Ethereum, Composability and Creating Options w/ Dan Ugolini (Rysk Finance)

**Speaker A:** Foreign. **Speaker B:** Hello, and welcome back to the Strange Water Podcast. Whether you're new to the pod or have been following for a while, thank you for tuning in. We've got a really great conversation for you today. A few weeks ago, I met Dan Ugolini from Risk Finance while moderating a panel discussion on options. I've never been a big options guy. While I think their ability to express a wide variety of views on the market is interesting, my eyes start to glaze over the moment we begin talking about Greek letters. But here lies one of the most exciting parts about working in crypto. Even though I had very little interest in the mechanics or actually trading options, I found myself more and more fascinated by the larger conversation about building on Ethereum. Specifically, the way Dan spoke about composability and building smart programmable options set my mind racing on what it means to build on the world computer. The following conversation is one of the best, best, most nuanced conversations I've had about the peculiarities of building on Ethereum in a long time. We cover the power of composability to unleash a community's creativity, the differences between developing in Web2 versus Web3 first principles on integrating third party protocols, and so much more. Again, I am not an options person, but I am an Ethereum. And after this conversation, I can confidently say that very few people get it. From the finance to the computer science and everything in between, better than Dan. One more thing before we begin. Please do not take financial advice from this or any podcast. Ethereum will change the world one day, but you can easily lose all of your money between now and then. All right, enough of me. Let's bring on Dan. Dan, thank you so much for joining the podcast. Great to have you. **Speaker A:** Yeah, no, thanks for having me. That's going to be exciting. So great to be here. **Speaker B:** Yeah. So before we start getting like, real big brain and talk about like, the future of finance and composability and all that stuff, like, I. We got to start with what brought you here and what brought you into crypto. And, you know, I'm like a huge believer that you don't find yourself on the outside of, like, the global financial system without, you know, a story or a reason. So, Dan, what brought you to crypto? **Speaker A:** Yeah, let's start with that. That's actually a good point. So I started my career, I was doing investment banking. So, you know, like real financial stuff. And I was working in the M and A, corporate banking. So, you know, very institutional. And to be honest, I loved finance per Se like as a, you know, the way of actually financing projects and stuff like that. What I didn't like was all the bureaucracy. So I started was like 2012 or 2013, something like that. So right after, you know, the big crisis and the whole job was like huge bureaucracy, like everything was an internal committee and stuff like that. And so I quit that and I wanted to work in something more, you know, exciting, if I can call it that way. Even though, you know, I loved finance per se and, and I started to actually learn programming because I wanted to work in tech. And I was like, I. If I work in tech, I need to have an understanding of what's going on behind the product, right? So I started to learn coding, take some time off and actually moved to Berlin back then. And that was actually the first time where I heard about Ethereum. I remember like going to meetups and gnosis theme, for example was I think one of the first one in Berlin. I'm talking about like 2016, 2015. And so I was like, oh, this is actually exciting. I knew about Bitcoin already and I found Bitcoin super cool and whatever, but I couldn't find anything exciting except buying it and holding it and waiting for price to go up. This was pretty much everything about Bitcoin for me. It's like I never paid a friend with bitcoin or something like that. But when Ethereum came out I was like, oh, this is actually exciting because we can build products and stuff. So back then I was actually working on my own project and it wasn't crypto related, not even and finance. I was doing online education software as a service. I have my own company. And so in the spare time I was always, you know, excited about crypto. So the job was working on my stuff, building a lot of like backend and full stack work. But in the meantime looking into, you know, crypto. And at the beginning, like even with Ethereum, I got pretty excited, you know, the ICO area. I was like, okay, this is getting like something interesting, if you can call it that way, but I don't really know what's going on. And I remember most of this SEO was like, okay, this is just a good way to lose a lot of money. That's what is going on, right? But I remember actually finding some nice projects back then and I was like, okay, this is actually interesting. Like the first one obviously was AAVE it Land. It wasn't even AAVE back then. And so I remember like going in 2019 for example to some hackathons I remember one organized by Consensys, one in Paris meeting, you know, like all those OG teams. And I was, okay, this is actually exciting because there is, you know, utilization of what we build in years. Like, this is a new financial system. I remember like speaking with Stani and it was like, we are building open finance. It wasn't even called Defi back then. **Speaker B:** During this time when like 2016, 2017 area era, when you're like really starting to realize there's something here. You know, as you said, your background is like real finance and then like learning computer science when you were seeing these new primitives and like talking to Stanley and stuff, like what, what was like getting you like really pumped? Was it about like open finance and like this new like paradigm? Was it about distributed computing and like where computer science was going? Like, what did you. Was it just about the people? And like the smartest people in the world were gathered around this. Like, what did you see back then that allowed you to take the plunge? **Speaker A:** Yeah, no, I mean back then again, like at the beginning I was most skeptical because I couldn't find like, you know, a utilization of those, you know, ICOs, whatever. But when it was like 2018, 2019, like this idea of open finance, I mean, I still remember literally Stani being on stage and talking about open finance. I was like, wait, this is actually pretty cool because myself at this hackathon, I can basically build a product on top of, you know, AAVE or IT plan back then and I can create, you know, a new financial product. And I was like, this is actually very exciting because I didn't mention that. But one of the first project that I made myself when I was learning coding, it was actually a payment system. So the idea was I want to pay back my friends after a trip, right? Super simple. And I was in Italy back then and there is no way that you can build at least like in 2012, 2013 when I was, you know, starting to get excited about coding to build a product, financial product, like it wasn't, it was completely closed system. There is no way that you can send money to someone else. **Speaker B:** I mean, it was possible then you could just raise like $5 billion and be called Stripe. **Speaker A:** Yeah, yeah, exactly. Or I remember looking in Italy and I think I was talking about like 2013, 2014. And I was like, oh yeah, you need the banking license. I was like, okay, that's interesting. I was like, you know, 5 million banking license. So when I was looking, you know, like at this open presentation, I'll say Wow, this is actually very exciting. Like in, in an hackathon I can build a product, I can also use, you know, those primitives and I can actually create a lending market and everything on top of what we have. So that was probably the main thing that excited me the most. And the second one is like, I don't have to ask to anyone, I can just gonna build it. It's like that was simple as that. Right. And so that was probably the, the trick that was like, okay, this is interesting. This is like a very new paradigm in what we building in the space. So there was like the excitement phase. **Speaker B:** Yeah, well, I, we did not plan this. This is supposed to be a talk about composability. And it turns out