E186: Variational CEO: This Hidden Fee Is Quietly Draining Your Crypto Account

20:33That includes ETFs, index funds, SMAs, custom option strategies, staking, vaults, and more. However you want to invest in crypto, the experts at Bitwise have you covered. Did you ever regret selling your company to DCG that early?

20:53Lucas Schuermann:I think every founder eventually regrets a sale. I would be hard pressed to name any to the top of my head that don't. And that's not because we didn't like DCG. It's not because of a variety of things in the industry. But it's just I really miss being an entrepreneur almost immediately when we got on the other side. And we saw through that seat because DCG and Genesis were at such an amazing kind of focal point in the market during that hyper growth period, 19 to 21. We just saw so many opportunities coming across our desks, many of which we were able to action on, but through and under Genesis and DCG.

21:31Lucas Schuermann:And we just kept seeing so much opportunity, so much opportunity. It feels like you're kind of sitting there chained to a desk, right? And you're watching everything in the world go by your window. And I would say that the draw to being an entrepreneur never goes away. And you think that you're going to feel sitting pretty, but you don't. Two weeks in, you're like itching already. so not only you see all these opportunities but you also told me the other day that we made so much fucking money for dcg so you also feel like the thing that you build is actually like generating crazy returns and money yeah let's just say we were i'm proud of the work we did at dcg and at genesis um there's a lot of other people that were part of that effort um at genesis as a whole but it was a great business at the time and and yeah well maybe the better phrasing as i said as an entrepreneur, you just see so much opportunity within DCG and Genesis, the business lines we built, but also outside, some of which we couldn't take advantage of.

22:26Lucas Schuermann:So there was a lot of money being made in the industry at that time, within Genesis, within DCG, but also externally. And all of it creates that entrepreneurial itch, right? You want to be building.

22:38Why did you start a market-making firm as soon as your DCG vesting came to an end?

22:44Lucas Schuermann:Well, that's the follow up question to that itch, right? The moment we kind of wrapped up our time and our chapter at DCG and Genesis, we were like, well, how do we get right back into it, right back into the industry? And some of the itch we were feeling was the explosion of DeFi. This was kind of during so-called DeFi summer right after. We kept seeing so many opportunities in the OTC market and options trading where Genesis had also built a really large book of business. And it was the natural kind of evolution of our skill set and expertise at the time, but also where we felt we could be most nimble.

23:18Lucas Schuermann:Because market making is one side of our business, but I use the word prop trading, right? So we raised capital, very flexible equity capital that we could deploy across a variety of different ideas, strategies, sometimes building and incubating, sometimes partnering, a lot of times market making and running other types of HFT strategies. But, you know, it was our background, our expertise, and it was also the opportunity we saw on the market. And I think it gave us a lot of the resource and positioning that led us to where we are now. What does variational mean? Variational comes from a kind of minority math background that I was sharing.

23:53Lucas Schuermann:It's from variational inference, which is a kind of a concept in math and stats. A little known joke is, you know, Ed and I are absolutely terrible at naming things. Example, case in point, Columbia Quant team and so on. but we sat there on a call when we were first kind of leaving Genesis and we're like well what do we call this new thing what do we want to start it up and we had Wikipedia pages up on a lot of our favorite math topics and we were just going through like hey you know maybe Laminar Flow like Laminar would be a cool name is that is that taken is that like SEO worthy and so on and we went through and we found variational like oh that sounds good it's not a taken keyword it could be a great logo we could do some fun waves and so on exactly yeah yeah yeah um so it worked and you know we've been variational ever since it's actually pretty cool name yeah thank you thank you it's a cool name explain variational protocol to your mom okay to my mom a little bit difficult i love her she's great and uh it's a great let's call it a grounding in life that she has no idea what crypto is or fintech or anything in that vein.

25:02Lucas Schuermann:Let me first explain it to someone outside of crypto and then I'll explain it to my mom if you'll let me do both. So to someone outside of crypto, you know, variational protocols, infrastructure, it's infrastructure for derivatives trading on chain, right? What is a derivative? It's a financial product that you want to trade usually either versus institutions or interesting products for retail that have leverage. On-chain means we're using crypto and stable coins to make it safer and more efficient to trade and clear these things. To my mom, variational protocol is infrastructure for trading, for finance.

25:37Pretty good, actually. No, but you usually have these like very nerdy people who just like go on like crazy tangents. Yeah.

25:43Lucas Schuermann:So it's good. Yeah. Short and sweet, right? I mean, if I put my disambiguating hat on, right, so many finance terms, derivatives and options and structured products, And even on chain kind of crypto land, we talk in very specific terms about smart contracts and ZK proofs and, you know, all these other solvers. I'm allergic to all this. Right. Yeah. TPS and all this stuff. Exactly. How do you onboard new people with this kind of slang? Like it's just bad. People, I think, should think about a lot of what we're building, both for our application layer, especially for the protocols infrastructure.

26:15Lucas Schuermann:Right. But I'd say the same about crypto as a whole. You know, when I'm using Uber and other application, my mom's not deeply familiar with AWS and all the APIs and kind of the stack. But those businesses are infrastructure providers and it makes a lot of sense. Right. So I think these technologies are going to be really underpinning. But most of our end users won't know what variational protocol is, won't know what Arbitrum is and TPS and even some of these finance definitions. But they will know it's the best place to trade on the retail application side. and they will know there's some interesting underlying infrastructure in making it happen.

26:49What's the biggest mistake you've made building Variational?

26:57I think our general strategy has been show, don't tell.

27:04Lucas Schuermann:And I've gotten a lot of feedback from some of our amazing investors, particularly Hasib at Dragonfly, who's been really helping us to think about how do we market. And we talked about this in my background, right? We didn't come from a, you know, consumer app facing background. We didn't come from kind of a marketing background at all. If anything, in prop trading and HFT, the firms are relatively stealthy, quite intentionally, right? So we had to learn kind of this idea of marketing and growth and distribution. And, you know, I like to think we haven't made big mistakes there in the sense of, you know, KOL, you know, campaigns and some things that could damage the brand.

27:40Lucas Schuermann:Yeah. But I think for us, learning to speak more publicly about what we're doing, and this is a great example, frankly, this conversation, to your point, it builds trust, it builds credibility, and it gets our message out there. A lot of times people only find out about the bigger vision of variational, things like all these new things we have on the horizon as we launch them. But I think there's a lot of reasons to be excited about variational now for the future. And you could say the same a year or two ago. So we spent too long building in the dark is what I'd actually say. and we're doing a lot of catching up on education right now.

28:13When was the first time you thought, holy shit, we actually built something massive here?

28:20Lucas Schuermann:Around this time last year, actually. So it's not too long ago. We launched the protocol in January of last year, Mainnet, and we gave out invite codes to a very small number of close partners. Guys we'd known through our trading days and known in the crypto community for a while. And we saw the metrics slowly tick up, but we also saw plenty of feedback come in. And one of our cycles has always been take the feedback, implement it, right? Understand our product roadmap, just keep that flywheel going, that loop. And over time, the product improves, kind of the core architecture gets proven out.

