E147: Paradex CEO: Why Crypto Exchanges Are Replacing Wall Street (it's already happening)

29:48So, what you're saying is that the missing part of the entire economy online was finance online? No, it was smart contracts. Smart contracts and basically smart contract based architectures give businesses a common language to basically communicate on chain and conduct operations on chain in a manner that was not possible in Web2, right? Most critically, the movement of money based on rules, making things programmable was not just money, even messaging, for example, you have one common language now that you can use to communicate, to move money back and forth, and to do any sequence of operations that you want to mix and match, this is not possible, right?

30:39Now, because this, you know, now it's clear that this is possible. So, of course, businesses have now started to, you know, migrate on change. So, But what does that mean for, you know, in like a meta sense, right? What it really means is the whole, you know, we have the physical economy that is moving on chain. And now you have all this digital real estate that you have up for grabs, right? Because, you know, in a sense, if the physical economy needs a financial center, that means the, you know, the virtual, the internet economy will also need a financial center. Because if you're trying to build a business on it, that business needs to access these markets, issue securities, borrow, lend, invest, etc.

31:23Those things, those valuable pieces of digital real estate is what perplexes are. Today, like you said, people think they're online casinos. but if you can look past the noise, you can see here that what these things really are are the new systemically important financial centers of this new internet economy. Before we move into that, you say Ethereum is the chosen one where these new systemically important financial centers, the new London, the new New York, the new Singapore, the new Hong Kong, are or will be. What makes you say that Ethereum is the chosen one?

32:15For any capital markets to survive long-term or to scale in a sustainable way, it's not just the aggregation of capital and not just the existence of financial businesses that makes that thing work. You also need very strong law enforcement. You also need security, properties law, property laws, etc., right? If you think about, you know, the analogy to the regular world is Wall Street became massive, not just because it was a concentration of financial businesses on one street, and it made it easy for people to, you know, walk into one, you know, do another deal with the other person. It's not just that.

33:01It was also that the legal infrastructure in the United States, the security, the enforcement of laws, all of these things also need to happen kind of in a complementary way, right? And I think the best representation of that today in the internet economy is on Ethereum. Because it allows, Ethereum takes care of security, decentralization, which are again very like governmental type functions, which is like, you know, governance in that sense. at a federal level, if you want to kind of compare that. And then there's, it allows businesses, in this case, financial centers or financial businesses to exist while also availing of great security, great decentralization, great property laws and rights.

33:49And this combination doesn't exist yet on any other chain, or at least not to the same degree, right? Everybody's trying to get there. But I think the ecosystem that has it the most or to the best degree is Ethereum. You say that decentralized exchanges are becoming the new systemically important financial centers. The new London, the new New York, the new Singapore, the new Hong Kong that powers the world or this online. It's not online businesses anymore, right? Because online business is internet. the entire, not businesses, but economy moving online is on-chain. Right. Can you explain more how or why you see decentralized exchanges, a paradox, a Jupiter, become the new London, the new New York, the new Hong Kong, the new Singapore?

34:54The answer to this is also tied to software in that sense, right? Because software has always allowed lines of segmentation to be blurred very quickly between functions, right? Because software can do things sort of easily. And what I mean by that is if you think about London, New York, Hong Kong, Tokyo, et cetera, or Wall Street, for example, you have everybody doing different things. You have banks doing one function, you have brokerages doing another function, your clearinghouse is doing another function. And the aggregation of all these businesses was Wall Street, was New York, was Hong Kong, Tokyo, et cetera, right?

35:31But today in the internet economy, in our world, banks, you know, the exchange is the bank. It is the brokerage. It is the asset management platform. It is the borrow and money market system. It's everything in one, right? And so these kind of core financial primitives now don't need to exist as individual entities on the chain that basically have to worry about talking to each other and then worry about coordination costs. They can now be core financial primitives and be fully composable with each other in one unified system. Now that is insane, right? Because what that means is the TAM of these businesses is now the combined TAM of all the banks in the world, all the brokerages in the world, all the clearinghouses in the world, right, into one unified entity, right?

