Seth Rubin, founder, and CEO of Market Protocol

In this Wyre Talks, our guest is Seth Rubin, founder and CEO of Market Protocol. Market Protocol is a trustless derivatives protocol. Market Protocol allows users to stake collateral and enter into a position for any reference asset that has a price feed. The trader has complete price exposure and only lose the collateral once the position moved against the collateral. Since the positions are synthetic, liquidations never unwind in the market, preventing market solvency issues.

Seth has been a derivatives trader since 2005 and has managed several market making and quant trading desks. His co-founders also come from similar backgrounds. This experience in institutional trading within the crypto derivatives sector is something unique to Market Protocol This positions the team to navigate this domain from a regulatory and go-to-market perspective quite well.

Topics discussed in the episode

Difference between Market Protocol and its look-a-likes

The importance of synthetic positions for gaining price exposure to an underlying asset without custody of the asset

Issues behind forced liquidations as it related to overall market health

Going through different moments of market solvency issues in crypto such as the Bitfinex capitulation bottom, the Coinbase Ether flash crash, and the OkEx Quarterly Futures socialized loss.

How market protocol contracts could provide guaranteed stop loss execution but can be stitched together to provide unlimited upside potential (like a traditional futures roll)

How hooking up to existing ecosystem’s endpoints, like 0x standard relayer endpoints, can be a strategy for early adoption.

How the market protocol order book hosts operate and generate fees.

The oracle problem as it pertains to market protocol.

Who has the regulatory burden? The users, the dApp builders or the protocol?

How does market protocol deliver on the vision of Open Finance: specifically distribution of financial products to geographic or socio economic groups that currently do not have access.

Market protocol as a general purpose contact container for uses cases like escrowing apartment security deposits or sports betting.

The purpose of the MKT token

Partnerships for go-to-market and major challenges ahead for Market Protocol

Related Links

The Market Protocol website: https://marketprotocol.io/

Telegram: https://t.me/Market_Protocol_Chat

About Market Protocol:

MARKET Protocol has been created to provide a secure, flexible, open source foundation for decentralized trading on the Ethereum blockchain. We provide the pieces necessary to create a decentralized exchange, including the requisite clearing and collateral pool infrastructure, enabling third parties to build applications for trading. As a protocol, MARKET enables third parties to build applications for trading, order routing and related activities. The protocol is open source and available under the Apache 2.0 license.

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Podcast Transcription:

Thomas: Hey everyone, welcome to Wire Talks, the wire podcast where we discuss all things crypto. Whether you’re a veteran or a crypto noob, we’re all learning together. This is your host, Thomas [Scaria 00:00:10]. I work here at Wire. I’m also joined by my co-host, Louie [Abood 00:00:15], head of research at Wire. Louie, welcome.

Louie: Thank you.

Thomas: Cheers. But most importantly, and more importantly, I’m joined by Seth [Rubin 00:00:23], co-founder and CEO of Market Protocol. Seth, welcome.

Seth: Hi guys, thanks for having me.

Thomas: Yeah. Where are you joining us from today Seth?

Seth: I’m in today from Los Angeles, where I spend most of my time. I’m here for a few days in San Francisco for Blockchain week.

Thomas: Okay, okay. You said most of your time is spent in LA, and then how do you split your time with Market Protocol?

Seth: I spend a lot of time traveling in general, as I think a lot of people in this space do. I’m also spending a decent amount of time in the Denver/Boulder area, in Colorado. Which is where the majority of our team is based. So back and forth from there.

Thomas: How long have you been running this project?

Seth: Market Protocol originally started in June of 2017. It’s been about a year and a half now. That’s when we started working full time on Market Protocol.

Thomas: Okay, a year and a half. Then prior to that, what’s your background that led into Market Protocol, and crypto in general too?

Seth: I’ve been a derivatives trader since 2005. I’ve run and managed a number of market making and algorithmic trading desks. Along with one of my co-founders, Collins Brown, we’ve been working together off and on for the last 13 years or so. Our CTO in the trading business and our third co-founder is Phil [L. Sasser 00:01:47]. We’ve been working together for the last seven years. Together, we ran and managed a few different trading groups. We originally entered crypto in 2015 as traders. We were very interested in trading a few different crypto assets. It took us ’til about the middle of 2016 to really begin understanding that trading these crypto assets really wasn’t the interesting part. It was the underlying blockchain technology that really had a lot more potential. That’s when we began learning a lot more about what we could do in the blockchain space.

Seth: That originally led us to a path that illuminated what the benefits were, of decentralization in an exchange framework. That’s when we began learning about what decentralized exchanges were, what you could do with them. That’s when we began a path that eventually turned into Market Protocol.

Seth: The first thing that we found really interesting with the decentralized exchange space, which I think is what a lot of people find first, is what it could do with custody of funds. Someone who came from the traditional finance world, we find it really shocking and surprising how custody of funds was handled in the crypto space. That’s what began this whole path.

Thomas: Yep. I won’t ask you to speak for the rest of your founding team, but what kind of background do they come from?

Seth: Similar. As I said, we were all on the same trading desk, in the same group. Professional background is fairly similar. Collins has a finance background. Phil is a little different, I think he has a marine biology or something, not quite finance related. But he’s been a developer for seven or eight years now. He’s been the architect of a lot of the systems and low-latency framework we used on the trading side. Which aptly positions him to do well on the blockchain side.

