The Current State of Institutional Adoption

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1:36What's up, guys? It's Ash Bennington. Welcome to Real Vision Crypto Daily Briefing. Today, joining me is Sean Douglas, CEO of Amber Data. Sean, welcome. Hi, thank you, Ash. Great to be here. Well, it's a pleasure to have you, Sean. Tell us a little bit about your shop and what you do. Absolutely, absolutely. So Amber Data, we're the leading provider of digital access data, really focused on delivering comprehensive data and insights into blockchain networks, crypto markets, decentralized finance or DeFi, and are really focused on enabling financial institutions with their data for research, trading, risk, analytics, reporting, compliance.

2:17We enable them to build data-powered applications and act and seize opportunity in the growing crypto space. I was just telling some of the folks at Real Vision how much I enjoy having conversations with folks who provide data because you guys get a comprehensive view of what's happening in the space and you're able to see things that others are not. So with that said, Sean, where are we right now? Big picture. What's going on? Obviously, lots going on right now in the DeFi space with Curve Finance Hack. But big picture, where are we in terms of the data you see? Yeah. So, I mean, there's obviously some global macro headwinds going on today.

2:54Specifically, I don't know what's going on in the market, but it seems like there's a lot of activity. We really focused on helping institutions kind of understand what's going on on chain, what's going on in markets, quantify the opportunities and the risk, and where institutions are looking at today are there's a lot of activity offshore still focused heavily on DeFi and then you know we also see a tremendous amount of institutional participation arbitrage whether that be across centralized exchanges and decentralized exchanges or across derivatives and spot, you name it. I would say 50 plus percent of the institutional activity is really focused around eking out arbitrage opportunities.

3:43So what are the major themes that you're seeing in these markets? I think there's some major shifts going on. I think that we still continue to see a lot of institutional interest in the kind of forward curve. If you fast forward a few years from where we're at today, what's happening with DeFi, we're seeing a lot of movement into derivatives and specifically in options. And if you look at, for example, CME, which is not what you would really consider crypto, but they have, since FTX has gone away, the amount of trading activity that we're seeing in CME options has 3x over last year, where spot trading is down roughly 50 % last year.

4:30year over year in the spot markets. So really, just like you see in traditional financial markets where derivatives rule the world, we're seeing that movement to derivatives much more so. I mean, that's quite interesting with the decline in spot trading to see a 3x increase in derivatives trading on CME alone. Yeah. What does that suggest? Go ahead. Yeah, so what that suggests, I think, we're seeing a couple things. One is, you know, CME has been a venue for trading, you know, futures and derivatives and for U.S. firms that may not be able to participate in offshore venues or are a traditional financial players and they're entering the digital asset space and they simply want price exposure.

5:24This gives them a lot more surgical control over their price exposure, over the exposure to and the ability to take on risk. So, you know, we're seeing a lot of that. We're also seeing a lot of interest in, you know, moving offshore. So for we've seen a lot of movement into Hong Kong. A lot of U.S. firms have moved to the U.K., specifically into London. We're seeing a lot of movement into Dubai and Abu Dhabi. I think the U.S. is unfortunate, but we're having both an intellectual capital bleed as well as some funds taking activities offshore. Right. Let's talk a little bit about who your clients are, not in the sense of individual names, but what types of organizations do they represent?

6:14What type of data are they looking for and how do they use it? Yeah, certainly. So we really, if you think about the whole value chain for financial services, you know, front office, mid office, back office, we really span the entire spectrum and people, you know, build data powered applications, whether that be front office, trading, portfolio management, research, middle office, treasury, risk, and, you know, back office, fund administration, tax, compliance, and lately, a lot of auditors and regulators as well. So we really span that entire spectrum. And what we've seen is in the last, you know, going into the year before FTX, we saw a lot of the TradFi firms leaning in, trying to understand what is their crypto strategy, what is their digital asset strategy.

7:06Now, you know, fast forward past the implosion of FTX and all of the other fallout from the centralized lending platforms, et cetera. We're actually seeing institutions leaning back in. And a lot of those are tracked by players like centralized exchanges. We're seeing CME, CBOE, NASDAQ, all having developed significant crypto strategies, whether they've stepped, you know, some of them have stepped away from the custody business. But I think that there's clear interest in moving into digital assets. And what type of data are they consuming and how are they using it? You know, so it really depends on which part of the value chain you're speaking to.

