Crypto is Ready for Onchain Options | Nick Forster, CEO of Derive

Getting the direction of ETH right doesn’t guarantee you survive the trade. Derive co-founder Nick Forster joins David Hoffman to unpack why crypto’s options market has lagged behind perps, and why he believes that is changing. From the October 10 crash to a $300,000 Ethereum trade, they explore the different risks of leveraged bets, where options-based yield comes from, and why the deadline matters. --- 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium --- BANKLESS SPONSOR TOOLS: 🔓NEAR | TRADE CONFIDENTIALLY, GET 20% BACK https://bankless.cc/near2026 🎯THE DEFI REPORT | ONCHAIN INSIGHTS https://thedefireport.io/bankless 👑BANKLESS CONTENT MCP https://www.bankless.com/premium --- TIMESTAMPS 0:00 Why Options Lagged 5:56 The October 10 Shift 9:03 Options vs. Perps 21:37 Market Size & Economics 27:26 Derive’s HYPE Strategy 30:01 Why Onchain Matters 33:09 Inside the Risk Engine 35:51 What V3 Changes 38:02 Options in Everyday Apps 41:53 Does Volume Lift Prices? 44:08 Following Derive --- RESOURCES Nick Forster https://x.com/nickforster Derive https://x.com/DeriveXYZ --- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03David Hoffman?

  Bankless Nation, I am here with Nick Forster. He's the co-founder and CEO of Derive. Derive is the largest on-chain options exchange on Ethereum. Nick, welcome to the show.

• 0:13Speaker 01

  Hey, David, thanks for having me on.

• 0:14David Hoffman?

  Nick, I want to kind of get to just some very basic questions about crypto and options. Mainly, options really haven't come online in the crypto sense in ways that the perpetual has, or in ways that if we extrapolated to from how much TradFi loves options, they don't, the options in crypto don't really meet that level of popularity in the crypto industry. And I want to know why. Like, why haven't options grown as large in crypto as we would have otherwise expected?

• 0:47Speaker 01

  Yeah, it's a great question. I think to some extent, it's the natural evolution of all financial markets. Options are always the last vertical to mature. You kind of need to anchor the market, like some of these bigger, slower-moving institutional players, really trying to earn yield on their assets, whether it's equities in the equity market, or in crypto, like on Bitcoin and ETH, or you need structural hedgers. So things like, you know, airlines hedging their jet fuel costs, or, you know, farmers hedging the sort of price of their crop before harvest. Like, those are the big repeat flows that just take a while to emerge in a new industry, a new asset class. And for options, you know, in crypto, speculation is dominated, and options are good for speculation.

• 1:31Speaker 01

  But to really serve that use case, they need those guys, you know, in the market, selling options, creating a competitive two-way marketplace first. I mean, it's just taken a long time for that to happen, but now it really is starting to accelerate. And what options do really well, and it's a criticism people give them often, is like there are just so many of them, there's so many choices and different strikes and expiries. And it's like, kind of the point. It's the same reason prediction markets are beginning to take off. They give you this level of control and granularity and ability to express lots of different opinions about the market. And when typically you can do that in a more precise and defined way, you can make more money on your trading opinion when you're correct. So I expect options to continue. They've started to really grow as a market share in crypto. I expect that to really, you know, kick on over the next couple of years.

• 2:17David Hoffman?

  So your answer is that really there needs to be a pretty rich diversity of market participants in order for the options markets to grow. And maybe that stands in contrast to the perpetual as an instrument, where really you just need two market participants. You need people to LP, you need people to lend to the people going long or short, and then you need people going long or short. And the simplicity is maybe what allowed the perpetual to grow so fast. Options, on the other hand, has a wider variety of a need of different participants doing different things to create the double coincidence of wants, and a lot of them in order for the options market to really manifest. Is that, is that correct?

• 2:58Speaker 01

  Yeah, that's, that's really, really well said. And I think to date in crypto, again, if you think about the assets that have been popular or available in the market, you know, we've got this new recent wave of tokenized equities and commodities that's bringing like big useful assets on chain. But to date, we've had Bitcoin, Ethereum, maybe a couple other coins, but a lot of the coins that have done perp trading, those, you know, meme coins or whatever it is, they last for two or three weeks before people move on to the next thing. And this is not enough time for that market and that coincidence of wants to develop. But now, as I said, you've got this, you know, more and more high-quality crypto tokens that are emerging with longer-term, more sophisticated holder bases, like Ipe is kind of the most recent one that's had a breakout options market over the last year for that reason.

• 3:44Speaker 01

  And then also you have, you know, all of these quality assets, RWAs, equities, commodities, being issued and available and tokenized on chain. And I think those two trends are really, really good for the emergence of options markets and those coincidences of wants across the board.

• 4:01David Hoffman?