Louie: Something I think we’ve seen a lot, especially in the Ethereum community, is that a lot of the decentralized financial applications are developed by people that primarily have an engineering background. But they don’t necessarily have a background in finance or trading. They haven’t necessarily used traditional versions of the products they’re trying to recreate in a decentralized way. How does your background inform the key design decisions around Market Protocol?

Seth: I think that our team has strong domain knowledge in the domain we’re attacking. Which I think is, fundamentally, a very important piece if you hope to make a change, or improve what you’re dealing with. I think that our background as traders, our background as liquidity providers in the space that we’re addressing really does help us make sure that we, at the fundamental level, understand the problem we’re addressing. I think that the point you bring up is accurate in the sense that you’re seeing groups that are mainly engineer-heavy groups, that are looking to disrupt industries that they may have limited experience with. It’s not to say they couldn’t be successful, but one could argue they may not understand the problem as deeply as perhaps they could before addressing that problem with a new technology solution.

Louie: Interesting. If you could give us a very high-level overview of what is Market Protocol, what it allows you to do, and what the key implications are of its design.

Seth: Sure, Market Protocol originally started to address two pain points that led to more of an overall problem. One of the first things we saw as an issue in the crypto-exchange space or traditional exchange space was the custody of funds issue. We saw that in the traditional financial world when we saw Mann Financial basically misappropriate billions of dollars in customer funds in 2011. We see it manifest itself in the crypto space all the time, where best practice is to not leave your funds on the exchange, because you’re worried they’re gonna get stolen. I think that’s a fundamental custody issue. We saw an ability to address some of that.

Seth: The second thing that we saw with Market Protocol was a way to remove a lot of legacy financial infrastructure. In traditional finance and traditional trading, often times clearing firms stand in the middle of a lot of these trades. These clearing firms primarily act as almost big Excel spreadsheets. They move positions around, they move money around, and they provide credit validation. We saw an opportunity to take all of that and replace that with a blockchain solution.

Seth: The overall main problem, though, that we’re addressing with Market Protocol, we think is an adoption issue or a scaling issue. Oftentimes when people talk about scaling in the blockchain space, it means a technology scaling issue. Which, I agree with, is an issue, but I think that price volatility is really limiting the adoption of crypto assets in general. No matter how you view them as a store of value, or a medium exchange, or a token application, or a unit of account. Right now, these crypto assets are too volatile, period, to really act in any of those capacities.

Seth: What Market Protocol allows you to do is to actually separate the price volatility and the utility in those relationships. Very much how in the traditional space, an airline will hedge the price of their jet fuel, or a bank will hedge their interest rates, Market Protocol uses derivatives to allow users to create that separation.

Louie: It’s interesting that, in this space, there’s an obvious separation between users and speculators. Probably, at the moment, the speculator community is larger than the user community.

Seth: I would agree with that statement.

Louie: A bit of an issue I guess, structurally. In terms of being able to separate volatility from usage, it’s a definitely interesting concept. How is it that Market Protocol achieves this, and how does that differ from other products like DYDX, or Augur?

Seth: In general, Market Protocol didn’t invent the concept of derivatives. Neither did DYDX or any of the other groups that are tackling a similar problem. In general, I think that building a solution that allows users to hedge the price of their underlying assets, or hedge what they’re doing, and also allow speculators to speculate, is allowing the space to address volatility, and for a lot of these business and applications to scale.

Louie: In terms of functionally, or technically, the differences between other derivative products in the crypto space so far, what are the key points of differentiation?

Seth: Most often, when people mention Market Protocol, they often also mention DYDX. I think DYDX was one of the first projects in the space. They’ve recently launched expo. It’s definitely a project that’s brought up frequently. Market Protocol and DYDX are both in the derivative space, but fundamentally they are different products. Market Protocol is designed to allow users and holders of any ERC20 asset to use those assets as collateral to invest in other relationships. We’re not limited to specifically ERC20 relationships, or on-chain assets. I think that, fundamentally, that means that it’s a different product.

Seth: Market Protocol is designed very much in the way that traditional derivatives are designed. In the sense that there’s no custody of the reference asset. Derivative relationship traditionally has two main pieces. One would be the collateral currency. That’s what someone makes or loses. Then they have a reference asset, which is what you’re deriving or generating value from. With Market Protocol, we never custody the reference asset. We never have users, or require users to stake that. That gives us flexibility in how we can design contracts or what contract relationships can be traded. Where some other solutions have limited pairs and also require the underlying to be, at some level, located and staked for the relationship to even be tradable.

Louie: Right. Let’s dig into this, ’cause I think it’s quite important. The collateral asset, let’s just think of a traditional derivative, might just be US dollars. The reference asset might be, for instance, Apple stock. How is it that Market Protocol will allow you to use a collateral asset, for instance, DIE, or true USD, or something to that effect, and a reference asset like a stock which doesn’t really exist in crypto form?

Seth: I think a lot of people think about tokenization as a really necessary step to making some of these assets available on the blockchain. Tokenization is necessary for certain things, but I don’t think tokenization is fully necessary for everything.

