Mike: Thanks for tuning in to Around The Coin. Today's guest is Darius Tabatabai, the co-founder of Vertex Protocol. Darius has raised eight and a half million and has 12 full-time people, and Vertex is building a cross, or they are a cross margined order book, decentralized exchange. We talked about what that means.

Darius has a background in traditional trading from a few different shops and we talked about what he was doing previously on decentralized traditional finance world for trading. We talked about what trading mechanisms are useful today in a volatile world and in a non-volatile world. We talked about options, puts and deconstructed a lot of the mechanisms that people can use for trading. So this would be helpful if you are somewhat familiar with trading and wanna understand more.  

Darius throws out a few different references, to jump trading. He was previously trading commodity derivatives, which we talked about, and we talked about the world of centralized and decentralized trading on crypto. Looked at the world at large and talked about how to build mental models. Really a fascinating conversation and I hope you enjoy. I learned a ton from Darius, so I hope you do as well.  

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And here is Darius. I hope you enjoy.

Darius, the one thing I'll say that caught my attention prior to our conversation was that you were anticipating, or you were a part-time comedian at some point, Uhhuh. I'm interested to hear , I'm interested to hear what happened there and where your life splintered or, or left comedy.  

Darius: Yeah. So you obviously did your research. You hit me with that power, the first question. That's great. . So that's good. I, I don't love anything more than talking about comedy, so that's a great conversation line for me. So yeah, basically I did stand up pretty seriously for about five years. I I got divorced and I was going out with a new girl and she was doing pottery and I kind of.

Was taken in by that. I don't wanna do something creative. And the thing I lighted upon was stand up. And so I did it quite seriously. Like I took a show to Edinburgh Festival here, which is quite a big deal with some friends. And I was sort of doing a bunch of clubs and I did a bunch of, I'm seeing work.

I was sort of getting to the point of having to think about whether I'd want to do it more professionally rather than it just being a hobby. And then, I had some personal stuff come up. My mom got sick and I ended up taking a break and then, my mum passed and I was gonna go back to standup. And then, the pandemic happened.

And so I got locked in the house for two years. And when I got locked in the house, I'd been trading crypto in like 17, 18, and a bunch of stuff happened. and basically the obsessive energy I'd been putting into standup. I was kind of at home and the energy started going to crypto again. Basically I'd always been trading and stuff at the same time, been my day job, but I kind of got really fired up about crypto around that time.

Mike: And what do you think? To me it feels like whenever I personally operate on really important intricate software or trading related things, when I dive into that world, my mind seems to operate on a particular frequency that seems to be the polar opposite of when I'm in a deep flow creative state.

How did you think about which direct, you know, cuz a big question on where you wanna spend your life is how you, what you wanna be thinking about throughout the day. You chose to dive into Vertex, obviously the pandemic affected that. If you were to give yourself a piece of advice, Or other people that are considering different professions to go into a more creative or more technical area. What are the kinds of things you think about?  

Darius: that is an amazing question that covered about 10 different things that I can think to go off in like different directions at once. So if this goes loose, then like reign me back in. But I think the interesting thing there was you made a distinction between sort of hard problems and creative activities.

And I don't know that they're always as divergent as they seem. So like there's a lot of creativity in doing a startup or coming up with different trading strategies. You know, comedy is almost like mathematical depending on how you do it, right? There's like a rhythm to it. There's a certain amount of punchlines. You wanna be getting in in a minute. You wanna hit a certain rhythm over a certain length of set. You have a certain problem solve, you know, you've got a premise and you know that you've gotta get certain words in a certain order to make that problem solve, which the end result is always, you want people tell off.

That's, it's not as different as you might think from like, figuring out trades or risk or how to build a system. So that, like, I think what I realized about myself and I, you know, everyone had a different kind of pandemic and I was lucky. I had a, a good pandemic, right? I didn't have anyone close to me that I lost.

You know, we were easy, we were okay with finances and stuff, so we were lucky. But like, what I realized was the number one thing about me is I, I just love playing games. So anything that is like has a game factor to it that there's like, Play and an end point of like a challenge and trying to be competitive and win.

I like that and I think that's why I really like trading, which also why I really like comedy is that there's the play aspect of both. And so the gap between 2018 and say 2020 when I came back to crypto stuff had moved on so much in terms of like DeFi and the interaction with centralized there's so much difference between then and now and like a whole new branch of basically game had opened up for me. and I just kind of got obsessive with that. And that's sort of, yeah, I just love playing games.  

Mike: Yeah. . And now tell me a little bit about Vertex and what you decided to end up building. Where is gaming a part of it? I didn't see that explicitly, but are you thinking about gaming or are you just thinking about trading?  

Darius: When I say gaming, for me, trading is the game, right? And so with Vertex it sort of took a while for me to like come around to the idea. So when I first came into crypto full-time I was running trading for a couple of different shops and I, it took me a while to kind of crystallize the fact that what bothered me about crypto was you could come in and for the most part, trade on centralized exchanges and never really.