  Okay, so your primary answer, your first answer as to why options haven't come on chain yet is just a market structure one. The market structure for options is complex, it needs to be rich, it needs to be liquid, it takes time for these pieces to come together. What about technical constraints? Technically speaking, what has inhibited options from coming on chain up to this point?

• 4:23Speaker 01

  Couple things. So one, we've been doing this for five years now. We started with like an AMM architecture back in 2021 on an L2. We've been kind of at the forefront, I think, of scaling and sort of blockchain technology since that time. Now, we've kind of come to this model, which we think is the right structure, which involves, you know, like an off-chain order book and integrated RFQ for price matching and price discovery and all of these different instruments and low latency and written in Rust and very high performance. But the on-chain components, the critical pieces, self-custodial, portfolio margin, clearing and settlement is all happening in smart contracts. And now the systems are good enough to support all of that at like the level of, like the

• 5:07Speaker 01

  institutional level that is kind of expected by a lot of traders. And we're now competing with, you know, centralized exchanges just on merit alone. The tech is finally good enough on that front. And I think on the other front, it just takes time to like really build out all of the stack. It's like a very difficult problem to solve to build liquidity. And I do think, I guess, one final reason for why options haven't been that successful is again, like the most liquid venue in the market for a long time was Derive, and they've done a great job, they did a great job of building a great business, but like never really managed to, you know, switch up their user interface or really go after like a broader audience other than like the big institutional OTC desks. And I think we're now on the cusp of, you know, we are kind of liquid enough for the

• 5:50Speaker 01

  very first time to start making a push at, you know, a more broader audience for options too.

• 5:56David Hoffman?

  Is there an appetite conversation as well? I know we talked about like that we need more market participants who are interested in options to come online, obviously, but has just the appetite, the typical investor base in the crypto market, the crypto industry, just, have they just not been interested in options? Or is it really just a lack of a venue that has prevented them from having options? What can you say about the appetite of the typical crypto market participant up to like, you know, this year, for example?

• 6:25Speaker 01

  There was a step change on October 10 last year, the 1010 crash. So we had like very little interest across the board up until 1010. I think what 1010 did was showcase a couple of things. One was that like, it, obviously, the obvious point is that perps are very path-dependent, and you can do everything right and be delta neutral and manage your risk, and yet still get blown out on like a scam with to the downside. And a lot of people lost a lot of money doing that. Options, you know, you lose in other ways in options. You put a bet on, you buy an option, you, you have to get the timing, right? Otherwise, if you don't, you're going to lose your whole premium. But at least you've kind of locked into that bet. Whereas with perps, you can be very right on everything and still have like a bad print on a work and get liquidated if you're using leverage.

• 7:10Speaker 01

  And, and people found that out on 1010 and started looking for other forms of leverage. And that's when they started to think on the speculation side of things, okay, we're going to look to maybe trade options and use them for that. I think on the other side, there's this whole, like, really, you use options for three things. Speculation is clearly one of them. Hedging is one of them because you can sort of buy insurance and buy downside. And then yield generation, you can sell options on your asset and ring yield out of any asset, not just USDC, but stocks and whatever, by selling the volatility and expressing that view. I think the other thing that happened on 1010 was it was the death knell for two big sources of yield in crypto. The first was the basis trade, like it was already on the decline, and this like truly

• 7:53Speaker 01

  killed it, where the leverage in the industry got wiped and those rates got reset. And there were a lot of like hedge funds, family offices, liquid funds that had built their entire like four-year trajectory and like track record on earning, you know, 10% to 15% delta neutral. And that went up in flames on 1010. And the second was it crushed a ton of token valuations across the space. And there were a lot of teams kind of playing this game where you would sell tokens pre-TGE and get TVL into your protocol and make it look like you had traction. And you could sort of promise investors some sort of a yield in your own native token on that and hedge it out with OTC markets or some of the Pendle pre-market point stuff. Not that Pendle had anything to do with it, it was just like a function of people were using that as the venue to clear.

• 8:37Speaker 01

  And so that got wiped out too, because all the valuations got crushed. So at that point, you have this like, you know, kind of really nice beginning of like an inflection point for options where the speculators started looking into it. And also, on the yield generation side, it was kind of the only place you could earn yield in crypto, and it kind of has been sustainably really for the last year at institutional scale. And those trends have been a tailwind and a turning point in the market.

• 9:03David Hoffman?

  That's fascinating. I was not ready for the idea that 1010 was a tailwind for options. Can we go into why that's true? What about the market structure of a perpetual does an option buffer against? Like, what are its, what are an option's strengths against the perpetual? And why was 1010 so illustrative about the strength of an option and the risk of a perpetual?