36:22Or maybe three or four, whatever the, you know, the top three or four, I think, will end up winning in this space too. But that's into one entity. So we're not playing for billions anymore. These entities are, you know, the time of these businesses is in the trillions, right? So people say, you know, entities like Hyperliquate are overvalued. I think this is so early, and I don't think people still fully appreciate the scale of what these entities can be. Now, of course, there's a bunch of noise in things right now with people calling it casinos, etc. But at least we've never lost sight of this fact that the prize is massive right here, if you get it right.

37:04so the logic for these yield valuations or total addressable market is a decentralized exchange no matter if it's a Paradex Jupiter Hyperliquid whatever they're putting together the three or four main functions that Wall Street does that has in different businesses right and on the top of having all these things in one place, they are powering new industries

37:47that can't really be quantified because they're new, right? Same as when, I mean, I'm always thinking this example is not really right. I took the example the other day by saying Amazon actually powered, became a platform that powered so many new businesses that were possible. you actually took an example by saying New York Wall Street powered not just businesses powered industries right? The economy. Like powered the economy so basically now we have that kind of moment happening again but on Chicago. Or something much bigger. Right. Which is why these exchanges will become the new New York the new London, the new Singapore.

38:25And you can also see this where like the centralized exchange founders are also on this which is why they're rushing to build Aster, build Apex, right? And push because they understand that they also need to have their hat in the ring, right? But is it possible for them? I would say, why can't current banks or even current neobanks or exchanges like Revolut, Robinhood, or even Binance become the on-chain New York or on-chain London? That's a fantastic question. It's not that they can't, but anytime you bolt on a web 3 business to web 2 rails it's not that it can't be possible of course it's possible it just means that it's going to be bolted on if it's bolted on there's a bridge of some sense if there's bridge that means it's cost to run that bridge and so traffic that's flowing back and forth was going to have to pay this cost right and given that web 2 rails are such, you know, legacy rails.

39:29Like, I think crypto exchanges have a bit more of an advantage than, let's say, a Web2 business that, you know, like a banking system, which obviously is still stuck, you know, in the last century. But it's still difficult, right? And these entities, they move very slowly. So right now, I think it's all about speed. Those that are able to figure things out and move fast to be able to either bolt on in kind of like a hacky way or like, entities like hyper-liquid, just like us, like Leiter, etc., they have a chance to build things from scratch and do it in kind of a very efficient way, right? And capital markets has always been about lowest cost, least friction venues that have the most privacy, right?

40:14Because by having these things, it reduces the costs of capital formation and increases liquidity and increases capital efficiency. And that's good for everybody. And those markets tend to win always, right? So markets or entities like this that bolt on things will tend to have a little bit extra cost, right? At least theoretically. Now, physically, practically, they can mitigate it in other ways because their distribution is pretty large, right? So that's what I would say. It's not that it's not possible. It is, but it'll just be in a kind of a janky way that's like not as efficient. And that comes at the cost of the customer experience or the cost that the customer has to pay in some in some way or form.

40:54What happens to the actual traditional financial centers like New York, London, Singapore? What do they become in this new world?

41:06You saw an announcement by all the larger banks that they are looking to build their own stablecoin as a consortium of institutions. And I think that's the answer. It's like, one, they have also realized, you know, recently that, holy shit, this thing is real. It's not going away. And if there's this new world being built, this new digital real estate up for grabs, we need to have our hat in the ring. We need to build some buildings there. So I have to have some imprint. And the thing that they can leverage is their existing distribution because, you know, make no mistake, they have very, very deep distribution all over the world.

41:45And so that's, I think they're going to leverage their distribution and they're going to leverage their influence, whether that's politically, whether that's lobbying, that's whatever, to be able to kind of carve out what is their slice of this new world that is building. But if they don't, because if they don't, they're going to be irrelevant very quickly. I think you brought up the great point last time we spoke that the banks that didn't offer digital banking when digital banking was becoming a thing, very quickly became kind of like irrelevant, right? Because the younger generation decided to say, no, I'm going to start banking with a bank that understands digital banking and makes things easier for me, right?