28:54Lucas Schuermann:But most notably, you know, those invite codes spread a little bit. They spread from some of the guys that were just close in our network to some of the bigger traders on CT to some of those kind of early community groups. And by summer of last year, heading into conference season, we were starting to see first one mil, then 10 mil, then 15, then 20, then 50, then 100 mil in daily volume and open interest on all the other metrics. And we started to feel it a little bit at that phase, but it didn't really hit me until we were around a little bit later at the conferences in person, September, October of last year.

29:29Lucas Schuermann:And we would see our volumes two or three X in a day. and we would see users being onboarded through massive organic posts and variational meetups started to happen and the community started to be very interested in what we had to say and what we were doing and that's where I started to feel it it's just that organic growth it comes slowly and then all at once is how I describe it but people understood our thesis and that was exciting There's many reasons why people and traders should care about variational Let's talk about the three main reasons no fees asset selections and you mentioned before swaps right the first reason no fees variational doesn't charge any fees can you explain how it's possible as simple as possible to Uber driver you mentioned before Uber who pays 3 or 4 % on his Coinbase account without realizing it yeah Yeah, so let's think about, in general, the ways to monetize or the ways to make money on retail trading.

30:38Lucas Schuermann:And I'll actually zoom out to an even higher level, describing the three types of businesses that make money in trading. You have exchanges, you have market makers, and you have brokers. And usually all three are taking some cut of the pie. So let's use the example of a trade on Robinhood, for example. If I trade on Robinhood, Robinhood sends that order flow out to a market maker, maybe Citadel Securities or others. That market maker can monetize the spread, which is maybe a minute difference between the price of filling the order and the fair market price of the time. In other words, the difference between the spread and their eventual hedging cost becomes some P &L that they can pocket.

31:11Lucas Schuermann:They pay what looks like, we call it payment for order flow. It's one of those trendy finance terms, but it essentially looks like a little referral fee back down to Robinhood for this flow. And then you have exchanges and other kind of infrastructure providers, which is primarily where these market makers or HFT firms trade against each other for hedging. So exchanges monetize, of course, for every order that matches in their order books. So these are the kind of three parties that are making money. Some brokers, and we won't name names, you named one, but charge exorbitant fees. Some market makers, unfortunately, in crypto and a few odd parts of our industry are known for aggressive monetization of spread and front running and things like that.

31:48Lucas Schuermann:Then, of course, in exchanges, you have the big regulated US exchanges that are very, very cheap on a kind of per contract traded basis, NYSE, NASDAQ, CME. And then you have some that also trade, you know, with very, very large fees. So this is kind of the optimization space. And what I want people to think about with variational is it's combining the last two out of the three to gain efficiency, right? On the brokerage side, we're doing the liquidity aggregation, but instead of sending that flow out to external market makers who might be, you know, monetizing that primarily, let's think about how big these businesses are.

32:20Lucas Schuermann:Citadel Securities, just as one example, right? The tens of billions per year in terms of revenue, to my knowledge. We keep that within the platform. So at the end of the day, we're monetizing similar to, you know, a brokerage or similar to a market maker, but instead of leaking it out to those external parties, we're keeping it within the ecosystem. So that enables us not just to do zero fees because we're monetizing like the MM, but enables us also to take some of that and share it back with the users. Previously, our loss refunds and going forward, something we're calling spread rebates. But it also just lets us take a view of much more friendly spreads to the user.

32:54Lucas Schuermann:We try to optimize execution as much as possible. How can a user know that they're getting a fair price if there is only one market maker? And market makers usually are greedy, what you told us before. Well, two things. One is that crypto is different from other industries in that the vast majority of things in crypto are transparent and we're no exception, right? Our fund flows, our revenues, our P &Ls in many cases are tracked and visible on chain. Also, our quotes are stored by, at least to my just knowledge off the top of my head, no less than 12 sites tracking our execution quality. And the final is kind of a nice, let's just call it mutual community alignment.

33:38Lucas Schuermann:And what I mean by this is it's not in the business interest of OLP or kind of our platform as a whole to trade against our users or to provide bad execution. This is a competitive industry. People will notice that immediately. It's transparent and they'll go to all of our other competing platforms. It's actually in our interest to do quite the opposite. It's to provide consistent top execution across as many assets as we possibly can and do it in a transparent way. And that's where you build that trust and that idea and also the flywheel, right, where we can grow our monetization over time by growing a pie, not by fleecing individual users.

34:12Lucas Schuermann:So I'd argue it's kind of two things. One is trust through transparency and the other is alignment kind of from a business interest perspective. And also, again, as I said, we share a lot of our revenue with our users through a variety of both live and upcoming systems. So I think about this idea of alignment of the entire system with our users as the main driver. If it's possible to charge zero fees, does that mean that fees are a scam? I'd hesitate to call them a scam because I think there's a lot of great platforms out there that charge fees that I wouldn't use the word of scam. But I would put it this way, right?

34:51Lucas Schuermann:There's a reason why in very mature financial markets, like in traditional finance, if I'm trading on these great businesses like Robinhood and others, there's a reason why the market has kind of coalesced towards zero fees, because it is very possible. It is possible using a brokerage-like model. it is possible through liquidity aggregation. They needed to be innovated in crypto. But maybe I'd phrase it that I think long term, there's no reason for most retail traders to be paying fees. So with that in mind, we can say that at the very least, we're trying to lead the charge on building fair and transparent markets that are as friendly to retail as possible.

35:29Does zero fee alone can really make a big difference? It can.

35:34Lucas Schuermann:It depends on the type of trader that you are. And I like to talk about variational in terms of our product selection as well. As you're aware, we list perps, we list in the future swaps. These are derivatives. These are built for traders, not long-term investors necessarily, at least. Traders in general want to enter and exit positions very quickly. They want to trade overnight. In many cases, they want to have lots of open positions. They want to bet big sometimes when they believe in a thesis. Fees can add up a lot in these cases. So the more you trade, the higher your turnover is or the bigger your account size is, the more these fees hurt.

36:06Lucas Schuermann:But to your earlier question, again, I hesitate to call fees a scam, but why pay fees when you don't have to, right? And this is, they do add up for most people. I think you would be very surprised. Fees in crypto especially are usually a percentage of the notional amount traded, which means it's not$1 or$2 every time you trade. But if you're trading big sizes, it can add up to tens of thousands of dollars we've seen for some of the bigger accounts. That's meaningful and it damages our performance every time. So why should traders care about the traditional? No fees. Second reason or main reason is the asset selection.

36:42You said you can't rebuild 40 years of traditional market liquidity from scratch. What does that mean exactly?

36:49Lucas Schuermann:So dovetailing off of fees, actually, let's define market liquidity because this is one of those finance-y buzzwords that I feel like it's thrown around a lot as a positive, as a negative. But what does liquidity or illiquidity actually mean? At the end of the day, we're talking about one's ability to trade. So I like to use the example of maybe homes, right, or cars, right? These are illiquid assets, right? There's not a very efficient market, I can't go get a perfect exact market price for an individual home. And if I were to sell my home, I'm going to pay all sorts of fees, real estate commissions.