Seth: When I buy a share of Apple stock in my TD Ameritrade account, I’m not buying that share of Apple stock to vote on the corporate action. I’m buying that share of Apple stock to participate in the price of that asset. Those are two very different things. I actually don’t care about taking custody.

Seth: In a crypto sense, taking custody actually is a burden. I don’t actually wanna take custody of Monero, I just want the price exposure of Monero. Market Protocol contracts are designed with that theory in mind. Basically, you have a collateral currency. As Louie suggested, most often it probably would be something like a stable coin, like DIE or true USD, or maybe something like Ether.

Seth: That is what traders commit to making or losing. Based on the price of something else. That something else, in this example, is Apple stock. We don’t actually have to take custody of Apple stock, we just need to know the price of Apple stock. Then, basically, the two people or two or more people enter an agreement where they agree to swap DIE based on how Apple stock moves, without anyone ever taking custody of Apple stock. That’s really important because that allows Market Protocol relationships to derive value from almost anything that you can obtain price data for.

Thomas: How are you obtaining this price data with integrity, and placing it on the blockchain?

Seth: Market Protocol uses a few different Oracle solutions. But basically what we’ve designed Market Protocol to be is, really, a protocol and a framework that allows someone else to define some of the pieces. Our alpha product that we released earlier in the year was written to Oraclize it, which allows you to fetch data from a number of different sources.

Seth: I think everyone understands that an Oracle doesn’t guarantee the correctness of price, or the information it’s conveying. It only guarantees the integrity of that value. We see different people interested in using different Oracle solutions. We have a partnership with ChainLink, for example, which is a very popular decentralized Oracle. We’re currently writing our integration to ChainLink.

Seth: But Market Protocol contracts are designed to be flexible in the sense that, Thomson Reuters, for example, has a product called BlockOne IQ. If you wanna create a contract relationship and use Thomson Reuters to fetch the price of Apple stock, you can. If you wanna use Bloomberg, which, I don’t think has announced a solution, but I’m sure is working on one, to fetch price data, you can. The point is, the Oracle is how we’re fetching external data, but exactly what Oracle is up to the implementation of Market Protocol.

Louie: Interesting. In effect, Market Protocol will enable you to trade any asset that you can get a price Oracle for?

Seth: In theory, Market Protocol could allow you to trade it, yes. I agree.

Thomas: I think that’s super fascinating because we don’t have to wait for asset tokenization to actually happen for crypto users to access traditional markets. That’s one huge advantage of Market Protocol. Another advantage I see is that it’s very much a peer-to-peer simplistic solution. Which, when you’re building out a protocol, I think keeping it simple is always helpful. One criticism I have of DYDX, for instance, is that although all of the margin lending, and buying of the underlying asset, and things like that, all happen atomically, all at the same time, it’s quite a complicated system. Lenders have to give out Ether. Borrowers have to take that Ether and sell it for whatever they’re getting for the short. Perhaps it’s DIE. Then they have to go and collateralize a loan. There’s a rate of the lending component that’s compounding over time. There’s a lot going on.

Seth: You also have to talk about when the loans go insolvent. That’s a whole other piece.

Louie: Why don’t we dig into how the end user experience will differ if you’re trading assets with DYDX or Market Protocol, in terms of sourcing liquidity, placing a trade, and potentially getting [crosstalk 00:15:34] from a position.

Thomas: There must be some sort of trade-off between making a simplistic engine, and then having something more complex. If you can dig deeper into that.

Seth: One of the things that we look to improve when we began architecting Market Protocol was this notion of margin calls of forced liquidations. Again, as someone who has been in the traditional trading space for a long time, I’ve seen a lot of different forced liquidation, and systemic issues. I traded through the 2008 financial crisis. I traded through the flash crash. I was a market maker in products while that happened. I’ve experienced and traded through very, very volatile times. Seeing forced liquidations come through the marketplace, and watching what happens when different groups get stopped out of their positions, is a very systemically dangerous event. I think that one of the things that we really wanted to do when we started down this path was to figure out a way to remove that systemic element of margin.

Seth: On the flip side, I think that margin and leverage are efficient uses of capital when deployed appropriately. We still want to try to think about how people can trade for less than the full notional value of trades. Market Protocol is basically designed to have no funding liquidations and no margin calls.

Seth: The way that we implemented that in Market Protocol was when a contract is created, the contract specification defined, which are the rules that control and govern that contract. Say, for example, we are creating a contract that is Ethereum as our collateral currency deriving value from Monero. This contract now, let’s just say, for example, is trading at a price of 10 Ether. When that contract is created, price bands are defined. That means that, if the contract trades up 50%, or down 50%, that contract goes to settlement or expiration. If that contract trades up to 15 or five, that contract goes to expiration.

Seth: The benefit there is that, at trade execution, all counter-parties know the maximum downside of that contract. They know that if that contract goes … if I buy it at 10, and Louie sells it at 10, both of us only can lose five Ether. The benefit there is, as I mentioned before, that the contract then can be fully collateralized at execution. At that time, both of us basically stake five Ether in that contract as our maximum downside.

Seth: What that means is, there’s no funding liquidation. There’s no stop loss. There’s no request to either counter-party for additional collateral during the life of that trade. There are a number of systemic benefits there in the sense that, if that contract goes down to five, that contract just goes to expiration. It’s more of an accounting exercise. It’s not actually a position that needs to be liquidated to the broad market, which is what causes flash crashes, or cascading liquidations. Systemically, that’s a very different outcome.