Understand anything about crypto or blockchain or what smart contracts were or how they worked. It was just two numbers on a screen and the number went up and down and the whole kind of principle of crypto had kind of gone out the window. Right? And in reality there was all this like technology there.

We could look at it, you could see it. It was already to be built into something more decentralized, different to, you know, the institutions I dealt with when I was trading in Triad Fire and then moved to centralized exchange. You, the technology had moved on a place now where you could do genuine on chain risk management, trading, settlement, high performance, low fees.

It was all there to be done but the surface had barely been scratched. And so I kind of got fascinated with that idea of. building a really decentralized exchange. And could you do an, could you have an experience that was like on a par with centralized exchanges, but self custody then on chain and safe and so that's where we ended up building.  

Mike: When you say you were running trading for a few shops, what does that mean? What does that mean you're actually doing on a day to day basis? What is a shop and what does it mean to run trading?  

Darius: So my title was Head of Trading. I did that not two different places. One was an exchange with a trading arm, which I didn't stay out that long. And then the other one was a prop trading shop. So in both cases we were doing what was called proprietary trading. So we were taking the firm's money or partner's money, we didn't have outside money. And we would invest that in various strategies.

And because we were doing proprietary trading, we would tend to engage in things like market making arbitrage. Certain forms of like delta neutral yield farming would tend to be like, it could be quite leveraged, but it would tend to be quite low volatility. So it's things that we're looking for sort of high sharp ratio type return profiles.

So sort of on a small scale, the sort of things that say a jump or a winter mute would be doing.  

Mike: Okay. And what are the types of strategies that you see work well for different organizations and what does it, so I'm imagining there's some combination of. Intellectual dialogue you're having with your partners.

There's a qualitative assessment of the world, and then that gets encoded into bets, into tradings, into options. Is is that generally right? And then what does it look like in more detail?

Darius: Yeah. It, it's kind of interesting in crypto because, in tradify, the architecture of the spaces very, very well understood.

And so the intellectual power put into strategies is extremely high. And so, like, you know, people are shaving for super minute alphas, maybe they're going for like very clean ways of dealing with certain kinds of data or. In some cases they're spending vast amounts of money on optimizing connectivity infrastructure.

So, you know, building a certain microwave array that has a straight line between Chicago and New York, or you've heard these stories, I'm sure, and crypto is a bit different because, there are some people doing some of that like infrastructure piece, but generally because people aren't running on the same kind of server architecture, you know, there isn't the same sort of server in Chicago.

There is for some exchanges, they has such a setup in London, but most exchanges, the servers are kind of on an AWS array or whatever it is. The, the diversity of the space. I, you're trading on like 20 different venues, not one or two as you would be in tra. means that a lot of the alpha is in just having the infrastructure.

So a lot of the time I was spending was like, can we have accounts in all the exchanges we want? Can we have connections to all those exchanges? Can we trade them efficiently and manage our capital across all those places? Can we then make sure that you know, if one of these exchanges goes down, that we know what our position is there and on our other ones so we don't get a mismatch in our books.

There's a lot of that kind of intellectual energy going on where you're more mm-hmm. Operational risk than you would be in trad fiber. Mm-hmm. You're not so much what I would call like genuine market risk. We're taking less of that in crypto than we would've been in try fire.  

Mike: Mm-hmm. . So at market risk would be exposure or your allocation is in a particular asset like Bitcoin or some other cryptocurrency, whereas operational risk would be managing the likelihood of a loss or a gain through a price discrepancy on one of the centralized exchanges.  

Darius: I think I would even put that in the first one as like market risk, but like operational risk would be like risk that your server box blows up or risk that someone falls asleep on a keyboard and press the wrong button.

There's just way more like random little things that can go wrong in crypto, whereas in tra fires, like, or you can almost buy all that operational piece from someone else. So then you end up focusing on the market risk cuz there's no real edge in the operational piece. Does that make sense?  

Mike: And how so? Yeah, it certainly does. Do you put the, the downfall, the bankruptcy of a, of a major centralized crypto exchange in that category and. How, how do you sort of make sense? And maybe if you were to give a perception of your mindset prior to the collapse beginning maybe in May with Celsius and three arrows, and it seems to just be a, a consistently slow motion domino fall.

Like maybe just how do you make sense of the situation? Did you see this as being inevitable prior to, or what do you make of  

Darius: it?  

Yeah, so it's a really, again, a really interesting question. So in May, I was still at the same time I was building Vertex, I was exiting my job as head of trading at a prop trading firm.

And the conversation we had when Tara went down was that. You know, 60 plus billion dollars just disappeared. That's a huge number. We don't know what the damage is, but we know that the counterparts that took that loss are all gonna be cryp donated and likely they will be leveraged. So this is a hit to their equity and therefore that loss to the ecosystem will be a multiple of the loss that they've taken in equity, right?

Cause that's gonna be a loss of liquidity. On top of the equity you can, you know, say most people will leverage three times, you're really talking on the order of 180 to $200 billion is gonna disappear. That's a huge number.

