Welcome to this conversation with John Jansen, CEO of Deribit.
I should also note that Deribit has completed a “deep data integration” with Nomics.com. With this integration, Deribit receives an A+ exchange rating.
This interview is part of a series of interviews I’m doing with exchange operators. As part of this series, we’ve already interviewed Binance CEO Changpeng Zhao (CZ), Binance CFO Wei Zhou, as well as Ivan Poon from Switcheo, Alex Wearn from IDEX, and Sam Bankman-Fried from FTX. If you run a top 50 crypto exchange by volume, I want to speak with you as part of this series. Please reach out to set that up.
My conversation with John Jansen is broken up into 5 chapters:
- Chapter 1: What derivatives options and futures are
- Chapter 2: The current state of crypto derivatives exchanges
- Chapter 3: The current state of Deribit
- Chapter 4: Brand differentiation and growth hacking for crypto exchanges
- Chapter 5: An exploration of the future
Topics Discussed In This Episode
- Deribit’s origin story
- How Deribit is funded
- Why most exchange operators don’t really use social media
- How leverage changes as your position increases
- How crypto derivatives exchanges differ from derivatives exchanges in traditional finance
- Why more people have started spot exchanges versus derivatives exchanges
- How Deribit differentiates itself from the rest of the market
- How the crypto derivatives space has evolved over time
- Derivatives contracts volume versus spot exchange volume
- Why Deribit attracts institutional investors
- The number of Deribit users
- Deribit’s revenue figures
- Why Deribit uses geofencing
- Deribit’s future developments
- What Mass Quote Protections (MQP) are
Links Relevant To This Episode
- Cryptoinvestor Weekly Newsletter
- Clay Collins
- John Jansen
- Deribit on LinkedIn
- Deribit on Twitter
- CME Group
Quotes"I've always been interested in economics & I have a libertarian anarchist view so, when I discovered #Bitcoin, it felt like a gift from heaven." ~ John Jansen, CEO of Deribit Click To Tweet "Although our platform is open to both retail investors and institutional investors, when I look at our volume, more than two-thirds of the volume comes from institutional investors." ~ John Jansen, CEO of Deribit Click To Tweet "Mass Quote Protection allows certain traders to put in big orders in the book, but at the same time they can be guaranteed that only a few of them can execute at the same time. This increases the liquidity of the order books." ~… Click To Tweet
Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.
Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do [00:00:30] not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
Welcome to this conversation with John Jansen, CEO of Deribit. This interview is part of a series of interviews I’m doing with exchange operators. As part of the series, we’ve already interviewed Binance CEO, Changpeng Zhao; Binance CFO, Wei Zhou; as well Ivan Poon [00:01:00] from Switcheo, Alex Wearn from IDEX, and Sam Bankman-Fried from FTX, creators of the FTT token.
As a side note, if you run a top 50 exchange by volume, I want to speak with you as part of the series. Please reach out set that up if you’re interested.
Now, for a bit of background on Deribit. Deribit launched in 2016 and is one of the first futures and options crypto exchanges. At the time of this recording, Deribit does half a billion dollars of real volume per day. I should also note that Deribit has completed a [00:01:30] “deep data integration” with Nomics.com. With this integration, Deribit receives an A+ exchange rating, which certifies them as among the most transparent exchanges in the crypto asset space.
Now, about this conversation. This conversation is broken up into 5 chapters. In Chapter 1, we discuss what derivatives options and futures are. In Chapter 2, we explore the current state of crypto derivatives exchanges. In Chapter 3, we dive into the current state of Deribit. In Chapter 4, we discuss brand differentiation and growth hacking for [00:02:00] exchanges and crypto exchanges in particular. Finally, in Chapter 5, we close our conversation by exploring the future.
We’ll get right to this episode in just a second, but before we get started, I’d like to pause for a moment to tell you that this episode is brought to you by the Nomics API and CSV Data Export Service.
If you need an Enterprise-Grade Crypto Market Data API For Your Fund, Smart Contract, or App, or if you need historical CSV dumps of trading data from top exchanges or even obscure ones, then consider trying out the Nomics API or our historical data [00:02:30] export service. Our API enables programmatic access to clean, normalized, and gapless primary source trade data across a number of cryptocurrency exchanges. Instead of having to integrate with multiple exchange APIs of varying quality, you can get everything through one screaming fast fire hose. And if you’d like to order historical cryptocurrency market data as CSV exports from top exchanges, email us at email@example.com.
Okay, back to our regularly scheduled program. Here’s my conversation with John Jansen from Deribit. Enjoy. [00:03:00]
What was your background prior to starting Deribit?
John: Prior starting to Deribit, I was an options trader for two years back in 2000, quite a while ago. This is basically the backgrounds that relates to Deribit where I gained my knowledge in risk management, futures, [00:03:30] options, how all that stuff works. But in the 15 years prior to Deribit, I basically was having my own businesses in ecommerce mostly. And then in 2014 I switched back to where I left off 15 years ago.
Clay: Was the options trading that you did, was it high frequency trading? Was it swing trading? Was it a little bit more long-term in terms of the time horizon? Can you tell us a little bit more about the trading you did?
