Vladimir Novakovski: DeFi must match traditional finance performance, why solving real-world problems is crucial, and the evolving role of Ethereum in trading | Empire

Key takeaways

• DeFi must match the performance of traditional finance while maintaining verifiability.
• Building in crypto should focus on solving significant problems rather than building for its own sake.
• Most digital asset trading remains centralized, not utilizing blockchain technology.
• On-chain verifiable actions by intermediaries can improve efficiency over opaque traditional finance.
• Perpetual contracts are favored by traders for their capital efficiency and leverage.
• Customer feedback is crucial in tech development; starting with infrastructure alone is not effective.
• Market dominance in perpetual exchanges shifts with each cycle.
• The product market fit for DEXs was insufficient to attract traders post-FTX collapse.
• Competition between centralized and decentralized exchanges will intensify over time.
• Building on Ethereum is crucial for capturing the future of finance.
• Solving hard technical problems first can lead to greater long-term benefits.
• Ethereum’s connectivity and institutional use cases will see significant developments this year.
• Building on Ethereum L2 offers better security and access to existing DeFi protocols.
• The low latency of the trading system is achieved through an optimized sequencer.
• Verifiability in trading systems ensures fairness and efficiency, especially during volatile markets.

Guest intro

Vladimir Novakovski is Founder and CEO of Lighter, a decentralized perpetual futures exchange built on Ethereum. Previously, he co-founded Lunchclub, an AI-powered networking platform, and spent nearly 15 years in engineering and trading roles at firms including Quora, Addepar, and Citadel. A Harvard graduate who entered at age 16, Novakovski has also established strategic partnerships with major platforms like Robinhood to expand Lighter’s reach in the crypto derivatives market.

DeFi challenges and goals

• DeFi aims to perform at the same level as traditional finance without sacrificing verifiability.
• “If we think about how does defi actually perform at the same level as tradfi without sacrificing kind of the verifiability” – Vladimir Novakovski
• The need for verifiability in financial systems is a critical challenge in DeFi.
• Building in crypto should address significant problems, not just for the sake of building.
• “It’s not like okay let’s like build in crypto for the sake of building crypto” – Vladimir Novakovski
• Solving real-world issues is a priority in the crypto space.
• The philosophy behind innovation in crypto emphasizes meaningful contributions.
• “Here’s actually a really important problem that puts together a lot of the building blocks that exist now” – Vladimir Novakovski

Centralized vs. decentralized trading

• Most digital asset trading is centralized and does not utilize blockchain technology.
• “99% of the way digital assets were traded didn’t actually use the rails of blockchain” – Vladimir Novakovski
• Centralized trading does not offer improvements over traditional finance.
• On-chain verifiable actions by intermediaries can improve efficiency.
• “If what they do is verifiable and is on chain that just makes things more efficient” – Vladimir Novakovski
• Perpetual contracts are more appealing for traders due to capital efficiency.
• “Most active trading happens with perps… it makes sense when you think about it” – Vladimir Novakovski
• Understanding trading strategies is crucial for platform development.

The evolution of trading platforms

• Building core technology without real customer feedback is ineffective.
• “Without having that iteration where loop where you actually have like real customers using the tech” – Vladimir Novakovski
• The evolution of perpetual exchanges shows market dominance shifts with each cycle.
• “Every cycle you have like one perps platform that kinda dominates” – Vladimir Novakovski
• BitMEX, dYdX, and HyperLiquid have each dominated different cycles.
• The cyclical nature of market dominance informs future strategies.
• Understanding perpetual exchanges is key to navigating the crypto market.
• Market dynamics in perpetual exchanges are constantly changing.

DEXs and market fit

• The product market fit for DEXs was not strong enough post-FTX collapse.
• “The product market fit for most traders at the time of being on a dex is just not there” – Vladimir Novakovski
• The collapse highlighted challenges in gaining market share for DEXs.
• Competition between centralized and decentralized exchanges will intensify.
• “The shift from cefi to defi will continue” – Vladimir Novakovski
• The evolving dynamics in the exchange market indicate a shift in trading preferences.
• The competitive landscape between centralized and decentralized exchanges is changing.
• Understanding trader preferences is crucial for DEXs to gain traction.

Ethereum’s role in finance

• Building on Ethereum is essential for capturing the future of finance.
• “Building on top of ethereum and being connected with the broader ecosystem” – Vladimir Novakovski
• Ethereum’s significance in the financial ecosystem is growing.
• Solving hard technical problems first can lead to greater long-term benefits.
• “If you solve the hard technical problems first then you get the bigger unlock later” – Vladimir Novakovski
• The strategic importance of Ethereum for financial innovations is emphasized.
• Ethereum’s connectivity and institutional use cases will see significant developments.
• “This year will be a lot of things will happen as far as unlocking the full connectivity to ethereum” – Vladimir Novakovski