7:51For TradFi firms, for example, that are looking to enter this space, first they need to understand what are the opportunities, what are the relationships, how do I quantify those. And the beautiful thing about crypto and digital assets is it's radically transparent. So you have the ability to introspect and understand what are the mechanisms that drive these protocols. what are the incentives and then quantify those incentives in that participation and build models and understand what's the relationship between on-chain data and global liquidity and market depth and price movements and relationships.

8:26And from the front office perspective, people are really looking to research, identify those relationships, build those models, backtest those strategies. And then obviously, once they put those in action, then you start to have the portfolio management teams come in and the risk teams comes in. And how do we account for this now that we're operating in this space? Okay, walk us through what some of those data sets are that these folks are interested in and how they implement and use them specifically in order to help their strategies. Certainly. So let's pick a TradFi firm that maybe can't operate in the spot market or maybe not even in DeFi, but they're still interested in getting exposure to, say, Bitcoin or ETH or DeFi.

9:15First thing they need to understand is maybe they're going to participate in the market by a future or through one of, you know, all of the big banks now have non-deliverable forward futures contracts. So you can trade through CME, you can trade through Goldman, you can trade through several of the other big banks. So they may want to understand, okay, well, based upon the position size that I want to operate in, what is the global liquidity and market depth at any point in time for any period of the day? And what could be the potential price impact that could cause a market to move? And what are the constraints around that?

9:57Two, there's a lot of analysis that they go into and understand what is open interest, front month, back month, far month, futures, options. Is there, what are the bets that people are placing in the markets? And then understanding the underlying, what is the forward yield curve of those underlying, of those, you know, if you're looking at Bitcoin futures options, for example, front month, back month, far month. You know, what does that yield curve look like? And then they look at, okay, if I'm going to participate in these assets, what's the global context? What's the local context? And then how do I position my strategy to, you know, harvest yield, ARB, you know, build a structured product using, you know, maybe potentially options and futures to be able to package that and sell that to my customers, et cetera.

10:51Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

10:59Yeah, that's really, really interesting stuff that you're talking about there. I mean, the first part I heard you saying, essentially, one of the challenges in this space has always been market depth liquidity, the degree to which trading at scale is going to have a price impact and therefore move against you. So being able to understand the depth and liquidity on the opposite side of those trades, where the market's at, absolutely critical. It's something that you generally don't think of as a retail investor, particularly not if you're buying or selling 100 shares of Facebook. You pretty much know the price is going to be the same.

11:30This is not the case, particularly with lower market capitalization digital assets where you might see this. The second point, when you're talking about the structure of the futures curve, really interesting. We know that, for example, the basis trade in Bitcoin and Ethereum has been incredibly popular. some way for folks to generate yield on the other side of the trade for people to find ways of putting on essentially straddle positions and all types of other strategies to generate yield or to lock in, or I should say, hedge against downside loss. Talk a little bit about some of those strategies, particularly for our retail investors, retail users of these products who may be hearing about this for the very first time.

12:09I mean, we really focused on institutional users more so than retail. But at the end of the market, you need all participants, right? Well, I just want folks to understand who are listening to this conversation what institutional users are doing. Because if you're a retail user, you may not know about these types of strategies that are being put on by institutional traders. And I just want to get that explanation out to them. Yeah, sure, certainly. So, I mean, we don't have to talk about crypto in this particular instance because I think it's easier to explain it in something like crude oil, right?

12:42So, you know, the August contract versus the September contract versus the October contract for a futures contract, meaning that you will receive a physical underlining at some point in the future, has cost of storage, has the implied interest rate in that, and various other attributes of the underlying futures contract. And those usually trade at a premium as you go back further in time because the cost of capital. Bitcoin or Ethereum or what have you also trade with a premium built in. And some of that has to do with, you know, the volatility asset. Some of that has to do with the cost of lend and borrow, which in those assets and what institutional investors are looking at.

13:33Can I take the spread between those and effectively calendarize that risk? Buy one, sell another. They should settle together. and at one point when the contracts convert from one month to back month, and then they are looking to harvest that yield. And that is the strategy that, as you call it, institutions have been doing for six or seven years in digital assets at least. And talk a little bit about the role that the data provides for those institutions who are putting on these trades. How do they use your data? Yeah, certainly. So, you know, first you have to be able to look at the data in real time and then understand historically how have those relationships held?

