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- [00:10]
Bryce
All right, everybody, welcome back to another episode of the Crypto 101 podcast. I'm your co host, Bryce, as always, joined by my good buddy and options and futures degenerate, Brendan Veman.
- [00:23]
Brendan Veman
That's.
- [00:24]
Bryce
It's a new title that you're dawning today, but it's appropriate for our guests. But how are you doing, man?
- [00:29]
Nick Forster
Dude, it is appropriate and I willingly accept it because it's all true.
- [00:34]
Bryce
It's all true. Everything they say and more. It's true about you. But no, dude, I'm excited. I know we were just catching up before the show how excited you were. We've got Nick Forster, who is the co founder of an awesome platform all about options and derivatives. It's called, aptly, it's called Derive. And so we have Nick Forester, who's the co founder, joining us. Nick, how are you doing today?
- [00:58]
Brendan Veman
Doing great. Thanks, Bryce, and thanks for having me on.
- [01:01]
Bryce
You bet. So let's just zoom out on your career here before we dive into the markets. Dive into what you're building. You're a former Wall street guy. Tell us a little bit about what kind of work you were involved in prior to building Derive.
- [01:19]
Brendan Veman
Yeah, so I was a. That's right, I was a trader on Wall street, so an equity options trader at one of, I think the largest firm by options volume for like stock options. So I was trading like financial and technology stocks over on the, on the east coast of the US For a few years. And that was like kind of a crazy time when I was there. It was during the, if people are familiar with Gamestop and the kind of Wall street bets mania. I was kind of front and center, had a seat to that, was checking Reddit a lot of the time when I was trading, I had a few Melbourne Capital stocks that I was trading options on. And so it was a really crazy time. So I learned a lot about how options work, like how to make decisions under uncertainty. The firm I worked at taught us how to play poker. It's like part of the training and things like that. So a lot of like decision making, probability and really figuring out the right tools to make the right, you know, the sort of right bets in the markets.
- [02:18]
Nick Forster
That's pretty interesting. Why did they like, what was the thought process behind poker and how did they correlate that to the floor?
- [02:26]
Brendan Veman
Yeah, so the guys who started, started the firm, the firm's called Susquehanna, they were ex, like horse racing gamblers in the 80s as well as pro poker players. And that for them I think translated really well. Into making fast decisions with a lot of uncertainty. Right. When you have, when you have a poker hand like Texas Hold'em, you might have a hand like Jack 10 and the flop is Jack 3 7. And that's, you know, you have your information, you're like, this is a pretty good hand. I have the top pair. But if someone comes back at you and starts raising and re raising you and puts you to the test, you have to figure out like, okay, I have a thesis, I have a bet. But this other guy, which in trading world is the market, might be telling you something completely different. And you need to work out where you stand kind of within that spectrum. And then from there, how big do you want to bet? Are you assessing whether you have the best hand or not? And then if you, if you think you do, how confident are you? Because that, that determines how much you want to bet. And so the best traders figure out when they're correct versus when the market is telling them they might not be correct. And then when they have that opinion, they bet big. And that doesn't happen often. Right. Like that happens maybe five, ten times a year is when you really want to bet big. But those are the times that really dominate your returns in trading. So it's a really good like sort of small, shrunken down model of how you make decisions. Constantly making those decisions when you're at a trading desk, like thousands of them a day. And really that's, it's a nice little model for that process.
- [04:02]
Bryce
That's awesome. Any good books on how to that you kind of read on how to learn about poker and maybe even extending just to like any entry level options books as well.
- [04:14]
Brendan Veman
Yeah, so the options book is pretty straightforward. I'd recommend Dynamic Hedging by Taleb. It's not, it's not a simple book. I'll put that out there. Like it. You know, some of the concepts are accessible, but if you have some math background, maybe a year in university or college, it's a, it's a pretty good place to start with respect to poker. God, I can't remember the actual name of the book. We had to read a bunch. But there's an author called David Sklansky, S K L A N S K Y who wrote a couple of books on poker that I remember reading and were quite good. And it describes that process of how do you make a decision like and making positive expectancy decisions, not necessarily winning every time. Even if in poker you have a 50, 50 coin flip but you're getting 5% edge you're going to lose 45% of the time. It's about making sure you make the best decisions and then, you know, living with the outcomes, which is another good thing poker teaches you. So his book, I can't remember what it's called, but it's worth reading. It's very accessible and it describes that sort of expectance, positive expectancy thinking that really helps for trading, but as well as just in life. You can definitely take that philosophy too far. And people do, particularly people who are too transactional in general in life. But it is a very useful way of thinking about making decisions.