42:28Because it's always about catering to that marginal customer, right? To some extent. So I think that's what will happen. Basically, it's the same thing. If you don't adapt, you will die. You mentioned before the Wall Street functions, exchange, clearinghouse, asset management, banking. What are the four core components of a unified platform like Paradex in this on-chain world?

42:58these so we've always looked at it as you have three components you have active management which is trading you have passive management which is investing and then you have money markets or basically borrow land and all of them need to be able to happen from the same account because you unlock insane capital efficiency if you're able to long Jupiter perps with Bitcoin spot because you can borrow using your Bitcoin spot, borrow USDC using Bitcoin spot, all from the same account without having to go to this pool, borrow from this, move it here, etc. So this unification has a lot of power because it reduces the cost of access, increases capital efficiency, etc.

43:50So can you just explain these three different things? Yes. How they're done in the traditional finance. Who does active capital management, passive asset management, created money market, and how it's basically, I won't say dysfunctional, but not ideal. And now how in on-chain world, everything comes together. And that's why it's so much better. Exactly. So if you look at an exchange, I'll start with entities because it makes it easier for people to understand. An exchange is actually two things. It's a matching engine and it's a clearinghouse. The clearinghouse sits behind the matching engine.

44:25And matching engine allows people to buy and sell orders and find the other side. It's like a finding function. Help me find a buyer, right? But then once the buyer is found, it's sent to the clearinghouse and the clearinghouse swaps. You know, it's like, oh, you bought Bitcoin and you gave this person money, right? So you have exchanges. So you have basically like matching or brokering in some sense. and then you have clearing or settlement on one. Then you have basically borrow land and banks perform that function. Or you can go to the money markets. In TradFi, there's the corporate bond market, there's the money market.

45:00So you can basically buy or sell high yield bonds. Basically, it's a way for companies to borrow from the market. When they do that, they issue a bond and then they pay interest on that bond. And you can buy company bonds or you could buy U.S. government bonds, right? And it just depends on, you know, the risk of the two entities, right? But that in aggregate is the borrow-land market effectively. And of course, the banks also lend to you as a retail person, as a business, et cetera, right? So there's multiple different ways that you can access borrow-land. It just depends on your risk profile, you know, the type of entity that you are, et cetera, et cetera, right?

45:37So that's the borrow-land piece, right? And then there's other financial entities such as brokerages who specialize in not taking ownership of the asset or taking the other side of an asset, but they will help you find the other side, right? And that's typically what a broker does is he's basically saying, oh, you want to buy? Let me go find a seller for you, right? I'm trivializing, but, you know, all of this stuff is now obviously automated, right? It's not some physical guy, you know, picking up the phone anymore. Although in some instances, that still is. But you have all of these things now, all of these functions, all combined into one entity, even custodians, for example, right?

46:15Because in TradFi, for me to trade on an exchange, I'm not going depositing money on the exchange. I deposit it either with a prime brokerage, which then has an account with the exchange that I trade through, or I have a custodian and then I'm settling these assets directly from the custodian, right? So there's a separation of execution, custody, clearinghouse, like all these different functions are different things. But in crypto, that's not the case because all of these things are effective. We've removed all the middlemen, right? Crypto has always been about disintermediation. Pertexes are like the epitome of disintermediation because an asset management platform, for example, or an asset management company like BlackRock, that is basically our vaults.

47:02Our vaults are like basically the entire time of BlackRock. Our borrow-in markets, we will have them soon. That will be like the money markets that I just talked about. And then, of course, we have the exchange, which is basically the TAM of NASDAQ and CME and all of these things combined, right? And, of course, banks as well because you're borrowing lending, right? So banks, brokerages, clearinghouses, all the custodians, everything wrapped into one entity. What's some of the biggest advantages for Paradex to become the on-chain New York?

47:39And we, not just us, but PerpDexes in general, we've had the opportunity to build new financial rails from scratch. We were not constrained by legacy Web2 architecture because that is analog architecture. It evolved from the phone, the broker picking up the phone, and then all workflows were kind of like made for this or modeled after what was analog workflows. our businesses have been built natively kind of like online, right? Or natively kind of in this new land. So we've had this like, it's extreme privilege to not be constrained by any previous design or constrained in any way. So the first principles thinking that has gone into platforms like us, you will not find in a bolt on kind of like Web 2 business that decided to go buy a Web3 business, for example, right?

