let's say you like crypto, for whatever reason, you've decided that like, this is interesting to you.
00:11:12
Speaker
if you trade on any of the centralized exchanges, like, they, including Hyperliquid, by the way, which was way better than, like, way more transparent than, say, like, Binance, they get to unilaterally, unilaterally decide, like, when to unwind your positions and at what price.
00:11:29
Speaker
That is insane, right? Like, there is not and there is not a respectable financial market on Earth where that is the case. um Not to mention, like, you know,
00:11:43
Speaker
getting locked out of your accounts and getting kicked off the exchange. And, you know, as protocols, you're either paying like what amounts to a bribe or, um you know, getting deal with it. Right. It's like it's just not not good.
00:11:55
Speaker
um So that's like the centralized world. Then there's the decentralized world. Which is like, OK, what do you trade on? right Uniswap, that's not a market. i you know like Over collateralized lending, that's not a product either.
00:12:15
Speaker
There are no real options. um Vitalik wrote an article, which I really loved, called Safe DeFi, you know making the case that like DeFi is Google mode. Google has search, right?
00:12:28
Speaker
So what does Ethereum have? It has Safe DeFi. It's like, that's great, but it would be even better if it was like safe and useful DeFi. Right. um If a market is just subsidies, it's not a market.
00:12:43
Speaker
And so you need like trading infrastructure. You need like an exchange that people can actually use, like real traders, people who are looking at like, you know, taking the market data And then based on signals, generating a price and trading at that price, like, you know having a view or um like that's like actual trading.
00:13:08
Speaker
Selling AVAX and on that you get from like sticking your money in oil or pool is not trading, unfortunately. Right. That's all subsidies. Points farming, you know, subsidies. You can only kind of do that for so long.
Importance of Order Books in World Markets
00:13:25
Speaker
So how does your product come into this? Yeah, so and basically our knowledge from traditional markets, um yeah we have quite a lot of our traditional market market expertise, Harvard, Citadel, Goldman.
00:13:43
Speaker
um And ah DeFi, been doing this a long time, you know very technical, both on the builder side and on trading side. ah We have views on like what and like what a market really looks like um on chains. So I could actually, let me just sort of open my, can I share a screen?
00:14:08
Speaker
I think you can, yeah. guess you should be able to.
00:14:14
Speaker
All right, great.
00:14:17
Speaker
Okay, and I'll kind of talk through this for people on audio. So and this is what it currently looks like and it'll look you know lot cooler waiting up to launch, which is expect February 1st.
00:14:31
Speaker
So there's perps, spot and lending. That's the first thing you'll notice um you know all on one venue. And everything's order book based, including lending.
00:14:44
Speaker
And the reason is because, um like one, in order for for a market and you need an order book for a market.
00:14:56
Speaker
ah Like an order book is the literal manifestation of know, aggregating preferences and then like sorting preferences by price. It's the definition of a market. You can't have this like AMM sort of situation.
00:15:10
Speaker
Um, Okay, so that's on kind of like the three markets. You also need loans to be order book based, or at least you can't have pools.
00:15:24
Speaker
This was actually proven in the 70s. Somebody won a Nobel Prize for demonstrating why you can't i have pool based lending or really like pools in general ah due to adverse selection, gross death spirals, etc. around um So, ah yeah you know, you have like, you can build a really simple UX on top of it where you're, you obviously file or whatever.
00:15:46
Speaker
um But it's important for risk that, you know, loans are correctly structured. It's 10-day terms with a fixed interest over those 10 days.
00:15:58
Speaker
um That means that, you know, you can't manipulate the pool, you don't get, you know lock-in things, etc. and So you basically have like limit orders inside of the order book at different exchange rates which people can then.
00:16:11
Speaker
Yeah, different interest rates. So I'm willing to, you know, borrow at 6% and you're willing to, you know, lend at the same rate, right? And then people, like, people can express preferences. Let's say that, you know,
00:16:25
Speaker
I'm willing to lend, but only if you can pay 8%, right? Like I can stick that order in the book um and i can continue trading and doing other things until I get filled.
00:16:38
Speaker
ah Like you, again, like markets are literally expressions of preference. That's what makes a market good. and And why a market is, why you need markets for society instead of like, ah you know,
00:16:53
Speaker
like a central government kind of making decisions for everybody. It's like an aggregation of preferences.
00:17:00
Speaker
um Okay, so what's really cool is that ah there's universal margin. So when all of your positions are considered holistically, the risk engine finds opportunities to make more money ah or to ah reduce your risk.
How Does the Risk Engine Work in World Markets?
00:17:23
Speaker
And it does that automatically is maybe not the exact world, exactly correct word, but it does that natively, so to say. You could say like it does that automatically.