- [05:46]
Bryce
And when you think about kind of the overall market structure, when it comes to participants in the options market, there's, from what I understand, there's kind of two participants. There's the speculators who are buying up a lot of options or maybe speculative in the direction, and then there's kind of the folks who are hedging, right? They might have a large amount of a certain asset or commodity and they want to buy or sell options to hedge. Can you kind of just give us the 101 on what the market participants with crypto options are, the miners and the hedge funds and just give us that kind of lay of the land?
- [06:23]
Brendan Veman
Yeah, totally. So options are very good tools to like essentially precisely bet on different outcomes in the future. Whether that's, I think bitcoin's going up, which is usually expressed by buying calls, but not always, or I have a lot of bitcoin, as you said, and I want to Protect Bitcoin's at 90k when we're recording this. If you're a bitcoin miner and you suddenly become unprofitable, if bitcoin goes below 60k in the next year, you might buy a put option. And a put option allows you to sell bitcoin at the price of the strike. So if you buy the 60,000 strike puts it, it means you can sell Bitcoin at $60,000 a Bitcoin, no matter what the price is. So in a world in which bitcoin goes back down to the bear market lows last time of 16k, you can still sell it at 60k. So in that world, that put option is worth $44,000 a put option. Right now, if you were buying that for a year's worth of protection, you might pay a couple of hundred bucks or a few hundred bucks or $1,000 or something like that. So you can get a lot of protection to the downside and really lock in your cash Flows. So in crypto, yeah, that's certainly one of the big flows. You have bitcoin miners who are like constantly hedging. They have real cash flows, real sort of electricity bills they need to cover. They're buying puts. On the downside, you get a lot of hedge funds because volatility in crypto is higher than in traditional markets. You can take, you know, bitcoin or Ethereum or a number of other these currencies and actually sell upside on it to generate yield. And you can generate yields of like 15, 20, 30% on your Bitcoin and ETH by giving up a little bit of upside. And you see a lot of hedge funds piling into that trade at the moment as well, as, you know, we're seeing. And I imagine a lot of the newer institutions coming in. It's a very attractive risk reward profile. They get all the upside for bitcoin up to, you know, plus 30, 50%, but they still generate yield in the meantime. So you have all of these different flows. And of course, the speculative aspect, which is extremely useful as well, with options. The cool thing about options is they allow you to be really precise with your opinion. You can bet on something like, I think bitcoin is going to 110k by the end of this year. It's November when we're recording. By December 27th, I think Bitcoin is going to be well north of 110k. That's a specific bet. It has a timeframe and it also has a price. And when you're specific and precise, it means you can just earn a lot more money when you're correct than if you use a blunt type expression like spot. If you just buy Bitcoin at 90k or if you even use a perpetual kind of thing like, and you just have 3x levered long, you get more leverage and you get more upside when you're more specific about the outcome. So if you have a strong opinion on what's happening, they're very useful instruments, which is also why speculators and hedge funds use them to put on trades when they have a specific thesis.
- [09:35]
Bryce
That's awesome. A very comprehensive overview. Now, if we kind of take a step back again, what was it about crypto that stood out to you and maybe still stands out to you that made you leave that? Let's call it a cushy Wall street job, or an incredible job that anybody who went to study, you know, finance or economics, anybody, would kill for a job like that. And here you are, you leave it. What Was it about crypto, something specific? Or did you just want to go out and get that entrepreneurial itch?