48:40And there's three instances of that that are very clear in our design. The first is privacy, for example, right? Versus is privacy is enshrined at like a tech layer where we basically like, our orders are off-chain, so you cannot see them. And B, your positions are kind of on-chain, but encrypted, right? So even, so all the stuff where you saw people getting liquidation hunted. James Wynn is a great example of this. His orders were, you know, his orders and positions were visible to everybody. And so, you know, people took advantage of that. So privacy is one. The second one is this unification of margin, right?

49:21We have one account on which you can do spot. Purps, options, borrow land, everything from the same account. You don't have to jump margin pools. Even some of the DEXs out there today, your spot pool is different from your perpetual pool and you have to move money and that's inefficient. And then the last is liquidity. We've, you know, because of RPI, I talked about that, you know, a few moments ago. Foundationally, it means our liquidity is better than most other DEXs out there because we have decided to kind of have this tech-based innovation to, you know, it's all first principles, but that those first principles manifest in tech differentiation for us, right?

50:01So liquidity, privacy, and unification of margin. Those are the three, that's the trifecta for why we are different than other DEXs. We're talking about the big vision here. But today, decentralized exchanges are essentially casinos. How do we move from casinos to on-chain financial centers? I mean, in some sense, they already are financial centers today, right? Because crypto allowed people who didn't have access to traditional financial markets to now participate in speculation, in investing, in all of these borrow land and earning yield on whatever wealth you have. So for this group of people, this is the financial system.

50:54This is a financial center. These are financial centers today. But it's not powering an economy. But it's not powering an economy. incentivize the yields and trading or investing in speculation. It's not powering industries or new industries or actual economy that most people who live on this planet use every day and don't even know that the underlying technology is blockchain and that these exchanges are actually these financial centers. So the way I would characterize this is that it's not performing these functions, but it's performing these functions for a very small segment of the world. And this is for native Web3 businesses, right?

51:54So think of all these companies that have come and issued tokens as a way to raise capital to fund the innovation. And that's, in some sense, the primary benefit of a capital market. You go to issue securities, raise capital, and then you fund innovation and you fund things that ultimately become businesses in the future. That's how Wall Street was. That's how this is today. The only difference is that people don't know yet that this technology exists, right? And so why this is so important and why this is inevitable is because crypto has allowed capital formation to happen in such a cheap, permissionless, and kind of frictionless way that it represents not just an alternative, but like a far more efficient way than any Web2 Rails of issuing capital, et cetera.

52:39And so it is only a matter of time until people find out. It's like we're living in the future in some sense, where there's the future is here. It already exists, but it's only true for a small group of people who were in this sort of like fringe culture. But Web2 has realized this. Businesses have realized this. hey, I can now invest in these new assets. I can now borrow land from these new markets that I traditionally didn't have access to. So to me, it's just a matter of time. And it's my job in some sense, and, you know, PubDex founders or PubDex teams building, you know, PubDexes, it's their job to basically make this technology available for the rest of the world or show them that like, hey, this is available.

53:20This is not just alternative, but this is far more efficient and it's better for you, right? so I think that's the delta it's just a time thing and an effort thing but will it happen? Absolutely I absolutely think it will happen How far are we from traditional financial centers becoming irrelevant? I don't think they will fully be irrelevant because they're just very good at adapting, you can't kill these entities they are so entrenched in legacy financial systems well unless of course they refuse or remain very stubborn to making change. But I don't think they will go away. They will find a way to either come together, build their own consortium, and offer to the customer because ultimately everybody's competing for the end user.

54:09And so if they come together and they say, hey, you know what, end user, you already have your money here. And you don't really need to go to this kind of like new system because I built my own version of this system. And maybe that works for some people and maybe that doesn't, right? But I think that kind of like healthy competition will remain. And in some sense, I might want them to be around because there's always an enemy that gives us a goal towards saying, hey, we need to steal their lunch, right? Because they've been ripping us off for years. And this is our opportunity to kind of like provide a healthier, better alternative to the end user.