00:17:35
Speaker
um Really, it's like atomic, but yeah you get the point. and so what is What exactly does that mean? like What does it mean that it does that not automatically, but natively? ah Well, if I were to hear the word automatically, I would think that it's like a, I would think of like a sequence of calculations.
00:17:54
Speaker
You know what mean? Like one calculation triggers the next. um In this case, it's ah not a sequence of calculations, but it's literally like the state itself.
00:18:07
Speaker
um Going back to kind of what you know the origin story, which was we recognize this counterintuitive relationship between state synchronization and risk calculations.
00:18:19
Speaker
um Doing everything on chain, we're able to know like the full state of your portfolio, the liquidity in the order book, and the trade.
00:18:36
Speaker
all ah like simultaneously. And the calculations around like what trades you can do, how that affects your portfolio, the risk you can take, et cetera,
00:18:49
Speaker
that all happens atomically as well. And so it's this like instantaneous, it's these like almost discrete, guess they are technically discrete because of block times, like these discrete instantaneous moments in which everything is known and correctly calculated. And because it's instantaneous,
00:19:09
Speaker
um you're able to safely increase leverage, um you know, safely are kind of ah sp expand relative to, you know, less efficient systems.
00:19:28
Speaker
um The efficiency and that efficiency makes everybody more money. Maybe this is a bit of a very theoretical and description, but... Does does it require a manual user input? Like are there some propositions, for example, or is it something that the system just does like by itself?
00:19:44
Speaker
So the system does it ah instantaneously at every moment. So it's just a fact of state, if you will. um The u i makes the, like gives the user, ah you know, helps the user take full advantage of that state.
00:20:07
Speaker
none And so let me find a, A good one here. So so we have this um trade that we like to use to sort of showcase all these things I'm saying that feel like very maybe ephemeral.
Leveraged Trading on World Markets
00:20:24
Speaker
um This trade illustrates this these things more clearly. We call it the bullish levered basis trade. So everybody is everyone knows the basis trade or most people do.
00:20:37
Speaker
You hold spot of some asset with the ETH and you sell futures of the same asset. And if you do it the same size, your net market exposure is zero, right? Because the long position cancels out the short position.
00:20:53
Speaker
And so you earn the funding rate. um Now, if you do this on hyperliquid, then you'll make about like four ish percent depending on the asset and the and the market. But that's kind of like average.
00:21:08
Speaker
And the math here simply is you start with $10. um You're going to take four of your those $10 and buy each spot. You're going to take four of those $10 and short each futures.
00:21:22
Speaker
And then you need two of those $10 as the whole as collateral for your E futures. Mm-hmm. um And so your P&L is then you the $4 in the funding position or the $4 notional times the rate you're getting on that position, which is typically like 11%, call it 10%. So, you know, you can do that.
00:21:52
Speaker
So, and that's like, ah you know, you can do the trade more efficiently. um So you could, instead of doing like four, four, and two, you could do five and five, but that's the, you know, it's it's in that is in that range. Mm-hmm.
00:22:08
Speaker
The world markets version of that trade does 50% returns, connect with you higher than that. And the reason is because of this sort of the things that I've been talking about, which are maybe feel theoretical.
00:22:25
Speaker
That's the ah direct impact. So if you look at this you know this menu that I'm showing on my screen, there are three trades ah which get bundled into this you know single trade.
00:22:40
Speaker
So the first is that you're going to borrow under collateralized from the lending market. You can borrow under collateralized again because you have these three markets on one venue. And so you know that capital doesn't leave the exchange and so on and so forth. Right. Like the risk engine understands under collateralized loans and can price them ah you know perfectly efficiently with um relative to everything else.
00:23:05
Speaker
So Okay, so so you're going to borrow under collateral. So in our example where we were describing kind of the contrast with Hyperliquid, we start with $10. The first thing you're going to is borrow $90.
00:23:18
Speaker
So now you have $100. All right. Then you're going to take all $100 and you're going to buy Spot. So you're going to buy eSpot.
00:23:30
Speaker
And then you can simultaneously short $100 worth of ETH futures. And world markets recognizes that the long the short position ah net to zero in terms of their market exposure.
00:23:47
Speaker
So it literally understands net market exposures like natively. And because it knows that you can't get liquidated based on the price path of ETH or whatever the underlying asset is,
00:24:01
Speaker
It allows you to apply more leverage to that position. ah portfolio Portfolio leverage, which is why at the beginning, like like when you think about this whole trade, right, and and think of it as like one unit, we started the trade by borrowing.
00:24:20
Speaker
we can borrow a lot under collateralized because the full trade, the borrow plus the spot plus the futures, is considered together, right, as like one unit.
00:24:34
Speaker
And that then unlocks this extra leverage safely, again, because it knows the risk of the your full portfolio after including the transaction, right? Like the state change.