14:18Did the market go into backwardation or into contango? And, you know, did the yield, did the, the, the. For folks who may not know, this is the, this is the, what the curve looks like going forward. The relationship of future price to spot price and price along the curve going forward. Right. Right. So understanding those shifts between contango and backwardation historically, and then what may be those underlying drivers, for example, funding rates on crypto exchanges that trade a effectually perpetual futures contract that doesn't expire. Those are influenced by the supply and the demand of what the exchanges are charging for their funding rates.

15:04So basically, you need to be able to quantify the relationships across the curve and then backtest whether that holds true through time the majority of the time and then position size appropriately when they put those trades on. Right. Let's talk a little bit about regulation. Obviously, this is something that is very much in the news. What's your take from where you guys sit? What are you seeing and how are you thinking about it? So the regulatory landscape, it's actually more clear and more cloudy than it's ever been. I know that sounds completely like just opposed. However, if you look in the rest of the world, MICA in the EU, UK has come out with clear regulations.

15:49VARA in Dubai, Abu Dhabi has got clear regulations right now. Hong Kong is open for business. outside of the United States, it's very crystal clear. I would say I would say crystal clear. It's directionally a heck of a lot clearer than it's ever been. And I think that those governments are seizing the opportunity and inviting people to come in and embrace the clarity and regulation and do business there. The United States with the SEC, I don't have a crystal ball. I hope that there's regulatory clarity sometime soon in the SEC, specifically Gensler is maybe is less politically motivated and has more clarity.

16:43I think that it's really not good for the United States as a country and as a financial market to have this be so politicized, if you will, where there's such clarity in the rest of the world. It's just pushing business, trading, and innovation offshore. To what extent do you see that happening and how is it reflected in your data? Meaning, can you see this shift actually happening in the data for U.S. players moving offshore? So we see a lot from, you know, we have multiple customers that are market makers and some have picked up operations and literally moved offshore. and they're moving some into the Bahamas and in that region, some into the UK.

17:38But we see a clear trend where some of those players that have been liquidity providers in spot markets and in derivatives and offshore exchanges have just said, hey, until this is sorted out, I'm moving. I just opposed to that. We're seeing, you know, some of the big exchanges in traditional securities leaning in. And, you know, you have CBOE Digital now is is has leaned in pretty aggressively over there. You have Kathy Clay. She's leading that. I think they're aggressive. They're making their they're they're doing the right thing. I think Nasdaq has things in play. you have many of the TradFi players are going, hey, we know how to work in a regulated environment and play by the rules that we know and they're being more measured.

18:27But I don't think it's entirely a bad thing. Let's talk a little bit about traditional players, their role in the space and what you're seeing from the perspective of the data in terms of their interest in the traditional finance space and the exchange space, NASDAQ, CBOE and others in terms of their interest in digital assets? Yeah, so I think if you look, there's been four or five ETFs that have been put back up with BlackRock leading the charge on that and that I think that are all being considered by the SEC. And part of what there's concern about and interest in that we provide data to some of the people that are putting forward these ETF proposals is understanding what is the behavior and is there orderly price discovery within the order books and in the price discovery process.

19:33So there's also quite a bit of interest in assessing just the amount, kind of where is the trading volume happening globally? Then how do you actually define what is the price of Bitcoin? Because Bitcoin is trading on several hundred exchanges around the world, around the clock, but the price is actually local to each of those venues. So for example, maybe there's a large liquidation liquidation of futures contracts on on Deribit. Well, if it's two o 'clock in the morning and the the liquidity in the order book on one of the U.S. exchanges isn't super deep, you can have a large price impact due to a a a liquidation event that happened on a futures trading venue, maybe offshore and be based upon the liquidity on each of those respective exchanges, you can have price impact.

20:36So So what is the price of Bitcoin at any particular time? You need to be able to understand and develop a reference rate so you can actually strike end of day NAB calculations, pay your taxes, do accounting, settle derivatives, etc. So there's also a lot of interest in understanding what is the reference price in the primary markets. Hey, everyone, we're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

21:09Let me ask you this. How far away are we in terms of the feature set and also in terms of time to get to parity? Are we right now between digital markets and traditional capital markets? Obviously, when folks from NASDAQ and CBOE and others are coming online, they have a reference, which is the way that equities trade, the way that derivatives trade and other products. How far away are we from making that transition look similar? So ironically, digital assets is more transparent in many regards, especially for on-chain. When you start to look at, say, decentralized exchanges, we can tell you what is the total liquidity available in any pool in Uniswap V2 or V3.

