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- [00:00]
A
Is lit just a copycat beta trade to hype? Or is it actually something like differentiated in strategy and revenue and economics? As HyperLiquid breaks a 60 billion dollar market cap and is positioned to earn a top 10 spot in the crypto industry, investors are starting to realize how big the perps market actually could be. When you see Trad5fin twig commentators tweeting about Hyper Liquid and the Hyper Liquid ETFs DAs are pulling in tens to hundreds of millions of dollars of fl. It makes the entire perp sector more interesting and more exciting. But perhaps the number one reason to be excited about perps is that the world's largest capital market still hasn't given them regulatory approval. There's no one with a perps license inside the United States because that license doesn't exist yet. So while you may feel like you're late to the growth of offshore perps, the onshore perp game hasn't even started yet. And this isn't just Coinbase, Kraken or Robinhood competing amongst themselves for US Perp market share. Perps are on their way to eat all of finance. So you are welcome to dream bigger dreams. The real prize are the big brokerages like IBKR or Charles Schwab. And winning those as clients can result in tens of billions of dollars of flows in revenue going to whichever per platform gets regulatory approval and can execute quickly. The two guests on the show today think that lighter, the ZKL2 on Ethereum, is in prime position to win an outsized share of the United States market, given the eventual regulatory clarity that the United States is going to provide to the perp's sector. But even outside of the domestic market, the lit token, the token of lighters is already buying back twice the rate of the token compared to Hyperliquid and at just a 1 billion valuation compared to hyper liquid 60. I want to ask the question, is lit cheap? I'm here with Flip. He does a research at Delphi Digital. Flip, welcome to Bankless.
- [01:46]
B
Thank you. Thanks for having me.
- [01:47]
A
And I'm also joined by Will Price, a defi investor and also an advisor to Lighter and I think his first podcast in about four years. Will, welcome to Bankless also both of you guys, first time.
- [01:58]
C
Hi David. I know I tried to record a podcast with you like five years ago and we lost the audio very sadly.
- [02:03]
A
That's so that.
- [02:04]
C
Right.
- [02:04]
B
I.
- [02:04]
C
This is my first appearance on Bankless. Right, Right.
- [02:07]
A
Oh my God. It was about yams, right?
- [02:10]
C
Oh my gosh. It was.
- [02:11]
A
It was about yams. Yeah, yeah, we'll let the listener go investigate what yams was. If they don't know, they don't know. You don't know.
- [02:18]
C
Perfect.
- [02:19]
A
Okay guys, I have some questions about lighter. There has been a ton of attention on Hyper Liquid. The hyper business model is well established as working extremely well. Hyper Liquid is just getting known into tradfi circles, Wall street circles, getting a lot of clout and brand and there is a lesser known ZK layer 2 on Ethereum that is also doing well in terms of perps that I want to know just a little bit more of and maybe to kind of just start off this question, this is a question that I hear asked on crypto, Twitter and around is the token of lighter is lit, is lit just a copycat beta trade to hype or is it actually something like differentiated in strategy and revenue and economics? Maybe flip. I'll kind of just throw that one to you to answer to start.
- [03:09]
B
Yeah, and I think the short answer there, that's a good question. The short answer is yes, it's different. And I think the first and most obvious is zero fees. And why does that matter? It really affects their distribution strategy and the way in which they onboard new users and sell to existing platforms. And to to expand on that a little bit is if like recently they integrated with in Silico and in Silico is also integrated with HyperLiquid. Well, HyperLiquid has a base builder code fee of 4, 5 and in silico most OEMSS order and execution management systems charge one bit to their users for those type of orders. And so the total cost for the user is 5.5 bips. First, if you use lighter which has zero fees for their, you know, partner, partner attribution program which is just builder codes. I know the team would hate me saying that, but it's essentially a builder because there's zero fees. So in silico can still charge one one bit. But the trader you say 4.5, which matters a lot for people who trade volume. And so the way in which they go about their distribution strategy is very different than a hyper liquid. And this also goes into like the team's density, the engineering team, they have quite a, quite a large engineering team. One of the sharpest teams I've met in crypto. And the talent is very much so on par with a lot of the startups you see in AI now. And their talent density on the engineering side allows them to have a white glove treatment to integrating different partners, like integrating Telegram. Eventually hopefully they Integrate with brokers, the IBKRs of the world is they have the talent density to go integrate this tech stack for ibkr where the competitors don't quite have the same resources to go do that. And nor do they take that approach. It's usually, here's our SDK. If you want to integrate it, please go for it.
- [04:58]
A
So what I'm hearing and will maybe I can get you to clarify as well is, is the it's cheaper. Lighter is cheaper than Hyper Liquid. It's not, it's not just cheaper, it's actually just like zero fees. But I think what you're alluding to flip is that actually is like kind of a paradigm shift in the structure of the lighter strategy. It's not just that it's competitive on the fee market is actually just a completely different strategy that is opened up based on being zero fees. And that strategy is expressed or being pursued by this very competent engineering team that you alluded to. Is that correct?
- [05:32]
C
Yeah. So I guess zooming out for a second, like, yes, that's a difference in lighter's business model and go to market. Lidar also has some architectural differences. Like you said, David, it's a ZK rollup. And who cares if it's a ZK rollup? Well, there's a couple of things that that gets you. Number one is it gets you permissionless collateral which reduces the trust surface for traders. You don't have to trust, you know, whoever the bridge operator is or, or a multisig. The other thing that gets you is, you know, exit rights. LiDAR has an escape hatch to the Ethereum L1 that can be, you know, triggered in, in the event that lidar has a problem without any intervention from the team. And these are protections that people in general don't really care about until they really, really need them because they relate to fail safes and decentralization. And so I would say that the people that care most about it are institutions, but you still have to build a compelling product that is better for the end user. And I think that is the intention behind the zero fee for takers business model. And so the monetization happens by charging market makers fees to trade with retail users.
- [06:47]
A
Could we just expand on that a little bit more? So let's start from like square zero or maybe square Hyper Liquid because that's the anchor that everyone kind of understands. That's the anchor that I understand. What's Hyper Liquid's business model and then how is it differentiated with lighter?