the thing that got you excited was composability and like, you know, censorship, resistance. So we'll get there in a little bit, but please just continue with like your journey to 2023. So you're walking around, you see Stanley, he's like convincing you that like all you need to do is get interested and then you can build finance. Like how? Just bring us from 2019 to here. **Speaker A:** Yeah, 2019 to here. So 2020, that's the biggest point in time. I. I still had my web, you know, web to education and software, but Covid start. So there is a lockdown in Italy too. I was in Milan, the worst place ever. So I couldn't even leave my house. Like I had police in front of it. I was like, okay, let me find something to do right now. And so I found I was using a lot of defi back then and I started to get pretty excited about Open the options protocol. And so I got in contact with the team and I was like, I like your product. I had a couple of feedback, you know, like kind of a contributor at the beginning. And then we became kind of very, you know, friends and close. And so at some point they were like, hey, you have time because apparently there's this huge lockdown. You want to help us out? You have experience, you know, in startups and everything. And so I started to basically work with them kind of part time at the beginning, very early on, I'm talking like of him that just launched the first V1 and it was like, you know, March or April 2020, something like that. And so that was the big moment when I actually started to be in a way, way more involved, not just as a user, but more like on building and so on. And after that, after open, so I'm talking end of 2021, basically I was on the open discord and I found few people that I, you know, eventually became my co founders in the future and we started to brainstorm some ideas for an hackathon. And the idea was to build something on top of open. So back again to composability and the idea was how can we build some sort of liquidity layer on top of this primitive that it was the options settlement, right? So open was a settlement layer for options. So you can create any option using that protocol back then. And I was like, okay, let's try to build something on top of it, like similar to an amm. And it started like an project and actually became Risk. And since then we full time on it. So again, composability, that was the trigger at the beginning. Like I met those people and we done an hackathon to build something on top of Open and use that composability. So again, that's what bring me to the space, I guess. **Speaker B:** Man, very cool. Again, did not plan this, but so before we get to risk. So I think for people in this industry who don't have experience with real finance, finance is this monolith in which like all financial things happen. And just like if you're a farmer, you grow food, like if you're financier, you do finance. Right, Financier. And so for us that like have done real finance, like oh my God, like finance is so varied in variety. Right? You said you were working on M and A. Like I used to be working on treasury management. Like the idea, especially for M and A, you were not like messing with options on a day to day basis. Like that's just not what M and A is. And so can you talk a little bit about like what drew you to first open but then really realize that this whole space is something that is worth your time? **Speaker A:** Yeah, that's a good question. As you said, options is something that you really don't use when you work in finance in terms of corporate finance or as you said treasury and so on. **Speaker B:** The closest example of when I would use options at Anheuser Busch for Treasury management is we wouldn't use options, but we would use futures to lock in production costs or something. But point is, it's like it's like options are just like outside of the realm of like business operations. M and A, like all these kinds of things. So I just. Yeah. How did you get there? **Speaker A:** For me, the closest thing to option was like stock options. Right. It's not even like something you trade, it's just like something they give you like when you join a company, especially when you do, you know, startups and so on. But the thing for me is like about options, when I started at university I got pretty excited about them, but I wasn't probably like, I'm a bad trader. That's something like I'm honest in saying that I was like, definitely not a good trader or let's say that there are traders better than myself for sure. And so when I got excited about option, I was like, okay, I'm not gonna trade them anyway. So it's excitement, it's good to see like how the pricing moves and all the variables and Greeks. But you actually don't use it unless you trade them, right. But when I found open, I was like, oh wait, this is actually getting interesting because I can work with options, understand them, but I don't have to trade them, right? So I can build something on top of it. And even if I'm a bad trader, it's like I can play with it. And so I got very excited because working on building a protocol is actually makes you like, you have to understand a lot about the instrument. You have to understand how people use it. You have to understand like everything behind all the risk and what could go wrong. But even if you're a bad trader, as myself, you can still work on it because again, you don't have to trade, but you have to basically build something for people to actually trade. Right? And so when I started to basically create this liquidity layer on top of open actually like trading was involved because at the end of the game when you try to add liquidity, you have to make a lot of risk management, for example, you don't want people to lose money. Liquidity providers. So again, you need to understand a lot about trading risk and everything. But that was probably on a second level. The first level that actually made me like angels was like, options are cool and that's the best way for me to get into it because again, I probably I'm not enjoying trading a lot in my life, like in my daily life. I do like trading sometimes. I do like trading options sometimes. But building option is actually way more exciting for me because probably I'm more on the building side. So again, that's what made me actually go very deep into options and everything. And that's how we build risk. By the way, we have very good traders in our team as well. We've done a trading company, our comp won the trading competition. So we have very good trades. So don't worry about it. I'M the guy making sure everything works, but I'm not the trader. **Speaker B:** I have been wondering who the number the winner of that trading comp was, but now I know. **Speaker A:** So it was our quant, but we didn't give up right. Price because it was like, yo, you're from the team. Like, we cannot give you price. So it was our quant. **Speaker B:** Yeah. Hey, listen, all I have to say is, like, you're more honest than, like, 99% of people in crypto because it's always your own quant that wins the competition. It's just no one ever tells you that. **Speaker A:** Yeah, yeah, it is true. Right. I mean, the thing is that we also try to. For example, we didn't tell him, like, when we release new product or something, so we didn't want him to win and he won. So I was honest with you. I was like, yo, you really won, actually. You good? I mean, we did everything to make sure you couldn't win, but, yeah, it won. **Speaker B:** Yeah. All right, we'll get to the trading comp in a sec because, like, there's a lot of interesting stuff to pick apart there. But while we're still doing this slow roll, so you're at open and like, you're realizing, like, you're contributing. You're seeing what options are in defi, which, like, spoiler alert, like, meh, whatever's there is not great. And like, the reason it's not great is because, like, pricing is just so shot to shit that, like, it's not even worth buying. And so can you talk a little? Like, totally hear you. That the origin story of Risk is like, oh, like hackathon, like, build a liquidity layer on open and. But just like taking a step back during this time before you start risk, whether you're looking at open, Lyra, dope, dopex, like any. The entire ecosystem deribit, maybe even the entire ecosystem of crypto options. What are some of the real challenges and things you are seeing that need to be overcome before this