Geed

Why @variational_io Executional Cost Could Get Cheaper as It Gets Bigger Gvar, In a previous analysis of Variational’s BTC execution costs, we matched: - 624 $BTC perp fills - $37.4M in total notional - $15K - $100K clip sizes against external market data. The measured all-in taker execution cost was approximately: 0.8bp per side That was already highly competitive. But the more interesting point is that 0.8bp may not be the lowest level Variational can ultimately achieve. 1/ Most exchanges rely on multiple market makers quoting into a public order book. Variational is structurally different. Every user trade is directly quoted by one internal market maker: The OLP OLP sits between users and the wider market. It can offset user longs and shorts internally, then hedge only the remaining net exposure through CEXs, DEXs, TradFi dealers, and other external venues. This is the main reason we believe Variational’s execution costs could decline as volume and OI grow. 2/ A simple hypothetical example shows how powerful this structure can be. Assume $BTC is trading at $100,000, and Variational users collectively hold: - 1,000 BTC long - 900 BTC short The total gross exposure is: 1,900 BTC = $190M But because OLP stands on the other side of both groups, its final net directional exposure is only: 1,000 BTC − 900 BTC = 100 BTC So while users collectively hold $190M in gross exposure, OLP may only need to hedge: 100 BTC = $10M externally. That means only: $10M ÷ $190M = 5.26% of the gross exposure requires an external delta hedge. The other 94.74% offsets internally between user longs and shorts. (One clarification: This reduces the amount of external delta hedging required. It does not mean OLP’s collateral and settlement capacity requirements automatically fall by the same amount.) 3/ For illustration only, assume OLP’s external BTC hedge cost is 0.5bp. (This is not an estimate of OLP’s actual cost.) If every user position had to be hedged externally one by one: $190M × 0.5bp = $9,500 But after internalization, OLP only needs to hedge the remaining $10M: $10M × 0.5bp = $500 Measured against the full $190M in gross user exposure: $500 ÷ $190M = approximately 0.026bp In this simplified example, internalization reduces the external hedge-cost component from: 0.5bp → approximately 0.026bp That is roughly a 19x reduction. This does not mean OLP can offer users a 0.026bp spread. OLP still needs to cover lots of expenses and profit margin. But the example shows how strongly internalization can reduce one of the largest components of execution cost. 4/ This is where scale becomes important. When the platform is small, OLP cannot know when the other side of a large position will arrive. A 1,000 BTC long may arrive first, while the 900 BTC short may arrive seconds or minutes later. Until then, OLP must either: - Hold the risk temporarily - Hedge it externally - Or partially hedge while waiting for opposing flow But as more users and more strategies enter the platform, potentially driven by TGE expectations, the upcoming API, and the expansion of Swap markets: - Longs and shorts are more likely to offset - Opposing flow may arrive faster - External hedge requirements may fall relative to gross activity - OLP gains more flexibility in executing the residual hedge Greater volume can also provide: - Better external exchange fee tiers - Maker rebates and institutional pricing - Better dealer financing terms - Connectivity to more hedge venues The key point is simple: OLP can service gross user flow, while external hedge costs are concentrated mainly on the residual net exposure left after internalization. 5/ The main bottleneck is also clear: OLP’s capital and balance sheet If the long and short positions arrive around the same time, the risk offsets quickly. But when one side arrives first, OLP needs enough capital to hold or hedge that exposure until the opposing flow appears. Variational does not rehypothecate user collateral. Therefore, OLP needs its own separate balance sheet to: - Collateralize user positions - Fund external hedges - Absorb temporary inventory risk - Support additional OI @variational_lvs has identified capital as one of the key constraints on Variational’s long-term expansion. However, he also explained that it becomes increasingly solvable as the system, balance sheet, flow, and profitability grow. 6/ We do not view this as an unsolvable bottleneck, too. There are several potential ways to expand OLP capacity: - Reinvesting OLP profits - Expanding Variational’s own equity balance sheet - Raising additional investment or strategic capital - Increasing OI capacity with TradFi dealers - Eventually accepting external capital or launching a community OLP vault As the platform demonstrates: - Larger and more consistent flow - A stronger balance sheet - Controlled drawdowns - Sustainable risk-adjusted profitability it should become easier for external capital providers to decide how much capital or capacity they are willing to provide and under what terms. What currently appears to be a balance sheet bottleneck could eventually become a moat that competitors cannot easily replicate. 7/ This is why we are excited to see more volume and OI enter Variational as TGE approaches. On many platforms, incentives temporarily increase volume, but the product itself does not structurally improve. Variational may be able to create a different flywheel: More users and diversified two-way flow → Higher internalization rates → Less external hedging relative to gross flow → Lower hedge cost per dollar traded → Tighter spreads and larger executable size → More trading volume In other words, activity generated around TGE may not end as a simple volume statistic. It may directly improve Variational’s execution quality. 8/ Of course, more volume and OI do not automatically guarantee higher internalization. If most users take the same side at the same time: - Internalization rates will decline - External hedge requirements will increase - OLP’s capital usage and costs will rise For this structure to work at its strongest, Variational needs: - A sufficiently large user base - Diverse trading directions and strategies - Recurring two-way flow - Sufficient OLP capital - Access to multiple external hedge venues As these conditions develop, Variational could become a platform that provides: Lower costs and deeper liquidity as it grows TGE hype is important. But what excites us more is the possibility that the volume and capital attracted by TGE will strengthen Variational’s execution edge itself. That is why we believe Variational can evolve from a platform traders simply try into an execution venue that becomes increasingly difficult to leave. This is the admittedly biased view of LinenMito, after meeting @JustinCBram, @sjtional, @hansolar21, @sishido1011, and fellow Varriors at KBW. We respect all views, including those that differ from our own. If you are yet to join Variational and wish to do so, Simply join with our code for a 18% Boost (The maximum boost on any code. Use: OMNIDAE, omni.variational.io/?ref=OMN… gvar.