Trade everything: How Variational is bringing 100+ TradFi markets onchain

The onchain perps scene is one of DeFi’s busiest markets today, but many are still solving the same problem: how do you get liquidity before you have traders, and how do you get traders before you have liquidity?

Variational’s answer is to cut out the middleman entirely. With a vertically integrated liquidity provider tapping directly into CEX, DEX, and TradFi rails, the protocol lists markets without negotiating with a single market maker and passes the captured spread revenue back to users in the form of zero-fee trading.

Fresh off a $50M Series A led by Dragonfly, we sat down with co-founder and CEO Lucas Schuermann to find out what that model unlocks and where Variational takes it next.

You and co-founder Edward Yu spent years at the centre of crypto market structure, first at Genesis, then running your own prop trading firm. What did you see from that vantage point that made you want to build a protocol?

We usually cite three main learnings from our time at Genesis and Variational’s prop days: bootstrapping order books is slow, exchanges leak a ton of value to market makers, and trading derivatives OTC (i.e. off exchanges) is a huge hassle.

Order books have a cold start problem: takers need liquidity and tight spreads before they’re willing to trade, and makers need significant trading activity from takers. The industry-standard workaround for this is simply to pay makers to provide deep liquidity, in the hopes that takers eventually show up and exchange-level subsidization is no longer necessary. This is an expensive and slow process that requires negotiations and deals with market makers for each new listing. We solved this by vertically integrating our own liquidity provider that taps directly into existing liquidity sources like CEXs, DEXs, and OTC desks to completely bypass this negotiation and bootstrapping process. This model is also perfectly suited for RWAs, as the platform’s native liquidity provider can plug into TradFi desks as opposed to relying exclusively on liquidity from crypto-native market makers and exchanges.

Second, market makers extract a ton of value from exchanges. They generate just as much, if not more revenue than the exchanges they’re active on. That revenue is then completely removed from the exchange ecosystem. This is why we decided to exclude all third party market makers from Omni, the first trading platform on the protocol; by cutting out these external market makers, the vertically integrated liquidity provider is able to retain all of the spread revenue that is usually extracted from the protocol. Since the platform is able to generate consistent revenue solely from capturing the spreads, it’s also able to offer zero-fee trading to all users. 

Finally, OTC derivatives trading in crypto was (and still is) extremely inefficient. Even before our time at Genesis, when Ed and I were running our own hedge fund, doing an OTC trade required lawyers, tons of back and forth, bank wires, ops hires, etc – and even after all of that, had manual margining and liquidations. Once we were doing these OTC deals full-time at Genesis, this problem was even more obvious. The original purpose of the Variational protocol was to be a simple, automated, and decentralized mechanism to settle and clear derivatives trades against an arbitrary counterparty. That vision still exists today as the second product we’re building after Omni, called Pro. While our team is fully focused on going to market with Omni right now, releasing Pro to modernize OTC derivatives trading and bring it on-chain is still on our roadmap.

Variational bootstrapped initial development from trading profits before raising external capital. How did that shape the way you thought about product design, and what changed once Bain Capital Crypto, Dragonfly, and the other backers came in?

 It caused us to always have revenue as our north star. When you don’t have a war chest of VC capital, you don’t have the luxury of planning to lose money for years while acquiring users. From day 1 of our private beta launch, we’ve prioritized generating revenue to put in the treasury for runway, growth, and future token buybacks. 

Once Bain Capital Crypto, Dragonfly, etc. came in, it allowed us to scale up the internal liquidity provider to support more growth and hire a larger dev team to build faster. VC capital didn’t change our prioritization of revenue, but rather just allowed us to invest more and move faster in attacking new verticals we were already exploring, like RWAs.

Variational uses an RFQ model, a deliberate departure from the order book designs that dominate both CEX and DEX perps. What does RFQ unlock that an order book structurally cannot?

 The RFQ model solves the cold start problem of bootstrapping liquidity that limits order books. Order books require subsidizing external market makers to build depth for each new asset. Variational’s RFQ model, combined with a single vertically integrated liquidity provider, bypasses this requirement entirely. Variational’s use of RFQ results in more listings across both crypto and RWAs, and the ability to tap into existing CEX, DEX, and TradFi liquidity.

