dYdX Dialogue with Wintermute: What kind of strategies are needed for market making in DeFi protocols?

This article was published by Chain News, organized by: dYdX

On May 4th, we (dYdX) hosted a live AMA Spotlight with Evgeny Gaevoy, founder and CEO of Wintermute, and Yuriy Myronovych, head of DeFi.

Evgeny and Yuriy discussed various topics, including:

• Their backgrounds and the story behind Wintermute

• Deep market-making operations and different strategy deployments

• Differences in market making between DEXs and CEXs

• Wintermute's strategies for managing inventory, risk, collateral, and credit

• The future of DeFi market making

Here is the edited interview transcript:

David (dYdX): Hello everyone, I am David Gogel. I am part of the dYdX growth team. I am excited to be joined today by Evgeny Gaevoy, founder and CEO of Wintermute, Yuriy Myronovych, head of Wintermute DeFi, and Vijay, head of business development at dYdX. Over the next hour, we will discuss market making on Wintermute and dYdX. Thank you all for being here today. To start, could you introduce yourselves and tell us the story behind Wintermute?

Evgeny (Wintermute): I have a traditional finance background. Before founding Wintermute, I worked at Optiver, one of the largest market makers in traditional finance. At Optiver, I built the ETF department from scratch. In early 2017, as the cryptocurrency hype began to rise, especially with Bitcoin, I joined the blockchain industry.
So, I collaborated with another software engineer, and we founded Wintermute. Interestingly, the first business case we saw was a market-making project. But when we started in 2018, it was already a bear market for the industry. So we had to quickly pivot to more traditional market-making operations. Fortunately, we succeeded. By last year, we had become one of the key market makers in the crypto ecosystem. This year, our growth has also been remarkable. Throughout this process, especially since 2019, we have been supporting dYdX's liquidity. We are happy to see our mutual growth. Now it's Yuriy's turn.

Yuriy (Wintermute): Hello everyone, I am Yuriy, and I lead the DeFi efforts at Wintermute. Unlike Evgeny, my background is in software engineering and blockchain. The most famous project I worked on is probably Argent Wallet, which many people are currently using. But to some extent, I found trading more interesting personally, and I usually engage more in the DeFi ecosystem. That's when I joined Wintermute. That was two years ago. Since then, Wintermute has grown to become one of the largest market makers specializing in DeFi, and I am very excited to be part of it. When I joined Wintermute, dYdX was the first project I integrated. Since then, I have embarked on an interesting journey.

David (dYdX): Thank you for sharing. First, Evgeny, could you describe what market making is and the strategies Wintermute employs?

Evgeny (Wintermute): In short, market making is providing two-sided quotes to any given market. That is providing liquidity. Whenever you want to trade, for example, when you open a perpetual contract on dYdX, you can see the buy and sell prices, and there is a 95% chance that they are provided by market makers. Market makers have advanced trading systems that connect to various other liquidity platforms or liquidity pools to obtain pricing sources, which provide a lot of signals that make us efficient and flexible. But in short, it basically provides liquidity.

What we offer is the most basic market-making strategy. The buy and sell you see on any centralized exchange, or if you look at AMMs, it can provide liquidity for AMM pools. We are also a fairly large OTC market, where counterparties can ask us for prices, which is essentially market making as well. If you look at platforms like 1inch or Paraswap, they operate in the same way because they not only direct funds to different liquidity pools but also ask some private market makers for quotes, and we are one of them. So market makers can provide liquidity in different ways.

David (dYdX): There are many different types of market-making strategies. Can you talk about Wintermute's market-making strategies? Do you always maintain a neutral position in the market? If not, what would change that?

Evgeny (Wintermute): Generally speaking, the core of the business is to maintain market neutrality at all times. We can indeed take certain positions from OTC trades, allowing us to run them for longer periods, such as hours or even a day. However, our core business is always market neutral. Occasionally, in some other activities, these are not necessarily market making. If you are in farming (liquidity mining), it is quite difficult to maintain market neutrality with certain tokens because it is practically impossible to hedge the risk. We have also made significant attempts in venture capital. This obviously benefits us in taking long positions on any tokens. But that basically goes beyond our market-making responsibilities.