- [10:06]
Brendan Veman
It was. It was about crypto. So I was interested in Bitcoin from 2015 and then Ethereum from 2016. Made some friends at university around that time based on like the few people who were actually interested or knew About Ethereum in 2016, and a couple of them had gone off to work in Defi, were like at the very early Defi protocols. And I kept in touch with them. And for me, I've always had a bit of an entrepreneurial streak. But also at the same time, the blockchain really struck me as. I think it's amazing technology, to be clear. But I think the main thing that took me about the blockchain was that it was the only real way you could build a different version of the financial system. Like, it's the only place where you can gather like 15, 20 people, build an application that can suddenly be doing these functions that are almost exclusively reserved for the most capitalized firms in kind of like the craziest jurisdictions in the world. Whereas you can go out and really attack that system from the ground up. It's a completely new fundamental base of how value moves around and that is unique. It's like, if I could try and build a disruptive fintech using like an AWS server, I probably would, it would be a lot easier to do, certainly from a technological perspective and certainly in 2021 when we started, but you can't. And I think the fundamental unlock of the blockchain is it allows you to raise the entire system, which has been constructed from, you know, the early 1900s with mostly good intentions, but it's piled up all of this red tape and invested interests and all of these other things, and it raises that to zero. And we start from scratch and we build it back up and take the good bits and innovate and improve it. And really that to me was an extremely. Like, it was early 2021, it was very early. It was still an industry which it was clear you could sort of grab, grab it, you know, by the reins and make a difference. I still think we're in that phase and that's an opportunity I just couldn't pass up. You know, where your business would be without you. Imagine where it could go with more of you. Well, with wix, you can create a website with more of your vision, your voice, your expertise. Wix gives you the freedom to truly own your brand and do it on your own with full customization. And advanced AI tools that help turn your ideas into reality. Scale up without being held back by cookie cutter solutions and grow your business into your online brand. Because without you, your business is just business as usual. Take control. Go to wix.com so you know, when.
- [12:47]
Nick Forster
It comes to what you're building now, can you tell us a little bit more about like what you've been building about or building out at Derive? Because when you look at it, it's essentially like a one stop shop for just about anything that you want to do, whether it's borrowing or options or perpetuals or earning a yield and, and so much more.
- [13:07]
Brendan Veman
Yeah, so I like to call it and some other people on the team don't love this framing, but I like it. It's called the infinite payoff factory. And that means you can create any trade like using any instrument and any collateral and craft bets and opinions and yield generation sort of structures and borrow lent, that all emerges out of the same risk engine. So options markets like I think the sort of core insight of why we're building options like sure, yeah, I was trading options when I was in traditional finance, that definitely helps. But the reason why it was so compelling to me to go build in defi in the first place. And it comes back to some of that training that I described. One of the first things we learned, we had a sort of ex professor give us a four or five hour lecture as junior traders, essentially proving that you could make any financial instrument or like payoff out of calls and puts. You can take different options and just replicate literally anything in the entire universe of finance. So for me like being able to generate those calls and puts at scale in a programmable environment is a really natural fit for both options and blockchain technology. And that's been the vision and the goal is to really build a highly liquid base layer for these, these complex derivatives and then eventually abstract away all of the complicated bids and just give people what they want, which is I have this opinion, I'm willing to take this risk, give, give me the composite like options per spot, whatever it is and give it to me like that's what I want. I want to, I want to trade this opinion or I want to hedge my downside or I want to generate some yield on my, on my collateral. And that's, you know, we're not there yet. We're still building out the liquidity layer. We now have like a foundation with unrealist version that launched like almost a year ago that we've been building on and now Our liquidity is getting a lot better. And now in 2025, I'm excited, we're going to go on the attack and really start to uncover all of these different use cases with the components.
- [15:18]
Nick Forster
Yeah, you know, I've noticed kind of some of the stuff that you're saying in that like when it comes to traders, they can be really attached to their traditional way of doing things. You know, the, the futures guys like their futures contracts that have an expiration date. The perpetual guys love their perpetual contracts. The options guys, they love their options. And you know, typically if you want to do all that, you know, maybe you just want to spot trade, maybe you want to earn a yield and it's hard to find a place that does all of that. And I think by catering to all of them and again just really expands the pool of what is possible and as a really cool feature. And I was going to ask you about liquidity as well, but you kind of answered the question because, you know, with a lot of these, these contracts, you know, you do have to have, you like, you can't exit out of a position unless someone is willing to necessarily buy that. So I think working on liquidity is also just a big thing, which is great to hear that you're working on it. And also just to see crypto as a whole has done a really good job of increasing liquidity to make all this even possible, especially over the last five or so years, which is great to see. I'm curious what aspects of your system are centralized and which aspects of it are decentralized?