00:24:52
Speaker
It thinks of risk as like the end state and then determines like, you know, where you can unlock leverage or have like lower liquidation prices if you're long, um you know, so
Challenges in Building Similar Products
00:25:05
Speaker
on and so forth. Does that make sense?
00:25:06
Speaker
Makes sense to me. I'm just like very curious about the the associated risk risks with like all of this because there are like probably reasons why this hasn't really been done before so far. Maybe you could you could go a a bit into that and then like talk about what the the risks are and how you're like mitigating them.
00:25:26
Speaker
Yeah, so I think the what's interesting is that um there are there's there's no product like this that's been built due largely to ah the fact that blockchains have not been fast or cheap enough historically you to build it.
00:25:46
Speaker
um One of the other reasons we like yeah the EVM, ah maybe self-evident but just mentioned, Ethereum, which is yeah slow, expensive Ethereum, has many multiples more TVL than all other blockchains combined, in which you count like you know Bitcoin's value.
00:26:06
Speaker
um And that's due to like platform economics and sort of the network effects in platform economics. And liquidity is important to us. We want to be on a general purpose chain. We don't want to build... like i don't believe I think the app chain thesis is intellectually weak. Sorry if I am offending anybody here, I don't think it's like especially well thought through um ah for for for DAXes specifically. Maybe for other the for other things, I'm sure it makes sense. but And so um so that's like a core i you know part of the product.
00:26:42
Speaker
Now, if you look at, say, like centralized exchanges, you know why why haven't they done this? Mm-hmm. So actually it has been done. And um what's funny is that it's done very selectively.
00:26:58
Speaker
So where it's done today partially is Binance. um You can actually do this on Binance. What's funny is that, ah you know, consistent with like general centralized exchange world,
00:27:15
Speaker
You can only do it in markets that they own, meaning that they issued the asset or they have invested in the asset um and they want to so like sort of support trading for that asset.
00:27:30
Speaker
Then they do enable this. So yeah know they have like rap their own Solana wrapper, B&Sol. They have their own dollar wrapper. They own a big chunk of Athena.
00:27:41
Speaker
um For those markets, they actually do allow it and and you know it works great. um So that's one. ah And then, like, yeah, I mean, that's really kind of that. So that's like on the centralized exchange side. And then like different different exchanges have different go to markets, right? So, you know, Hyperlic was go to market was, um yeah even though it's centralized, it's it's obviously entirely unregulated and permissionless and anybody can make an account.
00:28:13
Speaker
um You know, and pair it like at the time, thecentalized the the other centralized exchanges were getting regulated and having to kick people off, etc.
00:28:24
Speaker
but But fundamentally, Binance is very fast to list things. And, you know, if you ask like your typical, especially like VC today, how to build a perpdex, everybody and their mother tells you the name of the game is to be fast to list things and be first to list.
00:28:39
Speaker
And really it's because they're just sort of copying the leader. um You it worked over there, so why you know just kind of do what worked? The obvious problem is that because it's a competitive market, if you just copy the leader, like you're for sure not, you know, that actually doesn't work because you have to let's Why would anybody use your thing if it's the thing that's the other thing but worse? So um the thing is, if your if your goal, if your whole premise is to be first to list, you actually cannot do what we're doing because you bring assets onto the exchange which have so much ah like risk associated with them.
00:29:23
Speaker
Whether it's like they can go to zero because they actually like aren't really worth anything credibly. um or ah usually like you know that's like the main issue or you know liquidity is controlled by like eight people, um so on and so forth, then it introduces too much risk to the exchange as a whole.
00:29:44
Speaker
um And so we actually don't look like we are not trying to be first to list everything. We do want to be first to list things that are of high quality. yeah so What what is like your your criteria for listing something then? What what are like the things? Do you just have like the top 20 or 50 coins or something for the beginning? or what what is that going to be like?
00:30:05
Speaker
Yeah, so at the beginning it will be a narrow set of listings really with the purpose of bootstrapping liquidity. i don't think it's good to list like everything under the sun to bootstrapping liquidity. But once we get sort of at the margin, um a good like the example i like to use is ah You know, we're in megaEath ecosystem.
00:30:25
Speaker
There are a lot of high quality projects and megaEath that are also very new, right? That's fine. But these are like, you know, real founders building real businesses um where we can have some, there's like some coherent view on this thing is not going to go to zero, right?
00:30:44
Speaker
Like we can stomach volatility because there are risk parameters that, you know, like essentially the risk the the way risk is calculated is um your portfolio determines your risk budget and when you take risk you consume margin you consume available margin and if you take more risk you can see more margin uh you know pretty straightforward so if you want to if we list an asset that has high volatility
00:31:17
Speaker
That asset is just going to consume more margin kind of on a per dollar basis than something that has low volatility. So that's relatively straightforward. and They're also like liquidity parameters, et cetera.