John: Actually it was a very low frequency [00:04:00] trading or differently set by then. This high frequency trading did not even exist. It was open outcry. It’s called open outcry. So, it was like a bunch of guys screaming on the floor with even some very light physical fights to fighting for your orders instead of doing it via computer. So, market making, the same thing, what’s being done right now, but you could go high frequency. But by then it was nonexistent yet, it was all [00:04:30] physical trading, just talking with the broker.
Clay: Bring us forward a bit to Deribit’s origin story. When did you start thinking about creating this exchange? And what was the genesis of Deribit? What were the preconditions that laid the foundation to you starting this up?
John: I got to know bitcoin in 2013. Straight away I was flabbergasted by this whole thing, how it even could exist; it’s like an invention. I’ve always been [00:05:00] very interested in economics, much libertarian anarchist point of view. Then, discovering a currency like bitcoin is some kind of gift from heaven. I was hooked up completely from this first moment I got into contact with it, basically.
That wasn’t the moments to decide to build an exchange. It’s just came after a couple of months, though they were already spot exchanges. I don’t remember if there was already a futures exchange, was maybe [00:05:30] about that time. My idea was like all there are already spot exchanges. So, this is already a done market, which was obviously absolutely not true because, for example, Binance started in 2017.
I had this idea and I said, “Okay, I’m going to build an options exchange or a futures and options exchange. So, a little bit ahead of the time because even now our options market can be much, much bigger than what it is. But then in the end of 2013, [00:06:00] I decided to build the exchange. It was also quite easy, I have my own business, I have the resources, so I didn’t even need to look for investors. Due to my previous business I knew some very good developers, so I was very confident that I could actually execute the idea. There were so many ideas which you also need to be able to execute them, of course. Then, basically it started slowly in 2014. The coding, that is, not the going live of the exchange.
Clay: Just so I have this right, [00:06:30] it’s 100% self-funded. You haven’t taken any outside investor money.
John: Right now there is a minority of external shareholders, but it wasn’t really an investment funding. It was just an agreement on selling some shares in the early moments. That was even after the exchange was live, so there was no real need for a funding.
Clay: I’m sure you’re bombarded right now with people wanting to put money into the business. [00:07:00]
John: Obviously, yeah. Now it’s different than by then. Even until the day that we went live, I didn’t even tell anybody, except for people like friends and other friends, but nobody even knew that there was an exchange going live the day before it went live basically.
Clay: Before we get into some of the more nitty gritty details, I guess I’d like to ask a little bit about your thoughts on social media outreach, personal branding, [00:07:30] et cetera. It seems like there’s a handful of people that operate exchanges, that interact on Twitter, that do podcast interviews, and things like that, but it’s actually pretty limited. There’s there’s CZ from Binance, there’s the CEO of BitMEX. Brian Armstrong doesn’t do interviews from Coinbase, but he is active on Twitter.
For the most part, people who operate exchanges, everything from pretty small exchanges to CME Group and [00:08:00] have across the board, LedgerX, et cetera. There isn’t a lot of interacting with the public. Why do you think that is? Is that for regulatory reasons? Security reasons? Is that just the kind of person that starts an exchange, generally doesn’t want to be in the public eye? What do you think is happening there?
John: Personally I’m actually not active on social media, but this is more like a personal thing. I just don’t feel so comfortable with it, yet who knows that this is going to change? Like the CEO of BitMEX, [00:08:30] CEO of Binance, you already have 60% of the trading volume—I’m just guessing a number now—so, that means that there is quite some activity on social media. We ourselves are very active, but this is more a community management thing on Telegram that we are interacting with the public on telegram and via Twitter announcing any important or relevant news around our exchange. So, I think that [00:09:00] social media is very important. The most important is maybe what other people say about you, influencers, and other people instead of yourself.
Clay: It probably would be incorrect to attribute the success of Binance and BitMEX to the fact that their CEOs are so active on Twitter. I think there is a real hunger in such a low trust environment to know that there’s a real person, there’s a face of the company that’s interacting. It’s really important especially [00:09:30] in such an unregulated environment with these very nascent markets to hear from the leaders of some of the more important companies in the space. But also in a space that has so many personalities, it does seem like exchange operators are a little bit below the radar, at least the CEOs of these companies.
John: Yeah, that’s correct. They’re not all well known figures except maybe for the companies that you mentioned.
Clay: Let’s kick off chapter one, which is about [00:10:00] derivatives options and futures. So, the listenership of this podcast is, for the most part, about half institutions and the other half are high net worth individuals, many of which became high net worth individuals through their crypto investments, and are increasingly interested in institutional financial infrastructure. And maybe a good place to start would be to discuss what futures and options are, and [00:10:30] how they work in the crypto space.
John: Futures and options are basically contracts agreements between two parties about an underlying, in this case, a bitcoin, where futures are basically a contract where you agree to buy or sell these assets at a certain point in the future. An option is the right to buy or sell at a certain price, a certain asset at some point in the future.
With a future, [00:11:00] the contracts will be executed basically like it’s an agreement on a sale at some point in the future. With option, you simply buy a right. For example, if Bitcoin is trading today at $10,000, you could buy or sell the right to buy a bitcoin for $15,000, which is higher than the price today, but still investors might be willing to pay for such a right because they might believe that at that point in the future, a bitcoin is worth more than $50,000. [00:11:30] Then, these rights, that gives you the possibility to buy this bitcoin for $15,000 will have a value.
