Unchained - At What Price Freedom? Stopping ‘All-Out Crime’ in Crypto Market Making - Ep. 809

Episode Date: April 1, 2025

As DeFi continues to evolve, the challenge of finding a balance between decentralization and protection from all manner of exploits persists. The founder of Infinex, Kain Warwick, joined the show to talk about: How crypto market makers have at times veered into “all-out crime” What market making looks like today Playing chart games with token allocations What Kain looks at when evaluating tokens Why Binance kicked a MOVE market maker off its platform The $JELLY attack on Hyperliquid and the problem of centralization in DeFi What problems in crypto Kain is attempting to solve with Infinex Visit our website for breaking news, analysis, op-eds, articles to learn about crypto, and much more: unchainedcrypto.com Thank you to our sponsors! Bitwise Guest: Kain Warwick, founder of Infinex App and Synthetix Previous appearances on Unchained: 2025 Will Be a Year of Crypto Competition. Can Ethereum Make a Comeback? Links: Crypto Market Making Kain Warwick: Discussion about market makers Binance: What happened with MOVE on Binance Coindesk: Binance Offboards Market Maker That It Said Made $38M Profit on MOVE Listing Bloomberg: Citadel Securities Plots Jump Into Crypto Trading After Trump’s Embrace Hyperliquid Unchained: Hyperliquid Saved Itself a $15 Million Loss, but Sparked Criticism Infinex The Block: Synthetix founder Kain Warwick launches Infinex The Block: Peter Thiel's Founders Fund invests in Infinex's Patron NFT sale as total amount raised hits $67.7 million Timestamps: 👋 0:00 Intro  💭 03:30 Thoughts on crypto market makers 🙊 05:54 ICO-era market makers engaging in ‘all-out crime’ 🦹 09:33 Extracting value in an inefficient market 💸 11:28 How crypto market making has evolved in recent years 😨 16:53 The low float meta problem 📊 19:49 Why Kain evaluates tokens on FDV rather than market cap ⁉️ 25:06 What happened with MOVE on Binance 😱 31:14 Citadel as a market maker? 🥷 35:48 The $JELLY attack on Hyperliquid and the problem of centralization 🔧 44:59 The problems Kain is trying to solve with Infinex 🌎 54:13 Building a web vs. mobile app 👂 56:17 Echo group integration with Infinex Learn more about your ad choices. Visit megaphone.fm/adchoices

I tweeted this. I was like, this is just the start. The first time someone was able to kind of put toxic flow into the vaults, I was like, they only escalate from here, which is true. And we're seeing it, right? Once people see that there's money to be made, then they will now be probing everything, right? Every single angle, every single, you know, potential exploit, they'll keep doing it, right? And so my view was that this was going to escalate. They were going to find other.

flaws and it is a really challenging thing to have a live system that, you know, there's a tradeoff between locking a thing down and making it exploitable and making it useful. And you have to find that tradeoff space in real time. It's a nightmare. Hi, everyone. Welcome to Unchained. Your no hype resource for all things crypto. I'm your host, Laura Shin. We are now featured quotes from listeners on the show. Today we have comments responding to interview with Doug Colcott about the jelly attack on hyperliquid. On X, Joshua Carlson says, quote, it's either decentralized or it's not. A platform should not claim it is fully decentralized if at any moment humans can intervene to change the rules or circumstances in its own or others'

favor. What's the difference between that and a human at a bank deciding that it's no longer going to let people withdraw their money or make trades or turn off the system for a day or two while it fixes its risk posture. To have your comment featured, write a review of the podcast overall, or leave a comment on our video on YouTube or X. This is the April 1st, 2025 episode of Unchained. Crypto moves fast. It's why Bitwise launched the weekly CIO memo, a jargon-free summary of what's moving crypto markets, written by one of the best in the business, CIO Matt Hogan. Get up to speed in five minutes or less. Check it out at bitwiseinvestments.com slash CIO, carefully consider the extreme risks associated with crypto before investing.

Today's guest is Kane Warwick, founder of Infinex app and Synthetics. Welcome, Kane. Thanks for having me. April 1st, April Fool's Day. I know I had the same exact thought. Maybe we'll find a way to make a joke that doesn't sound like a joke. Google seat. All right.

So you've been in crypto for a long while. And I know, of course, you've been on the show before. But obviously you've done multiple things. So why don't we start off by like reminding people how you got into crypto and just give a little bit of your background and the various things you've done? Yeah, for sure. So I came from like an e-commerce background and I got into Bitcoin when I was running an e-commerce website because I genuinely thought that there would be a use case for this kind of

bare asset that could be used on the internet. That was that was the thing that kind of hooked me. the actual peer-to-peer payment network aspect. Obviously, that, you know, has kind of unraveled a little bit as a narrative. But, you know, that was the thing that hooked me into crypto. And then from there, I started dabbling in some Ethereum stuff. And then this, it was basically stable coins that really hooked me. There were a few different use cases, prediction markets, tokenized equities, but like stable coins really hooked me. And that was the kind of jumping off point for building Haven, which was this stable coin protocol that eventually evolved into synthetics.

Okay. Yeah. And now you're doing Infinex, which we will talk about in a little bit. But the reason I thought to have you on the show is because you had an interesting thread recently about market makers. And they've been in the news a little bit recently. Probably the main incident people are thinking about is when finance kicked off Market Maker for Move. but why don't you just tell us a little bit about what your thoughts were on market makers? Yeah, so I've had a few of those threads over the years where I feel like there's things that a lot of people in the space who are active builders, you know, who kind of in the trenches building, no, but the average person on crypto Twitter may not necessarily know. And it's interesting. Sometimes it lands and people like, this is the craziest thing I've ever heard. Like, what are you talking about?

