Crypto Contracts are Making the Next-generation of Financial Markets Possible

jim bai interview

Have you ever felt that other traders have an advantage over you due to their vast technological firepower? In order to eliminate the pain points of the current exchange ecosystem, the financial markets need more fairness, efficiency, and modernity. Jim Bai, CEO of EMX, and his team realized that there is a better way, and this is how they’ve used their collective experience to create a next-generation derivatives trading platform that’s not only accelerating the speed of the transaction lifecycle, but it is also reducing the risk to the traders and to the exchange.

Great to meet you, Jim Bai! Can you tell us more about yourself, and how the team came together?

Craig, my co-founder, and I met each other during our freshman year at Carnegie Mellon University, where we both studied computer science. By junior year, we were roommates, and we even graduated early – in only three years – to begin our professional careers.

After college, I worked for almost 10 years in New York as a trader at Citigroup and Graham Capital, a global macro hedge fund. Craig moved out west shortly after graduation to take an engineering job in Seattle with Microsoft, where he worked for five years. After that, he spent seven years leading a quantitative research development team at the hedge fund AQR.  

About 18 months ago, while immersed in the blockchain and decentralization movement in San Francisco, Craig and I started discussing our idea with former colleagues and professional acquaintances.  Long story short, our first eight hires ended up being people we’ve either worked with, or have known for a long time, building EMX.

Mr. Bai, you have exceptional derivatives experience. Can you tell our readers a little more about your background?

While at Citigroup, I spent six years in various research, strategy, and trading roles within the fixed income division. At Graham Capital, I spent about three years overseeing a $1 billion futures and options book alongside one other portfolio manager. Towards the end of my time at Graham Capital, the limitations and drawbacks of a traditional market structure began to dominate discussions between Craig and I. And the rest is history, as they say.

jim bai

Your white paper has a lot of technical info in it and may not be easy to digest for the average reader. That said, from what I can tell, you are putting together a great platform.  What kind of person do you see as your user?

We are really proud of our white paper and it’s evolution – we are just shy of publishing our 100th updated version of it, actually. Compared to a lot of the other papers out there, we believe it’s balanced and strikes a good tone for potential market participants of all sizes.

Right now, our target audience is cryptocurrency traders and other people who have amassed crypto wealth that want to use their digital assets to trade cryptocurrencies and beyond. As the markets continue to develop, we also expect institutional investors, including large banks and hedge funds, to use our platform.

Many people are familiar with derivatives but are not so sure about how the blockchain fits into this equation. What led you to create EMX, and what are some of the problems you are looking to solve?

Our team is hyperfocused on using the latest in the blockchain, cryptography, and smart contracts to create the future of derivatives trading. By that, we mean one venue for trading global futures contracts without the need for posting collateral to multiple exchanges around the world or to convert from crypto to fiat currencies just to make those trades.

EMX is the result of our collective experience trading and operating derivatives markets, leading us to realize that there is a better way. We believe that we have created that better way, and we are excited to give traders their first look at the exchange during our trading competition set to be held later this year.

And how will EMX differ from the existing crypto exchanges?

From the beginning, our goal has been to take the lessons we’ve learned from working in the institutional arena and to apply them to the crypto markets. We’re providing a futures trading experience that is far more expansive and better suited to the needs of the crypto trader.

One example of this can be found in the contracts that will be listed for trading. After our initial set of contracts are launched, we will work with traders to determine the next contract from a wide range of assets, far beyond what other exchanges currently offer. Over time, participants will be able to ask for custom crypto indexes, pairs, and more.

Another example is how we’re using blockchain technology to eliminate the pain points of the current exchange ecosystem. Through the use of smart contracts and the distributed ledger, users will be able to withdraw and deposit funds almost instantaneously. Currently, this can take anywhere from one hour to two days.

emx team

Based on the white paper and recent news reports, EMX aims to introduce an entirely new market structure using auction pricing. Can you explain how that will work? Also, will it be hard for traders to adapt to this new and different matching engine?

That’s correct, we are working to level the playing field for all market participants, and this is another point of differentiation as opposed to the other exchanges. We chose auction pricing because it enables traders to compete on price, rather than speed. We want to eliminate the advantages that traders with vast technological firepower enjoy over the rest of the community, creating a fair marketplace for everyone.

By periodically crossing trades with a random element, versus a constant flow of bids and asks, the current strategies of high-frequency traders are effectively neutralized and participants compete on price versus speed, regardless of how big or small they are.

A similar market structure is currently in use at the London Stock Exchange and has worked well for quite some time, and we believe that traders will take to our auctions rather quickly.

How do cryptocurrency derivatives work? Are they similar to the Augur token?

Cryptocurrency derivatives work virtually the same way as other derivatives. A trader can buy or sell a contract and will post an approved form of collateral into an escrow account with the exchange. With EMX, the collateral is our EMX Token and, instead of being held in escrow, the collateral is held in a smart contract on the blockchain. Through the use of this technology we are able to streamline the existing flow of a trade and can manage risk, clearing, and settlement more efficiently.