That’s a very short explanation of options and futures. And of course, you can also try the option to sell the assets. So there are two types of options. Call options are the right to buy and put options are rights to sell, and of course, if there is a right, the counterparty has the obligation.
Clay: In the crypto space, it does seem like [00:12:00] these derivatives exchanges are synonymous with leverage. I think fewer people than most would estimate really understand futures and options contracts, but people pretty readily, I think, understand leverage, that you can trade with 5, 10, 20X leverage. That’s something that most people can relate to. If you have a great deal of conviction about the direction that you think something is going in, then it might [00:12:30] make sense to trade with leverage. How has leverage and these contracts? How are they related?
John: Because you don’t have to trade in the underlying value, you can make an agreement on something bigger than what you have, and close the position before you would need to deliver. In our case, all those products are cash settled in bitcoin, so it doesn’t take place any delivery. This gives for the possibility to use your equity more [00:13:00] efficiently, basically. This is what’s happening. If you want to take a position of one bitcoin, it’s just not limited to have one bitcoin collateral. There will be less collateral and automatically there is a leverage.
Clay: And do you offer 100X leverage with both futures and options contracts?
John: No. With futures contracts, yes, it starts with 100 leverage, but it decreases as your position increases. So, the bigger your position, the less leverage we will offer. [00:13:30] With options, it works a little bit different. If you buy options, there is actually no leverage at all. You’ll simply buy the option and you have this option, but this option can work leveraged in the sense that it can explode in value.
For example, the bitcoin is trading at 10,000. There’s 15,000 call for example. The seller would think it never reaches 15,000. So he sells it for $50, and then three months later at exploration, bitcoin is trading [00:14:00] at 20,000. And this option is worth $5000. So, then your $50 investments went up to $5000. That’s 100x. If you would have bought bitcoin, it would have gone just from 10,000 to 20,000. Now, the option itself is pure. You just bought it and you basically own the option.
Clay: How do crypto derivatives exchanges differ from derivatives exchanges in the legacy financial world? [00:14:30] Are there any notable differences or is it basically exactly the same contracts, and things work pretty much the same other than the fact that these contracts are collateralized with a cryptocurrency and settled in a cryptocurrency?
John: I think they are pretty much the same in the sense that there are so many derivatives of so many types, of so many different specs, that there are probably very similar products on the market that [00:15:00] are exactly the same or very similar. This is […] also for a spot crypto exchange. What makes it so unique is the cryptocurrency itself that can be sent over the whole world, and can be used as collateral. So it’s like it’s very easy to open up the exchange for anybody in the world in as so far until now in a regulated or very lightly regulated environments.
To compare with call, I can give a small comparison there. There is a regulated options exchange in America. [00:15:30] I don’t know how it is exactly today, but they require a huge amount of collateral. On top of that, they restrict the participants of the exchange due to regulations and working with US dollar. But working from another jurisdiction with crypto, you can operate in a much more client-friendly fashion, attracting clients from all over the world.
Clay: It seems like there’s been [00:16:00] a huge explosion in spot exchanges, and yet there seems to be a large demand for the ability to short bitcoin and ethereum and for leverage. For a while, BitMEX was the only player in town, and was doing enormous volumes, and still is. Why do you think, relatively speaking, so many more people have started spot exchanges versus derivatives exchanges? [00:16:30] Are the liquidity demands too high for starting this? Is that technological hurdles? Where’s the friction? Because the ratio of demand to creation of these businesses, it seems a little bit off relative to the rest of the crypto sphere?
John: First of all, like derivatives exchanges, they need spot exchanges to exist. So, you couldn’t start, for example, BitMEX. But also our exchange, we create an index based on spot exchanges. So, we could not possibly operate without the spot exchanges being there. [00:17:00] So, it starts where spot exchanges.
Most of the exchanges were started by people from the crypto movement, not so much from the financial industry. So, there was also, I think, in many of those founding teams, a lack of knowledge in those products, and then spot is just the way to go. Another thing is that spot exchanges, like every country might need its own spot exchange with the local currency.
With derivatives exchanges, it’s more like more of [00:17:30] a global play, like attracting artists from all over the world on your platform. For sure, there will always be more spot exchanges than derivatives exchanges because you simply don’t need so many derivatives exchanges, like the liquidity attracts liquidity, where the spot exchange is really like you have all those different currencies of those countries. Each currency already reserve spot exchange, basically.
Clay: I get your point that you need to be able to price these contracts in order [00:18:00] to price the contracts. You need spot exchanges and also having fiat on ramps in a bunch of different jurisdictions is really helpful to the ecosystem. But still, it does seem like given how much enthusiasm there was for the space, especially in 2017, even today, there really are not many derivatives exchanges of note. I mean, there’s you guys, there’s BitMEX, and FTX is coming up here a little bit. [00:18:30] But to have three compared to over 300 crypto exchanges, and then to see that the volumes do seem to be very high on all of these derivatives exchanges.
It does seem like there’s still a huge opportunity and yet very few people starting the exchanges. The main way you’d explain that is expertise in the space. Is there anything else or the liquidity demands harder? I feel like there’s something else going on.