Part of our core thesis building Variational was that RWAs and off-chain markets will see increased demand for on-chain trading. RFQ is the only way to bridge that gap without decades of bootstrapping and millions in subsidies to market makers.

You've raised $50M led by Dragonfly to go all in on RWAs. How does that capital get deployed across Phase 1 and Phase 2, and what does success look like before you bring 100+ TradFi markets on-chain this summer?

 We've been significantly expanding our development team to ship new markets & features faster. Dragonfly is also a very trusted and well-connected organization, which has helped us kick off and progress certain partnership and integration conversations. Success over the next few months means achieving our public goal of listing over 100 RWA markets with TradFi liquidity, and seeing genuine activity on these markets from our users.

The Series A positions Variational as building towards a crypto-native Robinhood-esque experience. Would that be a fair take? And if so, what do you find are the essential UX features that make for a top-tier platform for competitive, onchain trading apps?

 Yes, we see ourselves as the first platform with the design necessary to achieve the "trade everything in one place" thesis that retail trading apps have been progressing towards for decades. However, there are some obvious UI requirements to progress from onboarding crypto traders to onboarding traders in general: removing the need for a wallet (via account abstraction), allowing for easy deposits and withdraws through non-crypto channels, and improving the onboarding experience for first-time perps traders.

Omni has listed over 500 pairs, including long-tail and pre-listing assets, without requiring order book depth for each. How does the automated listing engine work, and where do you see the ceiling on market coverage?

 The automated listing engine has evolved a lot since our launch. At its core, it’s just an aggregation of APIs and risk checks meant to determine what markets are safe and liquid enough for listing. We monitor and adjust its risk checks and data sources regularly. 

We believe we’re pretty much at the ceiling of crypto market coverage these days, and are now expanding into RWAs. We believe RWAs have a huge ceiling for coverage that existing on-chain platforms are nowhere near. We also plan to explore other exotic markets like predictions in the future. 

Variational Pro is targeting a derivatives market where deals are still getting done over Telegram and settled manually off-chain. What frictions exist for bringing institutions onchain, and how are you removing it?

 There’s two different problems to solve: one is bringing institutions on-chain in general, and the other is streamlining the process for institutions that are already on-chain. 

Bringing institutions on-chain means giving them a significantly better product than they’re currently using. In that sense, Pro would be competing with existing OTC solutions on transparency, verifiability, usability, and capital efficiency.

Streamlining the process for institutions who are already trading crypto derivatives OTC has a much lower bar, since those are the deals currently being settled manually off-chain. For these institutions, being reliable, easier/cheaper than the manual processes, and having a large network of dealers onboarded is the focus. This is the initial market for Pro, giving the platform time to mature and be refined before moving to onboard new institutions.

Variational’s Oracle is described as modular enough to support commodities, prediction markets, and in-game assets. Are these hot markets something that the team is focused on in the near future?

 Yes. Having the liquidity provider vertically integrated to the trading platform means we are not reliant on any external parties for new listings. Our current priority is fully on RWAs (equities, commodities, indices, currencies), since this is what we see is most demanded by the market right now. As our RWA markets mature, we can begin to dedicate effort to other exotics. 

For traders or liquidity providers who haven't used Variational yet, what's your pitch for why they should try it this week?

 Variational already offers cross margin across hundreds of crypto & RWA markets with industry-leading execution costs (tight spreads + zero fees). Over the summer, we’re planning to list hundreds more RWA markets via direct connections to TradFi liquidity providers. 

If you trade crypto, Variational is the cheapest and most liquid place to do it. If you trade RWAs, you can trade the current listings with cross margin now, and hundreds of them with TradFi liquidity this summer.

What does your vision of Variational look like in the next five years, and how would you define ‘success’ for the protocol?

 In five years, my vision is for Omni to be the leading on-chain trading platform, offering thousands of 24/7 crypto & RWA markets with cross margin and TradFi liquidity depth. At scale, the Omni Liquidity Provider will become the largest market maker in crypto, with its revenue shared between community depositors, Omni traders, and the protocol treasury.

I’d also envision Pro becoming the industry standard for OTC derivatives trades, with every crypto market maker, liquid fund, and foundation onboarded. At this point, we’d be optimizing Pro for non-crypto institutions and OTC TradFi derivatives.