And then Celsius blew up and three arrows blew up. , but the damage was a lot less than I had predicted at that point. And at that point, my assumption was I just got it wrong. I'd just done some wrong math. Mm-hmm. . So I hadn't thought about it the right way. My mental model was broken, you know, as a trader tradeoff and you, you have to kind of accept that the facts tell you you are wrong, even if you really can't figure out how you were wrong.

But I think what's become apparent in the last six months is I, I don't think I was wrong and people hid those losses and so slowly but surely those losses have just leaked into the market. And we've just seen these dominoes fall one by one by one. And I don't know whether it's over, but it certainly feels that we're a good way into it now.

And so like. Yeah, I, I don't know whether I would put those losses down to operational losses. You know, when people talk about a certain large exchange that's just blown up and there seems to be some credulous conversation around this being an operational issue, it's hard to lose. $10 billion is an operational issue.

Mike: Is it possible that we may be conceptualizing the losses as slightly inappropriately? So for instance, may may also be true that the 68 billion in losses was never gains in the first place. That through the mechanism of tokenization that these projects created, created value, created capital in the market where there actually was none.

So maybe for instance, for every million dollars of US dollar in the crypto markets, there may have been 5 million of created or speculated tokens that were circulating. And so the actual perceived value of the market of the crypto market was much larger than than it actually was. And so that depression of 68 billion may, maybe some of it is, you know, some of it has to be real losses, but maybe it just recalibrated to the true value of currency circulating a crypto.

Does that make sense? Is that possible or is that obviously wrong?  

Darius: I don't know. Cause really what you're saying is that, is a paper profit still a profit? Right. Which is kind of like a conceptual right idea. Yeah. Okay. But given that like an asset's only worth what, someone will pay for it. If someone thinks that they've got a hundred million dollars in Luna, then they're much more willing to even buy 10 billion, 10 million worth of Bitcoin or Ethereum on very low leverage, right?

If that gets totally wiped out, that leverage number increases and eventually they'll just get stocked out. And what became apparent in May was the whole ecosystem was leveraged up the components, right? Like and say what you might, when UST went down, that was a 20 billion stable Coin hole. That was real money because that was money people were treating as dollars.

Those dollars disappeared. And then there was all this leverage going on in three ac. and Celsius, and it just, those were real dollars that went, so every real dollar was worth, let's say, another three to $5 in crypto asset value that. I think that's where, that, you see that just like a black hole, right?

It just dragged money out. And you see it in Alco crisis, right? They're down 1990 5%.  

Mike: Yeah. How so? I was recently going back to the 2008 financial crisis that was essentially predicated upon poorly, poorly managed, poorly allocated real estate loans from the banks in the us. It's where it seemed to start, and there was a movie made about it, the big short, and it's not one thing.

My, one of my takeaways was that it's both simple and not simple. The simple, simple idea of what went wrong conceptually. Was that the, the banks through the salespeople and the people that issued the loans increasingly took on more risk than the people who were able to pay back the real estate loans.

But then the mechanism through which that propagated into the real estate system was very complicated. And there's a whole movie to explain the different parts of it. Do you feel like the same thing is happening here, where maybe it's sim maybe from a macroeconomic standpoint, it's simple, but the mechanisms through which this is playing out right now are complicated and nuanced.

And it might be fair to say we don't understand them.  

Darius: yeah, I think finance is always a bit like that, right? Because it's a reflexive system, so one thing always affects something else, and it's this idea of the butterfly flapping its wing in Europe, creating a storm in China or whatever it is.

But yeah, at the same time there are some like simple truths we can latch onto. And so it's about how you like construct your mental model. If you want to know like every bit of the moving parts and how they all connected, it starts to get infinitely complicated, right? Or we can just look at it and say, we had a giant one-way bull market that was built on the back of lots and lots of leverage that naturally brought a space of bad actors into the space, as has happened over the course of the last 10 years.

That created a very anarchic type situation. And when that leverage started to run out of steam, especially as rates started to increase in the real world, and that started to make crypto look less attractive and valuations in the tax space and stocks and everything else started to turn over.

Leverage started to come out the system and it started to rip holes in people's balance sheets and those holes exposed problems. You can try and dig apart all the bits, but the truth is it's just a matter of easy money go up, someone pulls the plug prices came up. I don't think it like invalidates the underlying tech or anything else, but just showed there were a lot of like inorganic things that were happening in the ecosystem that needed washing air.

Mike: And this is, this is my lightly conceived mental model on this, is that this process of technological development from a civilizational standpoint is. Is is paired with the adoption of an over excitement period, and then a depression period, the, the bubble, and then the collapse. But the, the degree or the magnitude of that bubble, and then the collapse there seems to be an optimum, optimum time horizon, and then optimum amp intensity to that.

So, so large. If the bubble's so big and the depression's so big, then then society ceases to function in other critical areas. Whereas if there was a small bubble in a small collapse and that happened in a more periodic sense, it would be a more optimal development for the technology. Does that, does what I'm saying?

Do, do you agree that there's a, that having these deflationary periods and depressive periods are a natural process of, of a market growing? Do you view them as a. As a negative consequence of some artificial influence in the market. Like if you're, if you're to, maybe I'll summarize this question by saying, if you could communicate a message to everybody to say, Hey, let's, let's operate this way, what would it be and, and why?

