AD Derivatives Podcast Featuring Vertex Protocol

Welcome to the AD Derivatives podcast led by Director of Derivatives; Greg Magadini.

Featuring: Darius Tabatabai, Co-Founder of Vertex Protocol!

Vertex is a cross-margined decentralized exchange (DEX) protocol offering spot, perpetuals, and an integrated money market bundled into one vertically integrated application on Arbitrum.

Vertex is powered by a hybrid unified central limit order book (CLOB) and integrated automated market maker (AMM), whose liquidity is augmented as positions from pairwise LP markets populate the orderbook. Gas fees and MEV are minimized on Vertex due to the batched transaction and optimistic rollup model of the underlying Arbitrum layer two (L2), where Vertex’s smart contracts control the risk engine and core products.

Introduction

The Amberdata Derivatives Podcast welcomes Darius Tabatabai, Co-Founder of Vertex, who shares his extensive background in trading, including prop trading, commodities trading, and metals trading. The conversation begins with an exploration of Darius’s career journey from the London School of Economics (LSE) to his current role at Vertex.

Early Career and Trading Background

Darius attended LSE from 2001 to 2004, where he was more involved in partying, playing rugby, and gambling rather than focusing on academics. His gambling activities, particularly in spread betting on sports like cricket and snooker, led to significant success but also got him banned from multiple platforms. This experience piqued his interest in trading, leading to an internship at Citigroup and eventually a role as an FX options trader at UBS.

Trading at UBS and Career Progression

At UBS, Darius quickly rose through the ranks, moving from FX options to precious and base metals trading. His success during the financial crisis of 2007-2008, particularly with the bank's strong precious metals franchise, earned him recognition and a subsequent position at Credit Suisse, where he helped establish a new precious metals business. This trajectory continued with a stint at Bank of America.

Trading Approach and Market Making

Darius explains his trading strategy, which he describes as "prop market making." This involves taking substantial positions based on market arbitrage opportunities rather than just facilitating customer trades. His approach allowed him to manage significant portfolios, particularly in gold, where he became one of the largest traders on the CME and ETF markets.

Transition to Crypto

Darius's entry into crypto began with early investments in Bitcoin and sporadic trading during the BitMEX era. His serious involvement in crypto was reignited during the DeFi summer of 2020, leading him to co-found Vertex. Initially, they aimed to build on the Terra blockchain, but after Terra's collapse, they pivoted to Arbitrum, focusing on a comprehensive trading platform that offers on-chain, self-custody trading.

Vertex Protocol

Vertex provides both spot and perpetual trading on various cryptocurrencies. A unique feature of Vertex is its cross-currency margin collateral system, allowing traders to use multiple types of tokens as collateral without needing to convert them. This system enables efficient trading and margin offsets, making it attractive for sophisticated trading strategies.

Market Dynamics and Interest Rates

The discussion highlights the intricacies of Vertex’s money market, which operates on a utilization curve similar to Aave. Interest rates adjust based on the demand for borrowing USDC, providing competitive rates for traders. Darius notes that decentralized exchanges (DEXs) like Vertex tend to have higher funding rates than centralized exchanges (CEXs), primarily due to the capital requirements for market makers.

Future Outlook and Strategic Vision

Darius envisions Vertex as a platform that caters to both retail and institutional traders by offering advanced trading features traditionally found on CEXs but with the security and transparency of a DEX. He predicts a growing convergence between traditional financial products and crypto derivatives, facilitated by platforms like Vertex that offer sophisticated risk management and trading tools.

Leverage and Liquidations

Vertex offers significant leverage options to its users, with up to 20x leverage on Bitcoin and 10x on altcoins. The liquidation process at Vertex is modeled closely after the one used by dydx V3. It involves using an oracle to determine the discounted value of assets. If an account's health falls below a certain threshold, assets are liquidated at a discount, incentivizing liquidators with a small return on the discounted assets they purchase and sell on the market. This process continues until the account's health is restored above zero. Vertex employs a thoughtful, incremental liquidation approach, especially for cross-margin accounts, ensuring users are not completely liquidated in a single event.

Tokenomics and Staking

The Vertex token (VTX) plays a central role in the ecosystem. Users can stake VTX to earn a share of the protocol's revenue and accrue a 'Vertex Score,' which reflects their long-term participation and commitment. This score not only affects their revenue share but also future governance roles within the protocol. Additionally, tokens are distributed to active traders, ensuring that the most engaged participants in the ecosystem are rewarded proportionately.

Future Roadmap and Options Trading

While Vertex does not currently offer vanilla options trading akin to Deribit, the platform is exploring innovative, options-related products tailored for retail users. This approach aims to provide unique trading opportunities without directly competing with major liquidity centers.

Personal Insights

Darius, one of the leading figures behind Vertex, balances his professional life with personal interests such as sports, family time, and previously, stand-up comedy. His diverse background enriches his approach to managing and innovating within Vertex.

Recommended Trading Books - For those interested in enhancing their trading knowledge, Darius recommends several books:

• Market Wizards by Jack D. Schwager: A classic compilation of interviews with top traders.
• Reminiscences of a Stock Operator by Edwin Lefèvre: A timeless piece on trading psychology.
• Dynamic Hedging by Nassim Nicholas Taleb: A practical guide on options trading and risk management.
• FX Options School: A more technical read for aspiring professional options traders.

Conclusion

The podcast concludes with a reflection on the future of crypto trading and the role of platforms like Vertex in shaping this landscape. Darius emphasizes the importance of adaptability and innovation in navigating the rapidly evolving crypto market. Vertex aims to bridge the gap between traditional finance and decentralized trading, providing a robust and secure environment for diverse trading strategies.

Key Takeaways:

1. Diverse Trading Background: Darius’s extensive experience in traditional markets and early adoption of crypto trading inform Vertex's innovative approach.

2. Prop Market Making: Darius’s strategy involves taking significant positions based on market mispricings, which has translated into Vertex's trading philosophy.

3. On-Chain Trading Advantage: Vertex offers on-chain, self-custody trading with unique features like cross-currency margin collateral, setting it apart from both DEXs and CEXs.

4. Competitive Interest Rates: Vertex’s money market uses a utilization-based interest rate model, ensuring competitive borrowing costs for traders.

5. Future Potential: Vertex is well-positioned to cater to the evolving needs of both retail and institutional traders, leveraging the transparency and security of decentralized finance (DeFi).

AMBERDATA DISCLAIMER: The information provided in this research is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this report constitutes, or should be relied on as a suggestion, offer, or other solicitation to engage in, or refrain from engaging, in any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.