Louie: I’m just gonna give an overview for some of the audience on what some of these terms mean. I think it might be helpful. For instance, getting liquidated out of a margin position. What that is, in effect, is being forced to sell a position once your loss has eaten into your collateral to the point where you’ve reached the limit in which your collateral can be eaten up by your loss. Because you don’t want a situation where you’ve lost more than you have posted collateral, because then you’re effectively in debt. It’s an insolvent trade.

Louie: What you’ll see, often in crypto markets, be they … usually, actually, on products like BitMEX or OKCoin futures and other derivative products, is that you’ll have situations where the market crashes. Then people are forced to sell their positions because they’re being liquidated. That means you basically have compounding selling pressure. That’s what we call a margin cascade.

Louie: There’s been a few pretty significant ones. I know that Bitfinex had some problems. I think it was maybe around mid to late 2015, where we saw that capitulation that really marked the bottom of-

Louie: … where we saw that capitulation that really marked the bottom of the last bear cycle, which was basically where the price crashed, I think, from I don’t know what it was, $200 to $100 or something.

Seth: There’s the huge one on [Coin Base 00:20:14] where we went from 325 to 225.

Louie: The flash crash.

Seth: And then down to like eight cents.

Louie: Yeah, and of course we had the major socialized loss on [OK Coin 00:20:27]. Maybe you could talk a bet about that.

Seth: Sure. The one that happened that Louis just referenced, I think, is a very interesting situation as well in the sense that I don’t remember all the numbers offhand, but basically, I think it was a $400 million leverage dollar Bitcoin position was liquidated to the market. Basically what happened is that someone entered a long position and that position moved against them. OKX decided that that position needed more money, more margin to finance that position.

Louie: More collateral.

Seth: More collateral. The owner of that position didn’t contribute additional collateral, so OKX needed to liquidate that position to the marketplace. That’s a very public event, so everyone is aware that that’s happening. What happens is people are less willing to buy that position or take over that position when they know that a huge position needs to be sold.

Seth: What that eventually turned into was a loss that was socialized. Basically, 1,000 Bitcoin was needed to take over that position. Only, I think, perhaps 10 or 15 Bitcoin were available. What OKX does in that scenario is they do what’s called a socialized loss. What that means is because the long position lost too much money, they basically take money from people that had won on the short side.

Seth: If you basically were a short seller and were going to make five Ether, they basically said to you, “Sorry, you only make four Ether,” which is a really, as you can imagine, an unpopular concept. This conceptually doesn’t even exist in the traditional finance world. It’s a systemic, weird problem that I think is unique to the crypto space.

Louie: Yeah, I think Bitmax also implements a similar system, right?

Seth: Bitmax has a different, I don’t know what you want to call it, feature that’s called auto-deleverage which, again, automatically changes the leverage implied in these contracts sort of that their discretion. The problem with these two contracts and these two setups is they result in very unknown P&L outcomes. That means if I’m a trader and I’m using one of these products to hedge a position, I don’t know what I’m going to make because at any point there could be a socialized loss or an auto-deleverage.

Seth: In the fundamental, or in the traditional trading world, these contracts don’t exist because people use futures contracts or derivatives contracts as hedging instruments. If I’m a farmer, for example, and I need to hedge $50,000 in crops and all of a sudden what was supposed to be a $50,000 hedge is only a $20,000 hedge because of a socialized loss or an auto-deleverage, all of a sudden I may not be in business anymore. Those are very not popular concepts in the traditional space.

Louie: It’s interesting that, you know small products have become the most traded currency pairs in the crypto space. I think for a long time OK Coin held the ground with quarterly futures. It’s always been the case as long as I can remember back to 2015 that trading has actually been dominated in terms of notional value by these kind of centralized derivative products, and yet the way they’re structured doesn’t really seem that attractive. You’ve obviously got things like the funding cost, the interest you have to pay and so forth.

Louie: It seems like there is a decent opportunity out there for a well designed, simple, usable, decentralized derivative product.

Thomas: Yeah, going back to the protocol, and I really want to piggyback off of what Louis said about how this is so simplistic, since this is a peer to peer platform where your P&L is capped and limited to the agreed upon collateral, there’s some sort of defined upside for Trader A and some sort of defined downside for that Trader A and B as well.

Thomas: From a risk management perspective, that’s really cool because let’s say you enter into a position where you’re long Ether, when the price of Ether is at 10, you each posted $5 of collateral. There’s another trader that takes the opposite position. Then Ether goes to $15. One of the traders, the one that was short, gets stopped out and the contracts basically unwind. Trader A leaves with all of the collateral that was posted.

Thomas: That’s all cool from a risk management perspective for Trader B, but is there some sort of auto rolling feature for Trader A or either trader to have unlimited upside, much like …

Louie: How do you get the 500 extra tons is what he’s asking.

Seth: Yeah. When you’re right, you want to get paid. One quick distinction that I want to bring up is market protocol relationship trades are many to many, so I can trade in as Trader A with Trader B. Trader B can exit their position, but they’re exiting to Trader C. That’s fine because we’re all trading against the same contract specification and the same contract. Any number of participants can trade in or out of these contracts at any time.

