March 9, 2022
Something we have been talking about for over a year now is the evolution of the Option space in crypto markets and the demonstrable impact they have had and will continue to have in the future. Thus, we make it a point to keep up with the innovation, growth, and opportunities surrounding Crypto derivatives. This is of course almost impossible, the speed at which this space moves is astonishing, but we try our best. One such entity we have watched with much interest is Paradigm, in fact we had a call with Paradigm’s founder Anand in the early days (2020) to find out what they were building and what type of clientele they had.
What’s so fascinating to me about Paradigm is that they have largely stayed out of the public eye (crypto twitter). It would seem that even though they have been moving in stoic silence, they have managed to become a keystone to sophisticated option traders, and by extension they have become a fundamental piece of the crypto derivatives market.
Now I understand that most of you might not know what Paradigm is, and for those of you who do there are probably genuine questions which need to be answered. Over the course of this interview, we aim to shine more light on this silent giant, and satiate your curiosity.
What is Paradigm?
Paradigm is a liquidity network (marketplace) for sophisticated derivatives traders. What does this mean? Let’s say you wanted to execute a large purchase of say x1000 25MAR22 Call Options. If you were to go straight to an exchange, and put your order on the books, the price of those Calls would increase drastically because everyone now knows there is a buyer who is willing to bid for that strike. This generally isn’t a problem for us of the proletariat class, but it is a real problem for large OTC desks, prop traders, family offices, and hedge funds.
The network that has been built around Paradigm makes Peer-to-Peer trading incredibly efficient. All you need to do is submit an RFQ and another player in the network can choose to show a price anonymously. You can also preemptively choose which exchange you want the trade on (Deribit, Bybit etc.). If you like the price/offer the trade will be executed automatically via your preferred exchange. But the best part IMO, is that you can easily build complex structures. On other exchanges you need to leg into a spread, meaning you must buy or sell each Call or Put separately in order to build your desired structure. With Paradigm you can sell (or buy) the entire structure as a single entity, making things vastly more efficient.
~$250-$500m/d (~25-30% of daily Cefi options volume)
Requirements are Exchange dependent, there are no requirements on Bybit or Bit.com. However, on Deribit (which is our largest), clients have to do a trade notional of 25 BTC or 250 ETH per block.
Paradigm is FREE.
Can you give us a bit of your background, what did you do before Paradigm?
I’ve spent most of my career in the OTC markets at a bank, where I helped build trading businesses across interest rate, commodities and credit markets. I did a little stint in grad school graduating with an MBA and an MS in Finance from Case Western Reserve University. I was raised in an entrepreneurial family so prior to graduate school, I spent 3 years running my family’s middle-market, manufacturing firm in India.
How long have you been in finance?
Too long...Since 2012
How did you hear about crypto?
One of the VPs on my trading desk couldn’t shut up about it in 2013-14. It took me a few months to read the whitepaper but I remember being blown away by how elegant the solution was. In particular, it seemed to bring together digital signatures and public key cryptography in a manner that had never been done before. Of course, I had a very surface understanding of each of these ideas back then but the more I dug into it the more “beautiful” it seemed. At one point, I distinctly remember thinking “this is math, it can’t be refuted!”.
What made you want to enter the crypto space?
I started Paradigm because I wanted a better way to trade commodities OTC. The process is riddled with inefficient middlemen and arcane systems. I was spending two-thirds of my time booking and reconciling trades than actually trading or structuring. I was soon writing scripts (my undergrad was Computer Science) to automate my trading workflows. The result was this giant spreadsheet that automated pretty much everything I did on the desk. It didn’t take too long to realize that this was not just my need, but every trader’s need on the street and that there was no system out there that could handle the complexity + end-to-end automation. So I decided to build one :)
It wasn’t until 2018, that a friend suggested I build the same system but for crypto. It made a lot of sense given there was absolutely no institutional infrastructure (or any infrastructure for that matter) in the space. So it felt like a real opportunity to be a first mover in space! We ended up building for about a year and launching in August of 2019.
What are the best and worst aspects of crypto in your view?
This feeling of community is absolutely amazing along with the breakneck speed of innovation. The thing I don’t like is that it sometimes feels like it is just like the early days of Wall Street - there are a lot of scams and get rich quick schemes, which make main street folks lose their hard earned money but also bring our entire asset class into disrepute.
Can you give us a short summary of what Paradigm is?
Paradigm is the largest institutional liquidity network in crypto.
It turns out that if you are an institutional trader, finding on-demand liquidity that is tailored to their size and risk preferences can be very hard. So we built a marketplace with a simple mission: on-demand liquidity for institutional traders, anytime and anywhere without compromising on size, cost and immediacy. Today, we have grown to 700+ institutional clients trading ~$8-10 billion per month and have established ourselves as the go-to platform for large and multi-leg derivative trades. 2021 was an amazing year for us, with y-o-y volumes growing over 1000%!
