off-piste — The Decentralized pre-IPO Synthetic Derivatives Protocol — Serum Stories #8
“We believe if you are looking to have widespread adoption of DeFi, meaning the mass retail population and institutional traders, you are going to have to build something that is similar to how they interact with financial markets today, which is through an orderbook.”
Welcome to Serum Stories #8
Serum has always represented and championed the mass adoption of decentralized finance. Many proponents of DeFi have long recognized that one necessary factor for transforming DeFi into a global force is spurring institutional adoption and offering new avenues for better price discovery across diverse assets. Serum’s on-chain orderbook design paves the way for this development.
This week, we’re joined by Barrett from the off-piste team, a decentralized pre-IPO synthetic derivatives protocol leveraging Serum’s DEX. Barrett shares his pertinent insights into price discovery, democratizing financial access, and what it will take to accelerate institutional adoption of DeFi.
What’s up Next
1. — What is off-piste
2. — What’s in a name?
3. — The reason behind pre-IPO underlyings
4. — The founding story
5. — Orderbooks and institutional users
6. — Getting the institutions onboard
7. — A message to off-piste’s followers!
1. For those who are not already in the know, what is your 30 second elevator pitch for off-piste? What’s your usual introduction to institutional participants, to potential investors, and to the general public?
Off-piste is a decentralized expiratory derivatives protocol initially focused on pre-public markets, allowing individuals or institutions to gain exposure to companies like Stripe, Kraken, and Metamask.
2. What’s in a name? The phrase ‘off-piste’ is probably most recognizable to skiers. ‘Ski runs that are situated away from pre-prepared ones’.
What is the thinking behind your name?
Well, we are big fans of skiing of course, but the way we like to think about it is, what off-piste really means is “a non-traditional route from point A to point B” and we are a non-traditional route for gaining exposure to certain markets.
3. There’s a number of decentralized derivatives protocols emerging in the Solana and Serum domains, but your focus on pre-IPO underlyings is special and very much differentiates your mission.
Why pre-IPO markets through synthetic derivatives? What is your thinking here in terms of supporting price discovery and democratizing access to private capital markets?
Synthetics are a beautiful way to gain financial exposure to certain assets without needing the underlying contained in the system. For the initial focus of the protocol, this is very beneficial because the platform can enable that financial exposure without having to come in contact with the underlying shares or tokens. Given that these products are synthetic, the trading of these derivatives do not have a direct impact on the cap table and allow for the markets to remain liquid, meaning positions can be entered and exited at any given time. In a traditional secondaries market, the frequency and terms of turnover can be dictated by a specific organization’s bylaws or jurisdiction.
Price discovery and democratizing access go hand in hand, in our opinion. You need a mix of both institutional and retail investors in order to truly understand the market value of a particular company/protocol. This is why CEXs from both tradFi and crypto are often looked towards to be the true understanding of an asset’s value. Under current implementations, this is not possible for private companies and is a factor in why there are pops or drops on IPO day.
Price discovery enables organizations/protocols to capture the proper amount of value they have created. We love using Airbnb as an example:
Their IPO was priced at $68 per share, but hit the open market (retail and other institutions) at $140 per share. Given the amount of shares that got listed, Airbnb left approximately $3.7B on the table. This is over 100% of the amount of capital they raised during their IPO (~$3.5B).
This is a substantial amount of capital that they could have taken in and utilized to keep growing. Banks are going to inherently underprice their IPO in order to keep their largest institutional clients happy and still garner the underwriting fees. With a protocol such as off-piste (with volume of course), companies could look at the market, understand what people/institutions are valuing the company at, and utilize data for setting an appropriate valuation at IPO.
Democratizing access to private capital markets allows retail investors to take part in opportunities that have been picket fenced for those who are more wealthy. The regulators have left equity crowdfunding to retail investors, and while this is awesome in theory, it is not so great in practice. Equity crowdfunding is predatory in reality — there are a number of companies touting that they will achieve venture scale returns and massive IPOs when in fact, that is not the case. Unfortunately, equity crowdfunding is looked at as a neutral/negative signal by VCs, hindering a company’s chances of performing as well as their counterparts, who are receiving VC investments and participating in the venture feedback loop. If regulators are going to allow a retail investor to lock their capital into a startup that is seemingly going to underperform, why should they not be able to trade exposure to late-stage companies that have a much higher likelihood of success?
4. What brought you to where you are now? How would you describe the founding story of off-piste?
off-piste was originally a quantitative matchmaking platform for startups and investors. The algorithm would recommend a company its best suited investors and subsequently recommend an investor, startups that were aligned to their portfolio. I have always been fascinated with quant finance and believe it will make its way into private capital markets, but in the end, we decided that what we had built was not going to impact the world at the scale in which we would like. The platform would be serving a niche group of investors and founders and not truly democratize access to private capital markets.
We always had a trading platform in mind for the future and decided this was the best way forward. While looking at different blockchains to build the application on, we found Solana and shortly after, Serum. We saw the ability to build a protocol that would be able to function at an institutional level from a throughput and cost perspective and pretty quickly thereafter, we began to design out a protocol that would achieve what we were setting out to do.
5. You’re someone with a strong institutional background and you can really see things from that perspective. You’ve also described yourself as a “fan of orderbooks” before this interview, which we highly appreciate!