Seth: One of the points that you just brought up, though, is the price you pay for guaranteed solvency and known downside. One of the things that Louis mentioned on the futures side is those contracts are levered and they have unknown outcomes. If you get stopped out, you don’t know where you’re going to get stopped out. What mark protocol has, because of the structure, is guaranteed stop loss execution. The cost of that is we pay for it in the sense that someone who is long and is really right has a capped upside.

Seth: the way that we address that is you can actually strip together a series of contracts to replicate uncapped payoff structures. It’s almost like, if anyone is familiar with some of the trading terms, it’s like a futures roll. For example, if we talk about the contract that we talked about before where its upper bound is 15 and its lower bound is five and we enter a trade at 10, what we expect to happen in the marketplace would be that another contract could be created with a lower bound of 15 or a lower bound of 10 and an upper bound of 20, for example.

Seth: What we would expect to see is that as the price moves toward the upper bound, you may see volume in that contract begin migrating to the next contract, sort of up strike or something. I don’t exactly know how you would want to call it, but you would basically see volume beginning to migrate to this new contract.

Seth: I think there’s an opportunity then for someone to create an exchange or a dapp that obfuscates that process from a trader, simplifying what’s happening. You may just all of a sudden get a contract that is five contracts stripped together, but you may not even realize that someone else stitched them together and by putting on that position, you’re actually executing five contracts. I think that obfuscating that away from someone who’s trading it is very possible.

Louie: This notion, especially in crypto markets where there’s a concern around things like market manipulation, stop loss hunting, things like that, often when you get a short squeeze, all of the liquidity in the books disappear. The market makers run for the hills and the amount of slippage you get on short liquidations seems to be really, really high.

Louie: As a solution to that problem specifically, this to me as someone who trades assets for our fund seems like a really interesting concept but there is a kind of, let’s call it, a conflicting kind of … You know, like the whole investment thesis around a lot of crypto-assets is you have asymmetric upside. I can only lose 1X my money but I stand to gain 1,000X when Bitcoin is the one currency that everybody in the world uses.

Louie: How do you think, from a sort of marketing perspective or a user education perspective, how do you communicate this to people in a simple way that is digestible? Because it is all very technical, right? The average trader, retail trader, might not be able to understand these concepts. What do you think the challenges will be in terms of communicating the contract specifications, how this all works technically in a way that’s digestible for the average person?

Seth: I think a lot of that comes down to who’s implementing and how they’re implementing. With a lot of concepts in crypto and a lot of the different projects and all the subsets in the crypto space, it all comes down to implementation and what you abstract and obfuscate from your end user because, at the end of the day, most of these people don’t care about the technology behind it. They care about the service that’s being delivered.

Seth: For a trader, I need to convey to them what the benefits are of, say, trading a market protocol contract versus going and trading on coin base. For example, being able to short Ripple is not something possible for many people right now. Being able to short Ripple with guaranteed downside and guaranteed stop loss execution, that’s something that I think is digestible and not very complicated.

Seth: What it comes down to is how market protocol is implemented and how that person or group or application is presenting these relationships. Maybe they only offer two relationships because that’s all they think their traders care about or maybe they don’t offer certain coins or certain relationships and they say that I have a contract that has leverage or only allows for a very small downside. I think it all just comes down to how that’s presented to the end user.

Thomas: Yeah, and speaking of implementation, you are a protocol, but at the same time you’re releasing a decentralized application to access that protocol. Is the goal to focus perhaps on the protocol and maybe encourage others to build apps on yourself or bootstrap the liquidity on the protocol and the user base by building your own app? What’s your strategy there for implementations?

Seth: So market protocol has been written in a way that it very easily can integrate with existing ZeroX implementations. Market protocol from the beginning, one of the things that we wanted to do was to make sure that we delivered a protocol that had a technology footprint that was usable by as many people as possible. One or the things that we focused on early was making sure that market protocol mapped to ZeroX endpoint. Anyone who’s a ZeroX relayer can fairly easily implement and carry market protocol.

Seth: That’s an important piece, I think, on how we are looking to gain adoption. Market protocol, though, we’re releasing a beta application. That application isn’t really something that we expected to bring to production. I think that for the beta application, it’s designed as more of a here’s what market protocol is capable of and something that can be done with market protocol. I think that getting different exchanges or different applications to implement market protocol is also part of that strategy.

Louie: Right, so just to clarify, you don’t expect to bring your own end-user application to market?

Seth: At the beginning, we focused on protocol. I think that what we’re finding is bringing an application to market may be part of that. That wasn’t our original focus and the intent with the beta application was really to … It’s actually our second beta application to develop and show the exchange side.

Louie: So in effect, it’s quite similar to the way the ZeroX project is being brought to market, attracting relays to build on the project, build a business around the protocol and basically be a wholesale provider of technology.

Seth: Right. At this point, the goal was to develop a framework and a set of rules that someone else could be using to develop applications. In the future, I think that we may find that developing an application may make sense for us as well.

Thomas: So very much like ZeroX, I believe market protocol does have a, does enable and ecosystem for relayers to host order books. Are these centralized entities, how do they control how the orders are places and taken? How are fees generated by them?