37:20Lucas Schuermann:And you know, I couldn't necessarily get the immediate theoretical value, unless we're in San Francisco, but that's a booming market, right? So we call this, at the end of the day, difference between illiquidity and liquidity, having a really big bid-ask spread or a lot of fees. And what these financing terms mean for average users is cost. And in many cases, that cost is a deterrent to actually expressing a thesis or making a trade in the first place. So basically it means people on average know what the value of an asset is, but I can't get to sell my asset for that value now because it's not liquid.

37:58Lucas Schuermann:Correct. Yeah. It might take time. It might take, you know, discounting, like in the case of a car or house or someone, or it might take a lot of fees to get it done because there's not, again, that liquid market. So on the flip side, you have incredibly liquid markets. We use the example of traditional finance markets like US equities that have trillions of dollars in trading volume per day. If I know the value of my, say,$10 ,000 worth of NVIDIA shares and I were to sell them through traditional finance broker, I'm going to get that exact price to that exact second within one cent or something incredibly minute.

38:29Lucas Schuermann:So this is very powerful. Liquidity is powerful because when I enter an exit, you want to express a thesis on NVIDIA, for example. I don't want to be waiting and paying, you know, half a percent, a percent and even more. Like if I were selling a house, for example, versus a fair value, I want to be able to enter and exit a position right then and there at the fair value. So I think it's interesting. We only talk about fees, right? But fees are one of the costs of trading. The other cost is this illiquidity or, you know, we call it the spread and so on and so forth. So this is kind of the other big advantage of Variational's liquidity aggregation model.

39:02Lucas Schuermann:And it expresses itself in two ways. When we're trading in crypto, we're aggregating liquidity from as many sources as you can, centralized exchanges, decentralized exchanges, other dealers. And this can help improve execution, zero fees, lots and lots and lots of listings. But the bigger thing is for RWAs. You put it perfectly, right? When we talk about our ambitions to list hundreds, if not thousands of different RWAs and traditional market underlyings, we're not rebuilding that puddle of liquidity every time. With that puddle eventually meaning huge costs to users and in many cases, not even really a tradable user experience.

39:33Lucas Schuermann:markets, we're bridging liquidity directly from TradFi, where we take these best markets in the world for trading these things and bring that cost savings to the users. So I think about it kind of all in the vein of cost savings and tradability. Our goal is to make it as efficient to trade on variational as it would be in the traditional markets for these assets. And I think that's really where we have a zero to one moment for RWA trading on chain. So real world assets trading on chain, which is becoming massive, bigger and bigger. and many projects. I think if you're pretty reasonable and you're in crypto right now, you realize that real-world asset trading is going to be bigger on-chain than actual crypto trading.

40:19Yet, all the other platforms today who offer this real-world asset trading offer it in a less liquid fashion.

40:29Lucas Schuermann:I would agree with that statement. And yeah, it's an architectural difference. Why hasn't crypto figured out earlier the variational way to be able to offer a huge amount of real world assets with zero fees or zero costs? Because there is a ton of liquidity. This model, let's say two or three reasons. One is that there's a lot of great reasons why people are rebuilding order books in crypto. And we saw with the success of Hyperliquid, which I'm a huge fan of and was a very early user of, that there's a lot of merits to building exchange infrastructure. And let me put it this way. In traditional finance, NASDAQ, CME, etc., these are all still great businesses.

41:17Lucas Schuermann:Exchanges are not going anywhere. You need venues for price discovery, for trading. And some of the original innovations of Hyperliquid, especially for RWAs, was around creating a 24 by 7 perps market for these things. When we think about how this is going to evolve over time, now that the demand's been proven, now that kind of we've seen some bootstrapping, indeed, like this model makes the most sense. And we've seen a bit of movement in the industry. We've seen a few of our competitors start to introduce the idea of trading RFQ versus an order book, which helps for these illiquid assets. It's not our main structural edge.

41:46Lucas Schuermann:The structural edge is the broker-like model, as we were just discussing. But I expect some of these concepts will be attempted to be replicated and copied. But for us, it was really actually about achieving scale and the partnerships that we needed to bring that TradFi liquidity on chain. Let me put it this way. We architected Variational to work exactly for this, you know, RFQ for order matching broker like model for trading and settling and clearing. And then we have been working with many of these large financial institutions that we're partnered with for years to get them comfortable with doing this.

42:19Lucas Schuermann:So what we're seeing now is just the culmination of a very, very long time, long amount of effort. And I think, you know, it makes natural sense that because it's complicated to build, because it took a while to get those partnerships, we were able to be the first to do it. We won't be the last, but I hope and I expect that we'll continue to be the biggest. where does the current crypto purpose for real world asset model or architecture break because you said it was a good proof of concept but from what I understand there's a limit in terms of scale where does it break that everyone needs to to do it the variational way?

43:09Lucas Schuermann:So again, I'm a big fan of Hyperliquid and what they've built. I'm a big fan of a lot of our competitors on a team basis, but it's a different architecture. So we were just talking about zero fee trading. We were also just talking about aggregating liquidity to have a huge, huge number of listings. And those are two of three. We'll get back to swaps. Two of the big areas where I do think it breaks, right? So think about it this way, right? When we're trying to list one or two or 10 assets, just like we have very liquid trading for BTC, ETH and Solana and all these exchanges, you can really build a lot of depth of liquidity on a small number.

43:44Lucas Schuermann:But when we start to think about hundreds and thousands, we have to attract, by we I mean a market maker on a traditional order book, you have to attract and partner with guys to cover US stocks and Asian stocks and this and that. You have to rebuild those levels of liquidity. you're competing against trillions of dollars in TradFi, right? And you're rebuilding from scratch, quite literally from scratch. It's a Herculean effort. And it's been an amazing thing to watch Hyperliquid and XYZ do this well on a relatively smaller number of stocks. But when we start to say, hey, how does this scale at the edges?

44:16Lucas Schuermann:We want to take it from 10 and 20 tradable things to hundreds. We do start to see that breakdown because rebuilding from scratch to compete is a hell of a lot harder than just porting trillions of dollars on chain. But the problem is the model of order books on chain necessitates rebuilding liquidity, not porting it over, not aggregating it. So that was our big structural edge. So it means listing what's hot so you get enough liquidity and volume to actually make it work versus what you guys can do is say, we can list what's less hot, but that still might be used in different parts of the world by different people for very niche assets?

44:55Lucas Schuermann:I think that's one area for sure. But I'd argue that the combination of liquidity aggregation direct from TradFi and zero fee trading makes it much, much, much better to trade on almost every asset. There's a small number of assets on these order book based platforms that are very liquid, impressively liquid, right? Maybe gold and oil are two that come to mind. But even on variational there, you're still getting the savings of zero fees.

45:25Lucas Schuermann:You're still that difference becomes exponentially more impactful. Even on these, you know, very liquid and traditional markets, when you start to think about guys who trade big portfolios, institutions who might want to trade, guys who are turning over very frequently, you know, as a retail user trading maybe a$1 ,000 or$10 ,000 order, these things might be comparable on two or five or 10 markets. Outside of that, you know, the mid-pack, you know, hundreds of different things I might want to trade on NASDAQ, larger order sizes and indeed global markets, it's a difficult model to scale for order books.