goes from far out on the innovation curve and something that's coming to a real tool that traders can trade, hedgers can hedge, that kind of stuff? **Speaker A:** Yeah, yeah, that's. That's one of the, you know, biggest question and probably hardest challenge that we're facing, you know, on a daily basis. And when we started, Risk was basically based on this. Like, we figured out what were the issues back then and we talking, like a market that was also very early and like, how can we, you know, make this product in a sense that we're going to fix those problems. Right. One of the main one when it comes to options in crypto specifically, so not just defi, I'm talking about crypto in general. It's was the use case, right. So one thing about like using option, you mentioned some of the use case like the main one is actually obviously you want to get leverage or speculate on something that you can get like very good leverage with options. The other one is edging. Right. So those are like probably the two main ones. There are more, but let's say those are the two main ones on the edging side. Yeah, yeah. Structured product is definitely. But even on the structured product you have one goal at the end. Like it couldn't fall in one of those categories. Like you could protect or you know, you can basically create a structured product that is a super dj. But yeah, let's say you know, edging and speculation, the two main ones and then let's say like income generation for a third category. But when it comes to edging, crypto it's a very weird industry when it comes to that. And we saw that by results, right? Like look at what happened in last year and we realized that no one was actually edging. No one was doing risk management, like not even the big players, right. So obviously the. I'm not saying that everyone is not there, but I'm saying it's one of those industry where it's way more profitable to just be Delta 1 and means that you're just going to long any asset that get thousands of leverage and wait for the price to go up. That's how most of the people and funds and so on made money in this space. And so that's one of the things like who's going to use actually those products when it comes to edging. And right now because of the actors that we had and everything, it was challenging to find those use case. And so one thing I guess if we believe that crypto is going to mature as an industry and we're going to get more institutionals and we're going to get more, you know, advanced traders, pension funds, like all this, you know, actors making real volumes, real money, an options market will be needed because options are still a very good instrument especially when it comes for, you know, h net protection. So if you look at the volumes right now like even in, you know, something like that a bit that is doing like 95% of the volumes when it comes to crypto options, they still have this target market that is mostly crypto market makers or crypto let's call it hedge fund. So it's still limited to disclose industry. But again if you believe that this industry is going to grow and I definitely believe that myself and being here for a long time, we believe the option space should be there. So that's one thing about when it comes to crypto option, but when it comes to speculation. So not just hedging, we said that everyone wants to get leverage and, and everything. Something very interesting about crypto crypto market to me. It's how perpetual became so popular when it comes to leverage versus options, for example. So you know, FTX was doing, you know, perpetual, but we have a lot of them in defi. GMX is definitely the big one. Like our actually was better for options trader. Sorry for crypto traders they want to get speculation to actually use a perpetual instead of using options, right? **Speaker B:** Just to help the people at home who aren't like didn't have tradfi experience before this like a perpetual is actually called a perpetual futures contract and it does not exist in the real world. Like it, it was invented by like Arthur Hayes and I forget which exchange is his. But like this is what, what Dan is trying to say here is that like something weird happened in crypto where like the normal tool by which everyone does the exact same behavior was not created. Instead we created this like very custom thing that really didn't exist before to do that same behavior. And so anyway, I'll let you continue from there. **Speaker A:** Yeah, no, that's correct. I mean in traditional finance we didn't have this perpetual future. So if we are like no one was using it, but everyone was mostly using options or just futures, right? So the thing about perpetual futures is they made this type of leverage trading very easy. Like when you trade a perpetual, there is basically nothing that you have to do except of choosing what is your liquidation price. At some point then leverage you're gonna get, right? So you say, okay, I'm gonna get liquidator at this price. That's the max leverage I can get, right? So you basically just move one variables at the end of the game. But when you trade options you have a lot of variables, right? You need to trade and choose the strike price, choose the expert. You need to understand all those grades and so on. So that's also something very interesting to me. It's like how oversimplified was trading even though perpetual if you do them in a professional way, like if you talk with any professional trader or you know, more institutional. No one likes perpetual in the sense they're Very expensive, especially when it comes to defy. They doesn't let you play a lot with different variables. And when you're a professional, you like variables, right? You like to play whatever you like to find. So that's something also very interesting when it comes to option space in crypto, it seems that right now what traders want is something that is very, I wouldn't say basic but like simple, like you don't have to move. Sorry, a lot of variables. But with options, again, I still believe that it requires education, that it requires people to actually better understand what's going on. It requires people to play, if that's a good term with options, because they have advantages that can give you similar benefit, you can get leverage and so on. It's just a matter of people now in this space are preferring other instruments. So that's definitely the biggest challenge. How can we make options in a way where it's easy for everyone to understand, it's easy for traders to use. There is liquidity because one thing about even perpetual is like liquidity is concentrated most of the time, especially when it comes to defi. So you have liquidity. But when it comes to option there is a lot of fragmentation, a lot of issuance. There are a lot of issues. And back to your original question, like what are the main challenges? This is definitely one, educate. Make sure that people understand the advantage. That's definitely one big one. **Speaker B:** I totally hear you. And just to sum up, I think everything you're saying is one, we just need to get smarter, which I can say that about basically everything in this space. But two, it sounds like what you're saying is that today options just aren't, sorry crypto options just aren't capable of expressing the same views and the same positions that traditional options are. And like that's the gap that. So like forget liquidity, forget education. They're just like not expressive enough. And like, I think that's what you're saying, an opportunity you saw. **Speaker A:** No, that's absolutely correct. And one thing to add on there, like what I've realized talking with traders most of the time in crypto is always about direction. Like people trade directionality, market up or market down. There is not much more. People want to trade. It's like, okay, market is going to go up or down, easy as that, right? Very short term. With option you have a different dimension. You play in volatility. Right? So that's something that in, in this market, I don't think we there yet. But that doesn't mean that people don't want it. It means it's just a matter of, you know, time and again, education and so on. But in traditional finance, look at what happened with Robin Hood and GameStop and everything. Everyone was trading options back then. It became one of the most popular instrument in the U.S. it's like trading options. And so again, I really believe it's a