• 9:31Speaker 01

  Yeah, I'll give you an example. And like, perps are great, like you can use them for lots of things, they're just not the solution to everything. And I think that's been a lot of people's opinion in crypto to date is that you have perps, why do I need anything else? I'll give you an example from a trade that went up on Derive yesterday. And it was a user buying the Ethereum March 2027 expiring, so we got about six months from time of recording. It was the, they were buying the 5,000 calls and selling the 7,000 calls. So that's a 5,000, 7,000 call spread expiring in March. He has put down $300,000 worth of premiums. If ETH goes to 7K by March, that call spread will pay out about $20 million, which is about like, you know, you could look at it as like a 66X payout on the original, you

• 10:15Speaker 01

  know, 300 grand in capital with ETH at like 2,500. Now, if you were to try and like get 66x leverage on a perp, let's use a thousand dollars as the example because it's easier to work with the 300,000, but it's the same thing scaled up. You do like a thousand dollars at 66x leverage at 10% funding. You get a $66,000 position on ETH. It does a negative 1.5% drawdown from the current spot, which we might have just seen in the last 10 minutes before recording this. You getting instantly liquidated. And that's at 66x leverage, which is like, you know, kind of reckless and big. You also have the, the double beat of the funding rate is, you know, typically around 10% for these things.

• 10:58Speaker 01

  After a year on $66,000, that's, you know, $6,600 in funding, which is six times as much margin as you're putting down. You just can't express that view in any way, shape or form using the perps. And so like, we're starting to find users beginning to express those like leverage speculative bets using options versus perps. And I think the other thing to note is on 1010, right? Like people weren't doing 66x leverage. They were doing, you know, 1.5x leverage or 1.25x leverage. And you can get those big dislocations on a given exchange where it's like a one-touch on the liquidation. It's not some T WAP. It's, it's, you can, you know, you're path dependent. And if the exchange infrastructure of the liquidity is shaky,

• 11:43Speaker 01

  you can get ADL'd even if you have, maybe you have a long on one alt and a short on another or a long Bitcoin shorty, you have, you know, correlation hedge. Doesn't matter, you're getting wiped out nonetheless. And I think that's what a lot of people found out. So obviously the example I gave was extreme. You can't really replicate that payoff with perps, but that scales into, you know, the shorter dated, lower leverage stuff too.

• 12:04David Hoffman?

  Would you say that it's accurate that a perpetual as an instrument is better for longer tail assets on shorter term timeframes? And options are better for fatter tail assets on longer term timeframes? And like, what I'm really getting out of that story is that, you know, going leveraged long on a perpetual exposes you to a number of risks beyond just the price of the asset, you know, platform risk, contagion risk. You said path dependency risk where with an option, I can have an extreme option, something very, very high out on the risk, but I won't be liquidated on my way there. I will only be liquidated at the date of expiry, which is by design.

• 12:49David Hoffman?

  And that's not true with a perpetual, a perpetual, you could be directionally correct, but still get liquidated on the way there. And so just bluntly, perpetuals are better for longer tail assets in shorter term timeframes and options are better for fatter tail assets on longer term timeframes. Would you say that that's a fair summary?

• 13:11Speaker 01

  Yeah, I mean, I would all even argue that you can still speculate better on the short term with options too. Again, they're more precise, they're still less path dependent. You can get a lot more leverage out of them. People don't quite realize that they are a little more complicated. And my, I'm not here advocating people do that. Like you need to have an opinion and I think you should just consult and see whether like, what, what is the best way to express it? And the trade off to be very explicit around options is you have to be right within the timeframe. The bull case for perps in my example is if the price of Ethereum never moves for six months, you get your money back in the perp case minus the funding.

• 13:48Speaker 01

  Whereas in options case, you're, you're losing it if it doesn't go beyond 5K. You go to 4,500 ETH and you still would expire at zero. So, you know, there are like trade offs here, but it's about like the bet that you make and, and kind of making sure that you know that you're expressing it the best way possible.

• 14:04David Hoffman?

  So options and perps are just so frequently placed head to head with each other. Like perp bulls will tell you that like options are obsolete, you know, perps are the cool new thing. Just like options are for boomers, they're for tradfi. Like we found this cool new thing called the perp and it's going to replace everything. And like directionally, both of these instruments allow you to take a small amount of capital and get an outsized amount of return if, if you are correct. And so directionally, the, the form factor is like congruous. Is it fair to say options verse perps? Is it really verse? Like how much verse is it versus it just being just, these are two different instruments that actually don't conflict with each other? Do you have an opinion on this?

• 14:48Speaker 01

  That's the thing, they're completely complimentary. And we support options and perps like cross, like portfolio margin and cross margin on derive. Like you need them both in different spots. And perps are great, as I said, great instruments. You're not going to hear me arguing against perps at any point in time, but you need options also. Because I would say perps are, yeah, like more of a blunt instrument that's simple to use. You have a leverage slider, they're good for price discovery and short dated speculation. Options are much more like a Swiss army knife. The reason we started derive in the first place was because

• 15:20Speaker 01

  you can create any payoff structure imaginable for hedging, yield generation or speculation out of a different combination of calls and puts. And so you put them into a programmable environment for capital and you, you've kind of got like, it's like the perfect form factor for, you know, like the on-chain economy, in my opinion, because they're so malleable and flexible and programmable. And that was the thesis we started with five years ago. It's the thesis we still believe today. I do think that's something perps can't replicate and I think they go hand in hand. Perps for like quick price discovery, pre-market stuff, excellent for speculation, options for, you know, like the, almost everything else, structured products, yield generation, fine tuned hedging and speculation.