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46:52Why would a big trader on Hyperliquid not switch or move to variational?

47:00Lucas Schuermann:I think the biggest reason in the near term is actually trust and scale. This model that we're trying is new, right? And at the end of the day, this is true of most new technology, right? When you have a new model being tried, a new type of, you asked earlier about incentives and trust and so on, we need to prove that this works. And that's the scale we have achieved. And I've been proud of that. We achieved that scale with 450 different crypto listings, over a billion dollars of open interest, over a billion dollars of daily volume. We've now been achieving the same, rapidly expanding our market share and RWA perps.

47:34Lucas Schuermann:But I think it's prudent to wait and see how the model works and how people adapt to it and why you should trust the platform. But for us, my job is in a lot of ways to get our message out there, to make people understand how the technology works. Some of these things sound too good to be true as we're asking about how do zero fees even monetize for the protocol. But as people become familiar with the model and as we see it get proven out, I think over time, we will be able to provide a compelling product to most users who are on competing platforms. What happens when Wall Street liquidity finally comes on chain?

48:07Lucas Schuermann:We are, how a lot of Wall Street liquidity is coming on chain. So what happens when it comes on chain? We'll see a Cambrian explosion of people trading on chain. At the end of the day, as I said, illiquidity, lack of asset selection, and so on. These are costs. They're an opportunity cost. They're a financial cost to our users and to potential users in general on chain. So I think people who are stuck trading in TradFi, they're not there for the user experience, right? Imagine trading on a platform like Variational or Hyperliquid for that matter versus the clunkiness of interactive brokers or old school financial platforms in Indonesia and Singapore and Japan, right?

48:44Lucas Schuermann:They're not there for those reasons. They're there because they have to be. That's where the liquidity is. This is not available yet. They might be trading certain underlying assets that can't be traded on chain. They might be trading certain things that are so illiquid on chain that they might as well not be listed, or they might, for a variety of reasons, just not have the right connectivity or setup, right? So we are that enablement. And I think we're just going to see an absolute explosion of interest from all parties globally who might be moving not just from other DeFi platforms. In fact, again, I'm bullish and will continue to be bullish on Hyperliquid themselves.

49:16Lucas Schuermann:But I think we'll be pulling flow from traditional brokers and antiquated platforms where trading hundreds of markets in one place with one balance is a lot easier on chain. Who gets destroyed when Wall Street liquidity comes on chain on mass? Who gets destroyed?

49:40Lucas Schuermann:Long term, I have two big targets, let's say, to destroy. One are, who shall we name nameless, but one are these exchanges in crypto sense and brokers who charge exorbitant fees and use kind of captive markets and captive distribution to just fleece their users, frankly. I don't like seeing that. I'd go so far as to say it's a bit of a David versus Goliath story. We're still scaling, we're still small, but this concept has now been proven. We have the right partnerships and we'll be launching more and more over the rest of this summer. to your earlier question, as we continue to show that this works, show that people can trust variational in this new innovation technology, I think I want to see people get a little bit tired of paying those exorbitant fees to some other platforms.

50:27Lucas Schuermann:So I think over time, they're going to get competed away, just like we saw in traditional US markets, all the other exorbitant fee brokers get competed away either to zero or die when Robinhood kind of introduced zero fee trading. So that's one. Number two is some market makers who, again, shall remain nameless. I like the idea of not leaking this value externally. We partner with other market makers, don't get me wrong, occasionally. They don't face our external users, but we can use them as hedging venues just as we might trade on exchanges. And the majority of market makers are good, reasonable businesses that are providing a service, keeping the market orderly and efficient and liquid.

51:04Lucas Schuermann:But there are some who you know are looking to make a quick buck off of retail flow and i'd rather run this transparently through our platform and keep that value within the ecosystem

51:18why should traders care about variational third reason you mentioned swaps

51:29in comparison to perps right let's start with perps what's a perp explain to a non very financially savvy person a perp is a type of financial derivative but even

51:42Lucas Schuermann:that term derivative sounds a little bit loaded and complicated sometimes but it's a financial product that lets you trade an underlying right so that could be crypto it could be a stock or a commodity or an index or whatever using leverage and the ability to long and short from one usd or collateral balance as opposed to a spot share when you trade you actually physically trade and then own and settle the underlying, which might make it difficult to short, might make it difficult to use leverage, and it might have various types of restrictions in terms of the global access to these products. So perps were a major innovation in crypto, starting with BitMEX back kind of around the time when we were founding Q Capital, my first fund.

52:22Lucas Schuermann:And they really introduced this idea of building a financial product that unlocked the ability to use leverage and to settle easily while bootstrapping on new markets. What's the problem with perps? The problem with perps is the funding rate. So this is their major innovation, but it's also kind of potentially their major downside, particularly when it comes to RWA trading. At the end of the day, the way the perps work without getting too deep into the kind of financial mechanism side is dependent on this idea of a funding rate. This idea of a funding rate is what lets perps accumulate leverage and kind of bootstrap collateral efficiency.

52:59Lucas Schuermann:but it also can vary wildly and in many unexpected ways for non-sophisticated traders. So I'll give you an example, right? Let's say I'm trading a NVIDIA PERP or a Tesla PERP on chain right now as a PERP. If I hold this position for a very short amount of time, kind of within a funding window or so on, I'm not going to see the effect of a funding rate. Imagine funding rate kind of like a variable interest rate, right? Sometimes it's really low and I can ignore it because it's on an annualized basis. It's not going to be too high. but just like those predatory credit card loans and so on sometimes due to market dynamics not predatory nature but this funding rate can explode over say illiquid times over the weekend or when you have a huge amount of unidirectional interest coming in from retail takers and this can become a massive cost i've seen this all over twitter i'm sure you have too guys who enter a position on a friday and by monday they've paid tens of thousands of dollars or thousands of percent in funding fees.

53:54Lucas Schuermann:So this is a big barrier to retail traders feeling comfortable using these derivative products, which I believe are a great way to access underlying the ability to symmetrically long and short, the ability to use leverage is a great tool for a lot of traders. But the lack of predictability in funding rates and the fact that institutions who are marking this as a basis trade and sometimes taking advantage of it, that feels scary and maybe not great for a lot of retail users. So the ideas and kind of the benefits of a PERP, leverage, the ability to use collateral roll in one place and trade on a huge menu of things, build it long and short, those are fantastic.

54:26Lucas Schuermann:The funding rate variability, I think, is one of the big issues with perps. So the funding rate is what you pay to be able to use leverage. Correct, yeah. And there's a lot of very complicated economic drivers behind that, but you can think of it as, at the end of the day, a cost of leverage in the ecosystem. So when you have a lot of guys longing, you've got a lot of guys shorting, and you have not too many institutions coming in to make that basis more efficient, you can see a blowout. And there's a lot of reasons for this, but it goes back to that question we were actually asking earlier about illiquidity.