00:31:29
Speaker
What doesn't work is if the thing is like, you know could go to zero or is controlled by like five guys, right? It's like, it's it's not a high quality asset fundamentally.
00:31:43
Speaker
That's really like kind of the delineation between what we can do and what we can't. Hyperliquid doesn't have that same delineation. right And obviously, you know they've been unbelievably successful as a business. that um like i'm also so yeah Even though like we're building a competing product, and I complain about Hyperliquid.
00:32:04
Speaker
like they introduce a level of transparency to the industry that no centralized exchange is ever going to do. And, you know, like ah like to the benefit of everybody, right? So pro-hyperliquid, especially compared to like the other centralized exchanges.
00:32:25
Speaker
um But, you know, they're go-to-market. Like they don't care what the asset is as long as like their premise is that people want to trade the asset, whatever it is.
00:32:39
Speaker
And that's going to bring users to the exchange because you can't get it somewhere else. And then some of those users stay. And that works, right? Clearly works really well with them.
00:32:50
Speaker
Just a different value proposition, right?
00:32:55
Speaker
I'm curious, like what would happen with your exchange on a day like October 10th, for example, when there are like huge price dislocations, even in like major assets that are I feel like that could pose like a major risk in that case,
Managing Volatility with Circuit Breakers
00:33:11
Speaker
no?
00:33:11
Speaker
Yeah, that's a great question. So um there are kind of a ah couple of pieces to that. um One is that the Exchange has circuit breakers, our Exchange does, and I'll kind of get to that. um But the first thing is, well, what caused the issue?
00:33:28
Speaker
It was referencing local order book data to set a mark price. um And that's, you know, we don't do for obvious reasons.
00:33:38
Speaker
ah And I mean, the fact that finance did it sort of this late into the game is a little bit surprising. But um that's, you know, OK, that's kind of like the basics.
00:33:50
Speaker
Then the next thing is risk limits on the e exchange. So these are public, they're fully on-chain. um The kind of interesting thing about risk limits being public and on-chain as opposed to set by you know some internal committee at Binance or Hyperliquid for that matter, is that in theory and market equilibrium, those limits should be like optimal.
00:34:16
Speaker
right Because if those limits are too conservative, it's It's often because there's perfect information symmetry. Like the the the people who suggest the limits and the people who use them, the traders, have perfect information symmetry and you know talk to each other.
00:34:33
Speaker
So if the limits are too high or too low, like it should actually kind of recalibrate um very fluidly. Whereas like you know and on Binance, first of all, nobody knows who sets the limits.
00:34:47
Speaker
Nobody's ever met that guy. And second of all, if you don't like them, you know, good luck. um So the second thing is, and you know, the risk limits. It's like, you know, we are the risk limits in place to to protect against these scenarios?
00:35:01
Speaker
Then it's OK. Let's say that like the risk limits were just like the the move is so extreme that there's like nothing you can do. um Then there are circuit breakers. ah which is to handle these like October 10 scenarios, just the most extreme, you know, price goes to zero in two seconds kind of situation.
00:35:20
Speaker
In that case, it pauses liquidations, it pauses trading. It gives traders time to increase their collateral, to manage their positions elsewhere. Trading then resumes shortly thereafter.
00:35:33
Speaker
And um like, you know, ah you can cancel your orders, right? the market then like picks up from there. Would you still be able to like withdraw in that situation? Because like circuit breakers aren't really a thing that's like been done in crypto before. Yeah, that's a good question.
00:35:51
Speaker
where the circuit breakers, part of this is still a development. um You could withdraw, ah but you would not be able to withdraw um like beyond your collateral requirements. right So if you were like...
00:36:08
Speaker
you know, get me out of here because I'm not going to lose uses my shirt. You can't withdraw your shirt. Like the exchange won't let to you ah withdraw capital that, you know, is that a risk kind of consumed by your positions, etc.
00:36:23
Speaker
If it was if you were in spot and you know only in spot, right, that's not a contract. and it's also not subject to anything liquidated. So you could withdraw that. But say you you couldn't withdraw a spot that was used as collateral for a perp or something.
00:36:40
Speaker
um But that's kind of like the sort of the third line defense. Then there's the question of, well, what happens if like none of it works? right um which is to say like maybe FTX where that's not like a glitch.
00:36:58
Speaker
That was the market you know repricing this event. Yeah. What's interesting is that world markets does not have any ADLs.
00:37:10
Speaker
um We actually think ADLs are like not necessary and kind of a historical artifact. um adls The reason ADLs were actually created is because crypto exchanges were built like casinos, ah not like exchanges.
00:37:27
Speaker
And if you're the casino, like if you're the house, then it's really convenient to be able to like at your own, you know, kind of when and how you feel like it unwind to like the, you know, the people betting against the house, right? Unwind. You're the players unwind the positions.