- [07:03]
C
Yeah, the business model for Hyper Liquid is Trading fees. Right. And it is for lighter too. It's just, you know, how much trading fees do you charge and who do you charge them to?
- [07:12]
A
And then it's okay, what's that answer for hyper liquid? How much are the trading fees and who does hyper liquid trade charge the trading fees to? And then I think you alluded to lighter only charges it to market makers. What's the philosophy of the strategy around that?
- [07:26]
B
That is a good point. And so, so hyperliquid, they, they charge the makers, they charge the takers various Cs. They have the traditional fear tiers which you see most exchanges do. NATO has it extended, has it and a lot of the other competitors have this, this tiered fear model for both, for both makers and takers where, where lidar says hey takers, we just want you to trade on the platform. And you know, this incentivizes and brings in usually retail flow. They're used to that zero fee model and so you see a lot of market, market orders instead of limit orders. And the trade size on lighter tends to be a little bit smaller, indicative of retail users. And this is quite advantageous for market makers because this is somewhat benign flow for them. So they are willing to pay more in fees because they are more profitable per dollar traded against that type of flow versus a hyper liquid where you might be trading jump, might be trading against, you know, and one of the other market makers win or mute. And that's not a very advantageous trade for them versus here. It's like, okay, I kind of know I'm trading against a lot of retail, so I can be quite profitable on that. And so in order to do that, you charge your fees to the taker, the retail user, the front end user, and then market makers, you pay a little bit. And their integration with Telegram has brought a lot of that retail flow in, which probably gives lighter some pricing power. My speculation is I think over time you'll see fees increase for makers over time on lighter. I think they have some pricing power there just because market makers are so profitable trading, it's this retail benign flow.
- [09:00]
A
I see, I see. Okay, so it's worth highlighting to listeners that like retail flows are the golden goose for any financial app. This is how Robinhood has done so well. This is also why, why Kalshi, the domestic US Calci prediction market is actually very profitable because they have such strong retail flows. And so I think we just call it uninformed flows. Is retail just like smashing a market buy on a token they saw three seconds ago? On Twitter is a really profitable way for market makers to make money. And I think what you're saying is like the, the retail traders are being given zero fees as a perk to come trade on lighter which attracts the market makers to come and you know, clear the noise market make amongst all the uninformed flow. And that's, that's the market makers profit margins and the only the market makers are charged. And so the, the theory is that this is a better bootstrapping mechanism of attract the uninformed retail to attract the market makers. And then the net effect of this is that you have this like feedback loop that grows and grows and grows. Is that the strategy?
- [10:11]
C
Yeah, I think, I think you're, you're pretty much directionally accurate, David. Like of course there are big network effects to liquidity and so if you want people to use your platform then you need to provide them opportunities to trade for better execution cost or opportunities to trade with, with certain people that they want to trade with. And so you know, lighter can do that with some of their you know, fee structure, design and, and you know, they can also solve the other end of the equation through onboarding as many people as possible on the demand side through distribution.
- [10:45]
B
Yeah, I think it's also important to realize there that I think a lot of people when they, when they see zero fees, it's like okay, if you're not paying fees, you're usually the thing being being sold. I think this is, this is wrong in this context because as a retail user I generally speaking get better pricing because market makers want to trade against retail flow so they'll quote tighter and so spreads tend to be somewhat tighter. And so as retail, as a retail user I get better fills. My total execution cost is cheaper than if I used another venue and a market maker I'm excited to quote tighter than I usually would elsewhere because I know it's profitable. And then the exchange, they still make money because they're able to charge the market maker. So like the three parties here, the retail, the market maker and the exchange, they're all, they're all happy here. There's, there's one side's not getting screwed in a way here, they're not getting the short stick, if you will.
- [11:39]
C
Yeah, so I don't think you know, screwed is, is necessarily the way to look at it. But if we're talking about screwed. One thing to note on LIDAR is that even though it's a roll up which is a blockchain, There isn't any MEV on LiDAR and we can get into the microscope, structure details as to why, if you like David, and there
- [11:59]
A
is MEV on other platforms like hyperliquid or Aster or, or maybe there's.
- [12:06]
C
No, not necessarily. It's just different design decisions. I guess I'm thinking more about like a, a, a blockchain like Ethereum with, with, with an open mempool where, where pending transactions can be seen. Right. Uh, in the case of lighter, LIDR has a centralized sequencer. And so for example, base also has one.
- [12:24]
D
Right.
- [12:24]
C
And so transactions are processed in the order that, in which they're received. And, and what's interesting about lidr's architecture is they can benefit from the latency advantages and speed up that's associated with running that sequencer in a centralized way and at the same time still verify to Ethereum that all of the logic of the matching engine was run correctly.
- [12:49]
A
And this, this is a function of fairness. Kareem, maybe we can talk about the importance of fairness when it comes to perp exchanges, because as I understand it, traders are actually quite tuned to whether or not the platform that they're trading on is treating them fairly or not. Can, can we talk about that?
- [13:07]
C
Yeah, traders want the, the best fill quality. That's a function of a couple of things, one of which is liquidity and another of which is, you know, any adverse selection, if it exists. And so, you know, speaking of, of adverse selection, one of the things that you might worry about if you trade on this opaque centralized exchange is whether somebody is taking advantage of your flow. There are some pretty funny memes from last cycle around browser lag on ftx, just as one example. And in the case of lighter, because the verification logic is open source, you can see that the exchange rules have been attested to and guaranteed by math. And so you don't actually have to trust a centralized operator, even though right now lidar has a centralized sequencer.
- [14:03]
A
You're right. The centralized sequencer is like fully auditable and verifiable because of the nature of a ZK rollup. Doesn't hyperliquid also have some of these properties? Because hyperliquid is also a collection of nodes. I know if we talk about like, you know, a truly decentralized system, maybe hyperliquid doesn't quite fit the bill of that, but nonetheless it is. It's not Binance or ftx. And so, yeah, I mean, I would
- [14:24]
C
say hyper liquid's not decentralized on the level of, of Ethereum, but it does have a validator Set and that validator set coordinates to produce blocks which contain the trades. It's. It's a. It's a different trade off space.