And sometimes they're like, no, no, we all know this. So it's hard to know exactly how it will land. But that marketmaker threat definitely hit a nerve, right? Yeah, you know, I actually realized I don't know this so much about this area of the market, even though I've been in crypto for a long time. So, yeah, it was interesting to me how it kind of all works in the background. Yeah, I think part of it is that market making in crypto has evolved a lot. And it is a very kind of wide-ranging topic versus, say,

in, you know, TradFi, people understand what market makers are. It's sort of a known thing. I think particularly given there's much more regulatory scrutiny, what market makers can and can't do is much more constrained, right? So they really are there to add liquidity, you know, and quote around mid-market and, you know, provide tight spreads and all of the things that you sort of expect. In crypto, market makers can't help themselves, but, you know, branch out into other interesting areas of of the kind of problem space. So this thread was really about that. It was like what, what are market makers doing? What is typically the role that they play? And particularly around, you know, as a builder, how do you engage with market makers, which I think was maybe the most

interesting thing for people, particularly going back to the ICO era, you know, there was a period in time where you had to have a deal with one or two market makers in order to be able to get exchange listings, in order to be able to even get investment. You know, which is a bit wild if you think about it. But that was kind of the way that the market was structured at the time. And what you said when you were talking about the 2017, 2018, ICO era was you said, it wasn't long before these market makers realized they could pivot to all out crime. What did you mean by that?

So I think that, you know, if your job is to quote, you know, bids and offers and, you know, have tight spreads and your job is to basically provide liquidity, then that is supposed to. to be kind of a neutral process, right? Like you're you're kind of, you know, clipping pennies on the dollar, you know, over over a lot of volume, but you're supposed to just kind of stay neutral, right? The thing is, because crypto markets are so liquid, particularly on certain venues, it was very easy for some market makers to be like, well, what if we just juice up the buy side a little bit and see what happens, right? And, you know, you add a bit more liquidity on on the buy side.

you push the market up and all of a sudden, you know, these market makers are realized we can really move the market, right? You know, we can we can actually have an impact on where, you know, where mid-market sits because there isn't that much liquidity other than us. And so if we just move stuff around, we can really, you know, play around with this. And so I think that a lot of market makers, once they had that realization, it's hard to avoid doing that, particularly when they have incentives that are either paid in tokens or, you know, they've got a loan or they've got some other structure that gives them an incentive to move the price, whether up or down, right? The interesting thing about this is that I think, you know, seven years on from this,

most of the good market makers that you expect are not doing this, right, the ones that you've heard of, they're not necessarily moving the market. But most of the participants who are in crypto today grew up through that ICO era. even, you know, 2020, 2021, particularly with Alameda, who were very aggressively moving markets. And so they have this expectation that any, that's what market makers do. Market makers are there to move the price. And so when the price goes down, they start pointing fingers at, you know, Wintermute or whatever and saying like, winter mute's making the price go down, just make it go up, right?

That's not really how it's supposed to work. And I was curious, do you want to name any names from 2017, 2018, where? those tokens you feel, you know, experience that. So genuinely, I think that it was almost every single ICO, almost every single ICO, particularly when they would get listed on exchanges like, you know, some of the Korean exchanges, there was a lot of just natural buyers, retail buyers, on those exchanges. And so oftentimes it was the job of the market maker to even, you know,

try and tamp that down and arbitrage between the two because the spreads would get crazy, right? the kimchi premium was insane for Bitcoin, let alone for, you know, sometimes it was like 50% premium for, you know, for illiquid tokens, right? So there, again, there's a lot of ways that you can make money if there is no kind of efficient arbitrage mechanism there. And so the market makers would really take advantage of that. To be honest, I can't even remember the names of most of these firms. I think they're all dead now. You know, I could probably try and like dig it up somehow, but they were very fly-by-night operations that, you know, would last for maybe six months or nine months and then sort of disappear. I think a lot of the people who were doing that at the time

eventually pivoted to either, you know, running their own prop fund or something else. So some of those people are still floating around in the ecosystem, but not necessarily market making anymore. Yeah. Honestly, what you're describing here reminds me of how, yeah, I mean, this is like a pretty common observation, I think, about the crypto space, but it is so easy to make a lot of money without actually accomplishing anything that a lot of people kind of do that and then piece out, or they, you know, try their hand at something else or whatever, you know, whatever. But the point is, like, it is, and this is why, you know, to the outside world, there is a reputation that crypto has. And I can't understand it. I think, I do think sometimes it's like too negative to the point

where they don't recognize that there are serious people who are trying to build something real. But for sure, you know, like I would guess more than half of people are kind of the more unsavory type that we just described. I think, you know, it's in a nascent market, right, that's very inefficient. It is easy to come in and, you know, extract value, right? Like it's, you know, there were people who, who were able to just come in and, you know, make a lot of money extracting value, like really not delivering anything or not, you know, not making the markets more liquid or doing anything you would expect a normal market maker to do

and just get tokens. But the same thing was true for marketing firms. Back in the ICO area, there were all of these marketing firms that would help you with writing the white paper and help you with, you know, getting this partnership. And they would extract like one, two, three, four, five percent of the token supply, depending on the team. Wow. And, and, you know, obviously just turn around and just dump that. And so by the time we got to like mid-2018, there were multiple firms in Singapore that were set up. They were just ICO mills. They were just pumping out teams, helping them raise, extracting as many tokens as possible, and then rotating to the next one. Oh, wow. Okay, that is, that's super interesting. And I imagine that some version of that is also happening today.

But let's keep talking about the market making, because a later point in your tweet thread, you said you reference the current call option structure. And for the less financially minded people, that's a contract that are like you're referencing something like a contract that would give the buyer the right, but not the obligation to purchase the underlying asset at a specific price. How does it work? So when you describe that, how does this work today? So today, it has evolved a little bit.