David (dYdX): You mentioned that Wintermute is active in many different DeFi protocols. Can you tell us the differences or focuses of different types of products? For example, what is the difference between spot and derivatives?

Evgeny (Wintermute): For us, whether it's spot or derivatives, it's all part of a "big machine." Almost our entire team is focused on the portfolio of all products. Whether there are failed trades or frequent trades, then its effectiveness has potential issues. Therefore, we do not make significant distinctions between spot products and others.

David (dYdX): Can you describe what market depth is and why it is important for the healthy development of the order book?

Evgeny (Wintermute): This can be summed up as the concept of liquidity building liquidity. So, if you have good market depth, it can effectively help you formulate many different market strategies from active market participants who also take short-term or long-term positions or look at technical analysis, charts, etc. When they start trading, this effectively brings more liquidity in. Essentially, market makers start to see more trading volume, and then it naturally enters the order book, making it more liquid.

It's a self-reinforcing mechanism. But it needs to be initiated by market makers from the start; otherwise, if there are no market makers, nothing happens because there will be a bunch of orders in the order book that are only long without many trades. So you just need to kickstart the liquidity, which is something we are very happy to do with many platforms.

David (dYdX): You mentioned that market makers play a crucial role in helping to enhance market liquidity. Can you describe how market makers contribute to the long-term efficient functioning of the crypto market?

Evgeny (Wintermute): What I described is a good demonstration. For instance, when there is huge volatility in the market, or a flash crash occurs, or something unusual happens, market makers can provide liquidity when it is most needed. As for perpetual contracts, another important component is the funding rate. Many traders prefer different perpetual contracts simply because they can arbitrage. This is also where market makers are truly useful because they help align rates between different exchanges and different protocols, which indeed affects long-term price stability and user trust in any given exchange.

David (dYdX): I understand. Therefore, Wintermute is often cited as one of the leading market makers in DeFi. I am curious, what are the success metrics that define a top-tier market maker? How does Wintermute score on these metrics?

Evgeny (Wintermute): We prefer to believe that technology comes first, especially in DeFi, which is very important above all else. With more and more DeFi protocols launching, there are many factors to consider, and market makers need to decide whether to invest time and effort to support a given protocol. An advanced level of technology can be a must-have because the losses caused by programming errors can be devastating.

In addition, it is also necessary to integrate with as many mainstream exchanges as possible to provide the best and fastest prices. For us, this has always been a top priority. So this is one of the foundational aspects of the team building the best technology from the very beginning, especially in DeFi, which has been our focus since day one. The second is corporate culture, which is basically about ensuring that you hire the right talent for all roles, whether junior traders, senior traders, or senior developers, ensuring that the right employees become our "assets." Culture is something we take pride in because we have indeed put a lot of effort into ensuring it is built well. Even though people have to work around the clock, they also need to know that they are dedicating their best years to a company that appreciates them, which is what we do.

Finally, for market makers, how to handle risk is also important, especially for perpetual contracts. Market makers can also be liquidated like users. If there is, their risk in this regard is much greater because the positions we hold due to arbitraging different funding rates can be significant. Then managing collateral levels between exchanges while managing risk exposure to ensure neutrality across the market is very critical because you need to stick around until the end, not just make a lot of money. So for market makers, it is a much more precise trading approach than regular trading. For example, in the case of a quote error, you just need to ensure that these trades do not lead to the company's bankruptcy.

David (dYdX): The crypto market operates 24/7, and some huge price fluctuations occur while people are asleep at night. Can you describe a day in the life of a market maker?