John: I don’t know if there is something else going on. There are actually more derivative [00:19:00] exchanges that we might not know because they don’t attract volume. And again, the spot exchanges, they can have their niche function with a local currency or maybe some coins. There’s nobody wants to list, like Binance doesn’t list them. And then there is some small exchange that does list them.
With the derivative exchanges, this is a little bit less applicable in the sense that people who would want to try it on a liquid platform, so there was really just space for a few players [00:19:30] in the derivatives space. There are actually quite some parties trying to be on these markets and some fail, some are there. So, I think there is nothing special going on in this regard.
Clay: When you went to launch Deribit and you were looking at the space, what opportunities did you see for differentiation? What was the opportunity as you saw it?
John: There was no options exchange by then and actually right now, we are the only serious player [00:20:00] with the liquid options market. By then, this was very clearly what was differentiating us from other exchanges. There was no options exchange and I wanted there to be a crypto options exchange. Maybe looking back, this wasn’t maybe the wisest idea in the sense that we lost a lot of energy and options that we could have put in futures contracts.
The building of the platform took a very long time. Our specs are higher than most of the competition that I know of. [00:20:30] We can handle much more requests than other exchanges. All this was needed to be able to handle this option’s platform, which is still today a niche market that still has to explore. This was our unique selling point and it still is today, actually.
Clay: Let’s transition to chapter two, which is about the current state of crypto derivatives exchanges. It does seem like this space has evolved quite a bit over time. LedgerX was the first regulated US-based derivatives exchange [00:21:00] that offered bitcoin settled contracts, and then CME Group came in, and CBOE, and then of course, there’s BitMEX, and you guys. How have you seen this space evolve over time? What’s changed? What’s happening in the landscape?
John: Well, in the very beginning it started with non-regulated exchanges OKEx, which actually I don’t know if we heard that name yet in this conversation, but actually that was the first liquid derivatives market. The traditional exchanges [00:21:30] saw the success and the huge demand for crypto derivatives, and then they started to offer those products as well. There was one not insignificant difference. You have the exchanges that accept crypto as collateral, and you have the exchanges that accept fee out as collateral. BitMEX, Deribit, OKEx they’re all accepting crypto as collateral. And also, crypto is the settlement currency. Then, you have the regulated US exchanges [00:22:00] that are simply working with fiat money, and settling the contracts and fiat money.
Clay: When there are rankings of various crypto exchanges, I think something that often confuses people is when derivatives exchanges are in the ranking with spot exchanges. One might argue that volume isn’t equal, that spot exchange volume isn’t the same as futures volume. [00:22:30]
I think there’s also an argument to be made that the volume is the same because that is the amount that’s moving. Even though it’s leveraged volume, that’s a very real amount of money that’s passing through the system. If you lose with 100X leverage you have to pay.
What’s your thinking on derivatives contracts volume versus spot exchange volume? Is it apples to oranges? Is it apples to apples?
John: It’s apples to oranges, but still you could compare an apple to an orange. [00:23:00] It’s not the same, but it’s certainly not like some kind of fake volume or that you could say something like, “Well, it’s derivatives volume. You should divide it by two or whatever.” It’s just more and more easy to get to high volumes. It’s very real, but worrying about this thing with all those turnover list of exchanges, like many exchanges are pumping up their volumes miraculously $2 billion. If you look on coin market cap, it’s completely ridiculous. [00:23:30] Or at least it was until a while ago. It’s completely nonsense and bull[…] list.
Clay: Yes, it is. So, right now the top exchange by adjusted volume on coin market cap is BKX, and they’re reporting $1 billion in adjusted volume. They get roughly 200,000 visitors a day versus something like 64 million from Binance. So, yeah, it’s a total BS list. They’re just faking their volume to [00:24:00] spam the rankings.
John: We got this demand also very often like, “Why are you not on coin market cap?” You have to be there in the list, and maybe that’s exactly what a lot of exchanges are concentrating on being in that list. So, then you have to fake even more than your competitors and then you get this crazy, crazy, crazy volumes. I think we’re not even on that list.
Clay: Hey! I wanted to pause for a second to let you know that this episode of [00:24:30] the Flippening podcast is brought to you by the Nomics API and CSV Data Export Service.
And as a sponsor and producer of this podcast, I wanted to give you an announcement that I’m doing a webinar every week day, on crypto data and how it works. You should join me. This webinar is called Crypto Market Data 101: Fake Volume, Exchange Spam, and How The Seedy Market Data Underworld Actually Works.
On the webinar we discuss: (1) How exchanges use exchange volume spamming & ticker stuffing to spam CoinMarketCap and other aggregators; (2) What everyone is getting wrong about “transparency” and fake volume; [00:25:00] (3) Why most price aggregators are displaying bad data; (4) The three types of pricing data and why everyone is using the wrong one; and finally (5) The two transitions you must make in order to move from “Inaccurate Crypto Data” to “Good Crypto Data” and much much more.
To join me on a webinar, go to NomicsWebinar.com. Okay, back to the show.
John: We didn’t try hard enough to be listed on coin market cap, or maybe because they only [00:25:30] want to list off exchanges, I don’t know exactly. It’s reasonable to say to put them in a different list like spot exchanges is different from the derivatives exchanges. That would be a reasonable thing of course, but still you can compare the volumes. Sure.