time and making sure we, you know, educate and make them appealing to this, you know, global audience and more, you know, average user as well. **Speaker B:** Yeah, yeah. Cool. So let's talk about risk. You are with your buddies in the open chat realizing like, oh, there's an opportunity to run this hackathon, maybe do some liquidity. Can you talk a little bit about like how that hackathon project turned into a protocol or company or whatever you guys are calling it? **Speaker A:** Yeah. Back then Open had basically a settlement layer, right. And this is probably going to be very interesting when we talk about composability. But the way the protocol was built was to be composable. So the idea was everyone can create an option. So the protocol was, I wouldn't say simple because it's actually pretty complex, but was simple for anyone to create an option, right? So you can say, I want to create an option market. So I want to create an options market on it. You can use open and you create an options market on it, right. And then obviously you need counterparty for that trade. So you can say, I want to sell an option. You can create this option, but then you need someone to buy it. Right? So you can do this in very different ways. And back then, Open had an order book system. I think it was built on top of 0x. Again, composability. Right. So protocol and then 0x another protocol and I call it about composability. So it was an order book built on top of 0x. So to trade you need to post a limit order, right? So you say, okay, I want to sell this option for $10. Whatever. The main issue with that is when you are talking about options, options have experts, you have put in calls and you have multiple strikes, right. So if you think it does this way, you have a lot of different products because each product is kind of independent, right? So to have a market that is liquid enough, you need an infrastructure in terms of traders, market makers, that he has to be huge because everyone has to post, you know, those limit orders and so on. And back then it was on mainnet end of 2021, gas was crazy high, everything was on chain. So it was like basically, yeah, it was like crazy, like it's definitely. The protocol itself was great, but creating a market on top was very challenging. One thing we wanted to do is we can learn from other protocols similar to Uniswap and try to create this sort of amm. The idea originally was how can we build a pool on top of this protocol where actually anyone can trade and the counterparty will be this pool and this pool going to trade multiple product and so on, so we can concentrate all the liquidity into one single pool similar to what Uniswap was doing. The problem, obviously you cannot use Uniswap with options or like traditional amm, because options are again very interesting instrument. They have an expert. So if you try to see the pool like Uniswap put in options and you know, let's say USDC or whatever, you're going to probably end up losing a lot of money because you know when it goes to expert, one of the two assets like especially the options might be worth zero if it's out of the money. So you know, if you're selling, you're losing a lot of money, so you need to build something specific for it. So that was the original idea. I was like, okay, let's try to build this liquidity pool similar to an AMM, specifically for options. So that was how we started out of the hackathon and that was end of 2021. I think that the hackathon was even simpler than this. It wasn't like a real AMM or something. But let's start from it was an hackathon. We wanted to get something done. And since then we basically keep building the protocol. So we started to actually work like full time. I think it was February 2022 or something like that. So it's like over a year now. Yeah, right before industry ended. But something that was possible back then to build something we were building, it was also because layers were coming. So it wasn't even possible before because when you wanted to trade options, especially pricing options is very like computational intensive. And so we couldn't really do that with Ethereum Mainnet again back to Gas and everything. But we could do that with Arbitrum or Optimism back then. And so February 2022, we already have some layer twos there. I remember talking with Arbitrum a lot and was like, okay, now we can actually build this because of the infrastructure we have. And so this always remind me like how early everything it is in this industry because again, it wouldn't be possible to build it before layer two, just from Limitations. So again, options market, there are a lot of challenges, but again, we basically started to build not even a year ago, because before there wasn't actually even possible to do it, what we're trying to do. And so, yeah, since then we've been working. We had an alpha that we launched that it was very basic, just to test everything out. And we launched it September last year. Yeah, September. We learned a lot. We figured it out like something that we definitely need to change. So we improved it and then we basically released this new product that it's, you know, on the trading competition that I was talking to you a few months ago. So it's a very slow process. **Speaker B:** Please, maybe slow for crypto, but come on, you didn't have a product a year ago. In traditional world, you have four more years before it's even a real thing. **Speaker A:** That's true. Yeah, that's true. Like, compared to Web shoe, it's slow. Like, I'm coming for Web show, right? You don't need audit. You don't really care about, like, I mean, you care about security, but not them. So it's, it's different. Like you can really ship multiple products. **Speaker B:** Yeah, that's incredibly interesting. You know, this is the first moment I'm having this thought, but like, okay, so you go from like Web one to Web two and development speed, like, increases tremendously. Right? More tools, more frameworks, like more just everything. And then you go from Web two to Web three and everything slows down. And it's not because there's less, there is less tooling, but it's not because of that. It's basically because we've realized that in Web two, if you make a mistake, you literally just reboot the server. In Web three, if you make a mistake, you lose hundreds of millions of dollars. And I don't know, there's something profound in there. **Speaker A:** It is absolutely. Like, I remember when I was doing web share, we were releasing every Friday something new and it was like, easy as that. And I remember, you know, like Friday night, you release something, you're going to hope that everything's not going to break because you want to go out and drink with your friend, right? But that was the mood, you know, but we web three, it's absolutely the opposite. Like, until you are 100% sure that you have coverage on everything. That's like you have multiple audits, you have a bug bounty out. It's like, you know, release. And so it's way slower process. For sure. **Speaker B:** Yeah. Interesting. I don't know, maybe we'll talk about that more, if not just to get inside. So okay, so now that we're like in risk, can you like help me understand what is risk as a like complete holistic system? What is like the code that you guys have built? What are like the things you're drawing in from other protocols? Like what does the risk stack look like? **Speaker A:** Yeah, yeah. So let me give you an idea on overall risk. So we have one product right now that is called Dynamic Edge in vault. So as the name saying it is a vault or a pool, call it whatever you want. But let's say it's this liquidity pool that we have. So this liquidity pool on one side we have liquidity providers and that deposits stablecoin USDC for now, probably more in the future. So the deposit stable coin into this pool. And this pool as I said before, basically acts as an amm, so a market maker for options. On the other side we have options traders. Right? And when I say traders, it's not just people, it's not just like they don't expect like a guy trading options. We also have other protocols and that goes back to composability. We have more, some like institutional and so on. But protocols is actually a big one. So what they do is they can trade options and this pool or dynamic edge involved as we call it DHV is the counterparty for their trades. So let's make a simple example. Let's say I