- [14:37]
B
Right.
- [14:37]
A
But don't you get some of the same levels of transparency around for traders if they are being traded against with hyper?
- [14:47]
C
Absolutely. Compared to something like. Like an FTX or. Or other centralized exchange? Absolutely. Yeah.
- [14:52]
A
So I think some of the. A reoccurring question I'll have as we go on in this episode is like well, can't Hyper Liquid just do that? Like if the strategy of lighter fees is to not charge retail fees and instead charge market makers and that's such a good strategy that we're bullish, why doesn't Hyper Liquid just do that?
- [15:09]
C
Yeah, that hyperliquid could do. It would cannibalize a lot of their revenues and generally from the leader. You don't often see that sort of strategic positioning. There are other things that hyperliquid would have a hard time doing. One of which is approaching LiDAR's trade latency, another of which is providing the same guarantees around execution and verifiability of collateral and proper functioning of the liquidation engine. And the other things you get with the zk.
- [15:43]
B
Yeah, I think I would just add to why doesn't hyperliquidate go zero fees? I think will will kind of touched on is like why would you compress your own margins? Like you don't, you don't need to yet. You wait till the competitor does that. And I think you started to see some people get somewhat concerned about that pre TG just because volumes were such a large percent of pert volumes and now that's kind of faded and that's not less of a worry there. But I think you are starting to see some of the. The fee compression in the space. Like look at hip3 growth mode. Like the discount there. Like a lot of people will say that they believe HIPC growth mode will go away in a lot of these commodities and RWAs I. I disagree and I think this is just fee compression you're. You're seeing across the board. But until, until your hand is forced. Like if you're binance. If you're hyper liquid, why would you compress your fees when you, when you don't need to yet? And then like on the distribution side is like why, why doesn't Hyper Liquid take a similar distribution strategy is like they don't. They're not forced to yet. They don't need to. People come to them. People go use their. Their stack. They go to the SDK, they implement it. And so until other people start going elsewhere because they're getting a white glove treatment from a competitor, there's no reason for them to go do that yet.
- [16:55]
C
Hyperliquid is a great product. Incredibly, yeah. They've gotten great distribution because their product is great and they're, you know, they've formed a cult of sorts around it. And you know, I just happen to think that there are people that enjoy this other spot in trade off space as well and that the Exchange ultimate landscape will have many winners. And I think we see that with Coinbase and Binance and okx Bybit. How can I forget Bybit in the centralized exchange venue space. And I think we'll see similar in decentralized exchange space. Yeah.
- [17:30]
A
Okay. Okay, I'm starting to get my, my mind wrapped around this conversation. I think the, if we're bullish, the lit token, which is like a question I kind of want to end this podcast with, is just like understanding the lit token. I think what you guys are saying is that there's going to be some competitor that forces market dynamics upon Hyper Liquid because it can't just be a complete monopoly because if there's a monopoly, you incent a competitor. Potentially that competitor is Lighter. And Lighter's way, the way that it chooses to compete with hyperliquid is going to change the market dynamic of the space as a whole. One of the ways we've talked about this so far is the fee structure dynamic. Maybe the next one I want to talk about is Lighter's distribution strategy for actually attracting the retail flows which are, as we've established, so incredibly valuable. So, so maybe will, maybe I'll turn flip this one to you about how would you define or illustrate what Lighter's distribution strategy is?
- [18:26]
C
Yeah, so I think, I think Lighter is, is competing with like the entire exchange space, you know, not just the crypto exchange space. And I think all of the best crypto exchanges would, would say the same. There's a much bigger pie out there and Lighter is positioning itself to win.
- [18:42]
A
So you're talking about not, not, we're not just talking about like Lighter versus Hyper Liquid, but also Lighter versus Coinbase, Binance, but then also Robinhood and Interactive Brokers like stuff like that.
- [18:54]
C
So there's, there's, there's a few different potential universes depending on how things shake out. I think LiDAR can be a winner in multiple of them. One potential future is that lidar becomes a globally popular exchange with a ton of first party distribution. Another possible future is that Lighter achieves massive penetration on the infrastructure side, even though it doesn't wind up getting to global scale distribution directly itself. And so I'm not sure exactly how things are going to play out, but what I do know is that it's a very talented engineering team with a good grasp on financial markets that is laser focused on getting to a outcome with scale.
- [19:38]
B
Yeah, it's just they're going after growing Net new users. So instead of going specifically after teams and wallets that Hyperliquid already has relationships with or doesn't have relationships with, but they still leverage their tech stack is Lighters going after like Telegram Wallet for instance, I think is a great one. That's like NET new users Net or net new perp users. Like some of these users probably haven't used perps or maybe they have but like hey, Telegram's usually where I keep my assets like Uber and in Southeast Asia it's quite popular. And so you get users there that's like Net new perp users growing the pie growing NET distribution Net new per users.
- [20:18]
A
But inside of crypto still, correct?
- [20:20]
B
Right?
- [20:21]
A
We still haven't really penetrated outside of the crypto bubble.
- [20:23]
C
Yeah, it's hard, it's hard. Hard to know where the Telegram Wallet user base comes from. Obviously Telegram is popular within the crypto community, but it's also very popular outside the crypto community.
- [20:36]
A
Interesting. Okay, so Telegram and the Telegram Wallet, maybe we can just actually poke open up the hood and talk about how that works. I think, I mean, Lighter in the back, Telegram Wallet in the front, maybe it's as simple as that. But also just like what else is in the distribution strategy from Lighter that is like this.
- [20:52]
C
Yeah, that's pretty much how it works. There are some nuances that I would say are out of scope of this conversation, but basically Lighter helped Telegram set up a bespoke solution that worked for them and their architecture that uses lidar on the backend and I think we can call it a semi custodial arrangement that uses decentralized Rails and the right solution for each potential lighter partner is going to be different, but you know, can be supported, you know, as per their needs. And I, I know the lighter team is focused on, you know, getting as many distribution partners as possible because again, that's one side of the chicken and egg problem of, of getting liquidity network effects.