54:59Lucas Schuermann:These funding rates, the way they're defined mathematically, is really sensitive to illiquidity and kind of things blowing out over the weekend. So I think in general, this is one of the big limitations of trading perps, but especially for RWAs, where we see it more commonly if they're illiquid on chain. i'm not a big trader but i was using bitmec in 2019 2020 i thought i discovered the magic because i had understood bitcoin and eith late 2018 early 19 and then i invested all the money i had from a previous business sale into bitcoin and eith early 2019 but then i wanted more bitcoin because you never have more any of bitcoin when you understand but i didn't have cash right and then i discovered and I'm like, holy shit, like most people, right?

55:47Holy shit, I can make more Bitcoin with my Bitcoin. And I was like, how do I not get destroyed like 95 % of the traders? I spent a couple of months trying to understand a bunch of stuff. My strategy was extremely retarded. I thought I was smart. Obviously when you think we're smart, you're not smart, right?

56:09But I was just like, I'm gonna play only 10 % of my Bitcoin. use 1.52x leverage. If Bitcoin goes up 3%, that's 6%, close the position and compound the trade, right? But because Bitcoin is the collateral, right? On BitMEX, this creates more Bitcoin. Bitcoin was like 6k when I started in December 2020, or Jan 2020, and went from 6k to 10k in a month. So my strategy of leveraging long closing actually worked amazingly well. I didn't know that I was not a genius. It was just the market, right? And then after a month, I'm like, I'm a genius. I just created, I don't remember, a bunch of Bitcoin. Maybe it was like 30K worth of Bitcoin.

56:54But I was like, Bitcoin at the end of the month went from 6K to 10K. 10K, I was like, Bitcoin is going to be 100K one day. So I just made 300K in a month, right? And then I'm basically on BitMEX and I'm like, there's this other contract here. The ETH contract. I can use my Bitcoin on something more volatile so I can make more money. Well, number one, my strategy was shit. And then COVID happened. And before COVID, there was this Chinese flu. I was in Switzerland. I was like, it's in China, it doesn't matter. But the market's kind of stale, that doesn't go up anymore. So you start to have like these crazy unrealized losses.

57:29But also talking about funding fees, I didn't understand the funding fees. I didn't even know what it was. And it happened that the funding fees on this ETH contract were calculated differently. And the strategy of just saying, I'm going to top up my account to lower the liquidation doesn't work because the funding fees were so high that it would destroy your collateral. And therefore, you could basically lose all your money even if you never get liquidated.

57:56Lucas Schuermann:Right, right. Because your principal just gets eaten. And I realized that because I was underwater for maybe two, three weeks. And I was like, my collateral is just living, by the way, the day. So do I just top up more of my other 90 % of Bitcoin? but I don't know when the market is going to go back up or do I just get liquidated and obviously I made the wrong decision I topped up more topped up more put all my Bitcoin in there March March Covid crash happens liquidated anyway I understand I understood funding fees back then which was different between different contracts and which really destroyed I mean this was like again you see the trader usually will not keep a position open for like many weeks or many months right But that's how I understood the hard way, the pain of being faced.

58:48Lucas Schuermann:Yeah. Hard learned lesson, unfortunately, and sorry to hear that before for many of our community, probably many of our audience, right? Yeah, funding can hurt. Funding can hurt. So I think, again, this idea, one thing I actually want to double down on is not just making the funding rate more predictable, right? That is a major benefit of swap. But the other I actually want to call out is simplicity. When you're talking about Vimex, you know, the fact that they're providing leverage, their ability to long and short and so on. Fantastic. A fantastic product back in the day. Great innovation. But also lots of little risks you were taking to the funding rate, to kind of the quantal definition of the contract, since it was suddenly in BTC or ETH or vice versa, that are difficult for a retail trader, even a relatively sophisticated trader to understand.

59:29Lucas Schuermann:So this is a little bit of a guiding principle, generational that I like to highlight. These ideas can sound somewhat complicated. You know, RFQ and liquidity aggregation and OLP, our liquidity provider system, our in-house market maker, and even swaps. Right now we're like, oh, this is something I'm not used to. This sounds like a new financial product. Actually, it's the opposite. We're trying to simplify. We're trying to simplify and kind of reduce, let's say, those idiosyncratic risks and make this just more behave more straightforward in a way that traders can get their head around. Right.

59:57Lucas Schuermann:At the end of the day, traders want exposure to these underlying assets. They want exposure to NVIDIA or gold or oil or what have you. They want the dividends, maybe if it's a dividend-paying asset. They want leverage, but they don't want highly variable leverage ratios or leverage rates like funding. And these are our kind of design principles. We think about swaps, but it's also our design principle of variation in a whole. Aggregate liquidity, solve those hard problems behind the scenes, make it easy to trade, make it straightforward to trade especially global markets all in one place talking about ease of understanding for normal people which i'm definitely one of them a very normal person that's the amazing thing with perps because you see this chart you can it's just so easy right i was trying to trade some options in 2021 i think and i didn't understand i was on a dairy bit and i was like what the fuck is this right right i'm not i'm not a financial like a person what the fuck is this i don't understand anything i don't know what i'm doing here like and then if more people buy this option then the price gonna change what the fuck am i doing here right time decay you can't understand if you're not a financially technically technically savvy person right and therefore with perps it's extremely easy but the funding feasible so before we enter into like why swaps what they bring right what's a swap explain to me a dumb media guy who tries to simplify everything for everyone?

1:01:27Lucas Schuermann:Well, let's simplify it in the same way we simplified a perp, right? A perp was the derivative that used kind of this interesting contract definition of a funding rate as the mechanism. But at the end of the day, it gave you the ability to use a USD or USDC stable collateral to long and short and to use leverage. And swaps do the exact same thing, right? Swap is a derivative. It's linear, as you were describing. You don't have to worry about higher order Greeks and options pricing and things like that. It behaves in many ways linearly with respect to the underlying exact same way as a perp, right?

1:01:56Lucas Schuermann:But it helps to use as a different contract construction that trades bilaterally instead of on an exchange, which is something we uniquely can do to give a flat and predictable, we call it a carry cost and, you know, trad fi, but essentially think of it as a flat and predictable funding fee. And also aligns this type of product with how these derivatives trade in traditional finance. And that's actually an important second point. We were talking a lot before about our ambitions to list hundreds of different assets on one place and also to mirror this TradFi liquidity on chain. So by aligning the product, we also can increase our ability to hedge directly into the underlying markets.

1:02:33Think of it as, you know, we're not trying to put a square peg into a round hole and vice versa.

1:02:39Lucas Schuermann:We're aligning the tradable instrument on our platform with the most efficient and one of the most liquid instruments in the world for trading these underlyings, which is what the big institutions and banks use when they face each other. These ideas of swaps, total return swaps and other names like this. So the reason I mention this is to say swaps are not a new concept like in finance. They're actually well trodden and well understood in TradFi. They're a very new concept to bring into on-chain and into crypto. But fundamentally, you can think about them in the exact same way as a PERP. It's a financial product or derivative that lets you trade kind of the underlying, but use leverage and volume short and get the same pass-through cash flows as well.

1:03:20How do versional swaps change the game when compared to perps platforms?