And, you know, I haven't been directly negotiating a deal like this for a while. But word on the street was after I tweeted that, you know, a few people reached out and said, well, actually, it's evolved a little bit. It's not exactly that same structure. So that structure was basically you're launching a token. You're going to give me the ability to buy, let's say, you know, 1% of the token supply at, let's say it's trading at a dollar today. And it's on, you know, a couple of exchanges, but you haven't got a big exchange listing.

So you'll give me a call option to buy the token at, say, $2. And the theory behind this, right, is not that I'm going to take those tokens and push the price up. Although, you know, again, back in the old days, that was kind of the intention, right? That, you know, someone would basically inject liquidity in, you know, add some volume, especially on the tier two and tier three exchanges. But the idea is that if you're going to get a listing on a larger exchange, that, that will naturally inject liquidity. Someone will need to be there to quote on the token around mid-market. And so if I do a good job as a market maker and make the market as liquid as possible and I'm quoting really tight spreads, then what will happen is people will naturally be more comfortable

buying the asset because they feel like they can get in and out really comfortably, right? Whereas if you want to buy $50,000 of the token and it's going to be a 5% or 10% spread or, you know, the price impact is 5 or 10% to buy $50,000 worth of a token, you may just not buy it. Whereas if you can buy a million dollars with a 1% spread, then you'll go, okay, this is a liquid token. I can easily get in and out. And that just creates more incentive for people to trade it.

The liquidity be gets more liquidity. And so you can do a really good job as a market maker that makes an asset more liquid. And it's therefore inherently more valuable as a more liquid asset. And so then if the market, you know, is kind of improving and liquidity is improving, then naturally the value of the token should go up. And then you have this call option, which you can exercise to buy those tokens. And, you know, then you have your own liquidity that you can sell into the market later.

And, you know, that's how you can get paid. Okay. But when you said that now it's evolved a little bit, like what is, what does it look like now? So it's evolved into more like, so there was always this loan component, a call option, but the loan has become much more aggressive, right? In the sense that, you know, it's a much larger percentage of the token supply than it used to be. And, you know, there's been some funny incidents. Like one of them, you may remember, where optimism gave a token loan to Wintermew, but the token was on OP chain. And Wintermute didn't check to make sure that they had control of the safe that was on OP.

And so the tokens were sent to a multi-sig on OP, but the multi-sig didn't exist. If I remember correctly, the amount of tokens was large, but not, you know, single-digit percentages of the supply. It was like 20 million tokens or something like that. Today, those loans have gotten much larger, is my understanding. And, you know, you're talking two, three, four, five percent of the token supply is being loaned out. Now, in theory, that's not necessarily bad because it means there's potential for more liquidity.

In practice, it can create some perverse incentives, right? Because if you have a giant slug of tokens that have been loaned out to you, plus you've got this call option to buy them back, and you've got a situation where the token is very low float, right? So let's imagine that there's only 5% of the token circulating. And you've also got 5% of the tokens that have been loaned to you. Well, the actual circulating supply is 10%, right? It's just you control half the market. It's basically allowing a market maker to corner the market on a token. And at that point, you have significant market power.

Plus, you've got this call option strategy. So the theory goes that people have been dumping into this, you know, low float and then basically covering it later, you know, by by either exercising options or, you know, you know, just basically buying back lower and letting the option expire worthless, but you got the loan, right? So you're now essentially shorting the token, but you're not worried about it because you're like, I'm 50% of the market here.

I know what's going to happen with this token. So that's a very different structure. And again, you can imagine a world where that's fine if the market maker has the right incentive structure. You can also imagine a world where that's really not fine for all the people holding the token because one person controls the market. Wow. Yeah.

So then you had like a description of what you thought would be the optimal way for the market maker to act. So do you have, yeah, what's your like ideal like kind of best case scenario? I think the problem with the low float meta is there really is no ideal case. Because for you to have enough tokens as a market market. to be able to, you know, quote around mid-market, you will naturally have far too large of a percentage of the circulating supply, right? So, you know, that means ideally you want 15 to 20% of the token supply circulating. Now, you can do that in a bunch of ways. You can have air drops.

You can have, you know, there's a lot of different things you could do. But you just don't want one party to have such a large percentage of the circulating supply that they can really control the market. And so it's almost impossible with the low float meta to get this right is my take, right? So you have to actually get the liquidity of the token out there, you know, done correctly first. And then you can structure a deal with a market maker that, you know, is kind of incentive aligned, I suppose. And do you feel like teams are are trending that way? Or? I mean, the problem is, right, that. As a team that's about to launch a token, you have control over the initial token structure, right?

And so the incentive to kind of have the FDV, even if the market cap is low, the FDV as high as possible, is really powerful if you think about it, right? Because then I can come to anyone in the space, anyone that I want to incentivize and say, hey, I'm going to give you a million dollars with the tokens. Now, if the market cap is 100 mil, right, you know, and that's, that's 100% of the circulating supply, that's a big chunk of the token supply. But if it's trading at 50 billion FDB, it's a tiny fraction, right? And so I'm kind of incentivized to be able to, you know, create this very high FDV. So I can go around offering tokens to people. And it's like, hey, here's $5 million with the tokens.

Here's $2 million. and everyone's like, I guess it is. I mean, it looks like it's trading that way, right? The market cap and FDV do reflect that, and they've got a couple of exchange listings, so maybe I'll take that deal. And you just have a lot more dry powder versus a token that maybe launches at a 50 or 100 mil FDV, right,

and then has to, you know, create enough incentive for people to want to participate in the project, but you can't just be slinging $10 million for the $1.00 of the tokens around in the way that you can if your FDVs 50 billion. Right, right. Well, so for people who want to participate in different types of tokens that are launching, how would you, not that we're giving financial advice, but when you at least are kind of analyzing them, like what are things that you look for to kind of figure out whether

or not it's structured in a way that is at least fair? Yeah, I think I always look at FTV, right, over market cap. And it's funny, there's a bunch of people that I discuss this with regularly, right? And even in some very smart circles, people are like, it doesn't matter. The market cap's low, right? And this conversation happened with Trump coin, you know, because the problem is you have this Keynesian beauty contest as well where people who are trading the tokens go, no one looks at FTV.