Evgeny (Wintermute): Yes, the most annoying part at night is that it requires the person on the night shift to deal with the mess left by the day shift, and colleagues need to call each other to wake up enough people to handle it. But I think a typical day for a junior trader is that you wake up and take over the mess left by the night shift, handle some affairs, and ensure all positions are running smoothly.

During the day, it is mainly about reacting to what is happening in the market. Looking for opportunities, seeing what trades are most frequent, and ensuring we can seize the opportunities we see. Because Wintermute does not have purely trading roles, all our traders also do support work. So when the market is quiet, most traders will have one or two engineering projects to improve existing systems or integrate with new exchanges. So basically, they are either monitoring whether the market is busy or busy coding.

Vijay (dYdX): It's great to understand this. Changing the topic, I want to talk about how you view the mechanisms behind trading on decentralized exchanges and centralized exchanges. First, Yuriy, at a high level, what is the difference between centralized exchanges and decentralized exchanges, and how do their trading volumes compare?

Yuriy (Wintermute): This is an interesting question. Overall, there is no significant difference in how the two trade. Because our job is always to provide liquidity for them. However, this difference plays a larger role at the technical level, integration level, and asset management level because being closer to the blockchain has its downsides. You need to consider gas, what happens on the blockchain, and how assets are transferred on the blockchain. You need to consider many intricate situations.

However, there are also many benefits. For example, you do not have to worry about whether you can withdraw assets from the exchange because you know all funds are backed by the underlying blockchain. Therefore, you can rest assured that even now, technically, the assets always belong to you. Thus, on centralized trading platforms, it is entirely normal for independent traders and market makers to wait hours for withdrawals. In DeFi, if you want to complete a transaction in 15 seconds, you just need to input a very high gas fee, and it’s done. That’s great. It’s easy to predict and easy to use.

Vijay (dYdX): Do you think this effectively helps improve the overall collateral efficiency of trading systems and operations?

Yuriy (Wintermute): Absolutely, because from a market maker's perspective, we have to factor in all risks into the price, and if any issues arise in the flow of funds, it directly affects the price users pay for liquidity at the end of the day. If it can be plug-and-play in DeFi, it makes it easier for both users and us.

Vijay (dYdX): From a technical standpoint, in terms of coding for APIs or smart contracts in DeFi, how does it differ from connecting to centralized exchange APIs?

Yuriy (Wintermute): From a development perspective, it is definitely more interesting. You get to be more creative, and you have to adapt to many protocols and how they work. Especially DeFi is a bit like the wild west, where different protocols can work in completely different ways. Just like having AMMs, you can do order-based trading, or you can mix both and some other categories. You have to make all of this fit into your internal trading system. Whereas centralized exchanges are basically the same, just with some slight differences in the API. So in that sense, DeFi is definitely more interesting, and I can say our development team definitely prefers coding for DeFi.

Vijay (dYdX): Great. So I want to talk about market neutrality and how you view the role of perpetual contracts in maintaining it. Do you think perpetual contracts are an effective tool for maintaining market neutrality? Or what specific role do they play in your strategies? What different types of cross-product arbitrage and cross-trading arbitrage do you see and focus on?

Yuriy (Wintermute): In terms of market neutrality, generally speaking, as market makers, we always try to maintain market neutrality, but once certain situations arise, we cannot effectively match buyers and sellers. This has always been a challenge for us because it is not our business, nor do we want to do that. We never want to be on the opposite side of trade execution. So we always strive to maintain market neutrality, and we always try to perfectly match buyers and sellers. This is not always possible, but from our internal data, as long as you can reduce the holding time to below a few seconds, that is sufficient.

Evgeny (Wintermute): Speaking of the importance of perpetual contracts to market makers, one important aspect we often use, and this is particularly great about dYdX, is that it allows us to maintain market neutrality when trading certain products. What you can do is go long on the spot and short on the contract, so you have spot inventory to trade, but this also ensures you are market neutral, with ample funds, which is very positive, especially on centralized exchanges. This also means you can get paid, which is a great way.