• 16:02Speaker 01

  And I think the whole thing really kind of comes together and the vision for what we've been trying to build is the infinite payoff factory. You can really build any trade on any asset 24/7 in a programmable way. And that's what we've been setting up for this whole time and finally starting getting close to, to realizing that vision, I think.

• 16:20David Hoffman?

  How do you like this comparison? In crypto, the AMM really beat out the order book on-chain as like the, in the first, and maybe even to this day, the iteration of just like liquidity and DEXs. Like the AMM really found resonance with like the nature of a blockchain. It was really good for long tail liquidity. It was really good for centralizing liquidity in one single place. Whereas like the on-chain order book is just, there's more moving parts. It's harder to bootstrap liquidity. You need some more sophisticated actors to do market making. But me as like a retail, less sophisticated, you know, trader, I'm not doing order book management. I'm buying and selling into the liquidity.

• 17:02David Hoffman?

  And that kind of seems to be like, an order book seems to be more like an options platform, whereas the perpetual seems to be more like the AMM, where it's so much more passive and simple and accessible. And maybe that's why it just kind of got bootstrapped in the crypto context first. How, how do you, how do you like this comparison where like order books are more like options and AMMs are more like perpetuals?

• 17:27Speaker 01

  I don't hate that at first pass, actually. I kind of like it. I would say it's definitely true that, you know, perps are one, it's great to unify liquidity. It's one instrument per asset. It is certainly easier to market make. And that's why it's easier to spin out like new perp DEXs in theory and get liquid. And they, they both have their roles to play. I do think if I had to sort of draw the distinction, I do think AMMs, as someone who was building early AMM technology and, you know, we did, we did okay with it. They do have a fundamental limit on like how good they can get in terms of,

• 18:06Speaker 01

  you know, competitiveness in the market in the long run. And I do think that differs from perps and the perps are just going to be really, really big. I am very bullish on perps in the long run. And I don't think it's, it's, it's going to be a, you know, it's going, as I said, it's going to be both. Whereas I think, I don't really know the latest on the AMMs, but my, my gut feeling is with the Uniswap before, they do kind of function behind the scenes in terms of like how participants engage with them, like how they would similar to an order book. It has to be really actively managed if you want to make money over the long run. Having said that, Uniswap, again, for the longest of tail assets where no market makers are going to touch at the beginning, it's still great for spinning up, you know, new pools, new assets, new liquidity, which I love.

• 18:49David Hoffman?

  I've been trading crypto for almost a decade and I've used so many different wallets, exchanges, aggregators, different front ends over the years. And I'm always kind of looking for the same thing, just one interface with deep liquidity across a bunch of chains and assets where I can access all the markets like perps, earn yield, trade confidentially and still control all my own funds. And I've never really found this experience and I'm always switching wallets, juggling gas fees and just getting eaten by slippage. Near.com is not that. It feels fundamentally different to me. I can do everything I want from any chain and I keep all my activity confidential. I can even earn yield confidentially. It's the way crypto should work. The near.com wallet is powered by Near and it's moved over $25 billion cross-chain

• 19:32David Hoffman?

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• 21:37David Hoffman?

  This was a super educational section. It's from me. I really, really enjoyed this. I want to move on to just the sector, the options sector in crypto. Can you just paint some numbers as to how big options are in crypto? And then is it possible also just to talk about how big options are generally speaking? So we can kind of like anchor the size of the crypto industry options market versus what we hope it to be. If we were to extrapolate like TradFi's options market.

• 22:06Speaker 01

  Yeah, I think relative to perps were in terms of the crypto market. My stats could be slightly off on this, but I think order of magnitude, it's probably correct. We're like 3% or 4% of the perp market and in TradFi, they're about the same, if not options being slightly bigger. So that's like, you know, a 30 or 40 X to go to sort of equalize to where we are. In TradFi, I mean, the absolute numbers are staggering in terms of like the amount that options desks are making on the market maker's side. How much volume is going through them? There really was an inflection point. I was on a desk at Susquehanna in 2019, 2020, 2021. It's kind of at the beginning of that inflection point around, you know, zero commission trading with Robinhood, leading to some

• 22:50Speaker 01

  early meme-like activity on cannabis stocks through to the pandemic. And then finally, like the GameStop stuff in 2020, 2021. And that's really when we saw that inflection point and the numbers just have continued to grow since then globally. It is a enormous market, both from a retail perspective as well as like an institutional hedging perspective. A lot of that activity doesn't even show up on the exchange. A lot of that is in OTC bilateral type deals as well. I think the market split is like, you know, 50/50 even. So like there's double the actual amount of reported volume. In terms of like actual raw stats, like it's, it's really hard to come up with. It's in the quadrillions of notional volume.

