* DeFi must match traditional finance’s performance without losing verifiability.
* Building in crypto should solve significant problems, not just for innovation’s sake.
* Most digital asset trading in 2022 was centralized, lacking blockchain utilization.
* On-chain verifiable actions can enhance financial efficiency over opaque systems.
* Perpetual contracts are favored for their capital efficiency and leverage.
* Customer feedback is crucial in developing effective core technology.
* Market dominance in perpetual exchanges shifts with each cycle.
* DEXs lacked strong product market fit post-FTX collapse.
* Competition between centralized and decentralized exchanges is set to intensify.
* Building on Ethereum is vital for capturing future financial opportunities.
* Solving technical challenges first can yield long-term benefits.
* Significant developments in Ethereum’s connectivity and institutional use are expected this year.
* Low latency in trading systems is achieved through optimized technology.
* Verifiability in trading ensures fairness, especially in volatile markets.
* Innovating business models can significantly impact the industry.
Guest intro
Vladimir Novakovski is the Founder and CEO of Lighter, a decentralized perpetuals exchange built as an L2 on Ethereum. He previously co-founded Lunchclub in 2017 and served as its CEO, and earlier led machine learning at Quora while building engineering teams at Addepar. A Harvard economics graduate, he raised $68 million for Lighter led by Peter Thiel’s Founders Fund.
The challenge of DeFi performance
* “DeFi needs to perform at the same level as traditional finance without sacrificing verifiability.” – Vladimir Novakovski
* The need for verifiability in financial systems is crucial.
* DeFi aims to solve real-world issues rather than building for the sake of innovation.
* “It’s not like okay let’s like build in crypto for the sake of building crypto.” – Vladimir Novakovski
* The philosophy of solving important problems drives crypto innovation.
* Understanding the challenges of DeFi compared to traditional finance is essential.
* The goal is to enhance DeFi performance while maintaining transparency.
* Verifiability remains a key focus in the evolution of DeFi.
Centralized vs. decentralized trading
* “99% of the way digital assets were traded didn’t actually use the rails of blockchain.” – Vladimir Novakovski
* Centralized trading lacks the improvements offered by blockchain technology.
* On-chain verifiable actions improve efficiency over opaque traditional practices.
* “If what they do is verifiable and is on chain that just makes things more efficient.” – Vladimir Novakovski
* Perpetual contracts offer capital efficiency and leverage, appealing to traders.
* “Most active trading happens with perps… it makes sense when you think about it.” – Vladimir Novakovski
* The shift from centralized to decentralized finance is expected to continue.
* Understanding the trading preferences in the crypto market is crucial.
The evolution of trading platforms
* Building core technology without customer feedback is ineffective.
* “Without having that iteration where loop where you actually have like real customers using the tech.” – Vladimir Novakovski
* The evolution of perpetual exchanges shows market dominance shifts each cycle.
* “Every cycle you have like one perps platform that kinda dominates.” – Vladimir Novakovski
* The competitive landscape of perpetual exchanges is dynamic.
* Understanding the history of perpetual exchanges informs future predictions.
* Customer involvement is key to successful tech development.
* Market dynamics in trading platforms are influenced by trader behavior.
Ethereum’s role in future finance
* Building on Ethereum is essential for capturing future financial opportunities.
* “Building on top of Ethereum and being connected with the broader ecosystem.” – Vladimir Novakovski
* Solving hard technical problems first can lead to greater benefits.
* “If you solve the hard technical problems first then you get the bigger unlock later.” – Vladimir Novakovski
* Ethereum’s significance in the financial ecosystem is growing.
* The strategic importance of Ethereum for financial innovations is highlighted.
* Addressing technical challenges upfront is crucial for product development.
* Ethereum’s role in DeFi and traditional finance is expanding.
Institutional adoption and Ethereum
* Significant developments in Ethereum’s connectivity and institutional use are expected.
* “This year will be a lot of things will happen as far as unlocking the full connectivity to Ethereum.” – Vladimir Novakovski
* Building on Ethereum L2 allows better security and access to DeFi protocols.