00:37:48
Speaker
Yeah. That's why ADLs exist. um But if you're building an exchange, you actually don't need them to manage risk. So the way it works on WCM is, or on on world markets, is every contract is bilateral.
00:38:06
Speaker
So if you have if you you if you're long perps, there's somebody on the other side who's short perps. And if you're a counterparty in this scenario, right we're saying that the market has moved so quickly that ah you know, de-risk limits, circuit breakers, like nothing nothing has worked, right?
00:38:24
Speaker
um Your counterparty can't pay you as much as you're owed. Mm-hmm. That loss is socialized bilaterally.
00:38:36
Speaker
Sorry, it's not socialized is actually the point. um It's socialized amongst their counterparties, but it's not socialized amongst like the exchange as a whole. Right? Nor is the so nowhere is it to eaten by like the exchange's internal trading desk. We don't have an internal trading desk because that's a casino, not an exchange.
00:38:54
Speaker
And even if you like hyperlirquist returns, and I like them as much as the next guy, right? Lider as well. those trades are against the users it's a zero-sum game right so every dollar that gets every dollar p and l in that vault is one dollar less kind of in the hands of the traders um so like again losses are uh counterparty to counterparty uh they're not sort of exchange-wide socialized in this way
00:39:25
Speaker
um There is not this kind of like discretionary like unwinding fields that so on and so forth. Anyway, so that's that's how risk is. And what that means, what's kind of interesting then is if you're sophisticated and let's say that you care a lot about this particular risk, right ADL risk or you know risk on the exchange, et cetera, you can actually just take a view.
Counterparty Management in Trading
00:39:49
Speaker
So let's say that like i think mike I think the exchange risk settings are wrong.
00:39:55
Speaker
ETH is priced, you know, not not conservatively enough, for example. And my counterparty is leveraged to the max on ETH.
00:40:06
Speaker
I can actually swap my counterparty.
00:40:10
Speaker
how How would that work? What would it exactly what that mean? ah What it means fundamentally is that you just close and reopen your position and you reopen it from another a new counterparty in your order book.
00:40:24
Speaker
I see. So each trade basically has like their own designated counterparty instead of like total yeah open interest or something like that. That's right. Yeah, yeah, yeah. ah Because risk, again, this was proven in the 70s, right? We're, you know, 50 years behind on catching up to wo what we already know.
00:40:44
Speaker
ah Risk it should not be pooled. that does That just like doesn't work. It doesn't really work ever. um you can like the only The only sort of situation in which it kind of works, what doesn't work is when risk is pooled and the outcome is shared.
00:41:08
Speaker
um So yeah that's an important nuance. You can pool risk, but then you need a price. And importantly, like if you're pooling risk, that's like a asked like a actual like trading asset management function with hyper-specialized knowledge about like what the risks are and you know where the pricing is accurate, et cetera. Then you're just trading.
00:41:33
Speaker
um But let's say that... like ah you know, like an insurance market, right? Which is sort of the typical example used to illustrate the point.
00:41:47
Speaker
If you have, I'll just kind of give you the conclusion of, you know, the research in the 70s. Let's say you have, you know, a group of sick people and a group of healthy people, right?
00:42:00
Speaker
The healthiest person in the sick group is the most incentivized to leave because they're all paying the same insurance premium. yeah right They're all paying the same percentage. And so the healthiest person is subsidizing everybody else.
00:42:17
Speaker
So the healthiest person wants to leave. right They're the most in time to leave until they leave. the person who is most incentivized to stay in the group is the sickest person in the group, right?
00:42:30
Speaker
And as soon as the healthy person, the sick the healthiest person in the sick group goes to the healthy healthy group, right? Like you see the problem. um And so if you actually just like look at, you know, if if it's like a free market and everybody gets to choose,
00:42:47
Speaker
like the whole market collapses due to adverse selection. So like the healthy, you know, the healthy, like the, the two groups dissipate into like each individual person, right? The healthiest person in the healthy group leaves, right? So that guy's on his own. Now the healthiest person in the sick group joins the healthy, you know, the healthy group.
00:43:10
Speaker
Now the sick group is, you get the point, right? So you, you just extend the iteration. um anyway Anyway, that's the proof. It's not complicated. so here like i'm I'm not sure if I understand how exactly that would work on the exchange. like if you If you have a certain size, you would need to find someone else that is like willing to have a position against you with that exact size?
00:43:36
Speaker
No, no. ah So pick a position. ah you i say you have ah Do you have a preference? I don't know, let's just say 1 ETH long. Okay, so let's say, well, if you're long spot, there's no counterparty, right? But if let's say you're long ETH perps, right?
00:43:51
Speaker
Okay, so you're 1 ETH long. ah When you place, so let's let's look at the original trait. So kind of like T0, you go 1 ETH long perps.
