Date: September 27, 2023
GRVT Website: grvt.io
GRVT’s Twitter/X: https://twitter.com/grvt_io
“Our ignorance of the unknown, our misunderstanding of randomness, our misreading of probabilities, and our beliefs about risk and decision-making are our weaknesses.” - "The Black Swan" by Nassim Nicholas Taleb
TL;DR
GRVT, a new hybrid exchange (HEX), aims to address the challenges faced by centralized exchanges (CEXs) in terms of security and high-performance trading. By leveraging ZKSync's Layer 2 data availability and Validium solution, GRVT plans to offer users a trustworthy and efficient trading experience. The exchange emphasizes the importance of options trading as a hedging tool and its potential for growth. GRVT's system is built on ZK rollup technology, combining high-performance execution with zero-knowledge proofs for privacy and security. The team also places a strong focus on compliance, AML/KYC procedures, and user fund protection. With their unique approach and experienced team, GRVT aims to establish a new standard in digital asset derivatives trading.
Intro
Black Swan events have always served as a mirror reflecting the blind self-confidence of individual and institutional investors in their over-optimistic interpretation of data and statistical probabilities. Since the publication of the Bitcoin white paper, the crypto market has experienced several Black Swan events, including Mt. Gox, The DAO, bans, exchange crackdowns, and FTX's insolvency. The FTX debacle in 2022 revived the warning, "Not your keys, not your coins," in everyone's ears. As a result, Centralized Exchanges (CEXs) collectively issued nominal Proof of Reserves (PoR), and technologies like Multi-Party Computation (MPC), homomorphic encryption wallets, and zero-knowledge proofs have once again drawn the crypto community's attention to Decentralized Exchanges (DEXs) and self-custody.
GRVT, a Layer 3 exchange offering cross-asset perpetual futures and options contracts. Built upon ZKSync's Layer 2 data availability, and planning to use the Validium solution to provide users with a trustworthy high-performance trading experience, GRVT is the brainchild of Hong Gyu Yea, Matthew Quek, and Aaron Ong. Their aim is to use existing ZK encryption, blockchain technology, and high-performance trading systems to create a new generation of Hybrid Exchange (HEX), addressing the dilemma centralized exchanges face between high-performance trading and user fund security. According to GRVT's founder Hongyea, GRVT is set to develop a Testnet in Q4 2023 and plans to launch the Mainnet in Q1 2024.
1st Witching Factor: State of CEX/DEX
- Spot Trading: From 2017 to 2023, the 7-day average trading volume of cryptocurrency spot trades on CEXs grew from $50 billion to $500 billion. From 2019 to 2023, the emergence of decentralized exchanges like Uniswap allowed DEXs to stand out from centralized exchanges. DEXs have grown from non-existence to now holding a 15% share of the spot market trading ratio, with native Ethereum DApps like Uniswap and Curve establishing an oligopoly effect on chains centred on the Ethereum Virtual Machine (EVM).
- Perpetual Contracts: Since Bitmex introduced perpetual contract trading in 2016, major exchanges have also launched leveraged contract trading systems. The low trading costs and high-performance experience of centralized trading systems provide investors with convenient custodial services, bringing substantial profits to the exchanges. However, centralized services have been criticized for their opaque "spiking" counterparty trading, single-point failure hacker attacks, and illegal misappropriation of user assets. Data from TheBlock show that in 2022, the monthly average trading volume of BTC and ETH perpetual contracts exceeded the total monthly average trading volume of all cryptocurrencies. This highlights that if “Old Money” institutions and market makers enter the market, their biggest concern should be counterparty trading risk on centralized exchanges. Leverage trading should be a double-edged sword for market funds, not a black hole for counterparties to profit without investment.
- Options: After two cycles of wild growth in cryptocurrency, we see a new trend: "The emergence of professional investors and mature derivative trading tools has led to a decrease in market volatility returns (distribution chart price volatility 123 Sigma), while the activity and trading volume of the options market is rapidly growing." This not only reflects the importance of options as hedging tools but also reveals their enormous growth potential. As of March 2023, TheBlock data show that the trading volume of the BTC and ETH options market reached a monthly trading volume of $45 billion during the bull market from 2020 to 2021, and has already returned to the peak of the last cycle bull market in Q1 2023, maintaining strong trading volume. This understated data fully reflects the activity and growth potential brought to the options market by the entry of professional traders. With changes in the macroeconomic environment and uncertainty about the next halving, the demand for hedging tools by professional traders is also increasing.