Darius: If I was gonna be glib, I'd just say, no risky, no biscuit. If I'm gonna be more serious. , I would say, you know, like if you look at traditional markets, historically they showed just the same like air of euphoria and crash, right? If you go back a hundred years, that was like the pattern of stock market.

And the thing that clamped down on that was increasing regulation and increasing control of. The risk free rate and monetary mechanisms from central banks, right? Crypto doesn't have any of that for the large part, cause it's being kind of siloed off in its own little corner. So, one of the things that kind of attracted me into it is that it is kind of a thing all of its own on one side, right?

You've got stocks and bonds and FX and they're hugely, massively interconnected. And then over here you've got crypto and you know, it's, you can't even get bank account if you're a crypto company. Like it's really hard and it's a thing all of its own separate from the traditional financial system. And for good or bad, that.

it has some of these wild characteristics to it. And one of those things that you've described is if a normal, traditional financial market has a sine wave that looks like this, the waving crypto is like five times as big. But I think overall, you know, like it will recover. To your question, would it make it, would it help the progression of the technology if there was less volatility?

Is that essentially the question? Is that fair to summarize it like that? That's fair. Yeah. I, I think at the moment the volatility has been kind of the thing that's attracted people into this space. So weirdly, it's been a kind of promotional tool. But I think if we as an industry want to go much further, yes, we will need to mature and become less volatile.

Mike: Yeah. . your, your Vertex is really focusing on the decentralized aspect of crypto. There's both centralized organizations, companies, and then DeFi. Are you, would you categorize yourself as feeling like DeFi is the inevitable future and that the CFI collapses justification of that? Or do you see a more balanced equilibrium between centralized, regulated organizations then DeFi tools out there, say five to 10 years in the future?

Darius: I think I sort of see a world where everything kind of converges and mm-hmm . What you end up with is a kind of victory of the best ideas. And from my standpoint, you know, in this last bull run, you had a very binary market. You are either in. CFI and CFI meant it was easy. You had all the, all the tools and plugins and everything you wanted.

You get all the assets you wanted in one place. It was very capital efficient. The UI and UX was easy to deal with. And then you had define, if you wanted to do DeFi, you had to be a real hardened user and you had to be prepared to go down a rabbit hole and you had to be prepared to run big risks and not know what was going on.

And you know, we all remember the first time we pressed the button to send some tokens from a non-custodial wallet and thought, oh my God, the internet just took my money. Right? Like it was just it. It was quite a unnerving feeling.

I think there's a convergence where that UX and dark sort of experience of DeFi is gonna improve and become a much more. , it's gonna look and feel centralized. And I would say in like five, 10 years, it's gonna get to the point where you don't even know that you're using a decentralized product. When you click the button.

When you tap on something, you just trade, you do your thing. But then if one day you come back and that website's not there anymore, you'll be able to tap a few buttons, pull up your wallet and your cash, all be there waiting for you, and you just move on and deal with your next thing. That's, I think, where the space is go effect.

Mike: Yeah. Which means that it's available for the everyday person who doesn't need or want to learn about the underlying technology. I don't need to know how ACH system works in order to send a bank transfer. Same idea.  

Darius: Absolutely. You don't, you don't know how, you know, I. IP addresses work. You don't know how Hctp works. You don't know how AWS works. Yeah. But you know how to Google stuff, you know? Yeah. Everyone can do that. Yeah, totally. When the technology gets to that point, we'll be winning the argument. And I, I feel like it's very obvious to me right now that we're in, like the web circle, 1999, 2000, we just had that crash, right?

Mm-hmm. and there were plenty of Yeah. test.com type companies around, but also, you know, the next Amazon, Google, these companies are all out lists. They're probably there right now. And these are gonna be the things that make it long term.

Mike: Yeah. There's a lot of correlations to that, and it's, my intuition is to feel like we're over calibrating to the internet's. Adoption curve that, you know, there's a excitement period, late nineties, people are incredibly bullish. And then the economic realities of the underlying financial sheets come through and then everyone realizes that this is, this is not gonna grow at the rate that people are projecting.

It collapses around.com. It collapses now. But maybe that's just the way the human beings work and it takes a generation to forget. I think that's the other thing is like Darius and Mike are not gonna forget the crypto collapse, but I dunno about you, but I was, I was 13 years old when the.com boom happened, and I don't remember that.

It's not like I had a financial account up. So maybe me and the millennials out there just had to go through that experience. There's some generational amnesia that happens and that 20 years from now you can expect a similar thing. , I don't know.  

Darius: Yeah, maybe. But I think like, you know, if I was gonna analogize it, , my impression is a lot of people got excited about the technology in 2000 and because it was so volatile, got dragged in much in the same way that maybe in this bull run people have and then if you were a normy, you sort of forgot about it, right?

For the next five to eight years. But in those five to eight years, those people have been dragged in. Were still building, they were still doing stuff and it takes kind of five years to build anything amazing. And so it might be, you know, even if it took another five years for a bull market to come back in Web3, you know, think of how much progress the space would make in the next five years flying under the radar.