1:03:24Lucas Schuermann:Those two things, right? One is funding. You're going to have a predictable rate and that's a massive unlock in my view. Now, I actually, I don't want to say I would encourage everyone's trading strategy is different but I could see reasons why many investors and traders would choose to leave positions open for a long period of time. We expect the funding rate of the carry cost on swaps to be in the 4 % to 5 % per annum range, per annum. So this is some of the cheapest leverage you can get anywhere in the financial system, right? What would be an average? Obviously, it depends a lot because it's flexible, right?

1:03:56But what would be an average when the market is not crazy, an average funding rate that you pay on a PERP contract?

1:04:04Lucas Schuermann:The problem is it varies so much. And exactly to a point I was about to make about the fungibility of PERPs and the complexities there. or maybe to your point about like quantile derivatives on BitMEX and how like all the contracts different. I mean, the reality is like PERP is a class of products and there's funding bands and multipliers and contract specs and definitions. If you go to some of the larger centralized exchanges, you can read this like fancy math in the footnotes. But the reality is it's really hard to say an average rate, like on a major, right, per annum, maybe seven, eight to 10%, meaning like BTC or ETH.

1:04:35Lucas Schuermann:But there's so many exceptions to exceptions to exceptions, depending on even comparing exchange A versus exchange B, what does average mean? Comparing BTC versus ETH versus SOL or in the game of these RWA perps, I'd say they've been around for so little time and the rates can be so crazy on the weekend. I don't even know what we'd really call average to be entirely honest. And that's part of the problem, right? We want to be able to say, ah, you know, maybe it's usually six or seven or eight. That's not really the case. I don't think that's a fair statement, especially to tell an average trader that that should be their expectation on perps?

1:05:06Lucas Schuermann:No, right? Like perps are variable when there's a lot of drivers and a lot of complexity and you can and should expect the funding rate to vary a lot. On swaps, it's the opposite, right? Not just lower, right? Some of the cheapest leverage you can get between crypto and intradify, but the key is that it's predictable. You know what to expect when you have that position open. And that's, I think, the big innovation on that front. Viational raised$50 million this year in May. Why? Right. We have ambitions, as we've kind of been teasing out and describing around the edges of competing, not just within crypto and kind of building the best RWA trading product on chain, but I want to build the best RWA trading product in finance, right?

1:05:49Lucas Schuermann:I want to provide the best experience when we compare it to traditional brokers, to the kind of wider financial ecosystem. And we talked about that with respect to why are people still paying fees? We talked about that with respect to the idea of accessing global markets, hundreds if not thousands of listings all through one account. No one's offering this right now, right? No one's offering this within crypto. We talked a little bit about some of the architectural reasons why, but definitely no one's even offering this within TradFi. And I think we can compete with both. So the reason to raise is we have massive ambitions and it takes a lot of trust and work and balance sheet and frankly size and legitimacy and warm introductions to get the partnerships on the TradFi side.

1:06:28Lucas Schuermann:we need to bring their liquidity on chain. So one of the big driving factors behind our raise was putting ourselves in a position where, to put it crudely, we would be taken seriously by the big guys. And we had the guns and the firepower to get these relationships in place. And now we have. This is something that's been machinating for a long time, but the raise was part of that overall strategy. The other is just giving ourselves the buffer to keep scaling aggressively. Variational has grown. We talked about when it became real for me. You know, it's grown exponentially in the last year. I mean, a year feels like forever in crypto time.

1:07:01Lucas Schuermann:And I'm sure for us with so much changing, but a year is a very short period of time. And we need the right resourcing to continue growing our team quite intentionally to have that buffer and those economic resources to build for the future. We're not even close to done. We're just getting started. We've had some great success and we're happy to see the product market fit and the excitement about Variational. But we're just now starting with proving this model out and showing what it can do. So we wanted to build for the future with the right partners and the right balance sheet. Quick shout out to the legendary team at Jupyter, the DeFi super app.

1:07:35Anything you want to do on chain, from trading to earning yield, you can just use Jupyter. Personally, I recommend getting the Jupyter wallet on either your phone or your laptop. 10 times faster and 10 times cheaper than the competition. You're going to love it. Thank you to the awesome team at Athena for backing today's conversation. Athena is one of the fastest growing projects in DeFi with over$7 billion in stablecoin supply and an average 11 % APY on SUSDE. And importantly, zero DPEGs since launch, which is exactly what you want from a stablecoin. Go check them out by following the link in the description down below.

1:08:14How do you think VC funding helps or hurts a project?

1:08:20Lucas Schuermann:I think it's a misnomer that VC funding births a project a priori. I think there's a lot of ways in which investors can have misaligned interests with a project or the community. And we unfortunately have seen this a few times in crypto before. But if you look at nearly every single successful business in and outside of crypto that has been built in the last many, many years, almost all of them were VC backed. Some of the best companies in the world, I'd argue, someone said, I'm very happy that they exist, like Google and plenty of others is a big part of my daily life. These are all VC-backed companies.

1:08:53Lucas Schuermann:And do we say that there's something predatory about the idea that that initial capital, that ability to keep growing exponentially quickly and the relationships and the network and trust that they can bring, there's something negative about that? Sure, there's bad apples and bad examples. But broadly speaking, I think it's more of an accelerant. We were very intentional when we built our cap table. To your question around why and how we raised capital. We worked with only a small number of the best firms in the space, guys that we thought would help us with specific goals, whether that's being day one users, whether that's being partners to OLP, whether that's being particularly helpful in connecting us to the TradFi side of the world.

1:09:33Lucas Schuermann:That's how we kind of thought about it. And I think it has been a big accelerant. I'm more beyond grateful to some of our largest lead investors. And I think we look forward to continuing to build with them.

1:09:46Variational is second to Hyperliquid in terms of upper interests and volume. So we need to talk a bit about the differences between Hyperliquid and Variational. You actually mentioned that you were trading on Hyperliquid for quite a long time.

1:10:02Lucas Schuermann:We've been quite public as well that Hyperliquid has previously also been a hedging venue for OLP. So activity on our platform sometimes shows up on Hyperliquid too.

1:10:14Explain as simple as possible the architecture difference between a Hyperliquid and a Variational.

1:10:24Lucas Schuermann:Hyperliquid is an exchange. It has an order book. If you were to map it into traditional finance, you could compare it more directly to NASDAQ and New York Stock Exchange and CME and other infrastructure pieces. This is a hugely valuable business and an important part of the financial ecosystem, as I was describing earlier, one of those three big rungs that kind of makes up a trading ecosystem. Uniquely in crypto, Hyperliquid is also a retail facing business, right? I can't trade directly on the New York Stock Exchange or NASDAQ, nor do you. But in crypto, we can directly trade onto the order books.

1:10:57Lucas Schuermann:I think that's the piece that's going to change. Variational is an RFQ platform. It looks like a broker. It does liquidity aggregation does not have its own order book. It's not built for market makers and high frequency trading and ultra low latency price discovery and order matching. It's built to aggregate liquidity and give the best pricing to retail traders. So architecturally, they actually couldn't be more different. There are some overlaps in that, for example, you can trade a BTC perp on both, at least as of right now. But I think as we go forward, Hyperliquid will continue to be very successful at what they're doing as an exchange, but we'll see a natural move towards some of the benefits of broker-like models and aggregation led by variational for retail traders in particular.