Seth: Sure. Market protocol is designed in a similar way to ZeroX in the sense that we have an on chain and off chain implementation that we’re on chain for settlement, for collateral of funds, for custody, for the accounting processes. Then we’re off change for order book hosts, which basically provides some exchange-like functionality but really they’re more like a bulletin board.

Seth: Those groups really have very little ability to influence or modify orders or anything like that. They really just act as a bulletin board very much, I think, in a similar vein to a ZeroX implementation. Really, all they can do is censor and order. They can’t manipulate it. They can’t do anything to it.

Louie: I’d like to, I mean, we touched on articles before, but I’d like to dive deeper because it is a point of some contention, I think, within the crypto community around … I think it’s now colloquially known as the Oracle problem. Can you trust them? What happens if they give you bad data? If you’re building a financial protocol like this where people are risking probably significant funds and the outcome of their bets or trades are basically determined by a third party data source, what happens if that is compromised? How do you deal with the Oracle providing the system bad data which may result in people getting stopped out of winning trades or a whole bunch of bad stuff happening?

Seth: Sure. We covered a few different things there. I think that Oracles, again, as we said before, are … They’re trusted. They’re not trustless. You talked about the notion of reputation just now. You talked about people getting stopped out, things like that. I think that Oracles on their own don’t quite solve the whole problem. I think that having a way to back up an Oracle and resolve a dispute in the case of … It doesn’t even have to be malicious data. It just has to be, say, null data, is important, especially as we look towards trustless and autonomous settlement.

Seth: With market protocol, when a contract specification is defined and a contract is tradable, there is a dispute resolution mechanism that needs to be established and thought about at that time. For example, say that we’re going to be checking the price of Ethereum and Monero on Binance at 3:00 on Friday and that’s what we’re going to use for contract settlement. It’s possible that I don’t know, Binance doesn’t return a value at settlement. Perhaps then we, you know, part of the backup solution is to check another Oracle or federation of Oracles for a settlement value. Maybe those Oracles are, I don’t know, less trusted or less reliable, but that’s better than, say, not returning anyone’s funds.

Seth: Maybe the next check for an Oracle is the average of the price on three different other maybe lower tier exchanges, for example. I think that thinking through that process is important but I also think that having a further way to deal with that is necessary. That’s an additional layer to the Oracle issue.

Louie: Right, like a dispute resolution process.

Seth: Right, so having that process or Oracle based settlement fall back on dispute resolution I think is the complete solution. I think Oracles on their own don’t necessarily get it done.

Louie: are there any unchained sources of pricing data, ie from unchained, decentralized exchanges?

Seth: I know that a lot of different exchanges, centralized and decentralized, are talking about doing that. There are ways to access price for a couple of different things. For example, Maker has an Eth dollar price Oracle. I think that Kyber is beginning to publish some of their pairs or will publish some of their pairs on chain. I think that we’ll continue to see that trend happening. Again, I still think that that still might be prone to failure, depending on how you look at it.

Seth: Really, from market protocol, what we really want to try to do at the beginning is if people have committed to Oracle based settlement, we want to try to use Oracle based settlement. Try Oracle A. If that doesn’t work, try Oracles B, C, and D. I think that if you still can’t resolve that, then perhaps you fall onto a different kind of dispute resolution.

Louie: Yeah, it sounds very much like a game of layers of risk mitigation.

Seth: Yeah, I agree with that.

Speaker 1: This is going to be a tough question, but I think going back to what DYDX was doing, I think I’ve described the margin trading process and as well as I could, at least. One thing novel that that team has done is that they’ve created something called a short Ethereum token, which represents … It’s a token that represents a fraction of ownership in a short position, which I believe is something that’s novel to crypto. I’ve never seen a product like that in the traditional markets, right? Do you envision any sort of products that are novel to, that are novel, that market protocol could bring to market?

Louie: I think they have short ETFs, right? And things like inverse XIV and stuff like that.

Seth: Yeah, you can design. Think of it almost like a formula bar. You can design a three times short position if you want on, or a crypto-basket, or anything like that. If you wanted to create your privacy coin ETF-like structure, I think that you …

Seth: … like your privacy coin ETF-like structure, I think that you could do that. If you wanted to create sort of the short version of that, you could do that. The point of market protocol is it’s designed to be flexible so creating a short Ethereum position or creating a short Ripple position, that’s certainly feasible. Creating a basket of shorts is certainly feasible. Things like that are definitely possible with market protocol.

Thomas: What are the biggest challenges for all decentralized finance products? Indexes, especially, is bootstrapping liquidity. Does market protocol have a particular advantage or disadvantage in getting the first user base, getting the first bit of liquidity off the ground?

Seth: I think that one of the things that comes up all the time when we talk about the decentralized spaces is liquidity, obviously, is the number one pain point that everyone brings up. I think that this pain point exists for a lot of different reasons, but I think one of the main reasons it exists is because it’s symptomatic of a different problem. That problem is what the decentralized exchange space offers beyond decentralized custody.

Seth: Right now, most of the relationships that are available for trading in the decentralized space, I know we said decentralized finance but I’ll talk about in the deck space specifically, is a limited number of products that are novel. You can have the option to trade your ERC 20 pair on Binance or you have the option to trade your ERC 20 pair on a dex. The experience is very, very different between those two options.

