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

Decentralized exchanges must innovate to compete with centralized platforms in the evolving crypto landscape.

Key takeaways

• DeFi must match traditional finances performance without losing verifiability.
• Building in crypto should solve significant problems, not just for innovations sake.
• Most digital asset trading in 2022 was centralized, lacking blockchain utilization.
• On-chain verifiable actions can enhance financial efficiency over opaque systems.
• Perpetual contracts are favored for their capital efficiency and leverage.
• Customer feedback is crucial in developing effective core technology.
• Market dominance in perpetual exchanges shifts with each cycle.
• DEXs lacked strong product market fit post-FTX collapse.
• Competition between centralized and decentralized exchanges is set to intensify.
• Building on Ethereum is vital for capturing future financial opportunities.
• Solving technical challenges first can yield long-term benefits.
• Significant developments in Ethereums connectivity and institutional use are expected this year.
• Low latency in trading systems is achieved through optimized technology.
• Verifiability in trading ensures fairness, especially in volatile markets.
• Innovating business models can significantly impact the industry.

Guest intro

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

The challenge of DeFi performance

• “DeFi needs to perform at the same level as traditional finance without sacrificing verifiability.” – Vladimir Novakovski
• The need for verifiability in financial systems is crucial.
• DeFi aims to solve real-world issues rather than building for the sake of innovation.
• “It‘s not like okay let’s like build in crypto for the sake of building crypto.” – Vladimir Novakovski
• The philosophy of solving important problems drives crypto innovation.
• Understanding the challenges of DeFi compared to traditional finance is essential.
• The goal is to enhance DeFi performance while maintaining transparency.
• Verifiability remains a key focus in the evolution of DeFi.

Centralized vs. decentralized trading

• “99% of the way digital assets were traded didnt actually use the rails of blockchain.” – Vladimir Novakovski
• Centralized trading lacks the improvements offered by blockchain technology.
• On-chain verifiable actions improve efficiency over opaque traditional practices.
• “If what they do is verifiable and is on chain that just makes things more efficient.” – Vladimir Novakovski
• Perpetual contracts offer capital efficiency and leverage, appealing to traders.
• “Most active trading happens with perps… it makes sense when you think about it.” – Vladimir Novakovski
• The shift from centralized to decentralized finance is expected to continue.
• Understanding the 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 loop where you actually have like real customers using the tech.” – Vladimir Novakovski
• The evolution of perpetual exchanges shows market dominance shifts each cycle.
• “Every cycle you have like one perps platform that kinda dominates.” – Vladimir Novakovski
• The competitive landscape of perpetual exchanges is dynamic.
• Understanding the history of perpetual exchanges informs future predictions.
• Customer involvement is key to successful tech development.
• Market dynamics in trading platforms are influenced by trader behavior.

Ethereums role in future finance

• Building on Ethereum is essential for capturing future financial opportunities.
• “Building on top of Ethereum and being connected with the broader ecosystem.” – Vladimir Novakovski
• Solving hard technical problems first can lead to greater benefits.
• “If you solve the hard technical problems first then you get the bigger unlock later.” – Vladimir Novakovski
• Ethereums significance in the financial ecosystem is growing.
• The strategic importance of Ethereum for financial innovations is highlighted.
• Addressing technical challenges upfront is crucial for product development.
• Ethereums role in DeFi and traditional finance is expanding.

Institutional adoption and Ethereum

• Significant developments in Ethereums connectivity and institutional use are expected.
• “This year will be a lot of things will happen as far as unlocking the full connectivity to Ethereum.” – Vladimir Novakovski
• Building on Ethereum L2 allows better security and access to DeFi protocols.
• “The whole point of being a part of building on top of Ethereum… is kind of by far the most decentralized.” – Vladimir Novakovski
• Institutional adoption of Ethereum is a key focus.
• Understanding Ethereums Layer 2 advantages is important for builders.
• The strategic advantage of using Ethereums infrastructure is emphasized.
• Institutional use cases for Ethereum are set to grow.