- [21:35]
A
And this is maybe where this apparently cracked engineering team comes in who are able to build these external externally facing products to integrate with things like Telegram or other venues that have users.
- [21:47]
C
I mean they have a lot of things to do. That's one of the places that they contribute for sure.
- [21:52]
B
I think it's a competitive edge as someone, a third party here. I think it's a competitive edge that they do have the same talent density I haven't seen elsewhere among their competitors, centralized or decentralized.
- [22:05]
A
Okay, the Cracked engineering team.
- [22:07]
B
The Cracked engineering team.
- [22:09]
A
Can we talk about the technical edge that LiDAR has? Will, you've talked about the latency dynamics that LiDAR has. What does that do for it when it comes to attracting flows and therefore fees? And then what, what are the other just like technical strengths that lighter has versus the rest of the market?
- [22:25]
C
So a human starts to notice latency somewhere around the quarter second mark or, or 250 milliseconds. Lighter's latency for taker orders is somewhere on the order of 20 milliseconds. So, you know, well under that threshold. And you know, that basically lets you provide an experience that is for all intents and purposes instant for your traders. Lighter, also on the architectural side, has a speed bump for taker orders. So basically any taker order or market order is going into a queue and it waits somewhere on the order of 140 to 300 milliseconds, depending on your, your staking tier and whatnot before it gets processed. But, you know, importantly, the market makers don't know that those orders are pending, but they can update where they quote in the book as fast as their connection to the API permits. And so this leads to a market structure where, you know, if the quote unquote true price of an asset changes somewhere else, like wherever the underlying is trading, whether it's NASDAQ or Binance or anywhere else, market makers can update their quotes and they can avoid getting what's called picked off by what are called toxic traders. And so from an architectural standpoint, with all the market makers that I've spoken to, they really like this architecture and they consider it a very fair playing field.
- [23:56]
A
And so the very, very low latency just is just like an assurance mechanism for market makers and who are very sensitive to these very low speeds. And that's what just preserves the volume on the platform.
- [24:10]
C
Yeah, so we're not, we're not approaching NASDAQ scale latency quite yet. You know, we're on the like 8 to 10 millisecond range, whereas NASDAQ is, I think, at least another order of magnitude faster than that. But it's faster than competition in the decentralized space for sure. But certainly there's Lots of room to improve. And all of the microstructure experts at trad firms that with their microwave towers would laugh. But you gotta start somewhere.
- [24:40]
B
I think you remove a lot of toxic flow by using speed bumps first things like cancel priority. Cancel priority gives you know, makers last look at takers hands. And so if you see your trade, if jump sees they're trading against one mute or some really informed person flow, they can pull their order just because they don't want to trade against that individual. Which makes sense for, for the makers. But as a, as a taker you can you, you see excess slippage at times you can be placing orders and you can have people front run them, you can have people pull orders and you see excess slippage which you generally speaking see a little bit less of on lidar.
- [25:18]
C
Yeah, I think 1, 1, 1 like North Star here is, is we want the order book to be what you see is what you get. And obviously you know there may be an organic price change between the time you decide to click the button and when you click the button. But you know, we don't want surprises and we don't want people to feel like they're being taken advantage of.
- [25:36]
A
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- [26:51]
B
Yeah.
- [26:51]
A
Okay, so the themes, the threads that like I think I'm identifying here is like we have, we have this cracked Cracked engineering team that is doing this thing which is really minimizing the latency, best latency in crypto for on a perps platform as I understand it. And, and then in addition to that, this same cracked engineering team is going out and doing just white glove integrations with things like Telegram, doing kind of the hard work to get flows and then with the, just the microstructure inside of the exchange, doing the things that truly optimize for fairness and confidence in the platform, which attracts some of the larger, the larger whales, the bigger market makers, the bigger institutions, the ZK roll up side of things also doing that same thing. ZK is a technical challenge, but again we have this allegedly Cracked engineering team to leverage ZK technology to do kind of the thing that the Ethereum community really always wanted to do is like look, look what you can do. Look at the magic with zk, you can prove everything. You can prove the state of things provable fairness. And Lighter is actually just like productizing that and taking that to ideally to parties outside of crypto and say hey, like our exchange is fantastic. And also we have perps and you don't have perps, but we have perps, so come trade on our platform.
- [28:07]
C
So yeah, I think that's a good summary David, but, but one thing to keep in mind is Lighter didn't just choose ZK to sound smart. They chose it because it was a good architectural fit for what they were trying to build. And the same thing with Ethereum, they chose Ethereum for security because there's a good architectural fit for what they're trying to build, which is a application specific roll up that you know is very opinionated about the design choices it makes to support the application of trading whatever those assets are, whatever those instruments are. And so that's led to, I think yesterday Lighter had something like over 10,000 transactions per second, which is far and away the most in the Ethereum ecosystem, while only using maybe 1% of the blob space, something like base, for example, somewhere around 100 transactions per second.
- [28:58]
B
Correct me if I'm wrong, Will and David, you might know this as well. But also the choice of using ZK should allow them to do true portfolio margining better than those without specifically with things with options, just because that is very computationally heavy. And so they should be able to do portfolio margin at scale with Spot perps options better than most competitors, which is something that I think people just haven't thought of yet. Just because we don't really have on chain options outside of derive that have really hit scale.
- [29:29]
A
I think what you're getting at and what aligns with my intuition is that an exchange, especially one with a centralized sequencer that has the computational bandwidth that I'm assuming Lighter has, is they can just simply do more computation. And since they are also the single source of truth, as opposed to maybe even something like hyperliquid, which is still a decentralized network of nodes, since there's a single source of truth plus the computational bandwidth, they can make stronger assurances about like what happens when positions net out across the exchange and can do that simulation to be more expressive in some of their products like options. I think that's what you're kind of getting at.