54:47You told me speculation is necessary because I was kind of critical about all these casino know, right, and speculation. I understand both sides of the argument and the smartest people in the industry, which I'm definitely not one of them, know or all say the same thing, which is speculation is absolutely necessary for this industry to fund actually the industry and for it to develop the, for us to develop the kinfa structure necessary for like the next iteration of useful products and companies. you have a more you come from the finance world so instead of necessarily talking about our funding infrastructure whatever you think much more about price discovery and capital formation you say speculation is necessary for price discovery and capital formation correct I don't understand that can you explain this to me a normal dude who isn't technical and who just ask questions to people who are much better than me for anything.

55:54No, definitely. You know, when I went to grad school, I had a professor, and I credit a lot of my early kind of curiosity into finance because he kind of peaked it. He kind of like evoked it out of me because he was just so fundamentally good at explaining things at like a really elemental level. And that really got me interested. but he used to always say that capital markets are the economic equivalent of democracy. And that statement has always remained with me throughout. And I bank on it every time I have a first principles conundrum that I'm thinking about. I always go back to my early discussions with him back then.

56:41But the crux of that statement is that effectively it is a pure form of democracy because putting a price in the order book is like casting your vote, but with money behind it. And that is way, way more powerful than going casting your vote in a ballot because you have nothing to lose, right? There's no money on the line. There's no risk on the line. and whenever you have a market, this is by the way also why things like Polymarket are so powerful is because now the previous alternative to hey, who's going to win the election was a poll. Now you have people putting real money, real dollars behind their vote on Polymarket and so in that sense, I will wait that way more than I will wait any poll that is out there, of course, right?

57:33And so in this like voting process, where people are voting with their dollars, it is also a way to express criticism on either an outcome or the value of an asset. And criticism is just speculation, right? But it has a different word for it. But it's basically me expressing a view that I think this will do either well or not well. Or I want this to do well or not. Or I want this to do well. But the difference is I'm putting my money where my mouth is. And if there's people, like in any democracy, if there's no criticism, there's no democracy. Yeah. Right? So this is why critics are needed and speculation, short sellers are needed to allow a healthy price for that asset to kind of settle at equilibrium because that is what price discovery is, good price discovery.

58:35And when good price discovery happens, then there is good capital formation. Yeah, that's also why people say that if you...

58:46I want to say I'm not long. I don't want to use this trader term. But if you are not invested, if you don't have Bitcoin, you're essentially short Bitcoin 1x, which means that you're not voting with your money, which is much more powerful than just my words. Words, exactly. that I think Bitcoin will win or that I want Bitcoin to win because I fucking hate banks. Or people who are critics who want Bitcoin to lose, right? Short it. Yeah, but I would say shorting is like already too kind of advanced, but for me, it's more about if we take exchanges, right? And we kind of understand more and more now that decentralized exchanges are probably more healthy for our industry.

59:32I can buy Hype, I can buy Zrip, I can buy at some point Dime, the Paradex token and by doing that, not even longing or short, I just like buy the token Spot, because I like Spot so much and I cannot buy BNB because I realize that Binance might do some shady shit. Might! I'm not saying they're doing. But it's a vote. It's a vote, exactly. It's a vote. And I would even go so far as to say that this ownership economy, and I'm stealing this term from Akshay, who had a really great talk at Token 2049. I just saw it, I think, a couple of days ago. Akshay BD from the Solanig. It was an excellent talk, highly recommended.

1:00:31this ownership economy is where markets will move to because there's permissionless asset creation everywhere. And now I can express the view, right? Rather than me being part of the labor class and not being part of the owner class, now it allows me, a laborer, to be a part of the ownership class by simply going and buying this token, right? And to take it even further and tie it to another broad idea you've seen in crypto, these new super brands will be the new network states of the world. It's because you have this decentralized network of ownership that doesn't require physical borders, but the network still exists.

1:01:12Bitcoin obviously is the first network state, but every other brand is vying to be one of the new network states in this new digital economy, basically. That's something that you're holding on to. that you know that you should let go of?

1:01:43That's a deep question. My favorite question. That's a very deep question. What am I holding on to that I know I should let go of?