All these people that have been dragged into the tech raised money VCs putting into the space engineers, blah, blah, blah. And they're putting all that intellectual energy in off the radar. Yeah, I think things, you know, I wouldn't be in this space if I didn't think you could do cool stuff and build great stuff.

Mike: Yeah, yeah, totally. Do you pay much attention to regulation? Do you have an opinion on not necessarily how it should roll out, although if you'd like to talk about that, but how you think it will roll out given what happened now? I mean, certainly a pessimistic lens on this would be there's a clamp down and a shutdown and a strong heavy hand. Do you have an intuition or have you seen anything come through that would give you a sense of this?  

Darius: I think at the moment it's unclear and I think the problem is crypto is moving very fast. and so regulators have just struggled to keep up. They sort of run from one issue to another, and you can kind of understand how that's happened, right?

I think from our point of view as a business, the viewpoint we've taken is to be agnostic. Regulation will come in some form and rather than try and predict it, you know, if you'd have asked us what the regulatory landscape was gonna be three months ago, or they've given you a different answer to what I would've given you six months ago to what I would've given you to nine months ago, right?

It changes it every month. So rather than try and predict it, or, you know, we're a small setup influencer, I think our viewpoint's been we'll do our best to like comply with as much things as we can. And as clarity comes in, we'll do that. but in the meantime, . We just like making best judgements where possible.

I, I think most people in crypto are doing the same. If anything, some clarity would probably be helpful.  

Mike: Yeah, yeah, totally. That seems to be the, the unanimous opinion on it. putting crypto aside, is there a particular area of the markets and you can take markets however you want, that could be global markets trading markets. Is there a particular area that you find most fascinating and interesting to pay attention to now?  

Darius: so I love talking about options trading. So my first job out of university was as an options trader. And I spent a lot of my time and intellectual energy for then the following, God, 15 years doing.

Pretty much that was my sole focus. And I find options markets incredibly interesting just for the amount of expression they give to things that most people don't think about. So at the moment, if you look, you know, crypto roll could not be more so pressed than it is, you know, it's on the lowest levels, been a very long time, has an extraordinarily large skew to it.

So you can see lots of things in that. You can see things in same things happening with equity roles. My sense is that like we are entering this kind of apathy stage with markets generally, people don't seem that turned on. By risk assets for the first time in a very long time. And we're at this like weird point with the rate cycle that I think in the next 12 to 24 months options, trading's probably gonna be incredibly profitable.

Cause there's just so many, we're at a turning point for so many different pieces of financial calibration. You know, that volatility rates, equity, risk, premium, all these things are suddenly now like, what should they be? No one knows that you see these distortions and those things are gonna be super interesting to trade.

So at the moment I'm spending a lot of time thinking and looking at like, what is the risk that no one is thinking about That options might give you the best exposure to. I can I get like a thousand to one bear at 50 to one prices or vice versa?

Mike: Can I rewind you a little a little bit here? So when you say options, do you, what is, tell me in your words what is an option and why is it an advantageous trading  

Darius: mechanism? Sorry, I jumped ahead. So the, if you go and Google an option, what would come upon veed? Something would be that an option is the right, but not the obligation to buy or sell an asset at a given time, at a given price in the future.

So what it effectively means is you buy this contract and it gives you the right to then buy or sell something at a price in the future. And what it means is when you look at a normal kind of, price curve. If you buy an asset, the price goes like this, price goes up, PNL goes up, price goes down, PNL goes down with a option where you as a hockey stick, where your PNLs flat, the amount you spent.

But then once you get to your strike price are the price you can buy out. Then your PNL go up and you get this kind of, we call it an options trading convexity. So you get this special quality and without being too boring, what that means is with some math and different bits and pieces of hedging, you can do, instead of just trading the price of a thing, which we would call like delta one or flat price trading, you can trade the convexity thing or the volatility of the thing.

So like often you'll hear on trading floors, they'll refer to the option traders as vol traders, volatility traders. So often you are. Predicting the volatility of the thing, not just the price movement, that sort of thing.  

Mike: Got it. Okay. So when someone says they're, they're buying an option, it doesn't necessarily tell you whether they think the, say stock is going to go up or down.

If you're shorting, then you'd buy an option to sell in the future, whereas if you're long, you'd buy an option to buy. What would be the, what would be the reason someone would purchase an option to buy as opposed to just buying the say stock?  

Darius: they would define their downside. So if you buy Bitcoin at 16,000, you could lose $16,000 if Bitcoin goes to zero, right?

Unlikely as that seems. If you buy a call option where it strike at 16,000 for a hundred dollars, the maximum you can lose is a hundred dollars. , but then your upside is unlimited beyond 1600. Well, you break even 16,100 and then it's upside all the way.  

Mike: Mm-hmm. . Got it. Got it. And options. When you say, if so, is your mental model when the markets are uncertain or when there's apathy in the markets as you put it, then options become the preferred mechanism of investment as opposed to just purchasing the the stock directly.

