Key takeaways

• 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

• All capital markets are likely to transition on-chain, merging traditional and crypto markets.
• “It seems very likely that all capital markets are coming on chain.” – Vladimir Novakovski
• Institutional players are increasingly recognizing the value of blockchain technologies.
• “The point is like it’s all like things like on chain hedge funds right or like tokenized stocks.” – Vladimir Novakovski
• The convergence of traditional finance and blockchain is predicted.
• Understanding the integration of blockchain in capital markets is crucial.
• Institutional acceptance of blockchain indicates a shift in the industry.
• The future of capital markets is set to be on-chain.