What are some of your personal hopes or anticipations for the Serum ecosystem and what the on-chain central limit orderbook design can open up for DeFi going forward, especially for an ‘institutional userbase’?
While I do have a background in math and finance, I would say James (a co-founder) has much more institutional knowledge than I have. Yes, we are big fans of orderbooks, especially Serum’s.
We believe if you are looking to have widespread adoption of DeFi, meaning the mass retail population and institutional traders, you are going to have to build something that is similar to how they interact with financial markets today, which is through an orderbook. Institutional traders and investors want to be able to buy and sell an asset at a specific price, which is not how most AMMs work today.
An orderbook DEX allows for an easier transition into DeFi for these institutional participants because they do not have to learn about an additional new piece of technology. Also, we believe the best way to be a price discovery mechanism is to be orderbook based, another reason why we chose to build on Serum.
The Serum team has done a lot of amazing work already and provided us with some unique workarounds to enable what we are building. We would love to see the ability to trade traditional style derivatives via the orderbook, although we have heard this might be in the works ;). Maybe even support for arbitrary smart contract trading; I think this would go a long way to support OTC products, which we know are one of the largest markets by value in the traditional finance world. I think that would probably solve the majority of use cases, although we know that is no easy undertaking.
6. Not to get too techy for our readers, but we thought this was a pretty nifty thing you did with Serum’s design.
One recent feature of Serum that makes off-piste possible is permissioned markets, where an authority account can control who trades on a specific market. Market listers can choose how their order books are used. This gives more freedom to programs composing with the DEX.
From your perspective, how are you seeing the institutional opportunity in DeFi and what are some of the features institutions need to participate?
I think there are a few institutional opportunities: trading, lending, and art.
Trading: I think the most obvious opportunity for institutions in DeFi is around asset management. This can be done via passive or active management styles, although given volatility in the space, I’d say active portfolio management comes first. Hedge funds are already leading the charge for institutional money managers in the space, at the end of the day, these funds get paid to speculate.
Lending: Another institutional opportunity is lending, but this is a bit farther out in our opinion. The lack of KYC makes it hard for corporations to take loans in DeFi and just as hard to be lenders. Platforms like Aave have gone with a bifurcated approach and plan to launch a KYC’d version to attract institutional borrowers and lenders.
Art: Auction houses and music platforms are already starting to adapt to the NFT space. The ability to have royalties programmed in is a big draw for artists of all types and believe this will force industry giants to adopt this segment relatively quickly. We have already seen this with Sotheby’s and Christie’s auction houses.
Some of the features which I believe DeFi needs depend on the institution. If we look at asset managers, they are going to need a few things such as more composable derivative assets, better risk modeling, and consolidating the fragmented liquidity. Composable derivatives and risk modeling go hand-in-hand. I have heard about some awesome initiatives from Serum and other projects in the ecosystem regarding composable derivatives, which is super exciting.
Next big thing institutions need will be something like cross-protocol margin trading, essentially a decentralized trading account. Some protocols have taken steps in the right direction with cross-portfolio margin such as Mango Markets; this is just the first step though. Institutions will need to maintain margin across their entire portfolio, not just a segment of their portfolio contained inside a particular protocol.
For institutional borrowers and lenders, as unfortunate as this may sound, I think KYC is going to be a must for them to get in and participate. The regulatory penalties for this are pretty steep and will keep them out otherwise. Also, borrowers and lenders need much more liquidity than what is locked in today. Take a look these 2021 stats:
- Issuance (as of July) $1,216.2 billion, -20.9% Y/Y
- Trading (as of July) $41.2 billion ADV, -6.9% Y/Y
- Outstanding (as of 1Q21) $10.7 trillion, +7.6% Y/Y
Corporate debt operates at a massive scale, which means DeFi has a long way to go to enable institutional lending and borrowing.
We believe it will happen, it just will take some time to on-ramp that much liquidity to any of the prospering ecosystems out there. If DeFi has taught us anything, it’s that everything happens faster.
7. The Serum and Solana communities continue to grow each day as the merits and possibilities of DeFi become more apparent. We’re all super excited for what off-piste can accomplish!
Is there anything else you want your followers and the wider community to know?
We love your excitement, we are also very excited for the upcoming months as well. Definitely thrilled about the partnership with Serum regarding the integration of the protocol with the DEX!
I guess now is as good of a time as any to announce that we will be launching on devnet this fall, aiming for within the next 1.5 months, and then mainnet once audits pass.
Finally, we are adamant about providing the best protocol we can and believe education goes a long way for this. We have made a couple partnerships for this, one with a company that writes sell-side equity reports around pre-public companies and one with an alternative data provider that has a number of financial metrics, as well as some really interesting data like sentiment analysis. These reports and data points will be available to every user of the platform because we believe in making sure users can make informed trading decisions.
We are always happy to take feedback, so anyone in the community, please feel free to DM us! Our Discord will be dropping soon as well, so stay tuned!
We hope you enjoyed the interview! And a huge thank you to off-piste for making this happen.
And there’s more where that came from!
We would love to continue having these kinds of conversations with all the incredible teams building on Serum and sharing them with you. Just let us know who you want to read about next!
Listen to Sam Bankman-Fried’s breakdown of the Serum ecosystem