So I'm not going to look at FTV. Because if no one's looking at FDV and everyone's looking at market cap, then what's the point of looking at FDB, right? So there were a lot of people that are like, but 80% of the supply of the Trump coin is locked up. So really, the market cap is only $5 billion. And that's low for a presidential token, right? As if there's some precedent there of like what presidential token should trade at. But, you know, they're like $5 billion for Trump coin seems low. And it's like, but it's not really $5 billion, you know, it's $5 that or 10x that or whatever.

And so there's this kind of siops of like, well, if no one's paying attention to that, then I shouldn't pay attention to it. But I always look at FTV and try and understand, okay, is this FDB sustainable? If that FDV is based on 3% of the supply circulating, right, then it's probably not sustainable. Because all things being equal, you know, it would be much higher, right? for any given price, it would be much higher, you know, if the float, you know, were different, right? As in the market cap, it would be much higher. And can that market cap be sustained if the float goes 10x from 3% to 30%? Right. You know, it's hard to say, right, what the interaction between market cap and FDD will be. But that needs a lot of net new buyers to come in if people are selling. Now, if the, and this is where people play a lot of games between market cap and FDV, what is circulating, what's not.

And funnily enough, back in the day, you know, people have tried this for a long time, right? Binance was the one that put the most pressure on teams. That chart that you've seen a million times where it shows the unlock schedule and it shows like team, you know, where does it grow? Binance, to the best of my knowledge, was the one that kind of forced people into disclosing that. It was this kind of forced disclosure resume. You couldn't get listed on finance without providing finance with a spreadsheet that had every single buyer, how long they were locked for, what the locks were, when the unlocks happened.

And that gave people a lot more clarity into, is this really circulating or not, right? Because people will play games where they'd be like, well, the circulating supply is 30%. But it's like, wait a second. Are you counting the treasury? And it's like, yeah, yeah, because the treasury could sell it. It's like, but it's not going to. So that doesn't really count, right? And there was all this, you know, these different criteria that finance was like,

if it is in the treasury, it's not liquid, right? If it's in a staking contract where the staking contract is not liquid, then it's not liquid. You can't say, but yeah, there's a bunch in the staking contract locked for four years, right? So there were all these games that people play. And people are playing those same games today. It's just the game shifted a little bit. And it does seem like finance, you know, Binance has the most. market power to shift these things. And it does seem like finance has gotten sick of some of this

nonsense. And they are starting to put some pressure on teams to not play these games. So, you know, that will be an interesting thing to watch as well, right, to see where the market pushes people in terms of disclosures. Yeah. Some of the, I mean, this isn't the exact same scenario, but, you know, sometimes those token teams will have a graphic of the allocation. And then there's like a really small slice that, you know, like normally would be, I don't know, like, let's say a 10% slice, but it's labeled 30%, but they just drew it like it's like 10. Yeah, with blank chart games. Yeah.

Yeah. Yeah. Part of my favorite one. There's a chart. I tweeted this out ages ago. I don't know who made it, but it was one of the Sam coins. I think it might have even been serum or something. And it was like the tokenomics chart.

And it was like FTX, SBF, Alameda, FX, FX, 3. to Sam personally, like Sam's parents. Like it was just like the whole chart is like all owned by him, right? It was just different like slices that they were owned by Sam or Alamed or FDX. Yeah. Yeah. I mean, it's it's ridiculous too because it's like if you do it like that, then it's definitely going to fail. But, you know, it's just what we were talking about earlier.

Like in the meantime, you've gotten rich quick and like who cares if, you know, people get wrecked or if this, you know, last long. longer or, you know, indefinitely. Well, let's actually now just talk quickly about the, what happened with Move on finance. Essentially, this market maker, as far as I understand, netted a $38 million profit rather than doing like, you know, neutral bids and offers on both sides of the market. So what do you think of what happened there and how finance handled it? Again, I think this is one of those things where the incentive is always keep extracting, keep pushing the envelope, keep trying to do whatever you can, especially when people feel like this is not a multi-round game, right?

If it's a single round game, then each team is incentivized to try and max extract. But Binance is playing a multi-round game. So they need to constrain what people are doing. And for whatever reason, Binance got, you know, maybe they were distracted, who knows, right? But Binance got to a point where they weren't putting as much scrutiny me, I don't think, on some of these things. And also, you know, people are very good at kind of obfuscating and playing games and, you know, doing things. And even for Binance, it's hard to keep track, right? There's like huge incentives on the other side to play games with these things.

And so I think basically what happened is my sense, you know, is that it just got pushed and further and further and eventually Binance was like, no, like this is not okay. And remember, there's multiple different parties involved in this, right? It's not just just the teams, it's also the market makers, right? And, and, you know, they are, the market makers are playing a multi-round game, but hiding it oftentimes as well, right? Like, they've got different entities, different structures, and, you know, they've got different accounts even on the exchanges, and they're trying to obfuscate what's going on here, but eventually they're going to get caught out. And so, so I think what happened is that it was just pushed a little bit too far. And,

And back in the day, there was an incident that happened with Cosmos where they had their unlocked chart and they had their tokenomics pie graph, right? And they went in loan something like 5%. It wasn't even, it might even be less than 5%. But they went and loan 5% to a market maker and the market maker started selling. And people were like, wait a second, this is supposed to be in the treasury, but it's actually sitting with a market maker on Binance. that's not what you said. Like you said this is locked up in the treasury, and it's actually liquid on market,

and people lost their minds, right? Which is, you know, so quaint now, because then every single person was like, wait a second, we can do this. And so they started, you know, playing games and trying to do it. And again, I just think that, you know, people push the envelope as far as they can,

and then finance gets the point where they're like, sorry, no, and they crack down. And I think that this was, for whatever reason, the straw that broke the camel's back in finance, It's like, you have to stop doing this. It's bad for users. It's bad for the ecosystem. And we're not going to allow it anymore.