want to buy an option, a call option, one month, expiry strike, whatever, what you can do when you buy this option, you basically can get a quote from the dhv. So DHV is going to say okay, if you want to buy this option then let's price some will be able to give you. And when you do the trade as a user you pay a premium, right? Because you're buying the option. And we use the liquidity into the dhv. So the deposit at USDC from liquidity providers, we use them as collateral to mint and sell this option, right? So now there is a call option. Let's say this call option has $1,000 as collateral. We got the $1,000 from the liquidity deposited and now the user is buying let's say for $100. So what happened is the liquidity pool now has exposure. So he sold one of these call options and it collected $100 from the trader as a premium, right? So that's something very simple that is happening there. Obviously there is also selling side. So you as a trader you can sell the option in this Case you collateralize the option yourself. So you're going to put this $1,000 as collateral and the pool is buying from you, right? So we use the deposited USDC to actually pay the premium to you. Right? So how the business model is working on this now there is a bid and ask, right? Or buy and sell. Call it whatever you want. So let's say we buy from $100 from the first user. When I say we, I mean say the DHV is buying from $100 and is selling for, you know, basically for higher price. So it's selling for let's say $105, right? So what happened in this case is like the DHV collected $5. That's the spread. So basically those $5 is the amount that is going to liquidity providers because that deposit liquidity into this. So this is like a very, let's say if the market was efficient, everything was perfect. That would be the deal scenario, right? You have one buyer, one seller. They both trade the same option. The exposure for the pool is actually zero. Because one buy, one selling, you collect the spread, you make money, everyone is happy. This is something that will be perfect. Obviously the reality is absolutely different because sometimes you have more buyer than seller. Sometimes you have the pool that is actually exposed towards a single instrument. Here it comes a lot of the composability component of the dhv because what we build for the DHV we have the idea that if you are one of the liquidity provider there should be like no risk or absolutely lowest risk for them, right? That's like if you think about casino, that's the bank. So you don't want to, you know, you don't want to make risk with those people. You don't want to make risk with those liquidity. That's the bank at the casino, right? So we're playing blackjack and you want to make sure that you get return out of it. So let's say this the case I told you before, where everyone is buying. So the pool at this point is short and they sold a lot of calls. What happened in this case, if the price of it is going up, the pool could have a loss because when the price goes up, the call could be in the money. It means that there will be a loss for those liquidity providers. So what the bolt is doing is as a mechanism that try to hedge the position. So this hedging happens in a lot of different way. The main one is price on the soption in basically a more expensive. So we incentivize people to sell because price is high. That's the first thing you do. Again, this works if there is an efficient market, a lot of arbitrage and so on. **Speaker B:** Just to. Let's unpack each one of these. So when you're, what you're saying there is in the first line of defense is the. Sorry, what is it? The dhv. **Speaker A:** Dhv Dynamic edge involved. **Speaker B:** Yeah, yeah, the dhv, okay. Says like oh my God, I've just noticed I have exposure. The first thing I'm going to do is try to like eliminate that exposure by either buying or selling the opposite thing at like a discount or a premium. So that like yes, I might have to pay a little bit amount but my exposures are netted to zero. Is that right? **Speaker A:** Pretty much, yeah. So basically saying, you know, we mentioned the option that it was worth a hundred dollar, right? So what we do now is like we try to sell this option for 150, let's say something like that. So if you are a seller you're going to be like oh this is a very interesting price. Let me basically sell it for, you know, let me. Yeah, basically sell for. When I say sell like from the trading side. So you're going to basically sell for 150. So the vault is like trying to do that. And so we have this mechanism where actually you reduce your exposure but you generate money out of the volumes because that's how again the DHV is making money, right? It's making money spread multiplied by volume. So if the turnover is the lowest, that's the best. So you don't want to have any inventory. So that's how we try to do as a first thing. So you create an arbitrage opportunity that is so high there's someone who's going to capture it. But again this might not be always the case. So the other call it like risk management mechanism is you trade in this case Ethereum. So for example if the main issue of the vault is eth price going up, what you're going to do, you're going to long it, right? Because in this case if eth price is going up, you're going to make money or profit from it going up. Right. So options have this concept of delta and I'm pretty sure audience are a lot of times about delta neutrality and stuff like that. It's sometimes a buzzword. But what you do basically like every option has its own delta, right? Delta could be a different number. So what we do is we check the exposure of the pool. When I say we it's like actually an automated process there. So the pool at that time is exposed by X delta. So we basically buy Ethereum in this case for compensate that amount delta. So we bring the exposure of the pool back to delta zero in that case. And so how do we trade it? Yeah, that's about composability. So we can trade the hit on Uniswap. So it's a fully automated process, fully permissionless and so on. It's like the pool is like okay, our delta right now is very high. We need to rebalance delta. Let me go to you know, Uniswap trade buy Summit for example. Or we can use other instrument as well, for example perpetuals as we mentioned before. Because if you want to short the market, you can basically short using a perpetual. So for example the vault is going to gmx. It's opening a short position a shorting it in that case and with a balance the delta of the poor. Right. So at the end of the game there is all this mechanism where again as a liquidity provider the Volt is hedging for them in a way where it's trying to be close to Delta 0. So that's why I was saying like delta neutral is sometimes a buzzword. For example, we don't use it because it's not delta neutral per se because we just rebalance delta all the time it's moving. So when Delta is like 0.1, 0.2, 0.3, let's say we put it back to zero, right. And then it might go to minus zero one and we put it back to zero again. So it's always try to rebalance in this delta. Obviously hedging has a cost. So every time we hedge we basically reducing what could be the final profit for the liquidity providers to have lower risk. So it is not a free move and it's risky to. Not risky but it's inconvenient to hedge too often because if you hedge too often you're going to basically not ever any returns. You just basically have a loss because you're edging too much. So it's always like yeah, so it's always like finding a good balance between edging not too often but edging when it's the right time. And that's probably one of the again challenge that we have right now. And we have a quantum working on how often should we hedge and so on. Because that's actually one of the critical component of such a product. **Speaker B:** Okay, got it. And so from the again just looking at the structure, the options that you guys are issuing and sorry, that the, that risk is issuing. Yeah. Is that, are those risk options? Are those open options? Like what are the primitives? **Speaker A:** Yeah, so those are like, that's an evolution of the open option. So we open wasn't deployed on Arbitrum back then, so we basically forked it in an official way let's say. I mean Open was aware of it and they suggested we made some changes and we deployed to Arbitram. So effectively still the open protocol, it's an