- [30:10]
C
Technically anyone can generate the proofs. It's just why would they? Because it's expensive to make a proof and you're unlikely to do it unless you are the exchange itself. But it is cheap to verify a proof. So from the user's perspective, as long as the proofs are being generated and they can trivially see that the rules are being followed, they should be happy.
- [30:32]
A
Okay.
- [30:33]
C
Okay.
- [30:33]
A
I want to talk about the real world assets on Lighter because I think any perps exchange that only sticks to crypto assets is going to remain constrained by how big that market is. And as we've seen even on Hyper Liquid, like real world assets on Hyper Liquid or have flipped crypto assets on Hyper Liquid in terms of volume. One thing that was actually surprised to note is that lighter listed SpaceX pre IPO a pre IPO market on lighter like two weeks before it did on Hyper Liquid. And I actually didn't hear about that until after it got listed on Hyper Liquid. Maybe we can talk about how Lighter's strategy for getting into this pre IPO market, which I think is kind of like the frontier, and what their strategy is, how this works and how they're going to grow it.
- [31:20]
C
Yeah, I mean certainly Lighter doesn't have the size or loudness of the community behind it at this point that hyperliquid has. And so it makes sense that you didn't necessarily hear about. Also makes sense that real world asset volume is taking off for some of the reasons that you mentioned specifically on hyperliquid. I think there's also some speculation around a trade XYZ airdrop for example, that might be driving some of it. And in tandem with as Flip mentioned, The fees on RWAs being significantly lower than they are on crypto assets. All of that tends to induce a lot more volume. Lidar itself is, you know, listing more and more RWA assets every week. There are, you know, various indices and commodities and equities not just from, from the US market, but various markets around the world. And it remains a core focus area for growth.
- [32:17]
B
As far as rwa, RWA growth goes. I think oftentimes we forget like the, the leader right now in the decentralized perp space, hyper liquid. They, they really, they the product is killer. But they really started to gain a ton of traction when they started listing assets that weren't listed elsewhere. And I think you see this a little bit with RWAs as well. A lot of the group chats on Telegram and Twitter, like everyone's trading memory stocks, compute robotics and things like that. And as you get these assets listed that people want to trade with with some leverage that they maybe they can't get on ibkr, they want to trade them in some, some other fashion. And so I think there's a game to be played here where if you can see where the puck is going with regards to like the hot potato of assets running that we're seeing right now, I think you can, you can earn a lot of market share that way because both products are incredible. And if you can get the product listed there first and then get people in front of it, let them know that hey, this product exists, you can trade this here if you want to, then I think you can get a lot of market share there. And that's something I'm like looking for like other teams and doing like Ostium was first to really lean into RWAs, now variational with the recent race from Dragonfly announcing the push there. And so you're seeing this big push and I'm really curious to see if lighter can start to bootstrap some of these markets a little bit faster than the competitors.
- [33:38]
A
So if I'm a perps exchange, I think I kind of am just looking at the United States onshore market and thinking like that is the market to go after. Like if whether even Coinbase, Robinhood, Binance, whatever. Like the onshore regulated, approved perps market is like this golden goose that everyone wants that no one can really get because we don't quite have clarity yet about United States perps. But it seems to be that that should be where lighter is going. Is that part of the like explicit strategy? Will, what can you say about that?
- [34:11]
C
Yeah, 100%. So if you listen to Vlad on the last LIDAR investor update call, he talks about the regulatory licenses that Lighter is pursuing. And just as you say, the main reason is the size of the US market and our desire to participate in it. Lighter is based in the US the late token is issued directly out of the Delaware C Corp. And you know, there's a presence on the ground with, you know, all of the important people making decisions on the regulatory side. And, and I, I don't know exactly or I don't even think the SEC and CFTC know exactly how the regulations are going to shape out. But certainly there, there are people from the crypto industry that are there to advocate for common sense.
- [35:01]
A
It seems like that is a $100 billion market that again, no one's really claimed because it seems unclaimable yet.
- [35:12]
C
Yeah, that's correct. And I think that obviously the US market is a big piece of the picture and whatever the requirements wind up being for accessing the US market, whether it's on chain, KYC or maybe it's like assurances about, you know, the exchange operating fairly, I think that blockchain protocols are well positioned to compete.
- [35:39]
A
Okay, interesting. One of Coinbase's strategy is that it has like the first party exchange where like most retail people go onto Coinbase with their accounts, hook up their bank accounts, trade there. But then also they're doing the whitelisting strategy. And so they are also the backend exchange for Charles Schwab who like doesn't want to build a first party exchange. And so they kind of just whitelist Coinbase and provide Bitcoin and ether trading to their clients. But it's really Coinbase in the background is, is lighter also thinking something along these terms.
- [36:09]
C
So one, one of the big reasons that I think that building on top of lidar is attractive is that the, the underlying fee structure is more appealing. And so if you are the party like Charles Schwab or, or Fidelity or any of these US trad institutions and you're making this kind of decision, the first thing you're going to look for is the underlying venue regulated. And then once you've checked that box, you're going to be like, okay, what are the commercial terms? And I would say that blockchain products generally tend to have lower structural costs and are therefore better positioned to offer more appealing commercial terms to their customers.
- [36:47]
A
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- [37:43]
D
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- [38:29]
A
So looking at the perps exchange, it doesn't seem actually all that complicated to get a real world asset listed. It's just like an oracle. And even with the pre IPO markets they kind of just like guess a price and then a market appears. And so really the game is liquidity. So what's the strategy for getting liquidity to actually show up on these markets?
- [38:49]
C
Yeah, well I mean the oracle part is, is slightly more complicated but you're right, any, anything you can get a price feed for you can trade. And so the, the most important financial primitive is the order book lighter's built a fully verifiable order book on chain that is, you know, a performant, low latency place to trade these markets. And so the question then becomes can you get the market makers on board to quote and then the question is who are the natural traders of these assets and do they need to hedge somewhere else? Do they want to just structurally be long? And I think in the case of RWAs there is some hedging demand and there are perhaps people trading on LIDAR that are able to buy the spot token of the underlying and take the basis trademark. But there is a capital cost hurdle to overcome. If I'm a market maker, I may not be willing to leave a bunch of orders open on the book because that takes up margin and margin means those are dollars that I can't be earning money market making elsewhere. So Lighter's built a RFQ product on top of the order book that basically lets large traders signal to market makers that they want to make a trade and then the market makers can provide just in time quotes. But all of it goes through the order book. But we've got some very promising early feedback from the beta of this and we're looking to roll it out more widely very soon.