Yeah, it feels like there probably needs to be some sort of standardization around certain, you know, norms. But yeah, it's, we're not there yet. Especially because, you know, it's so international. And I'm sure there would be a certain kind of like race to the bottom amongst exchanges in different jurisdictions. But, you know, I do think, like, Matt Levine had a really interesting take. a few weeks ago on this when the crypto task force was announced, right? That like we've sort of put up with the permissionless nature of crypto in the sense that it's very low barriers to entry and people can do whatever they want, but we try to create norms and we try to create, you know,

the right structure to not let people extract value because it is net negative, right? We sold this with meme points. Everyone realized that this is net negative. If you let, you know, the LA Vape cabal and the, you know, Dubai cabal and, you know, these various cabals just keep extracting value. They're not keeping it in the ecosystem. They're pulling it out and they're, you know, buying lambos or whatever they're doing. And that's net negative for the ecosystem. There's less liquidity there. And so I think that there is, there is certainly a view for people who are doing, you know, who are building genuine things that it would be better if we could have fewer scams. But the question is, what's the real tradeoff? Right.

If the trade-off is that there's this really harsh disclosure regime that incurs a bunch of costs for every single project, right? Then the trade-off is potentially worse because what you're doing is raising barriers to entry. You're making it much harder for a project to participate. You get less capital formation. You get all of these unintended consequences. And it's a genuine, like, kind of ideological question of, would we prefer this laissez-faire open thing? or do we want, you know, something that's more like tried-fired with very harsh disclosures and therefore, you know, costs that go alongside that.

Interesting. But I guess I think that there would be a way to not make it too onerous. Like if you just, well, I don't know. That's always how it starts. It's like, just give us these three little pieces of information, right? And then it's like, what about a fourth? And then all of a sudden it's like, how do you feel about, you know, the, like, ice caps melting? Like it just like go it just accelerates and accelerates right because there's someone sitting there

whose job it is to mandate disclosures and they're like just three more disclosures bro like we just that's just three more and we'll have it like all all lockdown right right but I guess yeah no I okay well yeah I do think no matter what though there should be something around this you know allocation probably that that would probably just be the main focus at least for the exchanges you know, whether or not like your white paper, whatever is up to stuff is probably not super, or not that is not relevant, but that gets into the territory more of like evaluating the asset rather than just like basic fairness around trading, which is I think where the exchanges should be focused.

But I did want to ask so just at the end of February, I'm sure you saw Citadel said it, was looking to become a market maker on crypto exchanges. And I wondered what you thought that could mean for all these issues that we've been discussing. So I think, you know, net, it's positive, right? And a lot of people, you know, there's a lot of stonks guys out there. They'd be like, Citadel is the devil. How could, like, why would you want them to, you know, play around, right? Because it's not like, there's the same meme in Tradfire, right? That like Citadel is like manipulating prices and shorting things and doing all of this stuff, right? And again, you know, probably they are shorting things sometimes and, you know, different people are shorting things and, you know, different people who are shorting things and, you know, different people who are, you know, are doing different things, but that's part of market structure. If you want an efficient market, you need people in there who are shorting things because if you can't short things, then, you know, it gets, markets get distorted, right? So if we want efficient markets, we want good players, right?

People who are good at doing the things that markets want them to do, which is liquidity and, you know, quoting tight spreads and all of that stuff. So I think I don't have an issue with Citadel coming in. What's interesting, though, is there's zero chance, at least from my perspective, that Citadel is going to be striking one of these, you know, loan call option structured products with a, you know, nascent L1. Now, I might be wrong, right, but I just don't think that they're going to touch that. They might come in and, you know, trade Bitcoin or ETH or Sall or whatever on, on finance. But I doubt they're going to be participating in this, which is part of the problem. right if you had you know an entity even if they're regulated in tradfine they came into crypto they're not

going to be willing to max crime to extract value right they're going to play by some kind of rulebook even if it's gray um so i think it would be good for a team to do a deal for citadel to market make their token it's just i think it would be too hard for them to get that over the line from a compliance perspective oh okay interesting i could be wrong but like it just to me feels unlikely now that said current regime, maybe it's different. It certainly would have, I would say it would be impossible for Citadel to do those kind of deals. But, you know, Jump and GSR, there's, you know, there's people out there that are, and, you know, people hate Jump. But I think my, my perspective on Jump is they were the most fair and transparent market makers that I've ever worked with, right? Because they, you knew what

they were going to do and the rules that they played by were really clear. And they all, were in TradFi in a way that they couldn't do, you know, there's no question that they made money, right? But it's okay to make money if you make money doing things that the market wants. It's when you're extracting value. Now, did they do some crazy stuff? Probably. But like on balance, my experience with Jump was very positive. Like they were really transparent.

They had very clear structures about how they were doing things. You know, they didn't play games with, you know, token structuring and deal structure. They were really fair and transparent. So I think jump coming back into the market would be good in the same way that, you know, Citadel coming into the market would also be good for the market. It will make markets more liquid. Huh. Super interesting. All right.

So in a moment, we're going to talk about what happened last week with hyperliquid. But first a quick word from the sponsors who make this show possible. Hi, I'm Matt Hogan, CIO of Crypto Asset Manager Bitwise. Look, crypto can be confusing. There's so much noise and the space changes so quickly. That's why, every week, I write a five-minute memo on the biggest stories impacting crypto, in plain English. Why is Bitcoin up or down? What are people missing?

Where should investors look next? Get the lowdown every week. Sign up to get the weekly CIO memo delivered straight to your inbox. Go to bitwiseinvestments.com slash CIO memo. That's bitwiseinvestments.com slash CIO memo. Carefully consider the extreme risks associated with crypto before investing. We have another listener comment responding to my interview with Doug Colquitt about the hyperliquid jelly attack. On YouTube, Carlos Ortiz says, if you can arbitrarily change one thing and you can change another, that's a debate.