Clay: So, over time you’ve seen more regulation. It doesn’t seem like you’re seeing actually more competition relative to volumes. It actually, it seems like the ratio of volume to competition is actually going in the right direction for you guys. Like for example, [00:26:00] so we’re a market data provider, and I can’t tell you the number of people that want Deribit data, and don’t even ask for BitMEX data. These days it seems like you’ve really done a good job attracting institutions.What is so appealing about what you’re doing from an institutional investor perspective? Is that a vertical that you’ve gone out that you’ve tried to target specifically? Or do you think a byproduct of just how you’ve built your product?
John: I think actually the last thing, it as not really meant specifically for institutions. If I look [00:26:30] at our volume, then quite surprisingly, more than two thirds of the volume comes basically from institutions. While they need our data, our platform can communicate also if you had the fixed protocol, which is relatively easy for them to connect with our exchange. We also offer options, which is for sure also our retail instruments, but it’s more complicated than it’s more often used by institutions. That makes it [00:27:00] automatically more of an institutional platform than a retail platform though that we are open for all public. So, we are just as much a retail platform has institutional platform.
Clay: Let’s move on to chapter three of this conversation, which is about the current state of Deribit. How many employees do you have?
John: We have about 25 employees or 28.
Clay: Wow, that’s pretty amazing that you’re doing the volume that you are with 25 employees.
John: Yeah, [00:27:30] I cannot change the numbers. It’s just what it is.
Clay: It seems like a pretty cash-efficient business. What about usage? How many users do you have?
John: We have about, I think 80,000 accounts registered, but they are not all of them active every day. So, we have about 3000 unique accounts trading every day. The amount of accounts that are actually have been trading, for example, in the last few months, I couldn’t say. [00:28:00] I actually would have to look it up. I’m not quite sure how much it is, but we have every day about 3000 unique accounts that are trading.
Of course, on a busy day it’s more, then on a quiet day, it’s less, of course. The users are more constant, but the volume is really quite concentrated. Sometimes it’s very busy and sometimes it’s very quiet. ○
Clay: Given the volume that you’re doing to have maybe 3000 active users on any given day, [00:28:30] I imagine there is a long tail, but it seems like there’s a pretty fat, thick beginning of that tail where you’ve got probably a handful of people doing a ton of volume, and then it drops down pretty quickly. And then there’s a really long tail. Is that about right? Or what does it look like in terms of trading activity?
John: There are some big accounts doing lots of volume, but I think this will be valid also for a spot exchange, not much difference. [00:29:00] But it’s correct. There are few accounts doing the majority of the volume. Yeah.
Clay: Are you open or willing to share revenue figures?
John: The trading turnover is public data. We are doing about half a billion of volume per day. Recently, maybe a little bit less, maybe a little bit more. The asset, the few revenues, that we keep private.
Clay: That said, you publish your fees and someone could look at [00:29:30] the volume, but of course, maybe there’s maker-taker incentives, or maybe you guys on one side of some of those trades and not paying fees, so it’d be impossible to calculate, but you could approximate it. Someone could approximate it.
John: We are a very healthy profitable company.
Clay: Sounds fantastic. What revenue sources do you have other than trading fees?
John: None. There is just trading fees.
Clay: I’ve seen a number of ways that, I guess spot exchanges mostly generate fees, [00:30:00] sometimes there’s listing fees, sometimes they create their own token, so they make money from the appreciation of that token. Do you guys have any intention of creating an exchange token?
John: Sometimes thinking about, it is very tempting to see those token valuations. Yeah, of course, I have to admit that. But so far, we decided to not go into that direction. It’s a possibility to make a membership token that will be basically an idea that the more tokens you own, [00:30:30] the higher level of membership you receive with their benefits. So far, we didn’t do that.
Clay: I’m seeing more and more exchanges adopt what I’d call maybe value added custody services. So, since you’re holding people’s funds anyway on wallets on the exchange, folks will do stuff like serve lending margin products, things like that. Are there things that people can do with their funds other than trade once they’re stored in your wallet? [00:31:00]
John: No. There is one lending, well, I cannot call it a product, but we offer also portfolio margin on our platform, which is specifically of interest for options traders.
John: Is risk-based margin. And it actually, it’s possible to have an account, a perfectly healthy account, trading accounts with a negative account balance, basically meaning that you are borrowing coins from somebody. At this moment, we do this at 0% interest. We just allow [00:31:30] this to happen as long as the position of the clients is guaranteed by their equity. Due to the options that we have, it’s possible to have a negative account balance with the positive equity and we allow this.
Clay: In the United States, at least, there’s a bunch of exchanges, but people are placing orders through brokerage accounts, and those brokerage accounts can provide leverage because they can see what’s happening across the entire portfolio. So, it’s a newer thing for [00:32:00] exchanges themselves to be providing loans and margin products like that, but it makes sense because there aren’t these execution hubs or brokers like there are in the traditional financial world.
John: Just like a logical thing that comes out of portfolio margin, but maybe a little bit complicated to really explain what portfolio margin exactly is. It’s just like internal lending, basically, but we couldn’t really call it lending is just the natural result [00:32:30] of portfolio margin that you can have a negative account balance with positive equity, perfectly healthy accounts that can trade.
