Inverting the Perps Playbook with Brett Harrison from Architect...

Full Title

Inverting the Perps Playbook with Brett Harrison from Architect

Summary

Architect, a regulated exchange, aims to bring the speed and innovation of crypto derivatives to traditional finance by offering perpetual futures on non-crypto assets.

The platform focuses on institutional adoption, regulatory compliance, and leveraging stablecoins as collateral to create a more efficient and accessible market structure.

Key Points

• Architect's AX exchange is the first regulated venue for perpetual futures on traditional assets like currencies, precious metals, and single stocks, aiming to bridge the gap between crypto innovation and traditional finance.
• The company's decision to be heavily regulated from the outset, based on lessons learned from FTX US, is crucial for attracting institutional investors who require trust, transparency, and risk management.
• Architect prioritizes stablecoins as collateral due to their speed, cost-effectiveness, and 24/7 transferability, which are essential for a perpetual futures market that operates continuously.
• The platform targets various customer segments, including market makers, traditional financial traders looking for efficiency, crypto-native firms expanding into new assets, and institutions globally that lack access to traditional exchanges.
• Perpetual futures offer advantages over traditional futures, such as eliminating the need to roll contracts, providing greater leverage, and enabling 24/7 trading, which are attractive to traders seeking more efficient exposure.
• Traditional finance's slow pace of innovation and inherent conflicts of interest (the "innovator's dilemma") have historically hindered the adoption of perpetual futures, creating an opportunity for Architect.
• Architect implements robust risk management features inspired by traditional exchanges, including price bands, circuit breakers, and a default waterfall, to prevent issues like flash crashes and unfair liquidations seen in some decentralized exchanges.
• The platform utilizes trusted third-party benchmarks for pricing and funding rates to ensure integrity and prevent manipulation, a contrast to some decentralized exchanges that may derive rates from their own order books.
• Architect aims to offer a more accessible and efficient market for hedging and speculating on assets like compute power, which are critical inputs for AI, and is exploring new asset classes that have not been widely available through exchange-traded derivatives.
• The company believes in a future with distinct regulated and unregulated trading venues, with Architect positioned to serve the institutional, regulated side of the market.

Conclusion

The financial industry is evolving, with a clear split emerging between regulated, institutional-grade platforms and unregulated, high-risk venues.

Architect is strategically positioned to capture institutional capital by offering regulated, innovative derivatives that bridge the gap between traditional finance and the digital asset space.

The future of finance will likely involve a broader range of tradable assets and a greater diversity of exchange models, catering to different investor needs and risk appetites.

Discussion Topics

• How can regulated exchanges like Architect balance the need for robust risk management with the demand for fast-paced innovation in financial markets?
• What are the key challenges and opportunities in bridging the gap between the crypto derivative market and traditional institutional finance?
• As the industry bifurcates into regulated and unregulated spaces, which side do you believe will see more growth and innovation in the next five years?

Key Terms

Perpetual Futures

A type of futures contract that does not have an expiration date, allowing traders to hold positions indefinitely and providing leveraged exposure to an underlying asset.

Stablecoins

Cryptocurrencies designed to maintain a stable value, often pegged to a fiat currency like the US dollar, used as collateral or for payments.

Broker Dealer

A firm that engages in the business of trading securities for its own account or for the account of its customers.

CFTC

Commodity Futures Trading Commission, a US government agency that regulates the U.S. derivatives markets.

FINRA

Financial Industry Regulatory Authority, a self-regulatory organization that oversees brokerage firms and exchange markets in the US.

SEC

Securities and Exchange Commission, the US government agency responsible for regulating the securities industry.

KYC

Know Your Customer, a process used by financial institutions to verify the identity of their clients.

DeFi

Decentralized Finance, a broad category of financial applications and services built on blockchain technology, aiming to recreate traditional financial systems without intermediaries.

ADL

Automatic Deleveraging, a mechanism used in some crypto exchanges where winning positions are used to offset losses from losing positions during extreme market conditions.

CME

Chicago Mercantile Exchange, one of the world's largest futures exchanges.

ICE

Intercontinental Exchange, a global operator of exchanges and clearing houses.

CFD

Contract for Difference, a derivative product that allows traders to speculate on the price movements of underlying assets without owning them.

ISDA

International Swaps and Derivatives Association, a global industry association for participants in the privately negotiated derivatives markets.

Timeline