Another fake principle of crypto. Again, if you want to hear a comment featured on the show, please write a review or leave a comment on an episode on YouTube or X. back to my conversation with Kane. So we are chatting the week after this big drama over what happened on Hyperliquid. And, you know, people were kind of on both sides of how it handled this manipulation of this jelly meme coin on its platform. And I wondered what your thoughts were on what happened and how they handled it. So back in the day when we first launched Perps, even before we launched Perps, when we first had an Oracle on Synthes, that you could trade against, we had probably like a three or six month window where

people were not trying to exploit the Oracle, which lulled us into a bit of a false sense of security. And then at some point, they realized that there was value to be extracted, right? And this is back in, you know, the dark ages where, you know, pre-mango markets, like pre-anyone being punished for anything, right? Like people genuinely were, and including myself, right, code is law. you put an Oracle out there and people can exploit it, it's kind of fair game, right? And so we had this kind of cat and mouse, you know, ongoing fight with people who were trying to exploit the

article, which created attention for us to improve the Oracle, right? That was part of, you know, if we, if we didn't have that, if people weren't trying to exploit it, then we wouldn't have needed to put as much effort into fixing it, tying it up and, you know, lowering latency and a bunch of other things. So we had this experience. And, I tweeted this. I was like, this is just the start. The first time someone was able to kind of put toxic flow into the vaults, I was like, they only escalate from here, which is true. And we're seeing it, right?

Once people see that there's money to be made, then they will now be probing everything, right? Every single angle, every single, you know, potential exploit, they'll keep doing it, right? And so my view was that this was going to escalate. They were going to find other. flaws and it is a really challenging thing to have a live system that you know you there's a trade off between locking a thing down and making it exploitable and making it useful and you have to find that trade off space in real time it's a nightmare like it was a nightmare for us went on for years we were dealing with this right and so I just think that hyperliquid is going to have more and more

of these incidents and they're going to have to tighten their parameters they're going to have to tighten the system. They're going to have to, you know, come up with a bunch of different ways of preventing these exploits. But there is absolutely a trade-off space here where it starts to be less good for users because of those things. You start to kind of impact usability in U.S. Because you're trying to prevent exploits. Interesting. But what do you think of how they decided to, you know, handle it in a way that would be favorable to them, you know, to the point where they actually made money off of the fact that out of something that was essentially their mistake is like the way you could think about it.

Because they could have, like, I think the amount they would have lost was something like around 15 million, which, you know, okay, I understand like it's not like it's a super tiny amount of money, but for them, you know, they could probably handle it. And instead they took the profit. it. Yeah, I think, again, one of the challenges with a system like this is that if you have aspects of centralization in the rules, right, in the way that the rules are enforced or the way that the rules are codified, then that's the place inevitably where the exploit will happen, almost, right? That, you know, that aspect of centralization becomes a sort of point of weakness and that's where people will push because they sort of hope that you won't be forced into

making the move that you inevitably will be right and so it will kind of escalate and escalate and escalate and then it gets to the point where it's like we've got to do something because if they had taken that loss right they would have had two options take the loss let the vaults eat it at which point you know you expect tbL would drop significantly right same thing happened to buy bit except Bybit decided to, you know, cover the loss from reserves or whatever, TVL still goes down. But if you make the vault eat that all, then TVL is going to go down much, much, you know, if Bybit had socialized those losses across the exchange, the exchange is dead, basically, right? But I don't understand because I thought the HLP had something like more than $200 million in it.

So. So difference between TVL and P&L, right? So the vault had, I think, 220 mil of TVL. That's not all P&L. There's P&L in there, right? But the P&L tracker of like how profitable has this vault been, if I put $200 million into a vault, it doesn't mean it's made any money. Now, the hyperliquid vault, I think it made about $60 million, maybe a little bit more.

And so this would have been 25% of the P&L written off. So again, like not, you know, not dead, right? But all of a sudden, a lot of people, especially people who had got, into the vault later would have had negative P&L and then they pull out and then all of a sudden the risk goes so they're you know and again this is not a novel situation that happened to GMX as well GMX had this you know socialized vault synthetics also has a vault strategy although it's a little bit different it's more hidden away in the core of the system this is how a decentralized probes decks kind of has to operate there needs to be someone who's backstopping the the P&L of

traders so that if something like this happens, because the thing that you don't want is to force traders to eat the loss. If you force traders to eat the loss, then that kind of blows up the game, right? And they're like, well, I'm not coming back here again. So you want someone else. You want someone else who's kind of pot committed to absorb the loss, which in this case was HLP. What they did, though, by, you know, changing the price was for some traders to eat the loss. There were traders who were in profit who then, you know, so again, it's a very harsh tradeoff space, right? You've got to choose someone has to eat this loss. To your point, could they have funded themselves?

Like, I think probably they probably could have, you know, but then the question is, what do you fund it from? Do you fund it from tokens? You know, if you go back to like the Bitmex hack, right? They just invented a token and gave everyone. Oh, BitFinex. that's the next. They're like, here you go, right? Like here's here's these magic beans everyone. We've made you all whole, right? And and so, you know, there's a bunch different ways you can play this. If there's a hole in an exchange, none of them are good. You just don't want holes in exchanges, right?

Like you don't want to, you know, regardless of where the money comes from, it's, it's not a good place to be. I think for hyperliquid, the bigger problem is not where's the hole, how do they fill it or whatever. it's that they have been making this assertion that they are sufficiently decentralized, that they don't need to do all of the things that a centralized exchange does, but then they are able to, when push comes a shove, do things that are very centralized, that feel very centralized, that have like an ability to kind of change the rules.