Seth: People are electing to actually pay to trade on, say Binance, versus to trade that pair for free on the decentralized space. What we need for liquidity in general and what I think some of the derivative projects and also market protocol are providing are unique trading relationships that aren’t accessible on any centralized or decentralized avenue. I think that that’s really important for fundamentally bringing liquidity in general.

Seth: One example I like to always talk about is Ether Delta. A lot of people didn’t really like Ether Delta or don’t like Ether Delta. It had a pretty difficult UX, but plenty of people, and I feel like everyone you talk to, has traded on Ether Delta. The reason they did that is it offered an opportunity to trade pairs and relationships you could not get on any other venue. I think that’s a really important fundamental thing to understand about the state of the decentralized space right now.

Seth: Market protocol is giving traders access to trade relationships that they can’t trade anywhere else. I think that, at its core, helps address some of the liquidity issues. To talk about some of the more practical stuff, I’ve been a registered market maker on a number of traditional exchanges. I’ve been a registered market maker on the Singapore futures exchange on Thai rubber futures, which no one on the planet trades. The point is, we built liquidity, built products, and participated in markets that had no liquidity and helped improve that liquidity, the liquidity in those markets. We understand what it takes to do that.

Seth: We’ve talked with a number of our peers, both on the traditional trading side and in the crypto and OTC crypto space. Everyone’s interested in having the ability to hedge their Ripple position or short a different crypto-asset, for example. We have a lot of interest in terms of people that want to make markets or be active on these platforms.

Speaker 2: Right, and what will market making look like for market protocol, especially when you’re trading assets outside of the crypto space?

Seth: Those assets, I think, may actually be easier to market make against because you have better liquidity and you have better ability to hedge them if you actually get filled or trade on those, in those pairs. I think someone who makes markets in crypto-assets obviously has a different set of hedge points than someone who makes markets in traditional assets.

Speaker 3: But you yourself won’t ever trade on market protocol or start bootstrapping liquidity, have it run like a market-making desk or something like that.

Seth: I think that’s a conflict. We’re not planning on anything like that.

Speaker 3: Just to piggyback off of that, you don’t handle client funds or make financial instruments, but you are a venue for people that want to do that. What’s your stance on licensing and regulations? Who ultimately, do you think, has the responsibility? The DAP that builds on top of you? The end user? Perhaps the custodian or the relayer? What are your thoughts on that?

Seth: Sure. One thing is there is no custodian in market protocol so all customer … Well, there’s a decentralized custodian. All contracts are stored in smart contracts on chain. Order book hosts, exchanges, market protocol, nobody actually takes custody of those funds. They’re stored on chains.

Seth: You identified three different groups in that question. It’s the end user, it’s the D App builder, and it’s the protocol itself. Each group, I think, obviously has a different profile. It’s my thought or understanding that market protocol at the protocol level is an open source product. We’re not controlling who implements or how they implement the protocol. In terms of a registration requirement or how that would work, I think it’s limited at the protocol level.

Seth: Most likely, if there is any registration, that would be falling at the application level. That registration, like all regulatory questions in the crypto space, is fairly open-ended and doesn’t have a lot of precedent. A number of factors will go into what’s required there. At some level, what kind of trading opportunities that application wants to offer will control some of their designation, at least in the United States?

Seth: Market protocol is designed in a way that someone can implement market protocol with varying levels of, I guess, like KYC or AML implementation or registration. We’re a protocol level solution. We don’t make a distinction on how you implement. All that we suggest is that people implementing applications on market protocol are compliant in their jurisdiction.

Thomas: Interesting. You talked a bit about, in terms of bootstrapping, liquidity, how market protocol is expansionary to the trading pairs that you can get access to, especially within the crypto space. One of the kind of themes that people talk about with the crypto space, in general, is that having a decentralized financial system will be market expansionary because you’ll give access to investment products or financial services to people in be it geographic areas or socio-economic groups that might not otherwise have access to them. How do you think market protocol delivers on that vision if at all?

Seth: Sure. I think about it a couple of different ways. I think that if you’re someone that lives in, say, you live in China, you’ve never had an ability to access US-listed equities. I think that that’s an interesting concept. I think market protocol allows someone in that kind of setup to trade that relationship. I also think that market protocol has the ability to trade interesting new products in a way that allows people to use these tools for more than speculation.

Seth: For example, if you live in, I don’t know, eastern Europe and you consume a lot of cement, right now, for example, there’s no way to manage the price risk of your cement. There’s no way to hedge that. I think that there are a people that use a lot of cement as an input to their business that may want to manage the price of that. I think that market protocol creates a container that really, at the highest level, is just an agreement between two people and people to do something in the future.

Seth: That can be created into an application or a product that’s not an exchange product. It’s more of just a way for someone to manage their risk. If that gets packaged and created in a way that makes sense that’s easy for someone with limited, say, financial knowledge to use and treats it almost more as an insurance product or something that helps them operate their business more smoothly, I think that that becomes a very interesting use case of market protocol.

Louis: Right, so we’ve talked about the price of cement in the Ukraine. What are two other interesting concepts that you’d like to see in terms of markets brought to market protocol?

Seth: I think that providing something like … I mean, this is way down the road and I don’t see this as right away, is again because it’s really just a contract container you can do interesting things like make it a security deposit between a tenant and a landlord. All that market protocol’s used for, then, is a contract that follows a set of rules and settles. You could, in some future world, perhaps crowdsource settlement. The settlement could be did Seth trash his apartment before he moved out. Now all of a sudden you have an escrowed security deposit.