Vijay (dYdX): That makes sense. In terms of the arbitrage opportunities you focus on, is there a specific framework that is particularly appealing to you? In terms of funding rate arbitrage or cross-rate arbitrage for the same product, or do you focus on a specific type of arbitrage trade? Or would you say you are looking for very broad ways?

Yuriy (Wintermute): We do not look at the market from that perspective because we do not really focus on arbitrage, and we do not have specific strategies to exploit arbitrage. But as market makers, it is natural to provide liquidity in multiple places, and then this liquidity balances supply and demand. From our perspective, we do not do arbitrage; we focus more on providing liquidity.

Vijay (dYdX): I understand. How do you view the risks behind inventory capital management and trading operations, and what role does credit play in that?

Yuriy (Wintermute): Inventory capital and risk, I think, are the most annoying parts of our trading system. Risk management is always the hardest because there are always certain demands that cannot be met. Maybe the market is more volatile than you think, or maybe you already have your positions, in which case you always revert to a market-neutral state and ensure your risk parameters are useful to bring you back to the neutral position you want to enter. So risk is a tool for us to ensure we maintain market neutrality.

Vijay (dYdX): I understand. So what role does credit play in the asset balances you maintain? Do you prefer to use it?

Evgeny (Wintermute): I can answer this question. Borrowing capital in cryptocurrency is not very simple. You can see this from the funding rates because you can see that in traditional finance, rates are zero or negative, while in cryptocurrency, sometimes borrowing dollars, or DAI, or any fiat equivalent, the rates are 20, 30, 40, 50, 100%. All of this also affects the extent to which market makers invest on the platform because there is no situation where anyone can have unlimited funds. Therefore, you just need to allocate funds appropriately to each appropriate exchange.

Thus, having enough inventory capital or even being able to easily deploy capital is a significant challenge for market makers. Even the largest market makers do not have enough capital to serve the entire market, leaving many opportunities for smaller market makers.

Vijay (dYdX): Now let's talk about flash crashes and how you handle them. So it is clear that rapid price increases and decreases are common in cryptocurrency, and in fact, we have experienced several in the past few weeks. Of course, there has been a strong rebound in the past few days. So how do you ensure that you can provide liquidity under market conditions, and more specifically, what is your strategy during market crashes? Tell us about your operational sequence or how you operate when there are significant changes in the market.

Yuriy (Wintermute): For market makers, monitoring market conditions and adapting to the market is very important. When the market crashes or surges, it is rarely pleasant for us. We prefer a stable and predictable market, but whenever any extreme situation arises, we must adapt. We must adjust our trading systems. We have to widen our range on the order book to ensure we do not encounter a "car crash." For individual traders or any algorithmic traders, this is usually a stressful experience, and it is the same for market makers. That is why we see the highest load on risk, whether it is manual risk components or automated risk; this is when it starts to come into play.

Evgeny (Wintermute): This is a key priority. When we really encounter significant market fluctuations like a flash crash, we are very conservative. Many of our systems will shut down and be restarted by the corresponding traders or developers. We prefer to do this because it is indeed very difficult to make systems perform well in such situations. Extreme market conditions not only lead to abnormal price fluctuations but can also lead to all pricing being out of sync, which also means that a lot of collateral may need to be exchanged for trades. Centralized exchanges are scarier. You cannot create a 7x24 hour fault-tolerant system. Therefore, we are basically very conservative; when we encounter extreme market conditions, we withdraw and re-enter as soon as we believe it is safe.

Vijay (dYdX): To summarize, what is the biggest risk market makers face, or what keeps you up at night? Clearly, we have discussed some, but is there one that you are always considering, or is it some technical risk or more operational risk?

Yuriy (Wintermute): I might say two: one is the security of on-chain funds, but that is somewhat similar to centralized exchanges, where you have to hand over your funds to centralized exchanges, and they will take full custody of your funds. That might be the worst one. The second is that the crypto market is very volatile.