Our flagship RFQ product offers institutions a single point of access to the most competitive prices for large and multi-leg trades without the need for manually intensive bilateral negotiations. Clients can simultaneously request two-way quotes from multiple counterparties on a disclosed or anonymous basis without revealing their trade direction and instantly execute on the Best Bid/Offer. Paradigm also provides end-to-end workflow automation tools necessary to facilitate complex, multi-leg and multi-product strategies that increases trading precision, eliminates leg risk and lowers execution costs.
We also have a growing credit business with our recently launched crypto-credit offering: Multi-Lender RFQ for Loans (LRFQ). LRFQ leverages our existing network of institutional counterparties combined with workflow automation to help borrowers manage all their lending relationships in one place.
Who are Paradigm’s core clientele?
We have a diversified, global network of 700+ institutional clients that include Hedge Funds, OTC Desks, Lenders, Structured Product Issuers, Market Makers, and Family Offices. Given the average trade size and the focus on options, our clients tend to be more sophisticated. But within that group the major client segments are hedge funds and digital investment platforms as well as what I would call crypto banks (i.e. large institutions which do everything, OTC spot/lending/derivatives/structured products). And of course providing liquidity to these clients there are the market makers on our platform.
However, given our new offerings particularly in future spreads i would say there is going to be a significant diversification of our client base to include more systematic players and ‘cash and carry’ clients - the option market is a fraction of the futures market in terms of volume, and we should increasingly be relevant to the broader ecosystem of crypto derivatives users.
Where do you see the Crypto Option Market 5 years from now?
Massive! Options haven’t seen the same growth as futures but I believe the institutionalization of the derivatives market will drive a significant increase over the next few years.
I expect it to be as liquid as some of the major FX and equity markets - a lot of the growth of options will be related to growth of crypto as an asset class. As an asset class matures and becomes more accepted as a store of value, it's normal that an option market develops as yield enhancers face off against hedgers.
Do you have any thoughts around Crypto regulation? Are regulation net positive or negative? Why?
Regulation legitimizes an asset class and I think sensible regulation would allow a broader subset of the investors in the world to get involved in crypto. I also think that a convergence of regulation and defi is inevitable, but it will be driven by customer demand (as opposed to through enforcement). If regulated customers want to access defi markets, they will demand that from the defi marketplaces the same way these customers demanded it from Cefi exchanges (in crypto). Defi protocols are likely to trade that in a bid to grow.
Are you interested in decentralized finance, DEX’s? What impact (if any) do you see these having on derivatives space in the future?
Paradigm at its core has always been a non-custodial platform- in cefi we have always viewed ourselves as being a non-custodial liquidity network where no client has credit risk to Paradigm. That, at its core, is a defi value. We are already in the process of adding support for defi assets, specifically the weekly auctions for DOVs will soon be hosted on Paradigm!!
The impact of these weekly auctions is already being seen on the vol surface and term structure so is quite noticeable. DOVs are an important bridge between the institutional traders on Deribit and the defi world, mainly because it is real flow that is both growing and predictable (i.e. not scamy or incentive driven that has a weekly cadence)
I expect, like a lot of others in this space, that defi TVL grows by 10x over the coming year. This in turn should suggest that defi derivatives will be a legitimate alternate source of liquidity for both price takers and makers.
What are your thoughts surrounding DOV’s? Does Paradigm have any plans to integrate with DOV’s in anyway?
We do! I think these protocols are great and a real source of alpha for both investors in the vaults and for market makers who are buying these options. We are in the process of integrating with these vaults and we are partners with the larger ones like Ribbon, Thetanuts and StakeDao, as well as a number of non-vault option exchanges like Opyn and Zeta Markets. The way we see our role in this space is similar to where we saw ourselves in cefi, we will connect the vaults with our large liquidity network to run a fair auction which is ultimately better for vault investors. Most importantly this would be through our existing interface - so a bidder basically sees a similar workflow to deal options for cefi exchanges and defi protocols all in one place! So DOVs operators don't have to waste their Fridays trying to coordinate hundreds of prices via chats (by the way I have talked to everyone - Friday nights are gone for the entire defi options community both for the protocols and the bidders - so Paradigm is single-handedly giving them back much needed bar time!🍻).
If you could point to one or two things that have been key to Paradigms success, what would you say those two things are?
Customer centricity, hard work and our people. There are no shortcuts, this sh*t is hard and isn’t for everybody. If you listen to your customers, work really hard and hire the best people, I think that is a combination that sets you up for success. Of course, you also need a lot of luck. I would say without the universe being on your side, none of this would be possible.
Finally, what is something you have learned over the last couple years while running Paradigm? And do you have any advice for someone looking to enter the crypto space?
There are no shortcuts, you can get lucky sometimes, but for success to be repeatable, you have to work hard. Above all else, I have learned that building a company is about managing your own psyche. If you want to grow you must learn to leave your ego at the door and be willing to come to work every day with an open mind. Rigidity/Ego is the enemy of growth so if you are too attached to your opinions, this market will leave you behind.
My only advice for those looking to enter space is to do it fast! This is incredibly fun and fulfilling and you won’t regret taking the plunge!