- [40:23]
B
I think this is a huge move by Lighter. I wrote, I wrote a thesis mid late last year talking about how I thought the winning exchanges would have multiple execution environments. They would have a, an order book, a club, they'd have a RFQ system and then they'd also have a privacy offering at some point and kind of in that order. And Lighter is the first one to, to have more than one. You've got variational Osteo, the two prominent RFQ on chain brokers, if you will. And now you've got Lighter stepping in. And I think it's just another way in which a user can express a type of bet and get filled in a different way that's more optimal for them. I think it's, it's a huge step for Lighter and it's, it's an incredible way to bootstrap liquidity for long tail assets. And you tend to see better fills on long tail assets. Both crypto and RWAs through an RFQ system. So you see, you see great, great fills on Austin and Variational on these long tail assets. Yes, it's, you know, early on their bootstrapping was difficult, but as the scale, the liquidity and the fills and the execution cost with using RFQ on these Long tail is, is quite good. And so I'm very excited to see Lighter kind of moving and having both the order book and, and an RFQ type of system. And RFQ is very different like the way in which they do Lighter does RFQ is very different than variational or ostium. And you know, you could get, you get Caldora, you could get Lucas and Vlad all in a conversation and hash that out. But like, just to note, like, I'm not saying they're the same, but like the way in which a user gets billed is pretty similar.
- [41:55]
C
I see.
- [41:56]
A
Really, it sounds like the broad strokes of everything we talk about is like Lighter is trying to evolve itself into a platform and it does that by allowing more expressivity towards what it deems as like valuable components of the marketplace. And so like right now it's kind of like a first party exchange, but really it's trying to like scale out into being a platform across all hubs and all spokes around its hub.
- [42:20]
C
Yeah, it's more instruments to trade both like in terms of number of perp listings, new instruments to trade like spot options, et cetera, and then more ways to trade them, whether it's directly on the order book, rfq, et cetera.
- [42:37]
A
With the US regulatory licenses. I think that's something that Lightr has over hyperliquid because I don't really know, maybe Hyper Liquid can go get those things because they do have Jay Stravinsky fighting the fight in dc, but tbd, because they're still a distributed protocol. I don't know really how that would work. I don't really know if anyone knows. But Lighter still has to go up against Coinbase and Kraken and Robinhood domestically. Aren't those like pretty big names to have to go up against? Because all of those want to do perps domestically inside of the United States. So how would this Lighter expect to compete with some of those gargantuans?
- [43:09]
C
Yeah, so it's worth noting that no one, including lidar, has a license to offer these products in the US right now. From what I understand on the regulatory side, there's appetite to, you know, find creative ways to make sure that blockchain platforms can, you know, get licenses and comply with regulations that weren't necessarily written when blockchains existed. And again, like I said earlier in the conversation, I think blockchains can offer like a better product, both from a permissionlessness, you know, verifiability and cost structure perspective. But yeah, you're right, there are many large financial services businesses in the US that are going to want to compete. But one thing I would point to is how difficult it is to actually build a highly performant venue. And if I'm one of these companies and I'm doing a cost benefit analysis, I'm going to look at how quickly can I get to market working with someone else as an infrastructure partner versus like how much money am I going to have to spend and how much time is it going to take me to build this in house? And you know, one thing that we see a lot in the US is that talent density tends to converge at startups, which is why there's often room for, you know, new entrants to, to destruct, disrupt the status quo.
- [44:37]
A
I see. So, so maybe one perspective is that, you know, maybe Coinbase is intimidated by what it takes to make a performant perps exchange. And I would say less so.
- [44:49]
C
Less so. Coinbase, you know, they've, they've been in the crypto space a long time, but there are plenty of financial services people that aren't necessarily used to the, you know, like crypto UX bar, shall we say. Like crypto products generally have a much higher level of UX in my opinion, than many trad products. And, and I think, you know, there, there are, there are a lot of hard things that have to happen under the hood to achieve that. I see.
- [45:17]
A
So, so maybe, maybe I'm stuck in the crypto industry. Maybe like I need to think even beyond Coinbase and beyond the bubble of crypto. And I think what you're alluding to is like, oh yeah, but like Lighter's trying to get integrated to the back end of some of the biggest brokerages out there and even those people are probably even more intimidating to look at a perps exchange and try to build that in house.
- [45:39]
C
Yeah, well, I don't know exactly how it's going to shake out. I think Lidar has a very good chance and at current valuation levels I think that chance is underpriced.
- [45:50]
B
Yeah, I'll bite on that. I'll bite on that. Yeah, I think they'll want to go after is the brokers and be the backends there. I think LIDAR is very much so moving towards a super app again. Another thesis I wrote last year was like perp Dexs are going to eat all of finance. And you're kind of seeing this iteration where their asset managers kind of like a vault. Then you have the bank, the exchange, the clearinghouse, the custodians, eventually prediction markets, options. And then you recently saw USDC and Hyper Liquid. They get in the stablecoin, they'll have borrow in, they'll have prediction markets hip four things like that. They're all going to converge into one platform and venue. And I think Lighter is one of those that has a Decent head start into Wells price. Like the valuation definitely doesn't reflect that.
- [46:35]
A
Yeah, I want to talk about the valuation. I'm looking at the price of lighter right now. It's coming in at a $291 million market cap of the fully diluted, diluted value of 1.16 billion. Not that many tokens are well below the $1 billion market cap that seemingly are alive these days. Lighter feels very, very much alive. Lots of development there. Just recently just raised a bunch of money not terribly long ago from like Robin Hood and a bunch of others. And as you guys have alluded to, apparently, allegedly that's cracked. Dev Team. Can we talk about the fundamentals of the lit token? So similar to hyper liquid, there are buybacks and burns, there's some amount of fees. Can we kind of maybe flip. I'll throw this one to you. Can we kind of just like do broad strokes over what the lit token is?