1:02:00I get tied to a certain way of thinking from time to time. And whether that's anchored in the path I want to walk in terms of the product or the roadmap, or there's a certain direction that I want to invest in personally, spiritually, whatever. and I tend to want to optimize towards that goal.

1:02:33And I'm a very determined person. And so when I put my sight on something, I give it my all. And I think when I have my eye on something and I want to do it, I have to work very hard to not do that thing anymore. and this can be both good and bad, right? It can be a strength. We only want to just get things done. But in the business that we operate in, timeframes are so short and the only thing that is constant is change. You cannot be tied to things too much such that you can't drop them, you know, when the market changes or the regime changes or more information comes your way. And I think this is, I've become a lot better at it now as, you know, I've grown older, you know, been more experienced as a founder, but I still struggle with it, right?

1:03:34It's just like when to be on and follow through and when to say, nope, I think we need to stop, right? but this inertia is something you know i struggle with so i don't have a like a answer or an instance for you it's like i have this thing i'm holding on to or not for me it's more about the kind of like the eternal fight that's kind of inside you right as a person as a founder as a human where you're just you're trying to constantly better be better and you're trying to refine your own process and it's this just this battle i think right it's just like when to know to continue and when to stop.

1:04:15And I think either side has inertia. And to learn, you know, I want to be better at knowing or learning when to drop things and when to move on, right? If that makes sense. What's one thing that people should remember from today's conversation? Oof.

1:04:37perp dexes are inevitable as being systemically important financial centers for the new world why do you add the word perp in front or it's just an easy way for people to understand what I'm talking about but decentralized exchanges right because I mean that is I am underselling it with that very shallow framing because they do so much, right? But that's easy, but people understand what I'm saying immediately. But what I'm really saying is, you know, decentralized exchanges are, I don't think people fully appreciate what these things are. If you can get past the noise and you can, you know, you have the vision to kind of see past all of that.

1:05:24It is very clear that these entities are just going to be, have such an outsized, not just in terms of money, but they're going to have such an outsized impact on everybody in the world because every single person in the world with a wallet on a mobile phone now has instant access to financial opportunity. And that is just insanely powerful to think about, right? That has never happened in the past in the world, ever. Thank you, Ayan, for doing this. Thank you for having me. Thank you for eating glass every day, putting in their insanely hard work every day and night to make this industry more accessible and more useful and usable to everyone.

1:06:10And last but not least, thank you for believing in us. My pleasure. In me and the When Shift Happens team and for supporting us in our mission to make CryptoFolks and Web3 less misunderstood and look more credible to the outside world. My pleasure. You guys are one of the few brands in crypto that I think do not just represent trust extremely well, which is more of a perception thing. But I think your follow through when you work with your partners, at least it's very clear with us that you guys really care. and I was just talking to your co-founder before the podcast and that's one of the things I said to him was that it is very clear that you guys give a shit.

1:07:03It's like you know your shit and you give a shit. And that combination is very tough in crypto. So when you find somebody that does both and does them well, you should keep them close, which is why we're partners. This is the Swiss villager mindset. That's my word is my bond. I didn't know that. That's cool. Actually, people in Swiss villages, you say one thing, you're just going to do it. Even if you say, let's meet in three weeks at 7 p.m. and you don't talk for three weeks. But you're there. The same day you say, hey, tonight, good. Good, right? Yeah. That's the problem I noticed in big cities and in business a lot.

1:07:42And in this industry a lot. In crypto, there's no fucking follow-through. Yeah, you know? People are just... It's terrible. It's like you have to follow up with people. you get on calls and he's like oh does this time still work and I'm like what happened yeah so well yeah just be reliable and you're on your way there that's the advice I think what we say internally is like do what you say and say what you do very simple it's not that hard to think about but the execution for most people it's very hard it's so hard yeah amazing thank you no thank you as you probably know by now, I host some of the biggest names in Bitcoin and crypto on my podcast.

1:08:23But a lot of the best stuff never makes it on air. The Shift newsletter is where I share that raw behind the alpha, the insights, stories, and lessons straight from my guests that you won't hear anywhere else. If you want the real insight take on Bitcoin and crypto, join my newsletter, The Shift, in the description down below.

1:08:49you