Darius: Well, it tends to be when there's less going on, you would sell options, right? Because when you buy options, you're sort of hoping things will be volatile. They'll move a lot, right? You'll get opportunity to trade against your option. If things aren't moving, you sell options and you just earn those premiums.

You know, another way to think about options is maybe as an insurance premium. . So you tend to want insurance when things are very uncertain, i e volatile and therefore the price of insurance goes up. But when things are very boring or calm, the value of insurance is less because you don't need it as much.

So that tends to be the same relationship with options when things are volatile. Price up, price of options up, price of volatility is up, and when volatility's down price of options down.  

Mike: Okay. That's, that's a good way to describe it. Now when you think about what you first talked about how comedy and the creative arts are similar to investments trading, weave that back in here.

So how would you look at the markets today and sort of look at it and maybe introduce a qualitative aspect to it? It's kind of understanding about where things are likely to go, not based on. Statistical analysis, but based on a more intuitive, or you, you know, you, you, you tell me how you, how you would weave that story back in.

Darius: I think what I said was it, it connects to sort of problem solving game, right? And so you kind of, let's talk about the game as if it's, you know, a poker game or another kind of high stakes kind of betting, right? Where you have kind of incomplete information, but you know, some of the information and the information you know, right now is the fed is tightening and they continue to tighten.

We have the potential for upside and downside surprise, but at the moment, The market seems calibrated to think that the Fed's tightening is slowing, which means that the capacity for upside shock is probably high. Does that seem a fair first assumption? Yeah. Yeah. Then on the crypto side, we have seen a number of large shocks that have come from unexpected angles to do with fraud for the most part, or certainly dishonesty, intellectual dishonesty, whatever it's been.

But there's been, holes have appeared in various balance sheets, and we still have a large number of unexamined institutions. People hope that everything has come out of the wash, but we have no real way of checking and so. , the market is still, to my mind, vulnerable to a downside shock on a micro level.

Mike: Do you view that as, as the market's vulnerable to the downside shock because there are unknown potential holes in the balance sheet on Cryp centralized crypto organizations?

Darius: No more because I just, I just look at the outcome that will have the most impact. I don't know whether the thing will happen or not. I'm not saying that necessarily balance sheets will come out bad. I hope not to be honest. Mm-hmm. . But if you're asking me, like, think through the game of the market right now, the games of the market to me right now is range bound, limited upside for the next six months or so.

Or another big leg lower and one of those trades has a lot bigger payoff than the other one. And so if you were asking me gun to my head to take a risk position, and that's not really what I do right now builder, but if you were saying to me like, think like a trader gun darris, think about risk, trades that leverage downside exposure.

I long put options or something that looks and smells like that seem to me decent ish trades, especially with implied volatility as low as it is means options are relatively cheap.

Mike: Interesting. Yeah. Yeah, that's an interesting way to look at it. Long put options would make sense if there's a more likely a downside risk than upside gain.  

Darius: Yeah. I it more like. , it's cheap right now for you to hedge that part of your portfolio. Right? So if you are long and you still want to stay long, but you want to like cap your downside, put, options are cheap.

If you want to try and exploit the downside, well put options are cheap. Is it? It's a same way of thinking. It's a different way of thinking about the same proposition, but the answer is volatility is cheap. And I think downside skew is kind of cheap even though it's relatively racially priced.  

Mike: Yeah, I kind ask you one intuition I've had for much of my life that I've begun to question is the, and this may vary based on the market, but that the markets were generally fairly competitive and. Well priced so that any new information that was introduced to the market by the, my, my always, my real thumb would be by the time it's on a mainstream news headline, like the fed bumps rates or this company collapses, or this company buys this one, it, the price is already baked in.

Do you, when you make statements like long put options and we're analyzing the market, do you view the market as being you know, I think about it this way and tell me if there's a better way to think about it, but I think of all the capital in the market, 90%, 80% has, has some intellectual rigor behind it.

There's somebody that's deciding to put that money into that particular location due to some mental model that they have. And, you know, that mental model, I'm sure is wrong in some cases, but at least there's some thought behind it as opposed to the spray and prey, like, and that to me seems like where crypto investing.

Went through that bubble where there was more of kind of, oh, o other people are making this investment, therefore I'm going to make it. And it was, it was that kind of investment mechanism that led to the, the highly priced assets that we saw. And then the kind of collapse. Is that the right way you think about it?

I mean, do you think about the efficiency of a market based on the percentage of capital that's in the market, and how much people think about these things? Cuz I'm always, I'm always trying to analyze like, how, how much is the price already encapsulating of what I'm thinking about? Am I behind the game or am I ahead of the game?

does that make sense?  

Darius: It makes sense. I, I have a bit of a problem with the idea of like, market efficiency. I think that you know, once you start to like scrape away at the concept of like, oh, the price is the price, therefore it contains all information. . Well, anyone who's worked as a market maker for like five minutes will tell you for a start, there's always two prices.

A price to buy and a price to sell. Right? And that's rule number one in the market. And the more volatile the market is, or the more complicated the instrument is, the bigger the difference is between those two prices. And that leaves a lot of like clear air, right? To not know where the real price of the thing is.