With the Augur token, traders are making market predictions. With futures contracts you could very well be speculating, but you can also be managing risk by buying a contract that hedges against a downside price move.

Now let’s talk about the EMX token. Being a utility token, fluctuations in value can have significant ripple effects. How are you going to ensure the stability of the EMX token in the long run?

You are correct in pointing out that the EMX token is a utility token, but even utility tokens can be subject to price swings. In order to help protect against this possibility, we will provide all traders an automatic hedge against price volatility through the use of an EMX futures contract that will allow market participants to lock in the price of the token, so their final settlement is not subject to the valuation volatility that can occur over the life of a futures contract.

emx

It’s also worth pointing out some things about our token as well. It’s a utility in that it’s what traders will use to access the market, post collateral, and pay transaction fees. It makes trading and posting collateral extremely efficient, compared to how exchanges currently function. This is especially true for collateral management – instead of posting collateral at multiple exchanges, the EMX token and the exchange enable cross-margining, which makes it more cost-effective to consolidate trading  activity on one exchange.

Your margin syndicate model is a new concept that doesn’t exist at other exchanges.  Tell us a bit more about it.

The concept of a margin syndicate dates back to the original version of our white paper.  On top of using technology to accelerate the speed of the transaction lifecycle, we also set out to reduce risk to the traders and to the exchange.  What evolved was the margin syndicate, whose role it is to help guarantee customers’ trading positions and to lend EMX tokens to those who don’t possess them.

There is a strong likelihood that we will act as one of the initial margin syndicates as well, in order to create a more robust market in the early days of operation.

What kind of traders or investors would you like to attract to your platform? Are you cultivating the necessary relationships?

Our platform is compelling for many different types of traders. As I mentioned earlier, there is a growing desire among crypto traders to deploy holdings into additional types of assets for diversification. So, we’re focusing a lot of our marketing efforts on the crypto community.

We’re taking the time to provide the crypto community with the tools to better understand how futures can elevate the impact of their trading strategies. Alongside the development of our platform, we have spent much of our time engaging directly with crypto traders around the world at events, meetups, and through virtual panels. We’ve also built deep relationships with influential participants in the community as well, leaning on their guidance to help us build a next-generation platform.

How is the development of your beta platform coming along? What kind of challenges did you have to overcome?  Also, how will development continue after the platform launches?

jim baiWe are on the cusp of launching the initial version of our trading platform as part of our trading competition. Our development team has been hard at work bringing our vision to life, from a dynamic, sleek trading interface to all of the core back-end functions. Of course, development doesn’t come without its challenges, but we’ve been able to take something from each experience and create an outstanding platform from it.

Our commitment to developing the derivatives trading platform of the future is ongoing, and the trading competition is reflective of that. It will give us valuable insights into how the platform functions under a variety of conditions as well as trader behavior.  This will allow us to fine tune things so that, when we launch later this year, the platform is operating at the highest possible level.

Most blockchain projects share their budget allocation in their white paper or on their website. You’ve chosen not to do this, which is interesting considering how thorough you’ve been with your market analysis and business plan. Any reason why?

We’ve kept our buyers informed of the concrete milestones and developments we’ve achieved. Our buyers have been satisfied with this and have also expressed their desire for us to focus on our mission of creating a next-generation derivatives trading platform. We’ll be sure to share more details when we launch the general public sale.

How do you predict the derivatives market will change in the coming years?

We’re at the forefront of some major shifts in the derivatives market – and we’re helping to lead the way. Where the equities markets have transformed in the last 10 years to introduce more fairness, efficiency and modernity, the futures marketplace is far behind. Exchanges have not had any incentive to improve the way contracts are traded or cleared, so we are busy at work doing so ourselves.

We believe that blockchain technology has the potential to radically transform all financial markets. Trading will be done more swiftly and efficiently. Traders will have more transparency. With these technological advancements and the expansion of crypto contracts, the landscape is going to look very different in the not-too-distant future.

Are derivative markets purely for speculation, or is there a point where these instruments can help add economic value?  

At their core, derivatives markets are a place where buyers and sellers can congregate (now electronically) to transfer risk and hedge against forward price exposure.

There are many traders that do use derivatives solely for speculative purposes. There is also a growing number that understands the value of derivatives for portfolio diversification and investing in assets without having to take physical possession. We believe that these traders will make up a larger percentage of the marketplace, especially as crypto holders come into the fold.

What materials or courses have you used to broaden your blockchain knowledge? Would you mind providing our readers with some of your resources?

Our team consists of blockchain experts, alongside former exchange operators and seasoned financial traders. In fact, one of our blockchain developers bought Bitcoin back when it was worth $0.25! So we know the space really well.

That said, there’s always something new to learn, and our advisors and partners include Hashed and the Korean crypto vlogger SoSo. It’s important for us to stay engaged with the community, whether through the multitude of conferences and events that happen each month or the array of forums that are out there, and these people play a huge role in keeping us in the know.

We also have a blog dedicated to updating the community on our latest developments and providing education on some of the tenets of futures trading and crypto exchanges.

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