Vladimir Novakovski: DeFi must match the performance of traditional finance, the importance of verifiability in trading and the role of Ethereum in future financial opportunities

Key takeaways

• DeFi must match the performance of traditional finance without losing verifiability.
• The integration of cryptography is expected to solve important problems, not just for the sake of innovation.
• Most digital asset trading in 2022 was centralized and lacked the use of blockchain.
• Verifiable on-chain actions can improve financial efficiency compared to opaque systems.
• Perpetual contracts are favored for their capital efficiency and leverage.
• Customer feedback is crucial to developing effective core technology.
• Market dominance in perpetual trading changes with each cycle.
• DEXs did not have good product market fit after the collapse of FTX.
• Competition between centralized and decentralized exchanges will intensify.
• Building on Ethereum is essential to seize future financial opportunities.
• Solving technical challenges first can yield long-term benefits.
• Significant developments in connectivity and institutional use of Ethereum are expected this year.
• Low latency in trading systems is achieved through optimized technology.
• Verifiability in trading ensures fairness, especially in volatile markets.
• Innovative business models can have a significant impact on the industry.

Guest presentation

Vladimir Novakovski is the founder and CEO of Lighter, a decentralized perpetual exchange built as an L2 on Ethereum. He previously co-founded Lunchclub in 2017 and served as its CEO, and previously led machine learning at Quora while building engineering teams at Addepar. A Harvard economics graduate, he raised $68 million for Lighter, led by Peter Thiel’s Founders Fund.

The DeFi Performance Challenge

• “DeFi must perform on the same level as traditional finance without sacrificing verifiability.” – Vladimir Novakovsky
• The need for auditability in financial systems is crucial.
• DeFi aims to solve real-world problems rather than building for the sake of innovation.
• “It’s not like, let’s integrate cryptography for the sake of creating cryptography.” – Vladimir Novakovsky
• The philosophy of solving big problems is what drives crypto innovation.
• Understanding the challenges of DeFi compared to traditional finance is essential.
• The goal is to improve DeFi performance while maintaining transparency.
• Verifiability remains a key goal in the evolution of DeFi.

Centralized or decentralized trading

• “99% of digital asset trading hasn’t actually used blockchain rails.” – Vladimir Novakovsky
• Centralized trading does not benefit from the improvements offered by blockchain technology.
• Verifiable on-chain actions improve efficiency compared to traditional opaque practices.
• “If what they’re doing is verifiable and is on-chain, it makes things more efficient.” – Vladimir Novakovsky
• Perpetual contracts offer capital efficiency and leverage, attractive to traders.
• “Most of the active trading is with criminals…it makes sense when you think about it.” – Vladimir Novakovsky
• The shift from centralized to decentralized finance is expected to continue.
• Understanding trading preferences in the crypto market is crucial.

The evolution of trading platforms

• Building core technology without customer feedback is ineffective.
• “Without having that iteration where the loop where you actually have real customers using the technology.” – Vladimir Novakovsky
• The evolution of perpetual trading shows that market dominance changes with each cycle.
• “Every cycle, you have like one pers platform that kind of dominates.” – Vladimir Novakovsky
• The competitive landscape for perpetual exchanges is dynamic.
• Understanding the history of perpetual trading informs future predictions.
• Customer involvement is the key to successful technology development.
• Market dynamics on trading platforms are influenced by the behavior of traders.

The role of Ethereum in future finance

• Building on Ethereum is essential to seize future financial opportunities.
• “Building on Ethereum and being connected to the broader ecosystem.” – Vladimir Novakovsky
• Solving difficult technical problems first can lead to greater benefits.
• “If you solve the difficult technical problems first, you will get a bigger unlock later.” – Vladimir Novakovsky
• The importance of Ethereum in the financial ecosystem continues to grow.
• The strategic importance of Ethereum for financial innovations is highlighted.
• Addressing technical challenges from the start is crucial for product development.
• Ethereum’s role in DeFi and traditional finance is expanding.

Institutional adoption and Ethereum

• Significant developments in the connectivity and institutional use of Ethereum are expected.
• “This year, a lot will happen in terms of unlocking full connectivity to Ethereum.” – Vladimir Novakovsky
• Building on Ethereum L2 allows for better security and access to DeFi protocols.
• “The interest in participating in building on Ethereum…is sort of the most decentralized.” – Vladimir Novakovsky
• Institutional adoption of Ethereum is a key goal.
• Understanding the benefits of Ethereum Layer 2 is important for builders.
• The strategic advantage of using Ethereum infrastructure is highlighted.
• Institutional use cases for Ethereum are expected to grow.