improved open protocol because we made some changes in terms of collateral and stuff like that to be a bit more efficient. We deployed to Arbitrarium. So effectively we are still built on top of an open primitive. So when you buy an option you buy an FC20 that is called an orthogon that represent the options that you're buying. And this is all the infrastructure that was built by open. So what the DHV is trading, it's this open basically token that was created by the OpenVichu protocol. **Speaker B:** Yeah. And so look, the low hanging fruit on the magic of composability is like okay look, you are able to focus on building the you know, like the part of the stack that you're interested in, like the liquidity and the rebalancing and like risk management without having to worry about like just like this, you know, like really basic, you know, like ERC20, like you know, function interfaces and that kind of stuff. And so I think like there's some like really obvious reasons on like how composability like got you to where you are but now that you are where you are and like you can look back, can you just like reflect a little bit on like this is not an opportunity or a request for you to pick on Open at all. But like can you just look back at your experience of developing a platform on somebody else's technology and how that like either made your experience like much easier and better or like resulted in some challenges that you maybe didn't foresee. **Speaker A:** Yeah, I mean it's, it's obviously like it's always a trade off when you build on someone else's technology. And obviously every technology is also different. Like in the case of Open for example, it's actually, we can say it's a settlement layer. Right. So you basically don't rewrite a lot of stuff as you said, that you don't want to rewrite and you use something that is already tested and it was used. And one thing about composability, there Other protocols we're using as well, Right. So for example, to give an idea, like Ribbon for example was using the same one, right? So Ribbon is not on Arbitram right now, but let's say Ribbon is going to be on Arbitram. We can basically trade each other very easily because we're using the same stack without actually doing anything else on top of it. Right? So that's one of the advantage of composability when you have like some sort of settlement layer. Let's say that even other protocols are using that makes the life very easy. I think composability when it's also standardized is actually very cool. It's not always the case. Most of the time it's not. But composability standardized is actually the best. But one of the other case of composability, for example, as I mentioned, on the edging side, when we edge using Uniswap or edging using gmx, the building on something like that is actually always not as straightforward as you can think of. Sometimes it requires documentation that it's. Most of the time it's not even there because we all trying to get fast, we all make innovation very fast. So sometimes we build a new V3 and before we write documentation for other protocols, it takes weeks and stuff like that. Sometimes it's hard to test because that's another big issue of this space compared to when I was talking webtue web shoe testing, it's easy. Like you spin off another server, you test it, whatever. Web3 testing is actually not as easy because you start testing on, you know, it could be a main network, everything seems to work fine. But then you integrate on mainnet and everything is not fine anymore because you know, completely different environment. So testing is actually something that it's. It's not there yet. So like integrating with other protocols, especially when you know, depends on liquidity, is also a bet that you're making on someone else. Like you make some integrations, it takes time. Like you have your developers, you do the audit. So there is a cost, there is a time on everything you do and that protocol might be successful, the one that you integrated with or already is. In our case we use Uniswap fine. But let's say you integrate with another new protocol that seems pretty cool and three months from now might be death. And so there is also this kind of risk on integration. Plus when you integrate in something that has liquidity, you are relying on their security a lot. And let's say there is an exploiter part of Your protocol might be exploited as well. Right. So in our case, simple scenario, let's say that we hedge with again, Uniswap and the pool is going to get drained. It means that what we were using, for example, in our case with Uniswap, it's actually a bit different because we just swap, so we're going to get the other asset. But let's say with gmx, for example, there's a different case with gmx we see all the position and the position might be worthless at some point. So security is definitely a very big issue. We saw many times that our protocol was drained, for example, from security, from an exploit and all the protocols on top losing liquidity in a cascade. Right. So that's definitely one big issue about integration as well. So composability, it is cool, but it's always a trade off, I guess, for sure. **Speaker B:** So like when you're, do you like, when you're designing these protocols, do you like, look at each opportunity integration like as. Let me rephrase this question. So like when I think of risk, right, like there's, you have risk in the middle and then you have the bottom, right? Like this open options layer and then the top, which is essentially the tools you use for hedging or risk management. And so when you're talking about the bottom layer, like, oh my God, that stuff better be locked in and like, you better believe in it and you better think that it's the right choice. But on the top side, like, let's say tomorrow, you guys just for whatever reason feel like you need diversified exposure from Uniswap and so you decide to add Grail or sorry, I Camelot as a Dex that you're swapping collateral in and out of. And like, you know what, maybe it's actually like not that big a deal if. Well, let me say it's a much less big deal for risk if Camelot gets like decimated than if Open does. And so I'm wondering, just like when you're constructing these systems, like how do you think about not only the integrations, but like given the integration point, how much catastrophe can cascade through that connection? **Speaker A:** Yeah, no, you are absolutely right. So it's not just about the catastrophe. That's one thing. The other thing is also how you design your protocol. Because when you build on something like Open, you have to design your protocol in a way that is going to build on top of that. So if tomorrow you decide to switch from open to something else is definitely going to change a lot in terms of Protocol because you're going to use that token, you're going to use their decimals, you're going to use basically everything that you have in terms of that structure, right? And obviously every protocol has its own, you know, like structure. So when you build on top, you make an even design decision and engineering decision that if you want to, you know, switch over to something else, it will definitely be very expensive in terms of again, new building and audit and so on, so on. That one is actually one of the biggest decision that you make. You want to make sure you don't, you know, you make it properly. You look at all the pros and cons, you are aware of all the trade off. But on the other case, like when you actually use other protocols, for example, you know, to again to trade or get some liquidity, the way we even structure that in our case we have a smart contract that is called edging reactor. So that's the one that we call and actually one of our ideal scenario, we want to have integration with as many as possible and we say to the edging reactor, look, we need to edge 10 Delta and we need to, I don't know, long it or short it, whatever, just look at the protocol with the best price right now to do that and let's do it right. So that will be the ideal scenario. Like you want as many as possible integrations with all of them and to be smart enough to say, okay, this is the cheapest one to do this edging, let's do it with. Could be gmx, could be perennial, could be whatever Max or Camelot or all those protocols. And so again, to go there obviously requires time because you have to build those integrations and