- [16:34]
Brendan Veman
Yeah, so I would say we're much more decentralized than a lot of teams in the space. We didn't cut any corners with respect to the protocol design. We wanted this version of the protocol. So we've been iterating on the protocol for like almost four years now. And we really wanted this version that we launched a year ago to be almost the final version. And so we put almost all of the core components of the entire setup on chain. That means that the sort of margin engine, the risk engine, settlement clearing of option spot derivatives, like lend borrower markets, that all emerges from these smart contracts that we have on chain. And you can take this sort of core risk engine and continue and like any developer can like slice a pot off and deploy like a different risk module that allows you to do more exotic trades or crazy trades or use like more degenerate collateral if you want, whilst isolating the risk from the rest of the system. So it's quite a modular and extensible base layer with which other teams and this is kind of the future for Derive can come and build interfaces that plug into that liquidity. Because options are such a very like, as I said, much more tailored instrument in some ways. You have a very specific opinion from a specific hedge fund or user and then you have an intermediary typically that can surface that trade. We can make it so that anyone can come in and build, you know, an order book or you know, an interface to build structured products on top of and access and tap into that liquidity, which is the split that we've gone for in the design, put the core components, the really critical stuff, maintain self custody, ensure that the rules of trading are clear or transparent and the collateral is all housed there. So you don't get a situation where you know the, there's a credit being extended behind the scenes to a certain counterparty who might not be good for it or things like, you know, what happened with rtx. It's just not possible using using the protocol as the base layer and bootstrapping.
- [18:42]
Bryce
Liquidity has been notoriously one of the most difficult things for any protocol to do. I know you guys have investors like Framework and gsr, which Framework is one of the largest crypto venture funds. GSR is one of the largest sort of market makers. Are they the ones that are kind of them and all the investors, are they the ones that are providing liquidity or is it some other entities or is it just kind of the world at large random people saying hey, I've got, you know, some spare Ethereum, I want to contribute it or kind of tell us about how you're bootstrapping actual liquidity?
- [19:17]
Brendan Veman
Yeah, it's not, it's not our investors. I can, I can tell you that the, the way that we've gone about it is been very methodical, like it's easier for us to do than I think some other teams in some sense because we've been so focused on options, which has been somewhat of a contrarian opinion in crypto over the last three or four, four years and because it is really hard to do. But we have a, you know, I think a very easy to integrate like API and backend setup so that market makers can get started. We've managed to go out and build a network over the last four years of the top market makers in the space, both the crypto native ones as well as some of the more traditional financial firms that are quietly in crypto behind the scenes that's allowed us to build out a competitive market making program and really bootstrap that liquidity. It's not easy, I'll tell you that, but you have to sort of do this game of onboarding users, onboarding more liquidity, trying to onboard even more users despite there might not be enough liquidity and continuing to ramp that process up. It takes time, it takes a lot of coordination. As I said, we're definitely not in our final form yet, but the liquidity is pretty strong. And if you go on any sort of given day, you'll see that the markets are healthy. We certainly have room to improve though.
- [20:31]
Bryce
And it certainly seems like they're healthy enough for a $25 million options trade to go through. I think I read that in the news. I think it was your platform. Tell us a little bit about that because I think that was maybe one of the largest on chain options trades that's really happened. And your decentralized network facilitated it. What was going on there?
- [20:52]
Brendan Veman
Yeah, so we had a user come through and they wanted to put on. This was collateralized using like a bitcoin type collateral, one of the BTC FI coll, like Lombards or like EtherFi's EBTC. And what they did was this is before the election, they sold some downside. So they essentially collected some premiums by selling the Bitcoin $50,000 puts and they bought upside. So they bought like the 70k, 80k call spreads. And this was like a big trade and big size. It got done at very competitive, like execution quality. And that's because, because of this network of market makers we've been able to spin up. And it essentially meant that this, you know, this counterparty, this customer, this user like profited if bitcoin rallied after the election. And that's exactly what happened. So they managed to put that trade on. Yeah, big time. So they managed to put that trade. They capped their upside with the, you know, by selling the 80k. But they still did and are doing fairly well off that trade. And you know, again, it's kind of like when this would they put this on when bitcoin would have been like 62k or something and it would have cost them almost nothing to put on because they're selling the downside to buy the upside. So you can really tailor like your, your, your trade and that is a complicated thing to do. Right. Like it's not, it's not easy for most people to do and we're certainly working on some pretty innovative stuff in terms of being, as I said, being able to abstract away the actual Components and just telling people, you know, giving people the payoff or the trade that they want.
- [22:26]
Nick Forster
That's so sick. It's, it's awesome to hear stuff like that. And I like, I even know that we've chatted a little bit internally, being like, you know, I wonder if there was any like degens out there who's just like, screw it, I'm going all in on the election, got levered up. And I mean, man, when you make a play like that, yeah, I mean, it really has to pay off. And you love to hear the success stories too. I think too often people read about, you know, Maybe even in DeFi specifically, like loans going bad and people getting over collateralized and stuff like that. But this is an example of someone getting into DeFi and it going really, really well and it going right and it being used for a good purpose the way it was intended to be. And we love to hear success stories like this. And I wish that stuff like that made as big of a headline as some of the more like negative headlines that we get, because I think it deserves it. And the space has come a long way to even make that possible.
