Video summary

Lucas Schuermann - Swapping Out Perpetual Futures (S7E34)

Main summary

Key takeaways

Finance

Disclosures / disclaimers

  • Not financial advice; informational purposes only.
  • Newfound Research won’t discuss its funds due to regulations.
  • Client positions may exist in securities mentioned.
  • Opinions are solely those of podcast participants.

What Variational is building (core market structure)

Omni (retail, broker-like RFQ model)

  • Unlike a central limit order book, each trade is quoted by a single internal liquidity provider (OOLP) via RFQ (request-for-quote).
  • Flow segmentation / “non-toxic” flow pricing:
    • OOLP knows the counterparty identity.
    • It can net offsetting positions internally.
    • It hedges only residual risk externally.
  • Goal: zero maker/taker fees; revenue comes from tight spreads.

Pro (institutional OTC / structured products)

  • Positioned as bringing multi-dealer life-cycle trading/settlement/clearing on-chain (not just liquidity aggregation).
  • Emphasis on OTC options / structured products.

Methodology / framework described

1) Omni pricing & execution framework

  • Flow segmentation (principal brokerage model):
    • Identify whether incoming flow is retail/non-adversarial vs toxic.
    • Use counterparty visibility to adjust quoting defensively (avoid being front-run / arbitraged).
  • Internal netting + residual hedging:
    • Internalize offsetting positions.
    • Hedge only remaining exposure externally across dealer venues.
  • Economies of scale flywheel:
    • As volume grows:
      • better internalization,
      • cheaper execution,
      • tighter spreads with improved margins.

2) Why RFQ/broker-like can beat public order books on cost

  • Adverse selection avoidance:
    • Order books suffer from unknown counterparties and “walking the book” / information leakage.
  • No need to quote against sniping/front-running:
    • Public top-of-book liquidity can be exploited.
    • Omni is optimized to quote retail flow tightly once it’s identified.

Instrument focus: Perpetuals vs Swaps (“swapping out perpetual futures” thesis)

Perpetual futures (perps) — problems highlighted

  • Funding rate is contract/index-relative, leading to:
    • volatility & unpredictability
    • difficulty forecasting long-horizon leveraged returns
  • RWA perps add further complexity:
    • Funding depends on roll schedules and index/mark definitions.
    • Potential basis risk from mismatched instrument definitions across venues.

Swaps — the proposed fix

  • New “swap” instrument structure:
    • A price return leg
    • plus an explicit financing/carry leg priced off SOFR
    • Cash-settled, designed to be conceptually closer to total return swaps (TRS) / CFDs.
  • Key claim: swaps provide predictable cost of carry vs perp funding variability.

Explicit numbers / ranges given for swaps financing leg

  • Expected swap financing: ~SOFR + ~100 bps to start, described as potentially varying slightly during rollout.
  • A contrast benchmark is provided for perp funding:
    • Perp funding often cited as around ~7–8–10% per annum (contextual benchmark).
  • Swap carry expected in a ~4.5–5% range (implied by SOFR + spread expectations).
  • Financing is described as flat/predictable relative to perps, but:
    • not guaranteed fixed for an indefinite term (can move with Fed/monetary policy / US rates).

Financing-rate variability example (motivation)

  • Example quoted for total return swaps:
    • SOFR + 100 → SOFR + 300
    • described as driven by balance-sheet availability and leverage demand
    • includes discussion of levered ETFs and events like a SpaceX IPO increasing leverage demand.

Decision guidance for users (explicit)

  • Trade perps if:
    • you want 24/7 trading, and/or
    • you intentionally want exposure to funding/basis.
  • Trade swaps if:
    • you want predictable financing/carry, clearer economics for holding weeks/months.
  • Near-term expectation:
    • Perps remain available, but the need to trade them is expected to diminish as swap liquidity expands and traditional markets move toward 24/7.
    • No firm “sunset” commitment, but possible eventual preference/merge over time.

Venue hours / hedging constraint (explicit claim)

  • Swaps are described as hedged exclusively into TradFi, so they are likely limited to traditional market hours (compared to perps being 24/7).

Real-world assets (RWA) on-chain: major macro/market mechanics

Index/mark price & weekend behavior for RWA perps

  • How RWA perps handle “no spot trading” environments:
    • Equities: when markets close, index/valuation may freeze at the last value.
    • Commodities: can switch to prices derived from the platform’s own order book / different methodology.
    • Mentions EMA / exponential weighted moving averages to smooth weekend/overnight discontinuities.
  • Problem addressed:
    • synthetic tracking can become volatile/thin off-hours, causing cascading liquidations.
  • Example of historical extremes:
    • funding rates going to thousands / tens of thousands % over weekend in early versions
    • described as sometimes usable as an exploit strategy.

Capacity & scaling numbers (open interest / dealer capacity)

  • Over $1B of dealer capacity signed (explicitly stated) backing the system.
  • Described as: “currently over a billion dollars of dealer capacity” behind swaps.
  • On-platform RWAs:
    • $500M in RWA per (stated)
    • ~$1.5B total open interest on platform (stated)
  • Market share metric (RWAs perp open interest):
    • Variational: ~12–13%
    • Hyperliquid: ~70+% (dominant)
    • Others: ~1–2%
  • Long-term addressable market:
    • Onchain space cited as ~$10B+ open interest to address (guest estimate).

Explicit asset/instrument mentions (examples referenced)

Crypto / trading venues (mentioned as hedging/pricing references)

  • Binance, Hyperliquid, Wintermute, Jump Trading, HRT, Jane Street, Optiver, QCP, Orbit Markets, Selini/Selene (appears as “selenium/seleni” in subtitles), Hudson River Trading (appears as “Hudson River trading”).

RWA / real-asset examples

  • Oil WTI (asked explicitly)
  • Oil, copper, natural gas (referenced as futures examples)
  • Gold (mentioned historically as a niche product)
  • Brent (TradeXYZ/RWAs example: “Brent”)

Equities / single-name examples

  • Nvidia, Tesla, SpaceX (used in anecdote about balance sheet & leverage demand)

Commodities indices / macro references

  • G10 FX, US single stocks (as desired swap expansion targets)

Benchmark rates / collateral

  • SOFR (swap financing leg)
  • USDC (single account balance mentioned)

Key recommendations / cautions (speaker framing)

  • Expect basis + funding unpredictability to be a key risk/cost driver when holding perps in RWAs.
  • Swaps aim to flatten/remove funding uncertainty, but:
    • trade-offs exist: swaps are tied to TradFi market hours (not fully 24/7).
  • Ongoing risk-control via API-era protections:
    • if API strategies connect, they must detect/monitor adversarial high-frequency arbitrage and widen/protect as needed.

Presenters / sources

  • Corey Hoffstein (host; co-founder and CIO of Newfound Research)
  • Lucas Sherman (guest; co-founder of Variational)

Original video