Seth: Right now, the landlord has all the power. You’re not going to sue your landlord because they took $1,000 out of your security deposit, and it’s wholly at their discretion. I think that that’s a way different application of market protocol, but it’s conceptually possible.

Louis: Have you had a bad experience with a landlord recently?

Seth: I haven’t, but I always worry about it because they have all the power. That’s not what market protocol has been designed to do but, again, because it’s a protocol and flexible, it’s an application that can be built with market protocol.

Seth: You asked for two, though, so another one could be market protocol could be used as a contract container for maybe sports betting as well because, again, it really is just a rule-based container that takes an input based on a number of different things. That’s additional, another way that I think you could use market protocol.

Louis: Okay, so market protocol does have a token, the MKT token. Putting the distribution of that token to one side, what are the functions of the token?

Seth: Sure? The token has a number of functions. The first, highest level function is it’s used to pay fees to order book hosts. If I provide a D app that allows a buyer and seller to find each other, I can charge a fee for providing that service. That’s very much designed like 0X in that it’s used to put the token in the larger users of the protocol, so the traders and the applications. That aligns our stakeholders as users and holders of the MKT token.

Seth: The second use of the MKT token is for contract creation, for contract specification. One of the things that we want to do is we want to incentivize the ecosystem as a whole to be thoughtful in the contracts that they create. For example, if there’s an Ether versus Bitcoin contract that expires in 28 days, we want to incentivize people to trade that contract versus creating an Ether versus Bitcoin contract that expires in 27 days. We think that many similar contracts, obviously, fracture and hinder liquidity.

Seth: The MKT token is used there almost as a speed bump in the sense it’s a quick address check that says, “Does this contract creator hold above in the white paper it’s 500 MKT tokens. If they do, they can create a contract.”

Seth: The third use of the MKT token is it’s used to access the market protocol platform by contract. If you have an Ether versus Monero contract and you have a Di versus Apple contract, to trade both of those contracts, the trader first needs to deposit the collateral currency. It’s Ether in the first example and Di in the second example. In addition to that, they need to deposit 25 MKT tokens. The MKT tokens are acting almost as a license and are returned after that trade is done trading that pair.

Seth: The next use of the MKT token is used in overall protocol governance. The couple of aspects of governance that I want to bring up, the first is used as a protocol upgrade and implementation. The second use case, though, is to modify the value for contract creation and also for contract access. It allows stakeholders to adjust those values up or down depending on whether or not they think that they need to be adjusted to find equilibrium. What that does is that allows the overall economy here of the MKT token to be inflationary or deflationary depending on how stakeholders feel at that time.

Seth: Finally, the MKT token is used in dispute resolution as well. Creating a feedback loop through dispute resolution and token holders is an important consideration in effective dispute resolution. We were talking about Oracles and Oracle based settlement eventually exiting through dispute resolution. What we want to do is we want to be sure that our stakeholders which are the MKT token holders have a vested interest in efficient and fair dispute resolution and aligning them with the protocol overall. That’s the five different use cases of MKT token.

Louis: Interesting.

Seth: Right, and so what’s the timeline for launching the protocol?

Seth: Sure. We currently are releasing the next version of our beta within the next two to four weeks, which will be a simulated exchange environment. After that, the next goal is then to release a main net launch in Q1 of 2019.

Seth: I’ve noticed that you’ve got a few partnerships in the bag already. What are the nature of those partnerships and how is that going to drive your go to market?

Seth: Sure. We have a number of different partnerships. Some of the partnerships are with, for example, 0X relayers that would be implementing the protocol. We have partnerships with more traditional exchanges that are centralized in spot trading but may also be implementing market protocol as a decentralized derivative side. We have a few partnerships with different stable coins, for example, to talk about a few is we also have partnerships with some Oracle based settlement, so we mentioned Chainlink before.

Seth: It’s very important that we have our application partners using market protocol to deliver products that they think their users would use and then also implementing some of the other pieces including dispute resolution or the Oracles.

Louis: Right. What do you think will be the major challenges for you and your team over the first 12 months post-launch?

Seth: Post-launch, I think some of the issues that we’re going to have is we did talk about and identify liquidity. I think we have a good handle on how we want to pursue and address that, but I think getting people to understand the what market protocol provides them and the benefits of market protocol versus perhaps trading on a spot exchange or understanding why market protocol is safer or better, I think, will be a challenge to broadly message the community or individuals in general. I think that will be one of the larger issues at the beginning.

Thomas: Very good. Well, thanks so much for joining us, Seth. Where can people get in touch with you or read about your work?

Seth: Sure. Check out our website at www.marketprotoco.io. Join our Telegram. We’re active on Telegram and also if you want to subscribe to a newsletter, you can stay up to date with what we’re doing.

Thomas: Awesome. Well, thanks again. Thanks for joining us today. To learn more about market protocol, check out the show notes included in your podcast and remember to subscribe to get the latest episodes. If you have any questions or comments, reach out to us on Twitter, Facebook, LinkedIn, or the Wire Blog, whatever works for you. If you liked this episode, share it with your friends and colleagues. Thanks again for listening.