- [23:21]
Bryce
Yeah. And speaking of the election, Nick, you know, obviously this is a very, very big moment for crypto. We have like a, an incumbent or a sitting or we have a president elect, sorry, who is like, he's launched his own crypto platform. We have a vice president elect who like owns a bunch of crypto. We've got a whole cabinet full of people that are all like crypto nuts. So this is great for your business, for our business. Tell us a little bit about how you're thinking about sort of, you know, 2025, 2026 and this post election bull run.
- [23:56]
Brendan Veman
Yeah, I, I don't think people realize in the industry or even like anyone who's not directly in like building in it like you guys or. I don't think people realize how distorted some of the incentives or ways that capital move around the space have been over the last four years based on this very unclear regulatory regime that has proliferated. I think like, I can't, you know, it's like, it's like holding, it's holding something buoyant down underwater. And I think the industry has been pushed down and down over the last four years. As I said to you at the beginning, I think this is the only meaningful way to challenge how value and finance works in the world. It's with blockchain type systems. And that caused a huge negative reaction from, from the existing regime. But if that tailwind does clear up, I think you just start to see and this is less of a price thing as much as it is just a usefulness thing. You really quickly start to see the usefulness of all of this tech that people have been building. And this wouldn't to be fair, like this would not have been true if this had happened in 2022 because the tech wasn't ready. We had like we were the first team to launch natively on a layer 2 back in August 2021. Barely existed. Transactions were super expensive. Transactions are great. We have enough block space, we have enough. There's still some UX things that need to be worked out, but things are really good technologically. I think the main barrier really is the regulatory overhang and the clarity and it seems like that's coming. Once you get that, I think quickly in 2026, 2027 people won't be having this sort of existential like where are all the apps, what are people doing, what's this all used for? I think it'll be very obvious and it'll happen very quickly because so many of these protocols just get 10x more useful. When you can start to integrate more assets from off chain, you can start to do interesting things with cash flows that are being generated on chain and those sorts of things are just not being, being done right now because of, because of how hostile the environment was.
- [26:07]
Bryce
Yeah, and I, I am hopeful that the derive platform will become available to us individuals, U S institutions, some level of interaction with the United States because I know pretty much every platform that has anything to do with derivatives or yield is like completely blacklisted from the US market just because of like the hostile CFTC and sec. But again, with this new sort of regime coming in, what do they have to do in order to make you feel comfortable opening up your platform to US investors and so on and so forth.
- [26:44]
Brendan Veman
Yeah, so you're right, we're not available to any US users or anything like that. In terms of the rules that we're looking for, obviously that'll be sort of a case by case basis. It's hard to necessarily say upfront. We, we definitely like as I said, we're much more like blockchain, native, self custodial and that really is how things run. We just need clarity in the same way, like strong clarity, like good faith. And we'll evaluate it if we can meet the requirements, if they publish requirements sort of quickly into the new, the new regime and we can meet those. We certainly would, would want to Sort of look at figuring out a way to get to US users. But until that comes, it's not something that we can do, unfortunately. But hopefully, you know, as I said, these things can change quickly. Relatively quickly, at least, you know, not.
- [27:35]
Bryce
Things change so quickly that we just saw today pretty much Options on Bitcoin ETFs in America get approved, like, pretty much overnight.
- [27:46]
Brendan Veman
Yeah, true.
- [27:47]
Bryce
That's crazy. I mean, that was something that we did not really expect till next year. And everybody's like, oh, all right, they're flipping, flipping the switch tomorrow. I'm like, oh, shit. All right, cool.
- [27:57]
Brendan Veman
Yeah, yeah, it's definitely a good indicator and that's a huge. Again, another big moment. It'll unlock a ton of these investors who haven't really been able to trade on any of the existing options platforms today because they don't service the US like Drive and some of the others in this space. That's going to ripple and cause all these sort of cross arbitrage flows and, you know, hedging flows from participants who can access both venues. It should be very bullish for, for options in general. In crypto.