00:44:05
Speaker
It's very unlikely at T0 that you would... um mike match with another guy who's exactly short when he's pervs.
00:44:16
Speaker
So you're probably already, there's already like you have multiple count of reddies. Let's say you have two. So you're long one eighth and on the other side of this you got somebody who's short 0.2 and somebody who's short 0.8.
00:44:32
Speaker
And let's say the 0.8 guy, you're like, and this guy's like super leveraged, like I don't like it. you can actually unwind that position.
00:44:45
Speaker
So you would go in and you would select the the like the exchange keeps the from the UI perspective, you see like long one ETH, right? I can actually even like show you. Let me open a position.
00:45:10
Speaker
I'm not sure if I see your screen anymore. Maybe you need to like... I'm on the screen. Okay.
00:45:24
Speaker
right. So far, so good. Yep. All right. So in in this case, I'm long like 3.05E, right? Mm-hmm. So what's interesting, if I go into details...
00:45:38
Speaker
then, right, well, in this case, it actually, I do only have one counterparty. Let me go along a lot more. You know like a partial fill going on. and Yeah. okay ah Did this stop sharing?
00:45:59
Speaker
Okay. All right. So, All right, now I'm long 21 ETH. And now I'm at risk of getting liquidated. Wow, all right, I still only have one counterparty.
00:46:11
Speaker
I have a pretty big counterparty on the other side of this. Um, all right. Well, point is that like, uh, normally if I was like this long, right, I guess in this case, I only have one counter party.
00:46:23
Speaker
Um, but say I had two, you would see more rows in this table, right? Um, which would be, you know, uh, the typical case.
00:46:34
Speaker
Yeah. So I can actually go and so maybe it's like, you know, I'm long 21. So maybe it's like, you know, one guy's short 11 and one guy's short 10 right on the other side.
00:46:44
Speaker
i can actually go in here and close that specific part of my position where I don't like the counter party um and then just like reopen, reopen it.
00:46:56
Speaker
And at the contract level, The contracts are actually um storing like the individual positions, i.e.
00:47:10
Speaker
at the sort of the most granular level. The ui which is just reading directly from the chain, which by the way, there's no back in here. This all fully on chain. um
00:47:23
Speaker
is then reading all of these granular positions, aggregating them into like one position because this is what people are used to seeing. And then it allows you to click into, you know, so like details if you'd like to.
00:47:43
Speaker
And obviously you can use all through API as well. How do you make sure you're not just like getting the same corner party again when they're closing and reopening the position? um I mean, it's possible, ah but it's unlikely, right? If you have like, you know hundreds of thousands of people on the exchange, particularly like in the order book, it's unlikely that you would get the same guy.
00:48:06
Speaker
It is possible. Basically, from what you've been talking about, it seems like what you're building is a lot more akin to like how it works in TradFi with exchanges and brokers and stuff like that.
Differences Between Exchanges and Casinos
00:48:18
Speaker
I mean, we built an exchange, not a casino. Yeah. It was really the bottom line. what What do you think like the the effects are going to be? Because I think in in TreadFi, everything is like way more... um like It's just one market, right? And we have like multiple different ones, if that makes sense. like Our price discovery is on multiple different exchanges. And and what what would the what could effects be like, for example, if Eurus is basically the only one that has like a circuit breaker, but all the others like keep trading and stuff like that?
00:48:50
Speaker
um So i might not not fully understand the question, but and tell so tell me if I'm misunderstanding. But what's really interesting is that the one like there are you know casinos building on top of us um or on top of the protocol. We don't we don't control It's on chain.
00:49:05
Speaker
um And the reason is just because like, you know, they have like a like casino front end. But like as their casino, you want to make more money. um So kind of the way we get retail flow with the retail aggregators and like most even retail wants to make more money. So if you just make things easy, I think like it attracts people. But um but to answer your your question, um so what's really interesting is that like in the 2000 year history of financial markets,
00:49:35
Speaker
It's actually never been possible to build ah world markets, what we've built. And the reason is because regulation is designed to prevent conflicts of interest.
00:49:47
Speaker
So the reason you know we have regulation is because historically, when the exchange was also the custodian and was also the clearinghouse, things blew up.
00:49:58
Speaker
right So what we saw with FTX, like that's happened in history before. And so what what regulators do is they say, okay, well, we can't know what every business does every day of the week, right?
00:50:10
Speaker
Because, you know, that would require just an army of people on technology. And so what we're going to do is we're going to set like forced businesses uh to separate their functionality so you know the clearinghouse the exchange and the custodian they all need to be separate businesses and so if the exchange does something wrong like in you know uh traditional markets maybe they have a contract they're trading and they change the fine print they change the terms or they change the payout and they don't tell anybody um or they you know ah that they there's there's a market there's some problem
00:50:48
Speaker
And they, know you know, cover it up or they don't honor the commitment, whatever it is, you know, because they're trying to protect the exchange. In order for any money to move, right, which is ultimately, like, what has to happen here, the clearinghouse and the the custodian need to agree.