• 23:32Speaker 01

  You have deaths from single market makers turning out like, you know, three or $4 billion of profit in a quarter. You're hearing like the sort of Jane Streets of the world now. It's just gargantuan numbers and it is because of, you know, this broader trend in markets where there are so many people with, you know, money and opinions on the markets and, you know, the sort of finance and the value of the stock market has just gone up so much. And all of these trading tools are getting democratized and, you know, costs to entry are coming down. And, you know, at some point in the next 10 to 15 years as well, you're going to have this big wealth transfer from the boomers over to the younger generations.

• 24:11Speaker 01

  And yeah, I think trading will continue to just have this, this, this big tailwind behind it in general.

• 24:18David Hoffman?

  As we know in crypto, the exchange is the first business of crypto, the first business after like producing hard assets. So like after we, you know, built blockchains, rebuilt, you know, Bitcoin, we built Ether, we built the monies. The next big product in crypto is the exchange and it's the most lucrative business model in crypto. And then the perpetual, again, exchanges love perps because of how lucrative perps are. Like you just take a spot exchange, you ratchet it up by 3X, 5X, 10X, and that's the amount of fees that you get. And so super lucrative industry here, like the exchange is just like such a cash cow. How lucrative are options as a product? And like, what is that actual like fee structure or take rate look like?

• 25:03David Hoffman?

  Can you kind of paint a picture of the economics of options as a, as an exchange?

• 25:09Speaker 01

  Yeah, as an exchange, I mean, we do have, I think, the lowest fees of like any liquid marketplace in general. It's like a, you know, basis point structure, like on the notional. I think our headline rate's around three basis points for takers, lower for makers as well. On the notional value, it's capped because some options are, you know, very like tail or wingy. So they cost a lot of like, not very much money to get a lot of notional exposure, like the out of the money, deep out of the money stuff. And those are capped at like a, you know, percentage of the premiums. We're confident we have the lowest fees, but the business model in general, because they are more specialized, because it's harder to build liquidity for, there are stronger network effects around options exchanges.

• 25:52Speaker 01

  Even more so than perps because of how slow moving the anchor, you know, participants are, the big institutional traders who are building the market. It's why Deribit had such a, you know, stranglehold on the market despite well-funded attempts from, you know, Binance to sort of muscle in in 2020, 21. And they had more liquid perps, Binance did, but it doesn't matter. It's about like that options liquidity network effect. So yeah, there's a lot of, I would say, pricing power. At the same time, we are running, you know, derived to try and encourage people to come and build on top of us. And the new version that we have out in a month is going to make it exceptionally easy to do that. We want people to come in and build, you know, retail interfaces on top of us, like structured products using the options, hedging products using the options.

• 26:35Speaker 01

  And, you know, for the economics for those sort of integrators can be even better because you can sell people, you know, not just options, but you can sell them like a payoff structure, like, hey, you put your Bitcoin in our structured product and you earn 10% on your Bitcoin and it gets converted into cash if Bitcoin goes above, you know, $90,000. That's a covered call. Anything in the English language, they can charge a, you know, kind of like a commission on, on that yield. Or, you know, they can mark it up how they want if they're a retail facing app too. And, you know, retail, it's, you know, for options and what Robinhood was making on their options is part of their payment for order flow. It was zero commission, but they were making buckets on, on the actual order flow that they were selling to. So a lot of big businesses have been built around this flow.

• 27:20Speaker 01

  I think it will only continue and we want other teams to come in and try and monetize that themselves.

• 27:26David Hoffman?

  Talk to me about just like the market structure of options in crypto as it stands. You talked about Deribit kind of owning the golden goose of options. And, you know, this, this analogy can apply to like spot exchanges too, right? Binance holds the golden goose. It holds the most liquidity. It can monetize the strongest. Coinbase also very dominant in the US market. What's it look like currently today in the options world? Deribit, I think, is still number one in terms of volume. Who are the players? Who's dominant? And then also what's your strategy at derive for penetrating into this market? How do you wrestle the golden goose out of the hands of Deribit?

• 28:05Speaker 01

  Yeah. So Deribit, I think, is still like 70, 75% of the market. They have some well-funded attempts to disrupt them from like the bullishers of the world, maybe Bybit as well, growing an OKX, doing some market share. But they're not making like huge headwinds in and we are now too finally. So we went from doing almost nothing, like 0.1, 0.15% like a year, year and a half ago. But we managed to like, the product finally got good enough. We, you know, improved our liquidity by orders of magnitude. And I think the big wedge that we had, we think we're like the fastest moving, most innovative options exchange. And so we listed hyper liquid options in November last year when hype was like $20 or a lot lower than it was. And suddenly, you know, we were the only venue for hype and hype went on this, this huge run.