- [28:25]
Nick Forster
It's been so cool to see how fast a lot of the crypto projects and crypto focused companies have switched. Like, Gary's not even out yet. The new administration isn't even in yet, and everyone's just like, here we go. We're, we're prepping early. And it almost seems as if they had this ready, like, just in case, like all these crypto companies and projects were ready to go and they had all these innovations. Like, just earlier we were talking with the CIO of Bitwise, Matt Hogan, and he was like, when we asked him like, hey, is there anything that you want to do that you couldn't previously? He's like, oh my goodness, is there.
- [29:04]
Bryce
A whole episode just to talk about that?
- [29:06]
Nick Forster
Yeah, I mean, it seriously could have been its own podcast. And that's how it feels like a lot of these crypto projects and crypto companies feel. And, you know, we really do love to see it, but I guess kind of narrowing in on the DRV token. Like, what role does that play in all of this?
- [29:22]
Brendan Veman
Yeah, so we, as I said, we, we have a protocol that is relatively decentralized on the spectrum of things, and the DRV token plays a pretty critical role in like, governing both the future of the protocol and how the current protocol operates. So we actually had a live token before it was called Lyra. The, the. The community and the DAO voted to, to go offline for a little while while we migrated, we launched an app chain with the new version. That upgrade is nearing completion. So at the moment the token that was offline is still responsible. Like the snapshot of balances are the ones sort of voting and controlling the DAO in the meantime. But that role I think is going to be really important in carrying the protocol forward. Continuing to solidify the kind of the immutability of certain components, components of the base layer to ensure that participants and traders and things like that have guarantees around what collaterals in the system, what the rules are, that there's no preferential treatment that all happens there and then continue to expand and really bring in more liquidity and become this, this liquidity layer for potentially the infinite power factory at the same time, like that. That all does need to be sustainable. There have been proposals in governance to sort of improve, improve the sustainability and the economics of it. I can, I can sort of link those to you guys afterwards, but there's a lot of interesting stuff happening with the token at the moment.
- [30:49]
Nick Forster
Yeah, you know, do you think that, you know, will options on tokenized stocks and bonds be trading on the platform?
- [30:57]
Brendan Veman
I hope so. You know, I definitely like, you know, I'm not here to build just a crypto native. Like I love crypto. As I said, I've been in here almost 10 years, I'm building in it. But I want this to be a fintech. Like I want to touch every sort of aspect of how value flows throughout the world because I think it is one of the industries whose margins just way, way, way, way out, like outstrip the value out in the world. Particularly in a world where we go from this sort of blockaded, isolated, highly sort of regulatory, with ladders being pulled up behind the incumbents to one where competition is fierce and margins get hacked away. So that includes in stocks and bonds and things like that. I want to bring the entire financial system on chain and we want to play our role in servicing those flows. So definitely want to get there. Will we get there in the next year? Probably not, but I hope to see it. And I know there are a lot of good teams in the RWA space trying to tokenize as many things as possible as quickly as possible.
- [32:03]
Bryce
And what are the kind of qualifications for a product or an asset to get listed on, to derive? Can anybody make a market or do they have to kind of go through a whitelisting process?
- [32:17]
Brendan Veman
Currently the collaterals that get added to the core risk engine need to be sort of whitelisted or approved and that will always be the case through like the DAO and governance and things like that, because you can't just let any collateral into a core risk engine. Having said that, there is a process that people can permissionlessly deploy, as I said, these isolated risk managers, so they can take their own collateral, set some risk parameters and deploy it on the side. That means you can do a bilateral trade maybe between you, Brendan and Bryce on Pepe Tokens or whatever it may be, where Brendan sells some upside to Bryce. That could be something you guys could do. And eventually, like if Pepe becomes some sort of like stable collateral, you could apply a haircut to it, you could bring it into the main risk engine. But it's kind of that balance between the, I would say closer to an AAVE type risk engine at the core and then these isolated instances which are much more permissionless and can really go and, you know, be forked and deployed by anyone.
- [33:24]
Bryce
Makes a ton of sense. Now can you kind of just for, for some of us who are not as experienced in options, which hopefully, you know, Lear is or derive is a platform that we can go to, but can you kind of tell us maybe one or two or three kind of common strategies and are these as easy as one click? Do you kind of abstract all of that complexities away on the drive platform? So you could say, hey, I want to do X strategy. And you could just kind of sign up for it or how does it work?