1:11:44Why would the Hyperliquid not have chosen an architecture that enables top liquidity directly for a ton of different assets?

1:11:53Lucas Schuermann:Hyperliquid built an exchange when they first set out and that was needed at the time. I think, Again, the world changes so quickly in crypto that we are now seeing multiple competitors to Hyperliquid. I'm still a particular fan of them on the exchange side, especially on chain. But at the end of the day, I think it's kind of like asking, why did NASDAQ or CME not build Robinhood? These are different businesses. You don't necessarily need to do everything at once. And maybe I'd say with a little bit of a give to Hyperliquid that in many ways they validated this market. We, again, we have hedged in the past on Hyperliquid.

1:12:28Lucas Schuermann:We were an early user of Hyperliquid when we were running a prop trading firm. I think a lot of what we're seeing kind of in the market is downstream of Hyperliquid building and showing that you can build an amazing product on chain. They built an exchange first. I think if I were in their shoes at kind of that phase in the ecosystem, there are a lot of great reasons to. No one had built a quality product as an exchange. We still had relatively lackluster set of exchanges, even in the centralized land. So it made a lot of sense. But these are completely different architectures. We came in at a time in the ecosystem where we could have the luxury of asking the question, where are we heading in the future towards RWAs, towards, in my view, broker-like models, towards making retail efficient or trading as efficient as possible.

1:13:10Lucas Schuermann:And that's why we chose this model. I asked the following question to Jeff on this podcast right before the Hype TG. So I'm going to ask you the same now. How will Variational continue to stay relevant amongst tough competition after the points program concludes? At the end of the day, I think there's one thing that matters in terms of pre-points versus post-points. And that's, did you use the time of points as a marketing tool to build that familiarity with Variational and what we're doing uniquely? To build the economy of scale and the size and the ecosystem to execute on the roadmap and the vision that we have?

1:13:53Lucas Schuermann:But did we build a product that people want to continue to use? And time has proven Jeff Wright on Hyperliquid's case. Hyperliquid built one of the first great on-chain exchanges and this order book model, and they did it the best. And that has been incredibly sticky because people trust Hyperliquid, because it's a great product, and because people really did want to use that product. For us, I think it's quite the same. The area that we're carving out is the first broker-like model, the benefits of zero-fee trading, the benefits of trading hundreds of different assets on chain, and the ability to bring TradFi liquidity to those, particularly for RWA trading and innovations like swaps.

1:14:29Lucas Schuermann:I haven't even talked at all yet, quite intentionally, because we don't want to create too much complexity, but about Variational's future roadmap. As with Hyperliquid, they talked about their future roadmap, housing, all of finance, HIP3, HIP4, prediction markets, at the time, experimentations with the chain and unit and everything else. Variational has a similar one pro institutions, nonlinear derivatives, all sorts of things. But to give you a succinct answer, kind of coming back to the point, people will continue using variational because it's a differentiated product and it's a great user experience.

1:14:59Lucas Schuermann:And it's my goal to just continue to make that product better and to double down on some of these systemic differences between our platform and the wider competition. On that first podcast I recorded with Jeff a year and a half ago, he was to simplify because that's what we're trying to do here. he was saying i mean now we talk about housing all of finance he was basically saying we're the amazon web services of liquidity what is variational in this if you simplify let me uh i'll use a finance comp because i think it's easier in my case um variational is the interactive brokers or robin hood of on-chain trading but it's one that can provide unique innovations that neither of them can.

1:15:49Lucas Schuermann:Things like swaps, things like derivatives, these aren't available on those platforms in the same way. But if I were to use a really understandable, you know, pithy quote, I think it would be that. Variational is an attempt to bring the benefits of brokerage and liquidity aggregation to on-chain trading and new types of derivatives. If we were to think of a kind of infrastructure type comparison, because I think it's an important when we even just talk about brokers versus exchanges, you know, Hyperliquid is an exchange. It's like CME, CBOE, and so on, NASDAQ. And we would put that in infrastructure wrong, like AWS.

1:16:24Lucas Schuermann:I would put variational as like Apple, right? Using a kind of a tech, you know, a little bit of a moniker. We want to own the end client. We want to build the best possible user-facing product. We sit on top of infrastructure layer players that enable our apps and our ecosystem. But we want to build the best experience by aggregating all those things together. What does Hyperliquid fundamentally misunderstand about the future of trading? I'll deflect this question slightly. I think that Jeff and his team are fantastic. Jeff Yann at Hyperliquid, Shoku and team at XYZ. I think they understand a lot about the future and where these things are heading.

1:17:08Lucas Schuermann:And I think we're choosing to compete in slightly different areas. I think, as we talked about, they're relatively intentional for their reasons to build an exchange, to build purpose-like products and so on, and to innovate on 24 by 7 trading and many other things. I don't think Hyperliquid is going away. I don't think it's going away even in the long term. But I think it's going to operate exactly as Jeff mentioned, it sounds like, with the AWS Compable at the infrastructure layer. And Variational is going to operate at the layer that faces retail, the brokerage layer. So I think we'll continue to evolve in parallel.

1:17:41Lucas Schuermann:I think we will compete in certain places, but we'll also collaborate in others. What could variational fundamentally misunderstand about the future of trading? I think it's dangerous to try to innovate on too many things at once. You know, it goes back to that idea we were talking about earlier in hubris. We're trying to innovate in terms of bringing not just, you know, on-chain traders onto a new type of derivative and a new type of platform architecture. Again, guys who might be used to trading on order books, trading on centralized and decentralized exchanges, trading on perps. We're saying, hey, trade on a new type of platform that's a broker-like model.

1:18:21Lucas Schuermann:Trade a new type of instrument like a swap, et cetera, et cetera. And then I was talking about our ambitions to compete with traditional brokerages, right? When we think about that, user education, onboarding flows, we have to bring them on chain as well. But this is going to be difficult. So I think the question is, can the benefits and the moat in terms of the quality of product and differentiated experience that we're providing outweigh the switching costs and the fact that we have to do this education? This is one of my biggest worries. And I think it's also why I'm happy to see that we've reached a certain scale where we are able to generate quite some buzz, get this in front of people to get swaps off the ground.

1:18:59Lucas Schuermann:And I think time will show that we'll be able to educate the public at large about why this is beneficial. Who wins long-term? Binance, Coinbase, Hyperliquid, or decentralized protocols like Variational? Well, as I said, and I know I'm dodging the question a little bit, there's a world where Variational coexists with all the other players that you mentioned, particularly because their infrastructure, I view exchanges as infrastructure. We trade on all of the names that you just mentioned, and we will likely continue to into the future. The beauty of Variational is that we're agnostic. We might use crypto liquidity or 24 by 7 liquidity on some of those platforms that provide it.