Evgeny (Wintermute): In this regard, DeFi is much better because it is more controllable. We have set up security mechanisms that can effectively control the risks seen in DeFi. In contrast, we cannot control anything on centralized exchanges. If someone hacks them or a certain exchange gets investigated and then shut down, that’s it. We are powerless in that regard.

Vijay (dYdX): So I want to spend a few minutes specifically discussing your experience with dYdX and the market environment. Can you describe your experience integrating the dYdX Layer2 perpetual contract API? How does it compare to other centralized exchanges?

Yuriy (Wintermute): For Layer2, I think the API is more similar to centralized exchange APIs, more like those of tier-one exchanges like Coinbase, Binance, etc. From my perspective, I can say this is a great change, as we no longer represent things in the API using the blockchain, for example, we do not have to deal with WEI or convert different currencies into the native values of the blockchain. The entire API is more streamlined and easier to use. On our side, integration has become very easy. I feel we have not encountered any issues. Obviously, having a knowledge base built by your team for different languages is definitely helpful.

Vijay (dYdX): From the perspective of capital efficiency, how helpful is cross-margining for you? From the perspective of market structure, how helpful is cross-margining for you?

Yuriy (Wintermute): Cross-margining is great; we love it because we have to trade across multiple markets. Without cross-margining, the collateral value we need to hold could be five times that of cross-margining.

Vijay (dYdX): How do you handle your tech stack? Do you typically build everything in-house, or in some cases, do you rely on API aggregators or institutions that provide capital functionality?

Yuriy (Wintermute): We almost never rely on any third parties as aggregators or APIs. There are two reasons for this. First, it is additional risk because if something happens, we are responsible for it. We have the obligation to enter the market and provide services, while third parties do not necessarily have those obligations. Therefore, if something goes wrong, it will be our problem, but not necessarily the third party's problem. The second thing is that all the tech stacks or tech solutions we currently use must be real-time and extremely responsive. Our work is at the millisecond level, so it is hard to find any existing solutions that we can use in the market. I think we have not seen a better product than what we do. So we are more or less forced to develop everything ourselves.

Evgeny (Wintermute): It’s a bit like the shortcut you can take when you first start. In the beginning, we used this Python library called CCXT to connect to many centralized exchanges that we did not have the capability to connect to, but as it developed, market makers developed everything themselves.

Vijay (dYdX): How do you view the market depth, spreads, and pricing of DeFi and dYdX? How do you think these metrics compare to centralized exchanges now? How do you see it developing in the future?

Yuriy (Wintermute): Interestingly, compared to centralized exchanges, the liquidity for executing instant trades on DeFi is stronger. If you look at the order books of centralized exchanges, even if you combine several order books, you will not always find millions of dollars in liquidity, but in DeFi, it is really, really easy. Typically, when market makers collaborate with exchanges, it is always the protocols and exchanges that incentivize market makers to contribute a specific amount to the order book. It depends on the relationship with market makers; how it is defined and structured to some extent determines how much presence market makers have in the order book. So from our perspective, if I compare dYdX with centralized exchanges, the liquidity we provide on dYdX could be three to four times that of the first-tier exchanges we usually provide.

David (dYdX): This is super helpful. Clearly, with the rise of AMMs, traditional market makers are being replaced by liquidity pools. There has been a lot of innovation in AMMs, and recently Uniswap V3 has returned to some aspects of order book rules, hoping that new products will be more widely adopted, namely liquidity pools. How do you view these? How do you see the role of market makers evolving in DeFi?

Evgeny (Wintermute): Personally, I find the so-called disintermediation claims quite ironic. Uniswap realized that simply providing liquidity to people and opening it up is not a simple task. Uniswap now has a lot of liquidity, but Uniswap V3 has almost returned to this order model, which can improve our current functions in centralized exchanges and centralized order books. But this proves that you cannot disintermediate like that, at least not market makers. Our business is complex, requiring the management of technology, risk, and capital, and it will take us a long time to see enough building blocks in DeFi to truly replace us. So I don’t think it will come anytime soon. I am curious how the V3 experiment will work; we are actually looking forward to providing liquidity for Uniswap now because it will be more efficient in capitalizing.