• 28:51Speaker 01

  And we started getting interest from, you know, big takers who were doing, dealing with like OTC desks directly. Because Deribit hadn't listed hype options. And over time, we started to get more and more takers for our hype options. And we became the most liquid venue globally for it and started to win market share from the OTC desks. And now Deribit, you know, took, they only launched it like two, two months ago or something. And we're still the dominant majority of hype volume. And we created that network effect around that market. And that's, you know, kind of the playbook. We're going to be running back for every new asset, both on the crypto front. Where, you know, we have the most alt markets. I think we're biggest on Solana now too. We're competitive in Bitcoin and ETH shows now.

• 29:34Speaker 01

  And then also for RWAs, commodities, anything that becomes popular in crypto, which has that sort of like profile I described before, with like a sophisticated holder base, a long-term view and a big market cap, like we're going to list and we will be able to outcompete and go faster than both Deribit, but also faster than, you know, the, provide a better experience than a lot of the OTC desks and the bilateral deals that a lot of the big takers are using currently because they don't have an option to go anywhere else.

• 30:01David Hoffman?

  What can you do with on-chain options that you can't with like trad options? And, you know, it's worthwhile to know that, you know, Deribit is a crypto options platform, but it's, it's like centralized, it's trad in the sense that it's a centralized database with, you know, centralized infrastructure. That's not what derive is. You guys are on-chain. Is there, what advantage or what option, what can be unlocked with on-chain options that you can't with like a centralized or trad options platform?

• 30:30Speaker 01

  Yeah, there's a couple of things. I mean, one is the obvious point that like some people really value and particularly in crypto, but less so over time, which is it is self-custodial. You can verify the state of this, the risk engine and the margin in real time. And that has been a problem for some other exchanges all the way up to regulated traditional ones. Like this is still a problem that people don't quite realize because there hasn't been a blow up since 2011, I think. But these, you know, even regulated commodities exchanges can go under because of like capital mismanagement. And we have all of our, you know, the state of the system is verifiable and transparent. And it's, you know, the, the credit risk is kind of, you can view it entirely by how, and all the rules are written in smart contracts with, you know, the margin and the liquidations and the settlement.

• 31:15Speaker 01

  I think like that is a, a major win for some people and particularly relative to some of these OTC desks that we're in competition with for some of the big chunky order flow via RFQ. When you're doing a deal with an OTC desk, you're kind of taking credit or like underwriting that desk solvency. And, you know, crypto has a long history of those desks blowing up at exactly the time you need them to function. With respect to like just raw like user experience stuff, I think the thing that we get out of the box, and particularly with the new version in V3, you can integrate and build a product on top of derive an hour of work. Even structured product or vaults, like quantitative investment strategies, like vaults,

• 31:57Speaker 01

  asset management vaults with like, you know, really like transparent execution, clear track records, you're going to be able to spin up and deploy those with three clicks on derive, like copy trading vaults, things that are just not possible to do in a transparent or verifiable way anywhere else. But also like just the ease of integration, you don't have to deal with like five different service providers and on ramps and off ramps. Like if it's just tokenized, we can interact with it, list it as collateral and, you know, start to build structured products. You know, other people can start to build structured products and user interfaces. And they know that they can do that on top of us because we are, you know, they can see the open source code, they can see how the exchange is built and the collateral in the

• 32:41Speaker 01

  system and the solvency, and they don't have to, you know, hack through five or six different service providers, onboarding off ramps, on ramps, just to be rugged by like a terms of use update from Terabyte or another, you know, third party provider. We found people who are building those sorts of products on us who couldn't do it on a centralized venue. And I think that that advantage is only going to sort of continue as more high quality assets come online and are tokenized, we can onboard and interact with them very, very quickly.

• 33:09David Hoffman?

  Technically speaking, how is derive actually built? So like if we pop the hood open and we look into the engine, the engine compartment of derive, what do we actually see? What are the components that go into building derive?

• 33:21Speaker 01

  At a high level, as I said before, we have like an order book and an RFQ product, both of them live, written in Rust, off chain. And then once a price gets matched between parties, so someone wants to buy some auctions or some perps or whatever it is, it gets sent through to the protocol for margin clearing settlement. So all of the rules for margin, we have both portfolio margin, which looks at your entire, like all of the assets that you have in your account. So maybe some Bitcoin, spot, some USDC, like a few calls, maybe like a short perp position. You look at all of that and it runs it through 27 different risk scenarios, like what happens if spot goes up 20% and volatility goes up 100%? Like what is the maximum loss of this portfolio?

• 34:06Speaker 01

  And it takes the worst case scenario, and that is your margin out of those, those margin, you know, like that's what you have to post. So that's really, really capital efficient. It's very common in the industry, but not so common in terms of on-chain protocols. And so that's the portfolio margin. Then we have standard like isolated margin, which a lot of users and traders are familiar with, where it's just like, you know, one position, you have your margin, it's like what most perfect exchanges use. And so you have to make sure you're above your, you know, you post initial margin, you have to stay above your maintenance. And the positions don't offset, you don't get any cross margin or cross collateral. So all of that is written in smart contracts, those rules, like what the margin is.