- [33:53]
Brendan Veman
Yeah, there's a, there's a little bit of that. So we have a few strategies in the earn tab. One of the common ones is covered calls. So you take your ether, your bitcoin, you post it into a vault, and the vault will do the rest. But what it does is it sells out of the money calls on a weekly basis. That's generating around like 10 to 15% on your Ethan bitcoin. And that has risk, right? Like you give up some of your upside. So, for example, the vault, the strategy has been running for like seven months now. It hasn't ever been in the money yet. But in an event where I think Bitcoin's what, 90k now, it would probably be selling the 1 week, 105k calls. Just off the top of my head, it could be correct. That might not be maybe a bit higher than that. So if bitcoin goes beyond 105k, you don't get the upside to the rally, but it means that you can generate 10 to 15% on your Bitcoin every sort of every week on a, on an Annualized basis. So that's one simple one. That's one Tradfi really liked. Because you can generate this yield that they. A lot of their mandates don't require them to hold coins that go up 100% in two weeks. It just means they want to get their sort of stable returns and sort of continue to compound and stack. Bitcoin.
- [35:11]
Nick Forster
Yeah, and I kind of have a quick follow up on that. When it comes to options, there's a lot of strategies that people can take, right? Some people like clients close expiration, far expiration. Some people like in the money, out of the money, at the money. Like, generally speaking, do you think that there's like one way that is probably just like the smarter way to play it?
- [35:32]
Brendan Veman
I actually don't. It really depends. It depends on the market environment, depends on the conditions. I would say this is not financial advice in general. Selling volatility is. Should be more profitable in the long run because there's a premium associated with risk. In the same way that when you sell insurance, insurers tend to make money, right? And you know, you have people who are essentially buying insurance, they're paying premiums, and they sometimes hit like a. Unfortunately, like a big payoff if your house burns down or whatever it is. So in theory, if you're selling options, you're selling protection, you're taking on risk, you should be earning more in the long run. But that is not, certainly not always.
- [36:11]
Nick Forster
True with the, with the crypto market being so volatile. You know, one of the things that comes to my mind is maybe the ideas of, like, straddles or strangles where people can get exposure to the volatility that way. And, you know, we haven't really been able to see that in full effect. Or even people experiment with that because options on bitcoin are about to be possible, and they haven't been in the past. But you know, when I think of, when people think of volatility and ways to play the volatility, especially with the crypto market, like, that's immediately where my brain kind of gravitates towards. But is that like the wrong way of thinking about it?
- [36:49]
Brendan Veman
No, it's the right way of thinking about it. Like certainly straddles and strangles. So a straddle would be, you know, as bitcoins at 90k, it would be buying both the 90,000 call and put. And so that essentially doesn't take a. Like it's betting on it going up and down at the same time. So it's not really taking A directional position. But the way that that payoff makes money is if bitcoin moves a lot. So if it moves to like 120k or 50k in that timeframe, you're making a lot of money. So you are betting purely on the volatility. That's certainly a way to do it. And there are, you know, in my opinion, it's possible that like crypto still somewhat underprices volatility in events like going into like, clear events. So you had things like the ETF approval like an almost, you know, almost a year ago now, right? Like where there was an event, there was a date, and really no one was paying that much attention to it. And the next day, like Ethereum rallied, you know, 20% or Bitcoin rallied. I can't remember what it was now, but it was way, way, way more than the event was implying. Even the election, you know, people somewhat underpriced the volatility for the election, although it is getting better. But those are the kind of the environments that you probably want to be taking those Vol. Opinions on in general. But again, it really depends on your strategy, your goals. And that's the beauty of options, is like a trade can make sense for two people at the same time, depending on what their mandate is. Right. You're transferring risk around, you're maybe giving up some upside. And you might be happy to do that if bitcoin does rally because the other guy who's buying the calls making a ton of money, you're happy because you've, your bitcoin's gone up in price and you've earned some yield. And so like, it really is the sort of purest marketplace in that way. You can take any small section of the distribution and trade it against someone else.
- [38:38]
Nick Forster
Yeah, I mean, can I just say, I love this conversation, you know, sorry if that was not 101 for some of the listeners, but, you know, it's fascinating and I think it's something that people should be at least familiar with because as we mentioned earlier, this stuff is coming to Bitcoin and you don't have to be someone who's actively doing it or using it, but I think it's important to at least understand it at a base level. So if you hear it in conversation, you're like, oh, yeah, you know, I remember getting into that. But, you know, when we're looking at like any given crypto trade, you know, what are what metrics or charts or indicators or maybe some other factor do you think is important? And maybe we can reference something that used on your, your days on Wall Street. Maybe it's different with crypto, but just curious to get your thoughts.