everything. But in that case it's more like some sort of aggregator, if I can call it that way, where you just want to look, all of them get the best price. But on the main layer it's actually completely different because you're making a lot of strong decisions. So when you decide to build on top of something else like this Lego programmable money is actually very cool. But you make a lot of decisions from an engineering and design perspective that you rely on them. So it's a very big decision to make. **Speaker B:** Yeah, well, okay, so let me just throw this out here and react and have you react to it. But what I just kind of heard you say is that when you're thinking about integrating other protocols into your protocol, you need to think of it in two different categories. One is the integrations that are going to result in fundamental design Decisions that are the core of your protocol and the other are kind of like features or add ons are nice to have that don't necessarily change what you're building. And it kind of seems like what you're saying is that for the first category, like yeah man, you just need to be smart and you need to know what you're doing and you need to make the right decisions. But for the second category, correct me if I push back if you want. But it kind of seems what you're saying is like the solution to integrating as many protocols as possible safely is to develop your internal protocols like their integrations. Right. And like you're basically proxy contract is like so hilarious to me because except for the fact that you guys wrote it, that to me sounds like a third party integration. **Speaker A:** Yeah, the safely thing is the key, like what you said is like safely. So in our case the due diligence there is like is this protocol legit? It's the liquidity. It's like we try to do some, obviously we cannot do all it for all of them, but we look today, all the trappers, we look and because obviously you don't want to lose money on those protocols. But if there is this first step, I mean obviously we talk with the team and everything, again if you have them competing at some point it's actually good. So it's all about getting a better price if you have the three or four different for each one. But on the other you're right if you can do this safely. So once you have this due diligence process, then if you have more and you have this proxy contract as you call that is able to find the best price is actually good. The problem that I also see on the main layer, let's say, you know, the layer zero, if you can call it this way, the due diligence there is actually like way higher because even when you want for example to wireless new assets or you know at the beginning I mentioned that we accept usdc, right? Even that decision is actually pretty big because the stable coin that you decide to accept is going to completely change the protocol future. Because we went through USDC and we know what happened a few months ago with that depech. And yeah, it worked out well. But still we have like is this the future? Like do we believe USDC is going to be the big one? Maybe not. We'll see. So we're trying to see if there is other stable coins. And this reminds me to funny story, like one protocol during the Luna crash was selling puts On Luna and those puts were collateralized with USD. So USD was worth zero, Luna was for basically zero. So imagine you long the spoon, you're like oh, I made a lot of money. But that's not true because collateral is worth zero. So that was one of those case where everyone lost, people lost from you know, holding those options and so on. So again those decisions matters a lot because even the collateral you choose actually is if you buy an option and you want to make sure you get your money if something happens and then the collateral back that you get and is worthless because the option, the pack, sorry the stablecoin, the pact is actually you know, big issue for the protocol. So on that level, when it comes to collateral, when it comes to which protocol we use and so on, we are absolutely top due diligence. We try to build the long term, we try to go deep into each one because it really matters a lot. On the other ones again it's more like small integration. Even if we have a loss because there is an exploit, it will be limited. We're not going to lose all the users money. The protocol itself, it could still work potentially you're just going to lock a loss because the protocol is insolvent, but it's not all the money. **Speaker B:** Yeah, I have not heard that story about the Luna options but now that you say it, it's so obviously true and so obviously happened that it's not even worth talking about. **Speaker A:** I say it's a funny story but it's actually pretty sad because everyone loves money. It's like there is no one that made money out of that. **Speaker B:** Yeah, let's be explicitly clear. The Luna thing was a tragedy in the true sense of the word and and was terrible for our industry. And like the only people that made money were like the richest in this industry. Like who? The VCs and like the people who took profit and like the people that lost her, like the grandmas that put their money in this app that said that they would give them 20 and all they did was put it into anchor and you know that there was nothing good that came out of like any of what happened. But anyway with our last few minutes here. So I like just to like kind of hammer home composability and like what we're building here. So look like I very much believe like once risk is you know like out there and has real volume and stuff, like a very large portion, if not like the majority is going to just be in like people doing DJ stuff looking for leverage, like just you know, whatever like that's our industry. But like I, I don't really care about that. I don't think that's interesting. Like what I find interesting is I think you said this earlier where like part of like one of the major customers that can't be served today, whether it's because they can't go to deribit or the options like the resources today are on chain are terrible are daos, right. Or any entity that exists entirely on chain. And so like something you said earlier was so powerful to me that like okay, when you guys need risk management you can just easily go to GMX and just get a perp and that nets things out I guess with our final few minutes here. I would love to just have you reflect on once we have risk that can provide this deep meaningful options market, what does that mean for like these like incredibly huge protocol Treasuries and Dow Treasuries? Do you like and, and how do you see them engaging with this like technology or this primitive in a way that like just, just makes everything, you know, more realistic and more similar to what happens in tradfi? **Speaker A:** Yeah, yeah, that's actually one of great points because when we study risk, as you said, you always try to have a vision what's going to happen in the next five years or 10 years. And the idea was who's going to trade those options. And obviously if we believe on this defi world the main traders is going to be other protocols. When I say protocols, as you said, I mean products, but I mean Treasuries, daos like on chain entities. And so even for example this complexity of options to me is not a big deal because I know there would be other products that try to reduce this complexity in a way that could be a very good UX or a very good product. They trade with the DHV as a counterparty and the users that probably doesn't even know, right? It's just like they trade this product, they have trading options they don't even know. And we already have some cases like that. **Speaker B:** Here's a great example which doesn't exist yet, but like totally could which is so our friend Wen Moom is like a member of umamidao and they just came out with this GLP vault. And so like the idea is you're supposed to deposit your collateral and then get like neutral exposure, no price action, but then earn APR and like in the background instead of doing this like really complex like per management like they could very simply go to risk, buy an option and then like all of this is happening without any of the users realizing that there's any hedging. Any financial products like Risk, gmx, it does not matter. All you know is like, oh, it's delta neutral. **Speaker A:** Yeah, yeah. The spoiler here is that actually that's how