Clay: What about services for institutions? Do you have an OTC desk? Can people call or place trades through chat, or the phone, and stuff like that?
John: We do not have an OTC desk, but we recently implemented block trading functionality. It’s not OTC, it’s like OTC creates via Deribits. So, yeah, [00:33:00] you can counterparty. We are not the counterparty, but we are not participating in those negotiations. Of course, if a client contacts us, we could forward them to […] or big traders that we think might be able to be their counterparty.
Party A and party B can agree upon its rates, see our block trading functionality executed, and clearance via our exchange. So, this volume would also be published, [00:33:30] but those trades will bypass the […] books. This is something that we just launched a couple of weeks ago and that there is a company called Paradigm. They are connected with our block trading functionality hence a counterpart. This is actually the jets, what you just mentioned. It’s like a new jets, and agree on a deal and execute it. This is exactly what this app is doing. It feels very much like OTC trading, but in reality it’s block trading clearance on our exchange.
Clay: Yeah, it’s a [00:34:00] settlement, clearing house, and all that stuff allowing two parties to interact through you.
John: And this is very much, of course, functionality for institutions like a retail would hardly use this function unless it’s a very big trader. It’s usually just for big deals.
Clay: Are fees lower for those kinds of trades?
John: Right now, the fees are the same. Maybe in the future we would allow lower fees, but we just didn’t implement anything like that. [00:34:30] We are busy coding other stuff right now, but maybe at some point we can work something special on those block fees. Right now, we just didn’t do this yet.
Clay: I see. If you come from a United States IP address, you can’t register for an account, I guess, unless you’re using a VPN or something. What regulatory obligations do you have? Do you do KYC, AML? You’re definitely doing geofencing. What kinds of gates, fences, and [00:35:00] things are in place?
John: Surprisingly, though we are based in the Netherlands—that’s European Union—there is at least no Dutch regulation applicable to us. It’s arguable because in some other European countries there is regulation; you need to be regulated. It’s a gray area in which we are operating, but so far, a company like ours cannot be regulated in the Netherlands, so basically there were no [00:35:30] rules outside of the normal standard law how to operate such a company. This will change starting in 2020. A crypto trading company would still not be regulated, but at least we’d have to register with the authorities, telling the authorities basically what they are doing.
Clay: Do you have KYC, AML processes in place or not?
John: No. Right now, we don’t have those things in place. Starting 2020, if we [00:36:00] continue to operate in the Netherlands, then we would need to have those things implemented. This is part of the new rules that will go into effect starting in January, 2020 in the Netherlands. Still not regulated, but we have some KYC, AML obligations for the exchange.
Clay: In terms of a geofencing, folks from the United States, why are you doing that? What happens if you don’t do that?
Hey, this is Clay cutting in from the editor’s booth to shed some light on what [00:36:30] geofencing is. Geofencing is the deliberate act of blocking access to a website or service based on a user’s geographic location. To do this, websites typically looks at the user’s IP address which reveals which country the user is from. To get around geofencing, people can use a virtual private network (VPN) which will obscure the IP address and also conceals the user’s location.
Ok, back to the show.
John: Honestly, we don’t really know, but we just don’t want to take the risk, basically. If law was very simple, [00:37:00] then we wouldn’t have all those expensive lawyers. It’s difficult to know exactly how things are. But what is very clear is that our activity would be a regulated activity in the United States. I’m not sure if we will be allowed to allow you as customers on our platform if we would not attract them. I’m not sure, but we just try to do everything to not have them on our platform. But it’s of course, [00:37:30] impossible. There’s always a way to sneak into a platform, you can either fake your identity or whatever.
We just don’t want to take a chance and actually, there was another exchange, a guy I don’t remember the name. One Broker. I think it was One Broker. They went one step further offering derivatives on US stocks, settled in bitcoin.
Clay: Is like currency.com or?
John: No, onebroker.com it was called.
Clay: Oh yeah, I remember. Yeah, I remember how that place was sketchy. [00:38:00]
John: Actually, I didn’t know it was sketchy, but they just went one step too far according to the US regulator because they were really touching US property kind of thing, like those US stocks that you could trade their derivatives on their platform. So, that’s one step further. It’s a very actual thing that also other exchanges like we are, like the small player on the market. So, the other bigger exchanges get a little bit more attention, maybe from regulators. [00:38:30] It’s unfortunate for US citizens, but there’s just no place for them on our platform at this moment.
Clay: Is the United States the only region that you’re geofencing or are there any others?
John: There are some other on the jurisdictions that we are also geofencing like Iran, for example.
Clay: Oh, interesting. Why is that?
John: Well, that might be because they are sanctioned countries, so it’s due to some rules that the [00:39:00] United States put up. That’s a very small group, maybe a list of 10 countries, but it’s really a very small group. Basically, most of the world can trade except for the United States. That being said, of course, there are more countries where this activity would need to be regulated.
What we cannot do is actively marketing our products in all jurisdictions. We can be there, but actively marketing your products, that will be like one step up too far in those countries [00:39:30] where this activity, if you would like to have this company in that self country, you would need to be regulated. This means that when we even being located in another country, cannot actively market our product in that country.