And the worst thing you can do to a bunch of autists is change the rules. Like that's the thing that you just cannot do. If you change, you know, there's many, many examples. One of the, one of my favorite examples of this was the first time that Athena changed the payout on the API. And everyone lost their minds. They're like, you can't do this. You can't change the API.

You know, you can't change the way the calculation's done. It was one of the only missteps that I think Athena has made in the last two years was this rule change. And they didn't anticipate how much people. would be mad about the fact that the rules were changed on. They're like, there's a set of rules. Code is law. You can't change things.

You know, and so, so again, I think that the problem for hyperliquid is that this really showed that, you know, the emperor has no clothes, right? Like, they can do whatever they want.

They have control of the system. They can change the article. And they have to now deal with the consequences of that decision. Yeah. I mean, the fact that they made this decision in two minutes is something also that people were talking about because it, shows clearly that it's extremely centralized. And then there were funny memes going around,

like those capture images, and it's like Jeff in all these different, you know. I actually made that meme. I was the, yeah. So there was a, there was a CZ meme back in the day. There was the Binance smart chain, which actually stole from Stanley. Stanley showed it to me. And I was like, I'm tweeting this. And I tweeted and it got like, I don't know, a few thousand likes or whatever. And so then when this was all happening, I was like, this is actually kind of funny. I'm going to, I'm going to remake. this meme with Jeff. But yeah, that was that was I was definitely the culprit there. All right. Well, let's talk about Infinex because as we discussed earlier, you've had a few different ventures in crypto. Yeah, you launched a new one last year. So what problems were you thinking about? Like,

what problems did you want to try to solve when you launched Infinex? So I think there are two eras to Infinix. There's the the pre-launch pre-pre-concum. Pre-Cose. kind of me taking over the project phase where I saw this problem with synthetics where the, you know, exchange wasn't getting much adoption. And I had this thesis that most of the reason why I wasn't getting adoption was due to UX issues, you know, due to latency on the front end, a bunch of, you know, kind of front end related issues that could be fixed to improve the experience and would make the exchange much better. You know, this is not too dissimilar to what hyperliferation. liquid did. So this is going back to like May 2023 when I was really trying to look at the

perp space and why we hadn't gotten an adoption. And, you know, so hyperliquid kind of did this, right? The real insight that I think Hyperliquid did that they nailed was making a NL1. Making a NL1 gave gave them a lot of flexibility in how they implemented this. But I looked at synthetics and I said, we've got a very good matching engine. We've got this this good exchange. but adoption has been slow. Why don't we build a centralized front end on top of it as an alternative to the decentralized DAP-based front-end? And we spent about nine months building that.

And out of that project came Infinex. And Infinex became something much different to what that was at the beginning. But in March of last year, I was like, this is a big opportunity. I'm actually going to step in myself and take over the project because I had someone else who was running it. And I was like, let's actually figure out how to do this. Let's build something that is going to, you know, allow us to not just make a better interface for perps, but to make a better interface for all of crypto. Okay.

So explain what Infinex does and how it works. So what we built is a non-custodial interface for basically all of Defi. And what we realized is that there was enough infrastructure that had been built over the previous. these two years to put something together that could give you the same experience as what you have on finance or buy bid or crackin or Coinbase, but without having to give up custody of assets. And while the average user doesn't care about whether a thing is custodial or not, right, they just want the best wallet experience or the best crypto experience. Being non-custodial and being on chain gives you the ability.

to tap into a bunch of different things that a fully centralized solution that's, that's, you know, custodial by nature, has a hard time accessing. So there's a bunch of different yield opportunities and, you know, the long tail of tokens that are not accessible to a centralized exchange. There's this sort of marginal effort every time they want to integrate something like that. And some of those things are impossible for them to integrate. So centralized exchanges have gone down this path of trying to create a hybrid solution. You look at Coinbase, they've got an L2 and they've got Coinbase wallet and then they've got the centralized exchange and it's this kind of ecosystem.

It's this hybrid thing. With Infinex, we just said, let's go all in on building a non-custodial interface for crypto. And we think that that's the right path forward and that the time is right for it. And I see that you have multiple different chains. There's a bunch of EVM one. Well, so there's a theory in itself, but then a lot of the large L2s, such as arbitram, optimism, and base, there's Salana. And there's also kind of like up-and-comers, like Barra chain, blast, unichain, Sonic.

So how do you decide which chains to add? Do you have specific criteria that you're following? There's some technical and architectural criteria that they need to meet in order for us to be able to do it. In theory, we can add any chain, right? Like, it's just software. So it's really been what are the things that are most similar to other L2, you know, EVM-based L2s. There's some SVM chains that are launching,

so those will be very easy for us to integrate. We probably will do SWI and APDOS and, you know, Cosmos and some of these other chains as well. But at the moment, it's very easy for us to add an L2, especially if it's EVM compatible. So Infinex does a way with gas and bridges. So you guys, I guess, are what, taking it out of some, the price in some way.

And then how do you handle the bridging? because like if a user wants to go from one of the EVM chains to Solana, like how does that work on the back end? So we have gas sponsorship everywhere on every chain, which means that you can move a stable coin to Solana and not worry about having solved for gas on Solana. You can then just do something with it. We sponsor all of the gas and on all of these different chains. You will pay a small fee for that, although we do have a structure in place where if you're holding our NFT, so we're, we did an NFT sale last year. If you're holding our NFT, then you don't pay for gas even on the kind of long tail chains, which means that you're basically only paying for gas on Ethereum.