David (dYdX): Wintermute is clearly one of the major market makers for many DeFi protocols. As the nature of these DeFi protocols evolves, does Wintermute participate in governance beyond providing liquidity? If so, in what capacity do you engage in the development and future of these DeFi protocols?

Evgeny (Wintermute): First of all, we really enjoy governance as a feature. I think protocols allowing more voices to be heard and enabling token holders to participate actively is really great. We do plan to become more active in this regard; for example, a few months ago, we signed market-making contracts for three protocols purely through engaging with the relevant communities.

I find the whole process really cool, and I think we will continue to do this because protocols are interesting, and I think it is truly transparent and progressive. We will definitely continue to participate in any governance votes related to our business, whether it is trading platforms, custody platforms, or other similar things.

David (dYdX): Great. There is a lot of innovation in DeFi, and sometimes it feels like the pace of innovation is accelerating. Evgeny and Yuriy, I am curious about your views on the future of DeFi. What’s next? What opportunities do you see for DeFi in the broader market?

Yuriy (Wintermute): It is great to see that DeFi is developing very quickly. You could say that compared to traditional finance, DeFi can cover ten years in one year. You could even compare the evolution of DeFi with CeFi trading; CeFi has not really changed in the past ten years, while in DeFi, we actually have up to 50 different projects trying different rules for AMM trading, order book exchanges, futures, options, or other more complex trading derivatives. It is very exciting to see its development. We believe we are just scratching the surface of what can be done and achieved. In traditional finance, the cost of experimentation is high, and trying new products can take years, but in DeFi, you can put everything together in just a week with a few partners, literally build it. I think that is the biggest advantage of DeFi.

Evgeny (Wintermute): My perspective is built on these foundations. Especially when we look at various derivatives in DeFi, it is very cool. We have seen many different protocols emerge this year and develop appropriately. But one thing that has not been talked about much, but I actually feel very optimistic about, is index products. We see that in traditional finance, the most traded products are S&P futures, not the underlying stocks, so seeing products like perpetual contracts and DeFi indices listed on dYdX would be very cool. I think if that happens, DeFi could surpass centralized exchanges by entering the market.

David (dYdX): That’s awesome. Yuriy, there’s a question related to your earlier comments about capital security. Can you share more about how Wintermute ensures the security of its funds? What are the differences in DeFi and CeFi?

Yuriy (Wintermute): In CeFi, you have almost no choice; your funds belong to the centralized exchange. While in DeFi, there may not be as many existing solutions, and you have to come up with solutions yourself. However, you have the ability to do so. For any business, more contracts and multi-signatures are helpful, which can answer or solve many security issues. Due to the flexibility of smart contracts, you can implement your own multi-signature contracts and customize them to your personal needs, which can be the most powerful feature.

Vijay (dYdX): Another question we received from the audience is: How can someone with a CeFi or traditional background start market making in DeFi? What do you think is the biggest difference between the two?

Yuriy (Wintermute): Fortunately, DeFi is very decentralized, and for many new protocols, they may not be large enough or have enough liquidity or attention to attract larger market makers to start participating. This provides many opportunities for smaller market makers who want to try this business to collaborate with those small projects and protocols and help them grow together.

As for how to get started, there is no simple answer. You just need to stop sleeping and read everything you can find about how smart contracts work, how the DeFi world works, and how this protocol works, etc.

Evgeny (Wintermute): I mean, when it comes to Ethereum, the best option is to use dYdX. You can also find Serum on Solana, which is also a centralized limit order book. Those are your top two choices because they are probably the closest. Secondly, you should try to integrate RFQ platforms, like Paraswap, which is also a way of market making; you can respond to quote requests and become a market maker. Obviously, all the competition is fierce, but it doesn’t hurt to give it a try.