Clay: All these places like Iran and stuff, so is the reason that you’re doing that is because you don’t want to piss off the United States? Is that why? It doesn’t sound like something you have to do like your government doesn’t care?
John: Well, let’s say that our compliance officer decided on that and I followed [00:40:00] his advices.
Clay: Yeah, you’re probably not missing out on a ton of volume by blocking Iran.
John: No, but it is a very small group small group of countries.
Clay: What about in North Korea? Can North Koreans cheat on your platform?
John: Actually, I think they’re also on this list. As long as there in no KYC, we cannot be sure that there is no North Korean on our platform. We just do what we can to not allow that.
Clay: Let’s kick-off chapter four, which is about brand differentiation and growth hacking for crypto exchanges. You guys have grown [00:40:30] pretty fast. I’ve been following you guys for a while and it seems like you’ve got a great marketing team. I think the messaging is good, I think the branding is on point, but it doesn’t look like you’re doing a lot in the way of traditional marketing. I don’t see a lot of SEO, I don’t see a lot of really ads being ran.
How do you think about growth and your growth efforts? I mean, I feel like if you asked most CEOs why they grew, they’d say, “Oh, it’s culture and our product is great.” [00:41:00] But there usually are some growth strategies that work. What can you share with us about why you’ve grown and also, deliberate growth activities that have been fruitful?
John: Initially I thought that just having a great product would be enough, actually. Then I found out rather quickly that it’s not really the case.
Clay: If you build it, they will come. Except, not really.
John: Yeah, something like that. When we opened the platform, it was a very exciting day of course, and then after [00:41:30] one week, maybe one option was traded or something. I would expect all option traders in the world to get so excited because of this exchange, but that was not really the case.
That being said, really in our DNA, let’s call it like that, it’s really based on delivering good products and our strength is not selling the products. It’s really not the marketing part, but the basis comes from the quality of the products. That’s still [00:42:00] today and what we do invest a lot of energy in this, for example, in our community, we have a telegram group also in some other languages where we support 24×7. Our users can ask questions or discuss things with our community managers. We don’t have to do it, but we do this to create a good name and this is basically our way of doing marketing.
This is a new thing that we did not launch yet. An educational [00:42:30] platform, where we put a lot of energy in some YouTube videos and courses, trying to explain options and futures from the very basics to the more advanced classes.
Clay: What changed along the way? You started, it took a week for some trading to happen. What happened between then,and now? Was there something you remember doing that really moved the needle on growth? There’s lots of platforms with telegram [00:43:00] groups, so that probably didn’t drive growth.
What bridge the gap? It was just a matter of waiting for the market to discover you or were there deliberate things you did that jump-started the platform?
John: We have one thing that other exchanges so far did not manage to implement though they are trying. This is the options trading parts. So, if anybody would be looking for trading bitcoin options, they would just sooner or later arrive on Deribit. The way we’ve been growing is basically not like [00:43:30] explosive growth, but more like a bit by bit growth.
We’ve seen always a spurt of new users after we launch our new products. We also launched a perpetual. This increased our user base and volume. And also, the moment when we added ethereum, we also accept ethereum as collateral for the ethereum products. This also gave us a growth spurt. For the rest, it’s a very small [00:44:00] steady growth.
I cannot give any dates, but of course, we plan to add more products on the exchange. Also, unique products that are a little bit different from what we have right now. I’m pretty sure that this will also result in the new small explosion of user-base and volume.
Clay: You mentioned the perpetual futures contracts. Are those more popular than the expiring contracts in the aggregate?
John: On our exchange, yes, and they are more liquid.
Clay: And is that [00:44:30] by a huge margin? Would you say it’s like 90% perpetual and 10% are liquid? What’s the ratio of a perpetual to expiring?
John: I think it’s about 80% of the volume you can find in the perpetual.
Clay: You have a telegram group, you’ve done some education classes, and it seems like every time you launch something new that was created in response to user feedback. Of course, that attracts new users because they’ve wanted the opportunity to trade in that way. [00:45:00] Any other growth hacking sledgehammers or anything that moved the needle on the marketing side of things?
John: Of course, we’ve done some little marketing things, but really on a very, very, very small scale. It’s really negligible, basically.
Clay: Let’s move on to chapter five, which is about the future. How do you see Deribit evolving over time? Are there any new products that you can tell us that are on your roadmap or at least areas of interest for future development of the platform? [00:45:30]
John: We are always extremely busy with developing. It might look like things are always the same. There is always a lot of work being done in the background. Personally for me, most important, maybe not strategically, is the performance of the platform. Though I think today we are already the most performance exchange like rate limit wise and response time wise, but still it needs to be better in my opinion. So, we are always working on increasing basically our capacity [00:46:00] on the platform, trying to reduce latencies. And we need to add some specifically for professional usage functions like one thing that I could mention specifically is mass called protection for options market makers. I don’t know if you are familiar with this concept.
Clay: What kind of protection?
John: Mass called protection.
Clay: Oh, no, I’m not.