Okay. So that's the patron token. That's the patron token. Exactly. Yeah. Yeah. So yeah, we sponsor gas just to make it as easy as possible for people to quickly go to a new chain like bear a chain and, you know, buy honey their stable coin or, you know, buy one of the yield-bearing assets they have on there. And then we will roll out the ability to also go into some of the yield farms that they have. Sonic and Barra Chain are really kind of max APYing at the moment, right? Like trying to get to 100, 100, 200, 300, 300 percent APY back back like the old days of Defi summer. And so getting access to those yield opportunities is something that we're working on as well. So you'll be able to just go straight from holding Sol on Solana into some weird Barra chain.

scheme and earn 200% APY. Okay. And so for the governance token, patrons like or patron, what type of decisions are people going to be making? So this is a very good question, right? It sort of speaks to the same thing about hyperliquid, right? When I, when I started Infinex, we built it like a D5 protocol. We built the governance structure like a D5 protocol. What I've realized over the last, you know, 18 months, is that that may not be the best governance structure for a project like this. At the end of the day, and this is something I'm working on at the moment, I've been sort of spending some time thinking about what is the optimal governance structure

for a project like Infinex today? Not six months ago, but today, given the current regulatory structure that we are operating in. And I think that we probably over-optimized for decentralized governance. That said, there's no question that. that you need some checks on power when it comes to decentralized systems. Because if you have a non-custodial system and the people who are operating it can take control of your funds, then it's not really non-custodial. Even if they are non-custodial most of the time, if they could go and deploy something that would take your money, you need a way to basically prevent that

from happening. And so the way that I've been thinking about this is that it's sort of management by exception. You delegate authority, and this is how synthetics ran as well, right? You delegate authority to a council to make decisions, but you have the ability to basically intervene and block those decisions if they're bad decisions. And so there needs to be a mechanism by which the people who are, you know, holding patron NFTs can stop something from happening, which means you need time locks. And, you know, there's some things that are important there. But you need the time locks just in the right places that are risky. And then you need to really just hand over control to the team that's building the thing to allow them to move as quickly as possible because the market is

very competitive now. So I'm working on this rethinking of what Infinex governance should look like and hopefully it'll come out in the next month or so. Yeah, I would imagine that it's one of those things where you need for their, like because it's kind of new, like I guess it's just what, even a year old at this point? Yeah, about a year old. Yeah, we launched in May of last year, so not quite a year of life. Yeah. So I feel like there needs to be more of just like a, what's the word, like a self-sustaining economy. And during the time when you're kind of like new and building that, then it would make sense for it to be more centralized. So yeah, it just sort of feels like governance would be something that would kind of come later after it's

were established. I did invite questions from people on X for you. And Defi Ignis was curious as to why Infinex is prioritizing the web app first rather than a mobile app. He said he felt Infinex would get more users with a mobile app and then said, quote, I feel he meaning you, Kane, has a Western bias prioritizing website page, which I don't even know if that's a Western bias thing. But anyway, what's your response to that? I probably do have a Western bias. So, you know, That lands. I think that the reason why we built a web app first is probably a little bit of part dependency in the sense that we were planning to roll out perps first. And we ended up rolling out other things before perps. Eventually, we will roll out spot and perps. So I think

you need both. I would argue that it is easier to iterate, particularly in the early days when you're trying to figure out what you should build. It's easier to iterate in a web app than it is in a mobile app for a bunch of different reasons. That said, we absolutely do need a mobile app and that is coming. We just wanted to get to a point where we had the core features and integrations ready to go. So we weren't kind of chasing out, you know, building two different interfaces for the same backend that is massively in flux is, you know, apart the madness, right? So we had to pick one. I think that we will get there eventually. And I think that we also need the ability for people to use Infinex with external systems as well, which is where a mobile app will also be very helpful.

All right. Well, I guess we will see what the further developments are with Infinex. I did also want to ask you because I saw that you said that you plan to do an echo group for the patron NFT holders. And I wondered if you had. And so this echo is like basically kind of a 2025 version of an ICO platform. And I wondered what vision you had for what types of projects you would want to invest in. So I've had that echo group up for a while now since last year. After the patron sale, I was waiting to launch the group until we had the patrons live so that we could have a patron gated platform. So it's only available to patrons. And one of the key criteria for doing a deal through our particular group is that we will integrate it into Infinex.

So we've done, I think, five or six different deals now. And most of those have been integrated already into Infinex. So it's a way of just getting alignment, I think, alignment between patrons, the platform. I'm also a big fan of Echo. I think that Echo is just fundamentally a better way of getting alignment for early stage deal flows. So there's a whole bunch of synergies there, I think. Okay. All right.

Well, is there anything that we didn't talk about that's on your mind these days that you would want to mention before we wrap. I think, you know, there's a bunch of things that are happening with Infinex. You know, obviously governance is one of the more boring ones. We have just been able to get to the point now where I think we understand what the next phase of Infinex looks like, which is this combination of first party integrations like Swidge, which is our swapping and bridge functionality. But then we need to be able to support third party integrations. So the ability to bring your Infinex account and use it in other. places. And I think that that's something that we're working on that is going to be probably

the next phase in the project. Once we land that and we figure out the right architecture for that, that will take us through to the next six to 12 months because you'll be able to get new functionality much faster than we've been able to build it today by just bringing your Infinex account wherever you do crypto things. Okay. I don't know if I fully understand. Is it sort of like the way that frequently on a Web 2 site, you would go. And when you sign up, it offers you the option to use your Google ID or... Like SSO. Yeah, exactly. Exactly right. That's exactly what it's like. Okay. Interesting. All right. Well, we'll be on the lookout for that. Where can people learn more about you in Infinex? Infinex is at Infinex underscore app. And my handle, I guess you can put in the

show notes there because it's a bit hard to spell. I can't get the cane handle on on Twitter, it was registered to too early. Yeah, I will put that in there because you're right. It's a little bit hard to spell. But anyway, it's been a pleasure having you on Unchained. Thanks so much. Thanks so much for joining us today. To learn more about Kane and Infinex, check out the show notes for this episode.

Unchained is produced by me, Laura Shin, love up from Matt Pilchard, Wanda Vannevich, Megan Gavis, Pam Chabdar, and Margaret Curia. Thanks for listening. Thank you.