David (dYdX): We have one more question about market making on AMMs. What are your thoughts on LP arbitrageurs exploiting the impermanent loss issue in liquidity pools?

Yuriy (Wintermute): This is a rather complex issue. The problem is that with AMMs, the liquidity supply means you cannot control the price or the pricing function; you have to rely on the AMM to provide these for you. If you are not satisfied with the price, you cannot do anything because the cost of reclaiming liquidity is very high. So in the current generation of AMMs, you have to come up with some very creative solutions on how to hedge this risk and how to address impermanent loss because, in reality, impermanent loss means you cannot control the price. Unfortunately, there is no simple answer. We have seen people trying to do this in different ways. You can use options to hedge your impermanent loss, or you can adopt a delta hedging approach. There are quite a few solutions reported in the media, but none are ideal, which is why we look forward to new inventions in the AMM space to see how to solve this problem.

David (dYdX): The last question relates to Wintermute's history of raising funds. How did Wintermute raise funds for the company? Would you recommend smaller market makers to take a similar approach? More broadly, how do market makers invest in themselves and scale over time?

Evgeny (Wintermute): That’s a good question. Market makers have two options: companies like Optiver, which are proprietary trading firms that do not have any external capital; they just trade with their own funds and do very well. Or you can create a hedge fund, basically paying in an 80/20 or 50/50 manner, or other ways.

Our approach was that in the early days, we decided to go the proprietary trading route, so our first round of financing was equity financing. In the crypto world, the main challenge is not being constrained by any platform or exchange but rather the difficulty of obtaining leverage. And this leverage is not limited to any given platform or exchange. Of course, you can obtain capital from centralized exchanges. In short, obtaining capital is very difficult; you can freely transfer capital between exchanges or DeFi, and you need to have a proper track record to achieve this.

We started with equity investment, and we actually took part of the capital as profits in a profit-sharing manner that lies between hedge funds and proprietary trading, but once we did the POC and started making money, we returned all the money to the dividend investors and shifted to unsecured loans. Because unsecured loan institutions agreed to provide us with increasing amounts of loans. That was our path, and while it was bumpy, we are now in a very good position because proprietary trading allows you to think and build long-term. And if investors invest, they can afford to take losses because investors can easily withdraw. If you are a hedge fund or a similar fund structure, you can get more capital from the start and expand faster, but obviously, you need to give up a lot of upside potential for that.

Vijay (dYdX): This is our last question. If you don’t have the data at hand, can you talk about your trading volume in DeFi compared to traditional exchanges, or the ratio between the two?

Yuriy (Wintermute): That’s an interesting question. I think currently, about 20% to 30% of our trading volume comes from DeFi. At first glance, this might seem like a small number, but you have to consider that most of the trading volume happens on Layer1, so users have to pay fees for every transaction they make. If you compare the 20% trading volume we have to pay for with the other 80% of trading volume that comes from centralized exchanges with free trading, the cost of trading back and forth is almost zero. From this perspective, it suddenly makes DeFi look more competitive because, in that sense, it is actually more impressive that you can have 20% of high-cost trading coming from DeFi.

We are very much looking forward to any type of Layer2 system being able to play a role, just like dYdX switching to Layer2 perpetual contracts. This is indeed the only solution for the first-layer blockchain to move forward because we believe the first layer is no longer scalable. "It has to run on Layer2," and the projects that realize this first will become the leaders in the industry.

David (dYdX): Awesome. Evgeny, Yuriy, Vijay, thank you all. That concludes this AMA session. You can follow dYdX and Wintermute on Twitter @dYdXprotocol or @Wintermute_T, and be sure to check out our latest perpetual contract version on dYdX.exchange. You can go long or short on dYdX with leverage up to 25x. Thank you all for watching and for your questions. That concludes this AMA session.