• 34:47Speaker 01

  And when a user goes below their margin requirements, there is an on-chain liquidation, which is open for anyone to participate in. What it does is it starts, kicks off like a Dutch auction, which offers your portfolio of assets, or maybe it's like a hundred thousand dollars worth of assets at a discount to the value. So it'll be auctioned off, you can buy it for like $95,000 in cash. And then that, that decays out to, you know, like 80% really quickly, and then it goes down to 100%, at which point like the on-chain insurance fund, which is funded by fees from trading fees in the protocol, starts to pay out users to take on the bad debt. And then if that gets blown through, I'm just going through the whole waterfall now,

• 35:31Speaker 01

  you get to like, like ADL rules, which again are transparent and written upfront. So like, that is the sort of core of the system. It's been in production now, this version for almost three years. We've seen some pretty crazy market conditions with it. And yet like, you know, we're, we're always very kind of monitoring the risk parameters and the, you know, the system itself, but it's worked very well in practice.

• 35:52David Hoffman?

  You guys over at driver are very close to delivering V3, version three of derive on chain. What does V3 bring? What is in V3?

• 36:00Speaker 01

  Yeah, I think it, it takes us from like what we are now, which is at the moment, we're like a L2, there's a lot of custom work and difficulty integrating and building on top of derive. We're in a bit of a straitjacket, it takes a while to list new collaterals and new markets. We go from all of that until like, almost like a Ferrari, like we think this is going to be the most integratable exchange and protocol and composable protocol in existence. And I think there's a huge opportunity to grow in parallel with our builders and people building on top of derive. Like the margin system is getting a huge upgrade, allowing for like just more complex portfolios, like more high performance in terms of the margin, like industry leading,

• 36:42Speaker 01

  in my opinion, as well as like multi-asset borrow land, a lot of like technical details around the options exchange, which might be like two in the weeds to really get into here. But the, the sort of takeaway from it is that we become, I think, extraordinarily fast, so fast and high performance that we can continue to like really start to innovate on the product front, both ourselves and as well as our builders. They're going to have access to like the most complete payoff factory in crypto. You can take and draw on all of these new markets that we're going to be listing on the RWA front, as well as the existing crypto markets, route users through, you know, the RFQ or the order book and start to stand up like these sort of structured products,

• 37:25Speaker 01

  quantitative investment strategies, which are, you know, massive markets and traditional finance, as well as start to build like more retail friendly applications on top of derive. And that is going to be something that like a lot of other exchanges in crypto are kind of shooting towards over like a one to two year time horizon. But we've been built natively for it from day one. And so, yeah, I think we're in a really, really interesting spot to handle the next wave of growth, as well as to deal with, you know, kind of like an agent first API and, you know, integration experience too, which again, we can get into, but it's a whole other can of worms that I don't want to open up just yet.

• 38:02David Hoffman?

  Yeah, I don't, I don't know if I'm ready as an interviewer to start saying the words options and agents in the same sentence, so maybe we'll save that for 2027. Nick, let's say options, you know, grow, evolve, expand as we expect them to, to kind of meet parity with like the TradFi world. So like, again, as we've stated, options are very loved, used, popular financial instrument. They're like lagging in crypto just because they're complicated and sophisticated, but nonetheless they are, they are coming. And in the future, hopefully in the short-term future, let's just say that they, they grow into what you expect them to grow into. How does that change the market structure in crypto?

• 38:44David Hoffman?

  Like what would be different in this world when options like 10x, 100x, just like, how would that impact the rest of the industry?

• 38:53Speaker 01

  Well, the first thing is when our options markets become liquid, volatility actually generally comes down because you get a lot of these option sellers who, you know, stuff dealers with like, you know, kind of vol and gamma, and then they have to hedge that themselves. So you, you start to see things in markets develop more in a more mature way over time. And I do think that that will happen, like at the moment, there are still lots of assets where you could, you know, and like a lot of the OTC desks are doing this, or like you know, OTC takers are doing this, they're selling volatility into the OTC desks and earning yield. And as that becomes more productized, you start to get like, you know, a dampening effect across the industry.

• 39:34Speaker 01

  I do think like options will become a mandatory offering for a lot of the exchanges, they're going to have to figure out a way to support it. And for a lot of them, it's going to be very difficult to build themselves. It's really hard to retrofit a perp risk engine to add options. And I think a lot of teams are finding this out at the moment. You kind of have to start from day one with the options, cross margin with the perps for a variety of technical reasons. So I, I would expect to see a lot of white labeling, a lot of integrations. Obviously that's our thesis, we stand to benefit from that, that's kind of what we want to play into, but.