John: Yeah, it basically means that you allow certain traders to put in big orders in the book, but at the same time they [00:46:30] can be guaranteed that’s only a few of them can execute at the same time. This increases the liquidity of the order books, basically, and all big options exchanges like CME, they have those functionality and we do not have it yet. It’s not very easy to implement such functionality keeping performance. So, this is a challenge that we still have to tackle, for example.
Clay: What about additional contract types maybe for, indices, things like that, maybe something based on the top 10, or the top 15, [00:47:00] or things of that nature? Are there products like that coming?
John: Those products could be coming. they are not yet on the agenda. What we are working on is outgoing contracts, or actually this could also be index, so it wouldn’t matter what it is. But let’s call it, for the moment, outgoing US dollar contract. The difference is that it is an outgoing US dollar contract that settles in bitcoin. So, still using [00:47:30] bitcoin as collateral and this will be the product that we would probably launch next. Then, it can be many outgoings of course, like doesn’t need to be. We don’t need to give names, but we all start with the bigger ones, of course.
Clay: Anything else coming down the road that you’re open to talking about or is that pretty much it?
John: This is pretty much it because most of the work goes into optimizations of what is already there. For the new product this is mostly all futures settled in [00:48:00] bitcoin with a daily settlement.
Clay: It seems like there’s definitely a lot of product companies that just ship new things and don’t spend a lot of time perfecting what’s already there when really in this space, what’s missing is just doing the boring basics right versus having all the shiny bells and whistles.
John: We are going slow with product launches, but still it’s going rather quickly. Traditional exchanges might announce half a year in advance and [00:48:30] make little change in their API. We do it quite a bit faster, but still reserved.
Clay: In terms of data and methodology, you mentioned that you need the spot exchanges in order to feed pricing data to these contracts. How do you think about data, data quality? As you mentioned, there aren’t a lot of exchanges that have trustworthy data, and then those APIs go up and down. Then, there’s crazy outliers that sometimes come through during flash [00:49:00] crashes, and of course, when there’s fluctuations and fiat currencies that are pretty prominent on a given platform, for example, on Korean exchanges or Japanese exchanges. How do you think about data quality? And what steps you guys take to make sure that the price feeds for your contracts are as solid as possible?
John: I would say at least our solution works surprisingly well and the feeds are always working. But we are receiving fees from a couple [00:49:30] of exchanges, and we cancel out the highest and the lowest value, then the average of the remaining is what our index is. This kind of covers us. It might not be always. You could argue about what is the best index, but this is a solution in the middle. To make it also robust, for example, you could argue that Coinbase is the biggest exchange, so you should base your index on Coinbase. But then, what you do if Coinbase goes offline or maybe Coinbase [00:50:00] gives false data or whatever. So, you need to have more exchanges as inputs.
There have been also flash crashes like some book in the spot exchange engine or whatever that that creates like a big crash, like Bitcoin dropping from 10,000 to 500, just for a flash of a second. If you would surprise our index based on such a data input, well, then you would liquidate everybody unjustly. Because moving [00:50:30] out the highest and the lowest value of a big group of exchanges makes our index very robust and that has been proven so in the past.
Clay: For awhile there, most exchanges were and still are very free with their data. In the United States, I think NASDAQ in the New York Stock Exchange have a monopoly on data. They can see […] on that. But I think in the crypto space, it’s a little bit different. The fees are still really healthy, so exchanges aren’t having to turn yet to their data for revenue. [00:51:00]
Then, I think also there’s this idea that these APIs are distribution tools. If you can get as many sites as possible showing your markets because they’ve better feeds about them, that can be good from a growth perspective.
One thing that I have seen around the time that the CME group and CBOE launched is restrictions in some places on using market data for pricing financial [00:51:30] products in these contracts. Do you guys have to pay to use data for pricing these contracts or is it still relatively free?
John: It’s still completely free. It’s actually the opposite that sometimes we have been approached like, “Can you please add us to your index?” So, I don’t know how this will evolve in the future, but right now none of the exchanges are restricting their data, neither are we. All our data is free, but who knows? This might develop [00:52:00] in a different direction in the future.
Clay: Last question. If you could wave a magic wand and altruistically make anything happen for the crypto sphere, what would it be?
John: A good news that Amazon starts to accept bitcoin or something like that. I don’t know. I think the crypto is going into the right direction. Of course, it will go with ups and downs, but I don’t think we need any magic like the genie [00:52:30] is out of the bottle. It’s difficult to make predictions. It’s always nice to make predictions and discuss about where we are going, but we are going in the right direction.
Clay: Well, that concludes my conversation with John Jansen from Deribit. I hope you enjoyed it. Before you go, however, I want to mention that since we’ve started producing [00:53:00] episodes at a much higher rate, we now have room for a few more sponsors. If you like the work we do and would like to support this show, then a sponsorship might be a good fit for you.
I can say from our own experience that Flippening sponsorships work. Each and every time we put out an episode of this podcast, we mention our own API, and to date, every single one of those advertisements has resulted in at least one customer. In fact, we would do these shows even if nobody else sponsored because of the business it brings to us. And over 80% of paying customers mention that they heard of us through our podcast. If you’re interested in sponsoring the show, [00:53:30] please hit us up at firstname.lastname@example.org.
Alright, that wraps up things for this week. Stay tuned for next week’s episode. Until then, take care.
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