Crypto is Ready for Onchain Options | Nick Forster, CEO of Derive

David Hoffman (0:03)

Bankless Nation, I am here with Nick Forster. He's the co-founder and CEO of Derive. Derive is the largest on-chain options exchange on Ethereum. Nick, welcome to the show.

Nick Forster (0:13)

Hey, David, thanks for having me on.

David Hoffman (0:14)

Nick, I want to kind of get to just some very basic questions about crypto and options. Mainly, options really haven't come online in the crypto sense in ways that the perpetual has, or in ways that if we extrapolated from how much TradFi loves options, the options in crypto don't really meet that level of popularity in the crypto industry. And I want to know why.

Why haven't options grown as large in crypto as we would have otherwise expected?

Nick Forster (0:47)

Yeah, it's a great question. I think to some extent, it's the natural evolution of all financial markets. Options are always the last vertical to mature.

You kind of need to anchor the market, like some of these bigger, slower moving institutional players, really trying to earn yield on their assets, whether it's equities in the equity market, or in crypto, like on Bitcoin and ETH, or you need structural hedgers. So things like airlines hedging their jet fuel costs, or farmers hedging the sort of price of their crop before harvest. Like those are the big repeat flows. They just take a while to emerge in a new industry, a new asset class. And for options, in crypto, speculation is dominated, and options are good for speculation, but to really serve that use case, they need those guys in the market, selling options, creating a competitive two-way marketplace first. I mean, it's just taken a long time for that to happen, but now it really is starting to accelerate. And what options do really well, and it's a criticism people give them often, is like there are just so many of them. There's so many choices and different strikes and expiries. It's like kind of the point. It's the same reason prediction markets are beginning to take off. They give you this level of control and granularity and ability to express lots of different opinions about the market. And when typically you can do that in a more precise and defined way, you can make more money on your trading opinion when you're correct. So I expect options to continue. They've started to really grow as a market share in crypto. I expect that to really kick on over the next couple of years.

David Hoffman (2:17)

So your answer is that really there needs to be a pretty rich diversity of market participants in order for the options markets to grow. And maybe that stands in contrast to the perpetual as an instrument, where really you just need two market participants. You need people to LP, you need people to lend to the people going long or short, and then you need people going long or short. And the simplicity is maybe what allowed the perpetual to grow so fast. Options, on the other hand, has a wider variety of a need of different participants doing different things to create the double coincidence of wants, and a lot of them, in order for the options market to really manifest. Is that correct?

Nick Forster (2:58)

Yeah, that's really, really well said. And I think to date in Crypto, again, if you think about the assets that have been popular or available in the market, we've got this new recent wave of tokenized equities and commodities that's bringing big useful assets on chain. But to date, we've had Bitcoin, Ethereum, maybe a couple other coins. But a lot of the coins that have done perp trading, those meme coins or whatever it is, they last for two or three weeks before people move on to the next thing. And this is not enough time for that market and that coincidence wants to develop. But now, as I said, you've got this more and more high quality crypto tokens that are emerging with longer term, more sophisticated holder bases, like IPE is kind of the most recent one that's had a breakout options market over the last year for that reason.

And then also you have all of these quality assets, RWAs, equities, commodities being issued and available and tokenized on chain. And I think those two trends are really, really good for the emergence of options markets and those coincidences of ones across the board.

David Hoffman (4:01)

Okay, so your primary answer, your first answer as to why options haven't come on chain yet is just a market structure one. The market structure for options is complex, it needs to be rich, it needs to be liquid. It takes time for these pieces to come together. What about technical constraints?