- [47:22]
B
Yeah, absolutely. So they do, they do buybacks for the revenues, 100% of buybacks. What they do is every hour they sweep revenues and then place limit orders down 10% below the current market price and do it as maker orders. So they're not taking liquidity out of their own token on their own venue, and so they place them that way. And so they do 100% of buybacks with revenues there and then as far as like fundamentals that we alluded to earlier, the distribution strategy I think is quite unique. They have pricing power with market makers. So I think there's, there's a world in which you probably see a 50% increase in their take rate, the revenue they make per dollar traded. I think there's a world in which you see a 50% increase there and then you assume no growth. You could have a 50% increase in revenues and therefore buybacks and value accrual to users. And you can see your buyback yield increase to, let's call it closer to 20%, which I think is quite attractive. And I think that's, that's a great spot for them to be as an underdog in this space. And I think there's a lot of dogmatism on Twitter and Telegram, which I go, if you hold lighter, you hate hyperleukino. You can, you can hold both. Crazy concept. Like I disclaimer, I hold both and I will continue to hold both. I think their distribution strategies are different and I just, I do like where Lightr sits today.
- [48:38]
C
Yeah, I view it a bit differently. Yes, I am happy to see that. You know, the team has committed to token value accrual and that revenue goes to buybacks. And they've made the public statement that, you know, all value from lighter products and services is going to accrue to the token. I see it as like more of a growth play. Like Lighter currently does like a maybe 20% of the crypto volume that hyperliquid does something like 10% of the RWA volume, but it's not monetized to the same degree. And that's a growth strategy. And so you would expect a different order of magnitude difference in the valuations if they were monetized in the same place. But Lighter's focused on growth and I know everyone else is focused on growth. This is just Lighter's approach to it.
- [49:29]
B
Yeah, I think the quality of that growth too, and quality of those revenues, I think Peter Thiel talks about it all the time. He's like, who cares about how much revenues you make in a short period of time is how durable are those revenues. And that's why I really like their go to market strategy on distribution. Like you're going after quality distribution in silico, like really working with them, making sure their traders like the product telegram, making sure that they really like this product and it's how they want it to be and so on and so on down the road is like that's a very unique strategy. I think that's like high quality revenues that they'll continue to grow like hyperliquids grown incredibly fast. And a lot of their revenues are durable. But I like to look at the durability of those revenues and the partners that they're integrating with.
- [50:12]
A
So when I look at the valuations here, the $291 million market cap, $1.16 billion FTV, big gap there. It's like a 3, a little bit more than a 3X. What accounts for the gap between the market cap and the fully diluted valuation.
- [50:27]
C
So there's a vesting schedule for team tokens and investor tokens like, you know, most crypto projects have. In the case of hyper liquid, they have the difference between their circulating and FTV is team tokens. There's also in both cases a bucket of unallocated tokens that might get distributed for future growth. But we really don't know what each of the respective teams is going to do. But for all intents and purposes, they don't exist right now.
- [50:57]
B
I hope they never use those tokens for growth. I hope they never use them. And then I do. One part of the unlocks I'D say, look at the cap table. The cap table is very different than most crypto rounds. I mean, you founder, fund ribbit, Juan Robin, like, those are very different names than you usually see in a crypto round. And speculating as a third party, I think a lot of those names, those people, they don't look for a quick 2x on an asset. I think they invest in generational businesses. And so, I mean, if I'm sitting in their seat, I'm like, okay, this is, you know, a 50x or it's a zero. And like that's just the way I think about it. Like, it's. If I go buy a 10 million market cap startup token, like I'm thinking, okay, give me a 25x or it's a bust. And I think they probably think about it similarly. And I don't want to talk for Will or anyone else who's invested, but like, that's the way in which I think about it.
- [51:50]
C
Yeah, I mean I've certainly got many, many zeros in my investing past. And it's, it's part of the game in terms of like whether to give out tokens for growth. I viewed it like as a cost benefit analysis. And if you have opportunities to spend on growth in a way that's going to create durable value for the business, you should do it. Most crypto projects have failed to meet that bar with most of their token distributions. It's something that I think about a lot.
- [52:16]
B
That's a good point. That is a good point. I think if you were to go to a season, whatever, a second season, second airdrop, I think that's probably a bad expected return on dollar invested versus if you go to like IBKR and they're like, hey, can we do a trading competition? Yes, please. Like, we will happily do that. I think, I think there's a big difference there. And I think crypto Twitter thinks it's. Think about. Thinks about the former all the time versus Will and other investors think about the former.
- [52:43]
A
Yeah. Yeah.
- [52:44]
C
Oh, I like airdrops too.
- [52:45]
B
The latter.
- [52:46]
C
When, when, when Airdrop.
- [52:47]
A
I like surprise airdrops.
- [52:50]
B
Pray there's not.
- [52:51]
C
Yeah, it's. Yeah, it's, it really was like, you know, airdrops, it's a good name because they, they come from heaven.
- [52:58]
A
Yeah, right. Yeah. You're not supposed to know when an airdrop comes. It's supposed to surprise you.
- [53:02]
B
Yeah.
- [53:03]
A
Okay, so maybe this is probably a question for Flip. Flip. When you. There again, the two numbers. 291 million dollar market cap, 1.16 billion dollar FTV. Where do you like, which number do you look at?
- [53:14]
B
I don't, I don't look at them that much to be honest. I think they both, like both, both are balanced. Both the leaders in this space probably go, probably go much higher. I think if I'm actually running like a fundamental analysis I'll use like an adjusted market cap is what I'll do is I'll take future unlocks like that I know are coming so team and investors and then I'll take out anything staked and any, any tokens bought back and that's what I'll use as my market cap or fdv. And so I call it my adjusted market cap metric. And then I do it relative to revenue is how I would look at that. And I would also include, you know, yield that they get on, on stable coins on the platform. So like hyper liquid gets 90% of USDC that's on the platform. Lighter gets something they haven't announced, they don't know what it is but they have announced that they're working with, with Circle. So let's say it's 50%. I would also include that in the revenues as well.