And so then you get into like liquidity considerations, like, and that, you know, that was a huge thing in all this shit that went down with FTX and Alameda was like, there was a price for these Solana shit coins, but there was a price in like a million dollars worth, and then there's a price in a billion dollars worth.

and the price for a million dollars. The bid offers like this and the price for a billion dollars, the bid offers like this. Right. And the trouble was they lent on this one and it should have been landing on this one. Right. It's so complex that like for me, I think you can have an edge the more you operate in these margins and not in this margin.

Right. That to me is what really you were saying is like something that's like efficiently priced. I, the bid offer is always tight in huge size and loads of people are able to transact there i s and P futures tenure. US treasuries then can you have an edge on that? Probably not. Right. And most of say the s and p 500 is being driven by index fund.

Rebalancing and moving assets around above. Like have you got hope? No, not really. And so most of the, most of the accrual of value goes to market makers, high frequency traders, right? Those are the most profitable traders in those market. But the bigger that bid offer goes, the more complex the market gets, right?

So I made my bones trading derivative markets and where I really made a lot of money was trading commodities, derivative markets. So quite illiquid, highly volatile, complicated markets in which I had like a genuine edge. I had a genuine edge cause there were like 10 people in the world that could do the job at the level I was doing the job, in terms of having a seat with capital and pricing and ability to do the stuff.

Yeah, you could make a lot of money. because, you know, there was a huge information edge, but like Yeah. On s and p 500, who knows.  

Mike: Right, right, right, right. And why, why was there such an information edge for somebody in that position trading commodities derivatives.  

Darius: If you had, you know, I had a lot of experience from, you know, early in my career, I worked with really great traders, like people who'd come through the O'Connor trading program at ups, which was a breeding ground for successful trading teams.

So the people that set up jump trading that everyone crypto is familiar with, they were ex O'Connor guys, for example, I think maybe some of the guys that did Jane Street also came from O'Connor by my knee correcting there. So a large number of like the biggest prop trading houses in the street. , A lot of those folks came from O'Connor.

And so I got really good training early and then I went into training precious metals, which was sort of a backwater. I went from FX to pressure and you just was less competitive, just people didn't try as hard, they didn't have the stuff set up in the same way that wasn't as clean. You know, you had this like open out cry floor in New York.

We were then trading OTC options into bank and with our customers. Then we were trading on, they opened a G L D etf, so then you're trading a third leg of it, which was equity options, but based off gold. And then you're doing vol arbitrage between three different markets. You're trading with customers all over the place here and there, and.

Yeah. It was just loads of money to be made because you were one of the only people that was seeing every piece of the market, all the flows, what was happening. You knew stuff other people didn't know, so you made money.  

Mike: It, so data data's, the data's like the, the fuel that comes in, but the engine is, is the engine to make those correct decisions.

Is that a highly sophisticated financial, statistical, mathematical model that basically you plug it all in and it pops out and says, here's what the machine thinks. I mean, you're not making decisions based on gut here. Right. Or to some  

Darius: it was like, it was like you were playing poker, right? You were playing poker against six different guys.

But two of those guys can only see the first two cars that got dropped the. Other two guys can only see the second two cards that got dropped and the third two guys can only see the last card that got dropped. You can see all the cards and you've got your cards in your hand.  

Mike: okay, it's good  

Darius: enough. It doesn't mean you are always gonna win, but you are gonna just have an edge over them.

That's what it was. If I was gonna analogize it, it's not as, you know, to say it was like a mathematical model, you know, I would be bullshiting. Right. You know, it was just more that I was just on top of everything that was happening. And so by knowing everything that was happening, you could just make more rational decisions and over time that would accrue to pnl.

Mike: Interesting. Yeah, that's a good analogy. Not a game worth playing if, if you're at that, that much of a disadvantage.  

Darius: Even those guys were making money. Yeah. Cause they were playing the game with other people that didn't know as much as them and it just kind of like trickles down. What you want to be is in a seat where you have some kind of information edge.

That's always the thing with trading. Like if you don't know your edge, you are probably someone else's edge. Right. And you shouldn't be in the game. Yeah. You can't sit down as a trader and say like, here's how I'm better than the other people around. Here's where I get my money from. If you don't know that you suck.

Mike: Yeah. Yeah. You're somebody else's edge. And so what's your edge? Now you have, you're the co-founder of Vertex. Is Vertex the edge or are you out of trading? Or how, what's, how do you weave the story of Vertex into your trading path?  

Darius: So obviously Vertex is a trading value and so I have. As I understand correctly, I, I could be corrected. I think I have one of the more institutional trading backgrounds of anyone I know building a decentralized trading platform. And my co-founder has a similar background. He worked with Jump historically, and so I think between us, the edge that we bring to Vertex is we have a real knowledge of how the business of trading works elsewhere.

And so we're able to bring that knowledge into Vertex and make it institutionally friendly in a way that will help engender good liquidity, that will then benefit retail, bring people in, and we can create a virtual circle by aligning interest. I think one of the things that often isn't, Solved for people don't solve for the institutional liquidity provider use case.