* “The whole point of being a part of building on top of Ethereum… is kind of by far the most decentralized.” – Vladimir Novakovski
* Institutional adoption of Ethereum is a key focus.
* Understanding Ethereum’s Layer 2 advantages is important for builders.
* The strategic advantage of using Ethereum’s infrastructure is emphasized.
* Institutional use cases for Ethereum are set to grow.
Trading system efficiency
* Low latency in trading systems is achieved through optimized technology.
* “The low latency part is really important… the sequencer can be highly optimized.” – Vladimir Novakovski
* The technology can process 500 million orders a day at low cost.
* “We’re processing 500,000,000 orders a day right now and the cost of doing all that are like under 50 k USD.” – Vladimir Novakovski
* Efficiency and scalability are key advantages of the trading system.
* Understanding the technical aspects of trading systems is crucial.
* Verifiability in trading ensures fairness, especially in volatile markets.
* Operational costs on certain exchanges can be lower than traditional ones.
Innovation in business models
* Innovating business models can significantly impact the industry.
* “Experimenting with the business model and not just keeping the status quo can be really powerful.” – Vladimir Novakovski
* The initial skepticism about Robinhood’s zero-fee model was widespread.
* “At the time right like when they had this idea of zero fees like no one thought that would work.” – Vladimir Novakovski
* Understanding the context of Robinhood’s model is crucial.
* The impact of innovative business models is highlighted.
* The significance of Robinhood’s success is emphasized.
* Strategic positioning in business models can drive industry change.
Institutional and retail trading dynamics
* Institutions trade on platforms like Lighter to access retail markets.
* “Ultimately the institutions go where the retail is too… they wanna participate in as many markets as they can.” – Vladimir Novakovski
* The cold start problem is a barrier to integrating real-world assets into crypto.
* “It’s like a cold start problem… to get retail you need liquidity and to get liquidity you need the institutions.” – Vladimir Novakovski
* Institutional motivations in crypto markets are strategic.
* Understanding the dynamics between institutional and retail trading is key.
* The interdependence of retail and institutional participation is emphasized.
* Strategic motivations drive institutional trading behavior.
Regulatory and compliance challenges
* Institutional players are hesitant to trade on DEXs due to regulatory concerns.
* “The players that do have that expertise up to now haven’t been haven’t actively wanted to trade on DEXs because of regulation.” – Vladimir Novakovski
* Collaboration with policymakers is needed for institutional trading on DEXs.
* “It’s so important for us to figure that out with policymakers in the US.” – Vladimir Novakovski
* On-chain KYC can enable compliance while allowing price discovery.
* “You can have certain rules around that and those are all made public.” – Vladimir Novakovski
* Regulatory clarity is vital for market growth.
* Understanding the regulatory landscape is crucial for institutional participation.
Technical alignment with traditional finance
* The technical stack must align with traditional finance needs for partnerships.
* “The alignment of the technical stack needs to be there… if there’s technical alignment and the tech actually works.” – Vladimir Novakovski
* Price action is often given more attention than other metrics.
* “People pay a lot of more attention to the price action than we would have thought.” – Vladimir Novakovski
* Technical compatibility is key to bridging crypto and traditional finance.
* Evaluating success in crypto requires a broader perspective beyond price.
* The role of technology in fostering relationships is emphasized.
* Understanding the importance of technical alignment is crucial for partnerships.
Growth potential in the Ethereum ecosystem
* The focus on revenue in crypto is positive, but growth metrics should also be considered.
* “It’s good that crypto now looks at revenue but you should also look at growth.” – Vladimir Novakovski
* Market reactions to revenue fluctuations reflect a shift in investor sentiment.
* “Before the token launch let’s say we had one day with like lower revenue like no one would freak out about that.” – Vladimir Novakovski
* The Ethereum ecosystem should be viewed as a startup with growth potential.
* “You have to think of it more as a startup… it’s not like a public company that’s existed for twenty years.” – Vladimir Novakovski
* Understanding the growth potential in Ethereum is key for investors.
* Balancing revenue assessment with growth potential is crucial in crypto.
The future of capital markets