00:51:06
Speaker
And if they see this, they're going to be like, you know, well, and no chance. So, like, and that's how these problems get surfaced and solved. um But what what happens is you also then like dramatically reduce the productivity of those dollars and the kind of efficient relationships because of the separation right and so the only way at least to my knowledge that this conflict of interest problem has ever been avoidable while putting while like integrating markets and integrating market functions
00:51:51
Speaker
is by building the whole thing on chain because the code can run autonomously.
00:51:58
Speaker
That's like a big breakthrough. Mm-hmm. So what we're one of the markets really, really interested in is FX because, you know, it's stable, relatively speaking.
00:52:12
Speaker
ah I mean, it is stable, um you know, huge liquidity and way more efficient on market like world markets than anywhere else in the world, to my knowledge.
00:52:27
Speaker
um That's like a really big unlock. ah Anyway, so you're asking about traditional markets. like Traditional markets, by the way, have circuit breakers. Just to go back to the circuit breaker thing. That's what I was wondering. I think what you said just made a lot of sense. I'm just thinking out loud a bit because I also don't really know how it properly works. But the NASDAQ is just one market, right? So if there is a circuit breaker in the NASDAQ, you basically can't trade it anymore unless you do OTC stuff or whatever. But if your exchange has a circuit breaker, all the other exchanges are still trading bitcoin or eith or whatever like the prices are still moving basically yeah okay so in this situation all right so one thing i will say is that um and historically like philosophically i've been against circle breakers basically my whole career because i'm like know just let the market decide um but after october 10th like because i was in the market trading
00:53:25
Speaker
um I thought like, okay, we actually need circuit breakers and they exist near ubiquitously in traditional markets. So I think that yeah know there's sort of a reason for that. um The thing is like in crypto, there are circuit breakers.
00:53:41
Speaker
ah They just aren't disclosed. So when an exchange like doesn't want to honor your orders, they just don't.
00:53:52
Speaker
And running a hedge fund, like, this happens on a very regular basis. Mm-hmm. I won't name any names due to NDAs and such, but, like, literally all of the top funds will just not execute your order if they are under stress. And when I say under stress, I mean their internal trading desk is losing money.
00:54:14
Speaker
Right? Mm-hmm. The, like, insurance fund, which has, like, zero transparency. Right? right ah yeah they And then it's like, if you you know like we've I have gone to either you know gone to exchanges with logs, system logs from their exchange.
00:54:32
Speaker
yeah And I'm talking about like top three liquid exchanges, not like exchange number 99. That say you didn't, you like you block these transactions, it's in your logs.
00:54:45
Speaker
So pay us back because if, you know, then whatever the account got liquidated or we didn't buy the thing and the market went up, whatever it is. Right. And they're like, yeah, you signed a terms of service and the terms of service says we can do whatever the hell we want because this is a casino, not an exchange.
00:55:01
Speaker
Right. Like if you don't like it, get lost. Mm hmm. And you can try and sue them and then there's like arbitration clauses and it becomes kind of a whole thing. um But if the market is behaving badly, they just stopped trading or they just don't tell you that.
00:55:19
Speaker
um listen That's been my experience. um
00:55:25
Speaker
Yeah. And they'll do it for like brief moments, right? Like yeah and if you look at like... Sorry, go ahead. No, no, go on. Sorry. we'll do like like Even like finance, right? If you look at October 10th, this is like one of my you know favorite things.
00:55:41
Speaker
It's like, well, maybe circuit breakers, it's hard to say that circuit breakers would have been like the best solution. Maybe would have helped, right? Because it's like, hey, guys, like known vulnerability being exploited in front of our eyes. Maybe just, like, fucking pause the trading for a second, like, you know, until this gets fixed.
00:55:59
Speaker
um ah But whatever, it's speculative. It's hard to know. But here's here's what they did do. public Public information. Like, if you look, you know, their official statement is that, like, oh, well, the...
00:56:13
Speaker
problem on Binance, like the exploit happened, you know, on this date at this time. And if you look at the time they say it happened and you look at like any chart where there's this like, you know, gigantic, it just falls off a cliff and comes back up.
00:56:30
Speaker
Their official date and time where they say like their, you know, this was, they don't have a fault, but even if you, even if you say like, okay, well, it's not your fault, but like, when did it happen? They say it happened like 20 minutes after it actually happened.
00:56:44
Speaker
They literally just like fucking draw a different line on the chart. They're like, i oh, it happened over here after the market's like fully recovered. Yeah. I mean, it's like comical, right? Like, yeah yeah anyway.