- Traditional Options Market: Compared to the traditional Nasdaq and CBOE options markets, the current cryptocurrency options market's hedging degree is relatively low, but its growth rate and potential cannot be overlooked. Especially when the trading volume of spot and perpetual contracts is shrinking, the rise in options trading volume shows its important position in the market. The main crypto options oligarch, Deribit, officially launched collateral asset options and platform hedging exchanges in 2020, quickly capturing the bulk trading market. Subsequently, OKX developed an internal customer options market, with a share of only 1%-5%. The Delta Exchange launched in 2021 reached a peak market share of 10%-15%. In fact, products like Binance's Dual Currency Winning, Amber's Shark Fin, and OKX's options have been launched for a long time, but due to the positive correlation of the volatility returns of cryptocurrencies themselves and the aforementioned counterparty risk, these structured products, which are huge in traditional trading volume and are based on vanilla, heterogeneous options fixed-income, did not receive enough attention in the early stages of the industry. In Q2 2023, Binance officially opened its one-sided options trading section, and OKX launched its snowball product section, proving that centralized exchanges also feel subtle market changes and their determination to seize the high certainty growth derivative track.
Solution One: RFQ + Cross Margin Hedging
The GRVT team believes that an options market without the choice of cross-margin collateral futures or contract trading cannot provide complex trading strategies and has low capital utilization. On the other hand, a derivatives exchange without options trading cannot provide professional traders with sufficient hedging tools. Therefore, they designed the option of full margin hedging in the initial product design. In addition, the RFQ inquiry system on Telegram and API can help traders and institutions conveniently and quickly query the customization and execution of complex structured strategies. The margin system and hedging function within the same platform are key designs to greatly improve the utilization rate of collateral. Therefore, the open ecology of the on-chain derivatives interface and the off-chain order book matching and delivery can provide large traders with a safe, rich, and powerful one-stop comprehensive trading platform while the underlying crypto technology continues to develop.
2nd Witching Factor: Trust Crisis in Centralized Custody
In 2022, the FTX debacle caused a company worth $40 billion to go bankrupt due to insolvency within a week, owing $8 billion in user assets. At this point, investors deeply realized the internal accounting chaos and centralization of centralized exchanges, forcing exchanges like Binance to take the lead in launching a hot wallet deposit proof (Proof of Reserve, "POR") in conjunction with other exchanges. In fact, PoR was first proposed by Kraken in 2014, and later Vitalik Buterin called for the use of zero-knowledge proofs (ZKP) of KZG polynomial commitments to replace the current deposit certificates generated by Merkle trees to ensure higher security and improved privacy.
However, deposit certificates cannot prove whether a CEX has the ability to pay. Customers' assets only represent part of the liabilities and do not include the exchange's credit and other businesses. Although disclosing assets and addresses allows investors to track and analyze suspicious behaviour, when an insolvency run occurs, users' assets still cannot data audit the CEX's asset payment ability, or user assets frozen in the recovery litigation stage. In fact, Mt Gox's liquidation third party has always been stalling applications to unscrupulously seek investors' interests.
Solution Two: High-Performance Engine + ZK
HongYea's original intention in founding GRVT was to protect user assets and allow users to achieve a one-click trading experience and low latency under self-custody accounts no different from centralized exchanges. It is reported that GRVT's off-chain order book matching engine has a high 600,000 TPS and a delay of less than 2 ms. When its trading execution and Validum ZK proof are combined, users can not only ensure the safety of their own assets like DYDX (StarkEx version) through Validum's data committee but also ensure the privacy of trading execution such as position information and liquidation lines, greatly reducing the counterparty risk of the current CEXs solution.