- [54:08]
A
I haven't crunched the numbers. It sounds like you guys have when it comes to actual revenue and broad strokes, I think what you guys are saying is that the actual valuation of the lit token punches below its weight class when it comes to the actual revenue dollars that it's actually pulling in. Maybe you guys can nod your head or shake your head if you.
- [54:25]
C
Yeah, so it's, it's relative to the market cap.
- [54:28]
A
Relative to the market cap. Right.
- [54:30]
C
Of course, over, over the last month lighters bought back, you know, twice the percentage of the supply that's true of the circulating supply and the fully diluted supply because those ratios are about the same for both projects as Hyper Liquid has.
- [54:45]
D
Okay.
- [54:46]
C
And so you know, the market is giving Hyper Liquid a larger multiple. Many reasons why it might do that. Maybe it's pressing in some incumbency advantage or thinks that it's closer to having exit velocity. But that's where the numbers are today.
- [55:01]
B
And I would say as like an outsider, I would also say that I think the market's pricing in higher quality revenues for Hyper from hyper. Yeah, okay. Yeah.
- [55:09]
A
Okay.
- [55:09]
B
Which I think is fair. Like in a post, post TGE world, especially going into TGE to you know, to assume it trades 70 times revs, few discount revs to some extent that seems kind of crazy. But here at, you know, call it 25 times, 20 times, depending on what metric you use, it seems a little bit more, more fair and in line with something you might see on like the cme, things like that.
- [55:32]
C
Yeah, I don't, I don't think, I don't think the right way to value these businesses is, is current revenues just because the TAM is so large. Um, and so it's, it's, it's much more so about like, positioning for future growth in my mind. Right.
- [55:44]
A
So the question I'm trying to get to is like, why is it only $1.1 billion? Like, was there a failure in this strategy of lighter? Are people just not aware of it? I mean, you guys are obviously bullish. That's literally why I'm having you. So maybe you guys are just making me bullish. So maybe that's what's going on here. But it's, it just like the perps arena feels like it has such a premium on it and the lighter token doesn't seem to reflect that.
- [56:09]
C
If I look at like what Lightr's built In the last 18 months, like, I would say they've, they've probably exceeded my expectations that I had 18 months ago in terms of, like, how they've navigated, you know, the, you know, few months since tge. I would say, like, if I was to make any changes, I would have perhaps, you know, done them on the communication side. But I've been very happy with what I've seen from a product development standpoint and, and shipping velocity. And so I think also there's like, generally like a broad lack of awareness among the trading community that they can get, you know, better quality execution on lighter. And I think the more time passes, the more people are going to be aware of what's in their financial best interest.
- [56:57]
B
Yeah, I would just, just the, to answer your question directly, I think it was the market not sure how to discount Lighter's revenues going into their tge. And then I think post tg, it was comms, which have gotten significantly better since. Since, you know, call it the last quarter or so, their comms have gotten a lot better and I think they're starting to build trust and good relationships with, with funds and community as well. So I've been very, very encouraged to see that turn around. But I mean, the product, I mean the, the things they've shipped in the last six months are incredible. I think if they didn't have a token, I think the sentiment towards them would be completely different. I think It'd be a 180. It'd be like, okay, this team is absolutely cracked. And they truly do have one of the best engineering teams in finance.
- [57:52]
A
Okay, why do we keep coming back to the cracked engineering team? How do we actually know they're so cracked? What do we know?
- [57:57]
B
Just look at the product velocity of the products they've shipped. And not just in the last six months, but since, since, you know, the early Elliot days. I mean, team is incredible.
- [58:09]
A
All right, maybe something and just be in the community a little bit more. Can we talk about if I'm, if I'm peaked and I kind of want to join the community you guys talked about? There's investor calls. What, what does it mean to be like a part of the lighter community? How. How would I find it? Where would I go? What behavior? What would I do?
- [58:27]
C
Yeah, I mean, I would say open x.com and figure it out yourself.
- [58:32]
B
Ask Rock.
- [58:34]
A
All right.
- [58:34]
B
No, I think they're pretty active in the Discord, so I would go there and then the Twitter account has gotten quite active as well. And from there you can, you can just figure it out as well. Said. Sure. Just start asking questions and, and giving high quality feedback and people will reach out.
- [58:52]
A
What are, what if you, what are you guys looking at for later in like the short and medium term? Like, is there anything that you guys are anticipating about Lighter? Anything you're looking forward, anything you're excited about?
- [59:02]
B
I just want to continue to see quality distribution partners continue to see that, continue to see this bottoming and in volumes and revenues and then to eventually see some pricing power on the maker side and maybe even through some ancillary product offerings and love to see their take rate increase quite meaningfully. I think right now it's like 0.6 bips. I'd love to see it get up to one bip. And I think if I see that over the next one to two quarters, I'm very excited. So that's what I'm looking for.
- [59:32]
C
Yeah, I'd like to see them win some big distribution partnerships, as Flip said. I'd also like to see them deliver on, you know, the product roadmap, which includes things like options, which includes a lighter EVM programmability layer and a few other things. But yeah, there's, there's a, there's a ton to do and, you know, we'll see how fast they get it done.
- [59:56]
A
Well, one of the good resources for people, I think, is actually Flip. Flip writes some good stuff about Lighter on his Twitter and also for Delphi. I always got it on Twitter, but I think probably also for Defi as well.
- [60:09]
B
Absolutely.
- [60:10]
A
Flip. Will. I had questions. Now I got some answers. Appreciate you guys coming on the show.
- [60:15]
C
Yeah, thanks for having us. This was fun.
- [60:17]
A
Bankless Asian. You guys know the deal. Crypto is risky. You can lose what you put in. But this is the frontier. It's not for everyone. We were glad you are with us on the bankless journey.
- [60:24]
B
Thanks a lot, Sam.