Technical advantages and cost efficiency

• The low latency of the trading system is achieved through an optimized sequencer.
• “The low latency part is really important… the sequencer can be highly optimized” – Vladimir Novakovski
• The trading system processes 500 million orders a day at a cost of under $50,000.
• “We’re processing 500,000,000 orders a day and the cost of doing all that are like under 50 k usd” – Vladimir Novakovski
• Verifiability in trading systems ensures fairness and efficiency.
• “If trades are settled on chain but matching is done off chain in a way that’s not verifiable” – Vladimir Novakovski
• Operating costs on Ethereum L2 solutions are lower than centralized exchanges.
• “Even centralized exchanges probably have a higher cost structure” – Vladimir Novakovski

Zero knowledge innovations

• The unique combination of expertise in cryptography and quantitative analysis is crucial.
• “We might be the only team that has both [cryptography and quant expertise]” – Vladimir Novakovski
• Zero knowledge circuits for finance are compared to specialized chips in hardware.
• “We created zero knowledge circuits that are specifically for finance” – Vladimir Novakovski
• Efficiently encoding financial rules is a key feature of zero knowledge circuits.
• “Our circuits can very efficiently encode the rules you need for finance” – Vladimir Novakovski
• The trade-off between optimization for trading efficiency and flexibility is acknowledged.
• “There is a trade off there… for the trading you need to have the efficiency” – Vladimir Novakovski

Business model innovation and industry impact

• Innovating business models can be powerful in changing an industry.
• “Experimenting with the business model and not just keeping the status quo can be really powerful” – Vladimir Novakovski
• The idea of zero fees in trading was initially met with skepticism.
• “When they had this idea of zero fees like no one thought that would work” – Vladimir Novakovski
• Early challenges faced by Robinhood highlight resistance to innovation.
• The impact of Robinhood’s zero-fee model on the trading industry is significant.
• Understanding the context of Robinhood’s model provides insights into industry shifts.
• Innovation in business models reflects a significant industry shift.

Institutional integration with DeFi

• Coinbase and Robinhood are exploring the integration of DeFi into their models.
• “Coinbase… understand the power of defi moving over time from centralized rails to decentralized rails” – Vladimir Novakovski
• The strategic direction of major financial players indicates a shift towards DeFi.
• Potential collaboration between DeFi innovators and traditional platforms is possible.
• “They certainly wanna work closely with folks innovating in defi” – Vladimir Novakovski
• The evolving relationship between decentralized and centralized finance is crucial.
• Understanding the integration of DeFi into traditional finance is key to future developments.
• The financial landscape is being shaped by collaborations between DeFi and traditional platforms.

Institutional trading and regulatory challenges

• Institutions are motivated to trade equities on platforms like Lighter.
• “Institutions go where the retail is too… they wanna participate in as many markets as they can” – Vladimir Novakovski
• The biggest challenge for crypto-native trading shops is expertise in US equities.
• “Crypto native trading shops… don’t have a lot of expertise in us equities” – Vladimir Novakovski
• Institutional players are hesitant to trade on DEXs due to regulatory concerns.
• “Players that do have that expertise haven’t actively wanted to trade on dexs… because of regulation and compliance questions” – Vladimir Novakovski
• On-chain KYC and compliance measures can facilitate institutional trading on DEXs.
• “If you have this on chain kyc you can have certain rules around that” – Vladimir Novakovski

Technical alignment and project success

• The technical stack must align with institutional needs for successful adoption.
• “The alignment of the technical stack needs to be there… if there’s technical alignment and the tech actually works” – Vladimir Novakovski
• Many projects fail due to inadequate technology despite institutional relationships.
• “There are some other projects that have a lot of institutional relationships but the tech there just doesn’t work” – Vladimir Novakovski
• Functional technology is crucial for the success of crypto projects.
• Understanding the importance of technical reliability is key to fostering institutional trust.
• The role of technical compatibility in crypto’s mainstream adoption is emphasized.
• The success of crypto projects depends on both technology and institutional relationships.

Valuation and growth in the crypto market

• The focus on revenue in crypto is important, but growth should also be considered.
• “Crypto now looks at revenue but you should also look at growth” – Vladimir Novakovski
• Market reactions to revenue fluctuations reflect a shift in investor sentiment.
• “Before the token launch… no one would freak out about lower revenue but now they do” – Vladimir Novakovski
• The Ethereum ecosystem should be viewed as a startup with growth potential.
• “You have to think of it more as a startup… not like a public company that’s existed for twenty years” – Vladimir Novakovski
• In acquisitions, acquiring entities need to buy up all tokens for value to accrue.
• “The acquiring entity would have to buy up all the tokens” – Vladimir Novakovski

Traditional finance and crypto integration

• Crypto native individuals often overlook the complexities of traditional finance.
• “Tradfi institutions… a lot of crypto native people don’t understand” – Vladimir Novakovski
• All capital markets are likely to transition onto blockchain technology.
• “All capital markets are coming on chain… we won’t think about it as traditional capital markets and crypto capital markets” – Vladimir Novakovski
• Institutional players recognize the value of blockchain technologies.
• “On chain hedge funds… tokenized stocks… people in finance actually understand these technologies now” – Vladimir Novakovski
• The integration of capital markets and blockchain highlights a significant trend.
• Understanding the evolving relationship between traditional finance and blockchain is crucial.
• The future of finance involves merging traditional and crypto markets.