21:55Who are the top liquidity providers? What is their impermanent loss? How did they earn their fees? what's the impact of a trade that's in the pending pool that has yet to be confirmed on chain. You can't do that in Trap5, period, full stop. You have to figure out in the rearview mirror what happened. But the flip side is that the liquidity is much lower. Oh, absolutely. The liquidity in a particular pool, in a particular asset, in a decentralized exchange or a decentralized lending protocol at any point in time can be insignificant. However, in some, the actual trading activity indexes now has surpassed some of the largest centralized exchanges, which is an interesting model and definitely has the attention of a lot of the TradFi players as well.

22:51Where are you seeing that? In other words, what exchanges, what digital assets, what does the profile look like where you're seeing the DEXs surpass liquidity on the centralized exchanges? Yeah, so if you look at the Uniswap B2 and B3 combined trading volume, it exceeds some of the largest exchanges. And for those assets in those pools, it's the same assets that you would trade on a Coinbase or a Kraken or on a Binance or what have you. A lot of that liquidity is in stablecoins. Pretty much all of DeFi is denominated in stablecoins almost categorically. So stablecoins being billions of dollars in market capitalization.

23:38And many of the decentralized exchanges or the lending protocols use stablecoins as the base pairs for the assets that are in a trade. Because how they work is, you know, unlike a, you go to Coinbase where you have a central limit order book, you have bids and you have asks at various price levels up the ladder. with a decentralized exchange or a lending protocol, you'll have a pool. And then people put pairs of these assets in these pools. And it's an algorithm that actually matches buyers and sellers. And depending on the size, you can have price impact, et cetera. So the, but it's definitely, you know, the, the, the big protocols out there is still Uniswap B2, Uniswap B3, the curve balancer, et cetera.

24:26Then from a lending protocol, it's really Aave, Maker, Compound, a few of the others up there. I talked about the curve exploit at the top of the show. What are you seeing there? Yeah. Yeah, it's unfortunate that there's been additional exploits in DeFi. We can see all the activity. We can see the flows. We can, you know, there's a lot of people lose trust in these decentralized systems when there's theft. Theft and fraud are bad in any financial services. I think the good thing about DeFi is there is a permanent record that will never go away. and hopefully the people who are exploiting or stealing or doing fraud, whether it be in this exploit or any other exploit, eventually get taken in.

25:31Sean, a really interesting conversation. Great experience here in terms of what you guys are doing. It gives us an interesting window into all the things that are happening in the digital asset space. Final thoughts, key takeaways that you'd like to leave our listeners and our viewers with. I think if you're operating in, you know, have you operated in TradFi, take a look at what's happening on chain in DeFi and you'll find much of what you know already familiar. They may have funny names or what have you, but I really think that DeFi and digital assets are going to really change the world. And, you know, the total addressable market is every person and every business on the planet.

26:21And it's really an unstoppable trend that the rest of the world is adopting right now. And I think there's just an exponential curve that Raul and you also, Ash, talk about regularly. they're not putting the genie back in the bottle on this. This will transform. It's the financialization of the internet. It will transform financial services. It will impact every person over time and reduce our dependencies on centralized institutions. So get smart, look at the data, be data-driven. And the data is out there, people like Amber Data and others. This is our day job to help people understand, identify opportunities to quantify the risk act and then you know i would also look at what's happening in derivatives i think derivatives are are just an area for that are right for inclusion in this place they they really give a lot more granular surgical control over on over your exposure and risk and allow you to be a lot more creative and how you capture opportunities sean i happen to agree with you i think the future is going to be more decentralized than it is today Thank you so much for coming and joining us on the show.

27:34Thanks for providing the insights that you guys see from your data. Much appreciated. Thank you, Ash. Really appreciate it. Thank you. That's it for today. Make sure to check out our website, realvision.com forward slash crypto. That's realvision.com forward slash crypto. It's free to sign up for our content. Tomorrow, Elaine Lee will be joined by Bellacourt Brooker, founder of Covey.io. See you live at 9 a.m. Pacific, noon Eastern, 5 p.m. London time. Thanks for watching, everybody.

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