The Fairest Casino
16 May 2025In my last essay, I wrote about the long term vision of Variational as a collection of distinct financial subnetworks that could enable the creation of programmable derivatives. Clearly, that’s still many years away, so today I want to highlight the near term vision for Omni, the retail-focused crypto perpetuals trading platform built on Variational Protocol.
The 10x improvement for users is what I’ll dub the “fairest casino thesis”. In our most recent investor letter, we wrote:
We have one metric we are very excited about:
Variational is 5x more profitable per dollar traded than other exchanges.
The math: according to our markouts, per dollar traded, we are capturing 15bps in revenue from the user. Surveying other exchanges gives us roughly ~3bps as a reasonable estimate of their volume weighted fees.
This is a consequence of our unique peer-to-peer architecture and vertically integrated liquidity provider. Whereas exchanges make revenue on trading commissions, and external maker makers capture the majority of the rest of the value from users, our revenue is the summation of both of those factors.
The catch is that users have no incentive to trade against one liquidity provider vs a group of liquidity providers, unless we return some of the revenue back to the user. We believe a hypothetical split of 10bps going to the user and 5bps going to Variational is a win-win long term equilibrium, which cuts out the external market maker. We plan on doubling down on our moat and returning value to users through several mechanisms:
- Zero trading fees (already implemented and very popular)
- Returning market making profits back to LPs by opening up OLP
- Loss refunds (refunding a portion of users’ losses generated on platform)
- A points program
The upshot: users actually pay less in total trading costs using Omni vs other platforms, due to cutting out hefty profit leakage going to 3rd party market makers and refunding that to users. It’s totally possible that users end up getting negative trading costs after summing all the factors.
The Casino Architecture
I don’t mean the word casino in a derogatory way. Yes we all know crypto is favored by, ahem, speculators. Still that has not stopped the creation of genuine technological advances: stablecoins, fast blockchains, lending pools, and many others. Anyways, I mean the word in a technical sense – a financial ecosystem consisting of only two parties, the house and the patron. Contrast this to the complex multi-faceted traditional financial market structure, which has exchanges, brokerages, clearinghouses, market makers, and so on and so forth. This system is hundreds of years old and works well for its purpose.
However, the advantage of the simplified casino architecture is that we only have to optimize for two parties. We propose another ground rule, that the casino must be community-owned, as a further simplification and a way to align the interests of the house and the patron.
Ground Rules
The ground rules we commit to are as follows.
The casino is community owned
Clearly if the casino profits are retained by the house, then it can veer in an exploitative direction – the profits are extracted from users and the games are designed to milk the users as heavily as possible. We commit to returning a majority of the value provided by users back to the users, therefore encouraging an environment designed to maximize the user experience.
Here’s how a normal exchange business model works in crypto: the exchange takes a small commission per dollar traded. The game is about maximizing volume, and high frequency trading firms/market makers provide the most volume. The market makers get all sorts of advantages over everyone else, such as co-location (a speed advantage), lower fee tiers (including negative fee tiers, aka rebates), and many other goodies.
The result is that up to 80% of the value generated by users is leaving the ecosystem (“leakage”) in the form of market maker profits. The other 20% is captured by the exchange. Both market makers and exchanges provide a valuable service: liquidity and infrastructure to access liquidity, respectively, so some profits are clearly deserved. But what if we built a system designed to minimize leakage?
On Omni, all users trade peer-to-peer against a dedicated liquidity provider called Omni Liquidity Provider (OLP). Like a traditional market maker, OLP generates revenue by providing liquidity to users. However, the key difference is that OLP will act as a vault, allowing users to deposit funds and receive a share of the market making profits. Aside from the platform usage fee going to the protocol, all market making profits will go back to LPs of the vault.
This creates a closed-loop ecosystem where profits are retained by users rather than leaking to external market making firms. The incentives are also aligned: OLP is only incentivized to provide liquidity in a clean and fair way, as profits are recycled back to the users on aggregate. If the users are receiving unfairly wide spreads, then they will leave for another ecosystem and OLP profits will be reduced. Third party market makers, on the other hand, are mercenary and generally do not care about the health of the ecosystem, as they can simply migrate to where the liquidity is.
The closed-loop architecture also creates the possibility of novel mechanisms that return value back to users in a more direct way. One direction we are very excited about is loss refunds. Imagine if a certain percentage of trading losses from a bad week were refunded back to you. This would make it infinitely easier for a trader to generate trading profits. Such mechanisms are of course impossible on traditional exchanges, as the exchange itself does not retain users’ trading losses. The best they can do is a fee rebate.
The house edge must be small; the rules must be fair
Make no mistake – Variational is intended to be a for-profit enterprise. I prefer to create a system where we are upfront that the house edge exists, but other than that, the game is positive sum (or at least, not negative sum), skill-based, and fair to all.
In this case, we are open about the fact that:
- The protocol takes a platform usage fee, similar to how exchanges take a trading commission per dollar traded. This is the house edge, and is paid by OLP (similar to a maker fee). There are no trading fees for takers.
- OLP is the only liquidity provider. Some exchanges run internal market making desks and hide this fact from users. Needless to say, the internal market making desks do not share profits back to the user.
- We do not provide preferential treatment to HFT firms, as they are not our main clientele, in contrast to exchanges. That means no special API access and no colocation. Any trading firm, of course, is welcome to sign up as a normal user.
An antifragile design ensures payouts
We designed the Omni architecture as many many segregated settlement pools. This means that every user actually has their own settlement pool with OLP (an user <> OLP pool). Both the user and OLP must deposit USDC into the pool to collateralize their positions. The segregated system creates anti-fragility – even if there is an unlikely and unprecedented data error which causes a trillion dollars of losses in one pool, the damage is contained to that pool, and does not spread throughout the ecosystem.
On the other hand, the fact that both OLP and the user must deposit collateral into a transparent, on-chain contract means we can trustlessly verify the solvency of the pool. Contrast this to centralized exchanges, where users send money to an unknown wallet controlled by an unknown entity, and pray that they get paid out and the exchange does not misappropriate the funds, either on purpose or due to an unfortunate accident or hack. The old way will soon seem like a jarring and barbaric experience.
Summary
Conventional startup wisdom says not to build a startup unless you can deliver a 10x improvement to users over existing products. Our social contract with the user is simple: build a closed loop ecosystem that cuts out value leakage to mercenary third parties, and instead returns the majority of the retained value back to the loyal user. Omni is the fairest casino.