Bringing Tradfi Liquidity On-Chain w/ Lucas V. Schuermann

Lucas Schuermann and Edward Yu co-founded Variational after meeting at Columbia University and spending roughly a decade building trading infrastructure together. Around 2016 to 2017 they launched Q Capital, a hedge fund backed by Digital Currency Group that became one of the first fully systematic market-neutral crypto funds. The team and technology were later absorbed into Genesis Trading, where they built an electronic market-making operation that processed approximately 250 billion dollars in volume across spot, linear derivatives, and options, with peak activity running from 2019 to 2021. Schuermann ran engineering and Yu led quant research at Genesis.

Variational launched in late 2021 as a prop shop focused on OTC options and early DeFi venues including DYDX, Lyra, Zeta, Drift, and Naivo, and was an early participant on Hyperliquid. The firm subsequently evolved into a broker-like model built around a request-for-quote system. A single in-house liquidity provider called OLP takes the other side of every trade with no external market makers involved. OLP immediately hedges the resulting risk, holding it for milliseconds in many cases before routing to other venues or internalizing offsetting flow. Schuermann compares the business model to firms like XTX, Virtu, Jump, Jane Street, and HRT, describing the book as running very flat with market risk negligible relative to book size. Revenue comes from capturing the spread between what users are charged and the total cost of hedging.

OLP connects directly to TradFi venues in New York, Chicago, and Amsterdam to hedge real-world asset positions, and the liquidity Variational can show users is a direct function of what it aggregates across those venues. Connecting to NYSE, NASDAQ, and CME involves Equinix data center meetings, FIX APIs, co-located servers, and networking configurations that can take days to weeks. Schuermann said onboarding to TradFi institutional venues required two quarters or longer to solve, and that tier-one TradFi institutions will not partner with smaller startups or smaller exchanges, making the firm's institutional relationships a core competitive moat.

Hedging across multiple perpetual venues is described as a non-trivial quantitative problem even for crypto underlyings, because perps on different venues differ in indexes, funding rates, and basis. For real-world asset underlyings the problem is harder, because the most liquid hedging instruments may be swaps, total return swaps, or CFDs rather than a matching perpetual. Variational is introducing swaps as a new instrument type designed to align the retail-facing leg with the TradFi hedging leg. Swaps carry a flat cost of carry of approximately four to five percent rather than a variable funding rate, which prevents the rate from spiking over weekends or during price dislocations. Schuermann described swaps as something he expects to be a home run for Variational and a way to move beyond being second to Hyperliquid in the RWA perpetual space.

Schuermann draws a sharp distinction between execution venues and price discovery venues, arguing they have fundamentally different design goals. He contends that for assets like NVIDIA, Google, gold, and oil, price discovery happens on TradFi venues and not on-chain, and that Variational imports efficient TradFi pricing by aggregating and hedging directly out to those venues. He acknowledges that Hyperliquid served as a meaningful price discovery venue for pre-IPO perps like Cerebras simply because it was one of the only liquid venues available, but frames this as a function of venue availability rather than anything structurally unique to on-chain markets. He expects the domain of on-chain price discovery to diminish as TradFi venues expand to 24-hour, seven-day trading.

Variational's contracts are deployed on Arbitrum One using isolated smart contracts called settlement pools, where each user account deploys a fresh contract to hold collateral independently. A liquidation event affecting one user or OLP has no impact on margin held in other contracts. The design was directly influenced by the FTX collapse and was built with institutional trading in mind. The tradeoff is meaningful gas spend on Arbitrum to maintain real-time rebalancing and isolation. OLP is currently funded entirely from Variational's own balance sheet to avoid vault infrastructure, which has historically been a source of vulnerabilities. Excess OLP revenue is intended to flow into a protocol fee with potential use cases tied to a future token, though Schuermann said details cannot be fully disclosed yet.

Variational is targeting 1.4 billion dollars in open interest and 1 billion dollars per day in trading volume as the scale needed to offer competitive quotes and internalize flow. Schuermann acknowledged that points programs become problematic when there is no underlying product reason for users to stay after incentives end, and cited Hyperliquid's retention as a function of execution quality and unique listings rather than points. Variational currently has no API, partly as a defensive measure against farming and gaming of its points program. A planned spread rebates mechanism is intended to replace a discontinued loss refund program and share OLP revenue with everyday users in a more targeted way.