I met Wen Moon, because we were discussing opportunities to trade with, you know, with their product. So yeah, I mean that's exactly. We already have some protocols trading that way. They created like principal protected instruments. Simple one, they go into estee, they get the interest from deposit into estate and they use the interest to buy options. Right. So if the they buy, put and call. So if the volatility is going up, they actually became more profitable. So basically as I, you know, as a depositor, you're giving away your potential interest to have higher returns if those options ended up being in the money. Right. So this product, we already trade with some of them and that's actually what is happening in the case of Treasuries there and, and Daos. That's when I started I was like, oh, this is going to be such a huge case for what we did. But then I started to talk with a lot of them and we have a Treasury itself for risk. So I know what that meant. And people, when it comes to Treasuries, especially on chain, they are extremely, I wouldn't say conservative but like they really care about security because you don't want your treasury drained because it's on some protocol and so on. So everyone is like, this is absolutely exciting. Like I will definitely use it in a sense where I, you know, for example, buy puts, let's say your treasury seat, you can, you know, periodically buy some boots, basically buying an insurance. If the price of it is down, you know, it's dropping, you can still get some money. So everyone is definitely interested. Everyone is interested in structured product that can use options. But everyone is like, I need to make sure I'm 100 sure. The security, it's top level because you don't want to lose the money from an exploit or something like that from your Treasury. And so that's something that I guess as an industry we need to work on to the point where security is so good everyone is going to be like, okay, I can trust, I'm a Treasury, I can trust any protocol out there or at least the ones that they have in all the security and so on because that's definitely something very big. But if we go to the point, because again, if we don't solve the security issue, I don't Think defi is going to be defy. It's like we have bigger problems, right? Then Treasuries are definitely one of the main use case because Treasuries are, as we mentioned at the beginning, pensions fund to me, or they could be where the liquidity actually is. And those are the main use case for this type of product. And so I really believe that's going to be a very big opportunity. And again, the composability here is the key. Like you have the treasury, you want to deposit into something from your multi sig on, you know, you are a dao, you have a multi sig on safe, you have a simple integration, you can deposit in a multi sig. And you know, that's the key of composability. And there is nothing something like that in traditional finance at all. But again, we need to definitely work into security first. **Speaker B:** Yeah, yeah, look, I mean, I think that that is what it is, right? And like we're in an industry where we can like reach the point where we've achieved security and everyone agrees that this protocol is like rock solid and then puts in their hundreds of millions of dollars and then Euler gets hacked. Right. And so you're totally right that this is just like a problem that needs to be solved. But like, it's, it's part of what growing pains are. And like, I don't, long term, I don't really have any doubt that we'll get there. But I think like, what I would love to like leave the audience on is this idea that you really just crystallized here at the end is that like, composability is like one of the three magic things about what we're doing here in blockchain, right? Like censorship, resistance, composability and, I don't know, transparency. Maybe we can decide that later. But composability means like so much more than like, probably what you guys are thinking, you guys, the audience are thinking in your head. It's not just that like Dan can build risk on top of Open, which includes Uniswap and like all these different products, but it also is about the composability and the integrations of like daos to protocols and daos to daos and protocols to, you know, like expressive financial instruments and that kind of thing. And I just think that like, one of the ways to truly be Ethereum, pilled and pilled on what we're doing is to take this idea of composability and then put it in your head and think like, okay, if I was Just to max this out to a point where it's ridiculous, what would that imply? And then welcome to the conversation. **Speaker A:** Yeah, I mean that's definitely the sum up of everything. And I'm just going to close it with a very funny story on the trading competition, just to give you an idea of how beautiful is composability. So we had this trading competition and one guy, he was doing a hackathon the first week of the trading cop and he built a library for our protocol, open source Python library. And he then built something basically like some sort of automation using another tool that's called Autonomous Basic smart contract automation. So it created its own product that it was trading during the trading competition, completely like fully automated. And he made that himself and potentially people can deposit into it. And this guy, I think he won some prize as well. So at the end it was working and he built basically that out of an hackathon. Right. So that's the key of composability. Everyone with Nvidia using couple of different tools can actually build another product for a very specific case. And because I cannot even think of all those use case, but people do. So that's definitely the beauty. And it's a small example, but I guess that's where we go in, where you can use all the other protocols, all the other tools out there and basically build products for daos, or you can build specific product for a very specific type of traders and so on. So that's the beauty of, as you said, like this Ethereum ecosystem. And that's the reason why we are, I guess. **Speaker B:** Yeah, man. And again when I reach out to you to record this podcast, like I just knew that I wanted to talk to you about composability because I think that's like what the interesting thing is when we're talking about these like real financial primitives. But it's just like pretty wild after sitting through this conversation for an hour to realize like this composability isn't just about options, man. It's like it's kind of your story of like how you got involved, how you got interested in risk and how like you're building what you are. And so man, I just can't wait to like continue talking to you and learning about what you're building and like how you're thinking. Because again man, I think, I think you get it. I think there's like three ways to understand why Ethereum is magic. And you've taught me so much more about that composability. 1. So thank you my friend. **Speaker A:** Yeah. Thanks for inviting me. That was a fun one. **Speaker B:** Of course. And before we head out, can you just tell the audience where they can find you? Where they can find Risk? **Speaker A:** Yeah, you can find me pretty much on Twitter, I guess. **Speaker B:** Hopefully, if you didn't run out of your quota. **Speaker A:** Yeah, exactly. Now we have a quota. But I don't use it a lot for reading. No, just kidding. I hope I will be in the quad, otherwise I'm gonna pay. But yeah, you can find me on Twitter and on. Regarding risk, basically, we. You know, the website is race finance Risk with the Y. You pretty much every. You know, you can find everything you need there. But just being me, if you have any questions or something you'd like to discuss about. Pretty much everything. Options, defi. Composability. I'm. Yeah, I love to talk about it. So that's the best way. **Speaker B:** Awesome, man. Well, I will definitely be badgering you on all sorts of channels. And again, man, like, I think you just get it in a way that most people don't. But, like, especially the ways that are like financialized conversation around crypto is just like, so brain dead and so not informed by like real experience and real building and stuff. And so, man, I just. I appreciate this conversation and appreciate meeting people like you. So thank you, man. And have a good one. **Speaker A:** Thanks a lot. You too. Bye.