- [39:25]
Brendan Veman
Yeah, I think one thing I look for is certainly, as I said, I still think crypto in general across the board, whether it's from the majors to the 300th coin on CoinGecko. I think news is very slow to be priced in. And so I look for catalysts like that when there's news out. And you might think in the traditional markets, if you're conditioned that markets are efficient, you might think, oh, it's already been priced in. Someone's seen this a lot of the time in crypto. That's just not true. So again, this is like a nice use case for options, because if you've spotted something and you think you can put a trade on, and you might make a lot of money if your thesis is correct, but you're not 100% sure that it's been priced in or not, you can pay a small amount of premium, get a lot of leverage, and lock in your bet, you know, over like the next month, at which point you can be pretty confident that if, if it was to be, you know, if the news was out and it was, you know, going to have an effect on the price, it would have happened in a month's time. So I think, like, certainly I look for catalysts. I look for things that, whether people know about them or not, maybe, maybe underpriced. And then you can take that and look at, like, past references. So for, for the election, you could go back and study the old events for Bitcoin and ETH and look at how much it moved and look at, try and pull up the options or the different price movements and what they were implying beforehand and how it ended up playing out afterwards and where that volatility was realized, whether it was all on day one, whether it leaked into day two, three, four, five, how it played out in the weeks after that. I think if you get a really good sense and you can sort of back up some of your intuition with at least a few reference points and data points, it can really help you execute on a trade and a strategy.
- [41:13]
Bryce
Incredible. Well, look, Nick, while we still have you, I got one final question, and it's one that we get a lot from our viewers and it's kind of around meme coins. And, you know, I want to get your thoughts on, you know, why do meme coins exist? And do you think that they're going to continue to exist? And, you know, yeah, It's a. It's a hard question because I don't want to ask too much about, you know, how would you integrate these into your portfolio? What are the best ways to trade them? But, like, as a phenomenon, what's, like, just a smart trader's take on these meme coins?
- [41:50]
Brendan Veman
Yeah, this is. This is certainly a spot where I. I'm in danger of falling into the midwit trap. So don't, like, take everything I say with a huge grain of salt. And that's the, like, I think meme coins are great. Like, they're a good way to, like, get people excited, like, to get people onboarded. They're certainly the thing that my friends who aren't into crypto talk about a lot, and they're useful. The question for me, as someone who, you know, like, invests as well as trades in crypto is like, is this an investment or is this a trade? And I think people get those mixed up a lot. If it's an investment, you really. I would not. There are only a handful of meme coins that really stay. If you're the kind of person that does a trade and then holds onto your bags and, like, will check it in, like, two years, I would stay away from most meme coins. But if you're someone who's actively trading, sure, it can be, like, a good way to have some fun. I think the reason that they've been so prolific in crypto is, one, because they're fun, but two, also part of this broken market structure. Like, the only sort of, like, technically coin that it's kind of been encouraged by the way the regulations and the rules and the enforcements have existed to date. It's funneled people into these very simple meme coins that have no, no, no value whatsoever attached to them other than the meme itself. My, my take is that, like, I think they're going to continue, they're going to proliferate, they're going to exist, but hopefully they won't dominate the market in terms of intrigue or interest, just because it previously was the only thing that really could proliferate in that way for trading. I hope that will change as the regime changes. But, yeah, in terms of being able to trade options on them, we're probably a little long, like, a little ways away from that. I think you need for, like, a super liquid options market. You probably need this progression of liquid spot markets to liquid perps and futures and then liquid options. And so it's always usually the last vertical to develop around an asset so maybe Doge will get there, surely. I think it's definitely possible.
- [43:51]
Bryce
That's awesome, man. I can't, I can't wait for a future where we could get options on meme coins. Brendan, that, that would really get my heart racing. But no, Nick, this was an incredible overview of options in Crypto Derive and just an incredible guy. It was, it was awesome to meet you. It was awesome to hear your story and we really do hope you come back on the show sometime soon when there's more announcements or when the token goes live or something. We have lots of guests that come back two or three times over the course of a couple years, so we'd love to stay in touch and I think our audience is really going to want to hear more from you. So, so thanks for joining for sure.
- [44:31]
Brendan Veman
Guys and thanks for having me. I really enjoyed this conversation. It's been fun.
- [44:35]
Bryce
Awesome. Well, thank you and everybody at home listening. Come on back same time, same place next week because we're going to have some more awesome crypto vets and incredible minds joining us. So we'll see you guys soon. Take care.
- [45:02]
Brendan Veman
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