Effectiveness of the trading system

• Low latency in trading systems is achieved through optimized technology.
• “The low latency part is really important…the sequencer can be highly optimized.” – Vladimir Novakovsky
• The technology can process 500 million orders per day at low cost.
• “We are currently processing 500,000,000 orders per day and the cost of all of this is less than $50,000.” – Vladimir Novakovsky
• Efficiency and scalability are the main advantages of the trading system.
• Understanding the technical aspects of business systems is crucial.
• Verifiability in trading ensures fairness, especially in volatile markets.
• Operational costs on some exchanges may be lower than traditional exchanges.

Innovation in business models

• Innovative business models can have a significant impact on the industry.
• “Experimenting with the business model and not just maintaining the status quo can be very powerful. » – Vladimir Novakovsky
• Initial skepticism of Robinhood’s no-fee model was widespread.
• “Back then, like when they came up with this idea of ​​zero fees, no one thought it would work.” – Vladimir Novakovsky
• Understanding the context of Robinhood’s model is crucial.
• The impact of innovative economic models is highlighted.
• The importance of Robinhood’s success is highlighted.
• Strategic positioning in business models can drive industry change.

Dynamics of institutional and retail trade

• Institutions trade on platforms like Lighter to access retail markets.
• “Ultimately, institutions also go where the retail is…they want to participate in as many markets as possible.” – Vladimir Novakovsky
• The cold start problem is a barrier to integrating real-world assets into crypto.
• “It’s like a cold start problem… to get retail sales you need liquidity and to get liquidity you need the institutions.” – Vladimir Novakovsky
• Institutional motivations in crypto markets are strategic.
• Understanding the dynamics between institutional trading and retail trading is essential.
• The interdependence of retailer and institutional participation is emphasized.
• Strategic motivations determine institutional business behavior.

Regulatory and compliance challenges

• Institutional players are hesitant to trade on DEXs due to regulatory concerns.
• “Players who have this expertise until now have not wanted to actively trade on DEXs due to regulation.” – Vladimir Novakovsky
• Collaboration with policy makers is necessary for institutional exchanges on DEXs.
• “It is very important for us to find a solution to this problem with American policymakers.” – Vladimir Novakovsky
• On-chain KYC can enable compliance while enabling price discovery.
• “You may have certain rules about it and they are all made public.” – Vladimir Novakovsky
• Regulatory clarity is essential for market growth.
• Understanding the regulatory landscape is crucial for institutional participation.

Technical alignment with traditional finance

• The technical stack should align with traditional financial needs of partnerships.
• “The technical stack alignment needs to be there…if there is technical alignment and the technology actually works.” – Vladimir Novakovsky
• Price action often receives more attention than other indicators.
• “People are paying a lot more attention to price developments than we would have thought.” – Vladimir Novakovsky
• Technical compatibility is key to bridging crypto and traditional finance.
• Measuring success in crypto requires a broader perspective, beyond price.
• The role of technology in fostering relationships is highlighted.
• Understanding the importance of technical alignment is crucial for partnerships.

Growth Potential in the Ethereum Ecosystem

• The focus on crypto revenue is positive, but growth indicators should also be considered.
• “It’s good that crypto is now looking at revenue, but you should also look at growth.” – Vladimir Novakovsky
• Market reactions to income fluctuations reflect a change in investor sentiment.
• “Before the token launch, let’s say we had a day with equally lower revenue, like no one would panic about that.” – Vladimir Novakovsky
• The Ethereum ecosystem should be considered a startup with growth potential.
• “You have to think of it more like a startup…it’s not like a public company that’s been around for twenty years.” – Vladimir Novakovsky
• Understanding Ethereum’s growth potential is essential for investors.
• Balancing revenue valuation with growth potential is crucial in the crypto space.

The future of capital markets

• All capital markets are likely to undergo an on-chain transition, merging traditional and crypto markets.
• “It seems very likely that all capital markets will come together.” – Vladimir Novakovsky
• Institutional players are increasingly recognizing the value of blockchain technologies.
• “The thing is, this all sounds like things like on-chain hedge funds or like tokenized stocks.” – Vladimir Novakovsky
• The convergence of traditional finance and blockchain is expected.
• Understanding the integration of blockchain in capital markets is crucial.
• Institutional acceptance of blockchain indicates a shift in the industry.
• The future of capital markets should be on-chain.