Trading system efficiency

• Low latency in trading systems is achieved through optimized technology.
• “The low latency part is really important… the sequencer can be highly optimized.” – Vladimir Novakovski
• The technology can process 500 million orders a day at low cost.
• “Were processing 500,000,000 orders a day right now and the cost of doing all that are like under 50 k USD.” – Vladimir Novakovski
• Efficiency and scalability are key advantages of the trading system.
• Understanding the technical aspects of trading systems is crucial.
• Verifiability in trading ensures fairness, especially in volatile markets.
• Operational costs on certain exchanges can be lower than traditional ones.

Innovation in business models

• Innovating business models can significantly impact the industry.
• “Experimenting with the business model and not just keeping the status quo can be really powerful.” – Vladimir Novakovski
• The initial skepticism about Robinhoods zero-fee model was widespread.
• “At the time right like when they had this idea of zero fees like no one thought that would work.” – Vladimir Novakovski
• Understanding the context of Robinhoods model is crucial.
• The impact of innovative business models is highlighted.
• The significance of Robinhoods success is emphasized.
• Strategic positioning in business models can drive industry change.

Institutional and retail trading dynamics

• Institutions trade on platforms like Lighter to access retail markets.
• “Ultimately the institutions go where the retail is too… they wanna participate in as many markets as they can.” – Vladimir Novakovski
• The cold start problem is a barrier to integrating real-world assets into crypto.
• “Its like a cold start problem… to get retail you need liquidity and to get liquidity you need the institutions.” – Vladimir Novakovski
• Institutional motivations in crypto markets are strategic.
• Understanding the dynamics between institutional and retail trading is key.
• The interdependence of retail and institutional participation is emphasized.
• Strategic motivations drive institutional trading behavior.

Regulatory and compliance challenges

• Institutional players are hesitant to trade on DEXs due to regulatory concerns.
• “The players that do have that expertise up to now haven‘t been haven’t actively wanted to trade on DEXs because of regulation.” – Vladimir Novakovski
• Collaboration with policymakers is needed for institutional trading on DEXs.
• “Its so important for us to figure that out with policymakers in the US.” – Vladimir Novakovski
• On-chain KYC can enable compliance while allowing price discovery.
• “You can have certain rules around that and those are all made public.” – Vladimir Novakovski
• Regulatory clarity is vital for market growth.
• Understanding the regulatory landscape is crucial for institutional participation.

Technical alignment with traditional finance

• The technical stack must align with traditional finance needs for partnerships.
• “The alignment of the technical stack needs to be there… if theres technical alignment and the tech actually works.” – Vladimir Novakovski
• Price action is often given more attention than other metrics.
• “People pay a lot of more attention to the price action than we would have thought.” – Vladimir Novakovski
• Technical compatibility is key to bridging crypto and traditional finance.
• Evaluating success in crypto requires a broader perspective beyond price.
• The role of technology in fostering relationships is emphasized.
• Understanding the importance of technical alignment is crucial for partnerships.

Growth potential in the Ethereum ecosystem

• The focus on revenue in crypto is positive, but growth metrics should also be considered.
• “Its good that 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 lets say we had one day with like lower revenue like no one would freak out about that.” – Vladimir Novakovski
• The Ethereum ecosystem should be viewed as a startup with growth potential.
• “You have to think of it more as a startup… it‘s not like a public company that’s existed for twenty years.” – Vladimir Novakovski
• Understanding the growth potential in Ethereum is key for investors.
• Balancing revenue assessment with growth potential is crucial in crypto.

The future of capital markets

• All capital markets are likely to transition on-chain, merging traditional and crypto markets.
• “It seems very likely that all capital markets are coming on chain.” – Vladimir Novakovski
• Institutional players are increasingly recognizing the value of blockchain technologies.
• “The point is like its all like things like on chain hedge funds right or like tokenized stocks.” – Vladimir Novakovski
• The convergence of traditional finance and blockchain is predicted.
• Understanding the integration of blockchain in capital markets is crucial.
• Institutional acceptance of blockchain indicates a shift in the industry.