1:19:38Lucas Schuermann:We might, we do hedge the majority of our RWAs into the TradFi markets because that's where the most liquidity is. But I don't see any of those businesses going away anytime soon. I have my own opinions about the merits of hyperliquid and decentralized trading and transparency versus some of these centralized exchanges. But I'm a big fan of all three of those businesses. And I think we're more introducing a new segment in the market. And I think we could maybe ask this question as who will exist in the future, variational or some of these high fee, old school, traditional brokerages. That's who I want to put my sights on.

1:20:16How quickly do you think that happens? that these old school, because for us, it's kind of like a no brainer. I mean, we don't even use them anymore since many years, right? Right. But hundreds of millions of people do, right?

1:20:31Lucas Schuermann:Yeah, exactly. But it's a multi-trillion dollar industry. And again, we haven't even talked about bringing institutions on chain as well, which is a whole other side of the vision. But just to keep the focus on Omni and on that, I think it can happen a lot sooner. Again, it's like when you asked about my first fund, it happens slowly and then all at once. Same with variational Omni, like even for our original crypto trading when we were getting off the ground last year, slowly and then all at once. And I think we're starting to feel that all at once happening now in terms of how quickly RWA activity is moving on chain to Hyperliquid to us and even to a few other platforms, whether it's spot and tokenized stocks and so on, tokenized RWAs or whether it's derivatives.

1:21:12Lucas Schuermann:So I think exponential curves are very powerful things. And I think we could see that in the next few years. We're in the early innings of it right now. The only reason why I say we're in the early innings is there's such a huge market to move on chain. It's massive, right? We're talking about global brokers on all types of global assets. We have to kind of pick our battles and choose. But it's happening faster than we think it's happening right now. You're a trader at heart? I saw that 4 % of the traders on CalShit think that Bitcoin reaches 150k by Jan 2027, which is not in a long time. How optimistic are you for crypto, for the crypto industry in terms of both adoption and prices for the upcoming year?

1:22:05Lucas Schuermann:I think I separate the questions of adoption and pricing. There's some amount of linkage there, of course, but particularly for things like Bitcoin and some of the majors, I think they trade in very different ways from the adoption of stable coins and agentic payment flows and so on. That might be accruing more to some of the stable coin issuer layers, some of the stable coin chains or L2s, things like that, payment chains, I should say, and particular other even app chains. And I think we'll be a little bit in that ecosystem. If you had to put a gun to my head and ask me on a macro take, I'm still bullish on Bitcoin and other majors as tradable assets.

1:22:41Lucas Schuermann:I think they're not going away anytime soon. We'll probably see periods of lower volatility and consolidation like we just did. We'll see periods of new capital rushing in as the global landscape and macro changes. But when it comes to adoption, I think crypto has silently been achieving all of the things we originally set out to achieve. Not in exactly the form we anticipated in the 2016, 17, 18 ICO boom and kind of all the ideas that were exploding back then. But, you know, crypto is quietly becoming one of the main ways that we even see FX payments internationally, interbank settlement, micropayments.

1:23:16Lucas Schuermann:It's being deeply and actively embedded into agentic payments, which is something I'm particularly bullish on. And, you know, nowadays we have entire sections of Bloomberg and Wall Street Journal and so on. This is unthinkable five years ago, dedicated to following the crypto industry. So yes, there's been many missteps and there's been a lot of projects and ideas that have been tried and failed. We saw a massive blow up in the dotcom bubble in 01 and many other times, right? But tech marched on and still is very pervasive in all of our lives. So I think crypto is actually achieving many of its aims and its death is greatly exaggerated.

1:23:49Lucas Schuermann:So I'm very bullish on crypto's infrastructure and the overall expansion of crypto into the rest of the economy.

1:23:59You told me the other day, Variational Protocol is our life's work, our magnum opus. What's the end game of Variational?

1:24:10Lucas Schuermann:You know, I ask myself this question a lot. And the reason to ask it a lot is, I think, to really put in the effort that it takes to be a founder. And not just for me, but for the rest of our team of 25. You know, we're running a very large and ambitious protocol. and by any metric, a very enlarged and important piece of the crypto economy at this point, we take this very seriously. So we have to have a vision and an end game and a reason why we wake up every day and grind on this. And for me, I think it gets into two things. One is on the product side, it's democratizing access. I think that traders globally should be able to trade global markets.

1:24:47Lucas Schuermann:I think it should be able to do so without red tape, without restrictions and taxes and fees and onboarding that are so ridiculously fragmenting and particularly without these predatory fees and platforms, again, that shall remain nameless. But I look forward to us kind of introducing a new way around that. But more broadly, I like building things that people use. And I think the thing that we really feel the most pride in when we see Variational's growth is the fact that we are attracting day by day thousands of more traders to these new products that we're innovating on. And the idea of introducing new technology and seeing it become used, and at this point, even seeing it be copied, some of the ideas we have around RFQ, it's really fulfilling.

1:25:33Lucas Schuermann:And I think for a lot of entrepreneurs, it's really that idea of building something and seeing it be used that you'll feel pride about. So that's, I think, at the end of the day, what we're doing. What's the one thing that people should remember from today's conversation? Yeah.

1:25:51Lucas Schuermann:I think there's two. I love redefining questions, right? So the one thing that I think is most important for an average audience member, let's say the broader kind of group looking at variational, is to understand that we're trying something entirely new. We're building a broker-like model. We're aggregating liquidity. We're taking TradFi and we're pulling it on chain. And what enables this, the way that we've been doing it, is a completely different architecture. Our product looks sometimes intentionally similar to some of the other leaders in our space because trading perps and trading swaps and so on should have charts in order and so on.

1:26:27Lucas Schuermann:But the underpinnings, the skeleton, like the foundational technology is completely different. And we have ambitions to do that again, not just in perps, but introducing even new types of innovations like swaps, bringing TradFi on chain and culminating and bringing institutional trading on chain as well, which we can talk about more in the future. but the other thing I think to keep in mind about Variational is actually the trust piece it'll take me some time to win over everyone and to build for example the same type of information base that Hyperliquid has that even some of our larger centralized competitors have but we're a real team out there building with real backgrounds and real chops in the space and it's my goal to show everyone through the quality of product and through talking a little bit about myself and the roadmap that you can trust us to be here and keep building and I would be honored if everyone would give this new technology a try

1:27:18well thank you so much lucas for doing that hopefully this helped people understand a bit more about what variational is building and i mean on this podcast specifically we really try to filter to the top builders and the most serious people so And I think that was a really great overview of what you guys are trying to do and of you as a person too. Thank you so much for opening up and coming here.

1:27:50Lucas Schuermann:Thank you for having me. I'm honored to be on and to be in great company of many of our peers and competitors. And again, we hope just like Hyperliquid, I guess you mentioned about a year, year and a half ago. I hope to come back on in the future and show the growth that we've kind of achieved since then. Amazing. Thank you so much. Thanks for having me. As you probably know by now, I host some of the biggest names in Bitcoin and crypto on my podcast, but a lot of the best stuff never makes it on air. The Shift newsletter is where I share that raw behind the scene alpha, the insights, stories, and lessons straight from my guests that you won't hear anywhere else.

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