• 40:04David Hoffman?

  You guys are doing the DeFi thesis, you guys are trying to do DeFi Mola?

• 40:09Speaker 01

  Exactly. And we think options are kind of perfect for that. I think we're going to see a lot of options as a back, back ended into both like just a trading experience, but also, you know, you can imagine options, our options integrated into like a neo-bank offering where again, it's like you can earn 8% annually backtested with this options covered call, spread selling strategy with a maximum defined drawdown of like 1% in a given week or a given month. And like these sorts of offerings are at the moment limited to like the highest sort of private wealth, high net worth kind of individuals and their massive markets behind the scenes. We think democratizing them, bringing them out in the open, making them transparent, reducing the fees, making all of that more competitive is going to be a huge market

• 40:52Speaker 01

  that serves users, particularly to things like tokenized stocks, which you can't really do much for them at the moment. Like you can lend, you can borrow against them, that's useful, but you can't really earn yields, there's not too much to do, you know, like new or different, unless you're kind of accessing them internationally for the first time. We think options are the perfect building, you know, playground for, for those sorts of use cases too. So I would expect to see options, DeFi mulleted, structured products to really come up, and then a variety of new, you know, strategy, vault curators, integrators, starting to incorporate them. And also, you know, it can enable some more fun use cases, which we haven't seen in a long time. So like crypto native stablecoins that are over collateralized in Bitcoin and ETH, you

• 41:35Speaker 01

  can have hedges embedded via the options to protect against massive downsides and big wicks that could potentially blow up lending, you know, lending protocols. We want to be integrated with them and, and start to become like, kind of the risk absorption engine for a lot of those different hedging flows. You can really capture that with, with options.

• 41:53David Hoffman?

  With the success of options, it's like, and all of the volume that options bring, doesn't that also mean that number must go up? In the sense that if there's a very rich options market, you know, BTC has all of these dated option, you know, three months out, six months out, two years out, you know, so does ETH, so does like all of the assets. Doesn't that mean that like more market makers, more market participants need to get their hands on the assets in the first place in order to create that volume? And so if like volume 100x's, wouldn't that imply that all of these assets that have volume and liquidity in the options world have gone up in price because people needed to buy the asset in the first place to create that volume?

• 42:38David Hoffman?

  Like is, is large volume associated with number go up?

• 42:43Speaker 01

  It can be, it's not necessarily, so not when the markets get created, but we saw, I mean, I saw that, you know, when I was at SIG, Arkagos, if you remember them, they blew up, the guy was like buying.

• 42:57Speaker 01

  Just insane amounts of like the big tech stocks at the time. He was single-handedly moving the NASDAQ with his options trades and it was forcing all of the market. He's buying calls, call spreads, out of the money calls, both on single names like Microsoft and Google, as well as CRM and some of the more SaaS kind of stocks. And then also buying NASDAQ options and it was pushing the whole index up because dealers had to scramble. And like this is like the gamma squeeze kind of concept that a lot of people are familiar with through GameStop and whatnot. But this was happening at the level of the entire US stock market. And it is, you know, you can really have a big outsized impact if you have size going into these options. And the markets do do that, but at the end of the day, markets are weighing machines, right? So like what goes up must come back down.

• 43:41Speaker 01

  If someone's putting that impact in and you know, the fundamentals on coming up with it, it does kind of go down. But it does reduce, you know, spreads, trading, execution quality, reduces volatility in the market over time. And that makes everything tighter as well. So it generally improves liquidity across the board and makes it more investable for some people. And they can put these hedges on. So in that sense, yes, but like I think the overall impact is, you know, a little more muted than that.

• 44:08David Hoffman?

  Okay, okay. But nonetheless, a rich, healthy options market does create a healthier market structure, which makes the market itself more palatable, more accessible, more interesting to a wider set of market participants. And that's bullish.

• 44:26Speaker 01

  Absolutely, yeah.

• 44:29David Hoffman?

  Cool. All right, options are bullish. Nick, Nick, thanks for coming on the show. What should listeners know about derive in the short term? You got, like I said, we have V3 coming. What if they want to learn more about derive? Or if there's anywhere you want to point them to, where should they go?

• 44:44Speaker 01

  Yeah, Twitter is at derive XYZ and then derive.xyz is the site. And you can pretty much find everything about what we're doing. That, you know, we publish everything and we do some analysis and market updates and things like that too. So hopefully that's helpful and useful for some of your listeners.

• 45:03David Hoffman?

  Cool, Nick, we'll get all of those stuff, all that stuff in the show notes. Thanks for coming on the show today.

• 45:07Speaker 01

  Thanks for having me on, this is great.

• 45:08David Hoffman?

  Bankless Nation, y'all know the deal. Crypto is risky, but not risky enough. The institutions have landed, so we are going even further west. This is the frontier. It's not for everyone, but we are glad you were with us on the bankless journey. Thanks a lot.