GRVT's system is designed to be compatible with ZK proofs and is built on ZKSync Era Rollup. According to the current proof submission speed of ZKSync, all traders' assets can be credited and settled on the Ethereum main chain within 2 to 24 hours. The speed of asset confirmation is critical for the naturally large collateralized volume of funds in TradeFi. Supposedly, these funds flow into the massive funds of ZKRollup, which need to turn to a "third-party centralized cross-chain bridge" or "wait for a 7-day optimistic solution challenge period". In that case, the risks these large funds bear, such as theft, market instability, time dimension, and settlement rate, are substantial. The faster settlement speed of ZKRollup is precisely one of the essential factors needed by TradeFi Layer 2. Therefore, compared to derivative applications built on optimistic solutions like GMX and Lyra, users using GRVT on the ZK expansion solution need to bear a safer and less lossy 7-day challenge period and third-party cross-chain bridge rights confirmation. The future potential for zero-knowledge expansion is higher.
Although Validum proof cannot preserve all historical transaction execution records, with the evolution of ZK proof algorithms. According to Zhang Ye from Scroll Tech, ZK expansion solutions can force proof recovery, and when a Black Swan event occurs in the market or data is tampered with illegally, users can question the security of funds by forcibly submitting ZK proof and recovering frozen or lost funds. Compared to PoR's "guarantee of total fund correctness," GRVT adheres to Vitalik Buterin's advocacy of using ZK proof to guarantee users' "absolute withdrawal" rights.
3rd Witching Factor: Compliance and Legislation
With the collapse of SBF and FTX, the US's decision to step into the crypto industry was urgently halted. Uncertainties prompted A16Z to announce the establishment of a European office, Coinbase's Brian Armstrong to announce a major development in South America's Coinbase derivative trading platform, the US digital asset deposit and withdrawal channel Silvergate to suffocate, and Binance to be subpoenaed by the SEC. These pieced-together clues form a comprehensive crackdown by the US on the regional, and cultural differences, racial faces, and offshore funds of the crypto industry. Due to regulatory pressure and the crackdown on giants, the start of the new generation of semi-centralized exchanges will be more difficult than the last cycle, and future on-chain regulation and restrictions will become an increasingly severe and centralized hybrid. The arrest of Tornado developers, Consensys Metamask's default IP surveillance RPC, Uniswap's integration of centralized purchase channels, etc., also foreshadows the compromise of on-chain crypto natives to the potential AML/KYC of mass users. In fact, Vitalik Buterin has also called for the provision of partial auditability to law enforcement agencies through ZK proof to face the increasingly severe on-chain audit system that the Tornado project cannot achieve due to the lack of AML.
Solution Three: Team Experience + AML/KYC
The GRVT team has rich experience in privacy data development and traditional financial compliance, operation, and practice. Founder HongYea is from South Korea and is based in Hong Kong. He is an experienced trader and has worked as a senior executive in Credit Suisse and Goldman Sachs in Hong Kong for 9 years. Matthew serves as the Chief Operating Officer and has led the blockchain and payment team at DBS Bank in Singapore to study blockchain applications in traditional finance. Aaron is the CTO of GRVT and has served as the technical director of two data privacy frameworks at Meta. According to the GRVT team, the project will focus on AML/KYC compliance, security, and high performance to provide a new generation of one-stop trading platforms for global digital asset derivative trading users.
According to the recently disclosed seed and pre-seed round funding, the seed round is led by Matrix Partner and Delphi Digital, which have cross-industries venture capital experience and a background in American digital asset research-driven media. Other seed round and pre-seed round investment institutions include ABCDE, a team of ex-founding Houbi digital asset exchanges, Darius Sit from QCP Capital (Deribit's seed investor)as an advisor, SIG, HackVC, Folius Ventures, Metalpha, CMS Holdings, Appworks, Fisher8 Capital, Kronos Research, 500 Global, Token Metrics Ventures, Primal Capital, CatcherVC.
Conclusion
Overall, the innovation of the GRVT team lies in their commitment to creating a new and unique digital asset derivatives trading platform. This platform will establish a new hybrid trading standard for existing exchanges, decentralized trading platforms (DEX), and investors, as well as spot, futures, and options. They use existing on-chain encryption blockchain technology and combine it with off-chain high-performance matching engines and off-market RFQ inquiry robots to provide a new type of hybrid trading platform (HEX) for the crypto industry, which is under regulatory pressure, faces centralized opaque risks, and has low trust.