And then you see it in a lot of DeFi platforms. People build something that looks interesting. Maybe it could be quite useful for people. It could be quite fun to trade with. Use it never tick off cuz they never solve the liquidity issue. Mm-hmm. , if you understand how trading works, you know you've gotta have liquidity up front and you solve for that problem, you can make your platform work.

Mike: Yeah. Yeah. These are fundamentally trading platforms. Not if you're gonna have an advantage of software versus trading. Trading makes more sense, especially for DeFi protocol.  

Darius: Yeah. You gotta solve for both for sure.  

Mike: So what are, what's top of mind for you now? What are you trying to do? Get more traders on, get more people building on top of Vertex.

What, what plays into the success of a protocol the most ?  

Darius: Yeah. Look, it's I think any founder, is by definition operating in quite a like, schizophrenic mindset. You know, you're in sort of 10 different places at once. So, you know, you're sort of setting vision and trying to think about, you know, where are we gonna be six months from now, 12 months from now?

How are we gonna build to that? What do we need to do? How am I gonna hire team and blah, blah, blah. And then, you know, like, how are we gonna get more people to look at our Twitter profile today for the tweet we put out? Or how are we gonna get traders on it in a week from now, two weeks from now? How are we gonna solve our test net?

And so, immediate things I'm thinking of at the moment are, we're moving towards our launch in January. We've had a great response to our test net. . We want to process the feedback we're getting from community as quickly as possible to get as good a product as possible out on launch and get a usable, decent trading experience in front of people day one, and build that into something that competes with our competitors within two, three months.

That's like immediate concern, long term concern. The thing I think about a lot is how do we take what we're building with Vertex and decentralize it even more? And I think one of the things I'm really excited about is can we make Vertex into like a modular kind of trading stack? So we've done a really great job, we think, with our smart contracting.

That is fed by our sequencer, which we have a plan that we want to decentralize and make into a kind of sequencer network that would effectively be like a decentralized kind of order book layer that people could put on any EBM chain. Could you build a decentralized risk engine that was high performance?

Could you make all these pieces available separately to other projects? Could you become this kind of decentralized exchange architecture that people could pick up the pieces of that could become a utility for crypto? There's, there's, so that part of it, like my brain is just constantly thinking about even when I'm dealing with like day to day everyday problems, the thing that's going through my head is, could you build something that doesn't just like, Copy tra fight in a bad way, which is what a lot of centralized exchanges have done.

And could you just rewrite the book and build something totally new, exciting, unique to crypto? And that's what gets me really jazzed up.  

Mike: Yeah, that is exciting. Oh, so Darius, who are you learning from? Are, are you following any people on Twitter? Any blogs YouTube channels, books? Are there any people that you consistently refer back to, to soak up new information?

Darius: in terms of soaking up new information, I would say the person that teaches me the most is probably my co-founder. He takes the kind of CTO role, if you like, and Awin is, I think one of the best communicators when it comes to like blockchain and smart contract technology. that I know. And he frequently does this for me, but like he's capable of starting up here with an idea and he will bring it down level to level to level until you get it.

And then he'll build you back up in terms of understanding without patronizing. And I find that an incredible skill actually. I'm really lucky to work with him. And to be honest, all of the engineers on our team are very good at that, very good communicators, which I feel very lucky about in terms of like general Twitter sphere I mean, I like all the sort of fun gossipy stuff that goes on that everyone else does.

You know, like I'll listen to Kobe and stuff like that. I learned a lot. I think, you know, one of the experiences that has been very educational for me in the last year has been. raising money from VCs? I think it's a little bit taboo in crypto. You know, like the average, particularly on like crypto, Twitter, VCs get a lot of shit talk.

Basically people talk about how they don't add anything and you know, right. They're extractive and blah, blah, blah. I have to say, I, I found the experience with my own VCs to be, they've been very thoughtful when I needed help, they've offered it. I've been able to pick up the phone to them. You know, we were kind of careful about who we asked to invest, but I found, I learned from them.

And, you know, like, honestly, like there's so many smart young people and things. I, I like having, you know, people of just to talk to young people in the team. They tell me a lot of shit all the way up to the senior people. So yeah, just it is a great space for learning.  

Mike: Yeah. Yeah, that's for sure. And you have raised 12, I have 12 and a half million with 12 people on board. Is that, is that about right?  

Darius: No, that's a little bit of an exaggeration. We, we raised eight and a half earlier this  

Mike: year. Oh, sorry. So I, I, that's actually what I have. I misread that eight and a half or 12.  

Darius: Yeah, we raised eight and a half earlier this year and yeah, the teamed around 12 now. Yeah. Nice. So we're, you know, we're fairly compact team.

Mike: Yeah. Well, Darius, congrats on all the progress, man. It sounds like you're the right person and you have the right team to do, do what you guys are trying to do. So look forward to seeing the launch and I appreciate your time today. It's been,  

Darius: thanks Mike. Ton of fun. This has been really great. I really appreciated it.

Mike: All right, take care.  

Darius: Thanks a lot.