00:56:58
Speaker
I was just going to to ask if you could explain a bit the, the like, what what is a casino versus an exchange for you? If you can like define that. Yeah, well, exchanges have, like, I mean, you could define it, if you ask a person in traditional markets, they would probably point you to some kind of license and, like, regulatory requirements, right? um You know, in the U.S., s it's an ATS. In Europe, it's an MTF, depending on, like, you know, and they have, like, different different rules ah for different jurisdictions.
00:57:29
Speaker
But i think that there is, like, amongst people who use exchanges a lot, and even amongst retail, there is a common sense definition here, which is fair and transparent across counterparties.
00:57:52
Speaker
It's not trading against you. Like, I would say that's the biggest. A casino, you're trading against the house. In exchange, you're not. That's really most rules around exchanges with respect to regulation extend from that principle in some way, shape or form.
00:58:09
Speaker
Right. um And then there's just general proper functionality that everybody is used to who is, you know, who who trades professionally.
00:58:21
Speaker
um
00:58:24
Speaker
Which is, you know, like There are some nuances around like, you counterparties and not pooling risk and like market structure and whatever. um But I would say for like, ah you know, that the average person, ah it's just, again, it goes back to like safe and useful.
00:58:44
Speaker
The house isn't trading against you. And you have like a market structure that makes sense. You have features that make sense. I would say that's like the core difference.
00:58:55
Speaker
Yeah, that makes sense. I think I just have like one more one more thing on the before we can wrap it up, which is like what probably many people always care about when a new thing in crypto comes
Token and Incentivization Plans
00:59:05
Speaker
out. Will you will you have a token? Will there be like a purpose to the token? Will you have like points, incentivization systems, anything like that?
00:59:12
Speaker
Yeah, yeah, we'll have all the good stuff. So ah there's a The protocol is are owned by foundation. um And so the foundation decides all these things. um ah you know We don't, but we obviously advise the foundation um And ah our current expectation is that there's going to be points program.
00:59:37
Speaker
um It will favor, ah or, you know, I can't say what it will do, but um we expect it to favor, like, early liquidity. um And, ah you know, like, what what you would expect, basically.
00:59:53
Speaker
um That ah we expect to launch a token, or we we expect the protocol to launch token. um And yeah, I mean, you know, it's like that's the that's the benefit of DeFi. You know, we kind of suck to not do like DeFi stuff. You know, put in all the effort and and knock not get any of the composability and the, you know, sort of democratization and permission with nature.
01:00:21
Speaker
Yeah, so. Do you have any details about like the role of the token? Will it just be like a governance function or... Um, not yet. That's a good question. So in terms of like, like one model we quite like at the moment is, like fees, right? So if you hold the token, then, you know, you either pay your fees or pay discounted fees, like, or binoculars with DMV.
01:00:49
Speaker
Um, yeah, like, um,
01:00:55
Speaker
There may be some mechanism by which ah in the future
01:01:02
Speaker
the exchange makes money Like, you know, Unisolve has this like fee switch, right? um We may do something similar. and The new protocol may do something similar. um So it's like, with respect to the token,
01:01:18
Speaker
plan is to really lean into, you know, what's done in DeFi um and kind of taking advantage of that.
01:01:28
Speaker
I see. Yeah, that makes sense. I think that's a good ah could place to stop. We went over various interesting topics. Are there any things ah that you still feel left?
01:01:42
Speaker
No, think that's good. Anything you want to say? Do you think maybe kind of the last thing is for traders which are... i you know looking to get like a a return, risk-adjusted, or just sort of... um like Some of those commentaries are know basis trade, basis trading, funding rate ARB, market-making.
01:02:03
Speaker
um ah World markets is, and to me in my opinion, the best
Why Choose World Markets for Trading?
01:02:09
Speaker
place to do it. You just make more money, right? Because if you're doing funding ARB, like our funding rates are structurally are like because of the lending market they are connected um just through like market forces so the gap in rates on world markets and on other exchanges i expect to be more predictable and like enduring you can lend your collateral which then picks up like additional returns um all of these like unlocks in the risk engine and sort of the trades that are
01:02:41
Speaker
know, that help users take advantage of it. That's all take or flow. um You know, being on mega youth, I think we'll have a lot of take or flow. and So yeah I think it's at least for me, like I think this is the place to be in terms of any of that kind trading.
01:03:00
Speaker
hmm.
01:03:03
Speaker
Did you ah announce the launch date yet? I'm not quite sure if said something about that. Day one with Maggie Eath. Okay. So we expect Maggie Eath and therefore us to go live. and I don't know what their official date is, so but it's very similar. I guess it will be pretty soon, yeah.
Conclusion and Farewell
01:03:23
Speaker
Okay. Yeah, then thank you very much for coming on and having this discussion. And that's it for today, everyone. That's all.
01:03:34
Speaker
Goodbye. Thank you. have a good one.