Nunchi is a Blockchain-based decentralized exchange that trades yield derivatives like bank interest rates in traditional financial markets.
Meeting in Seoul on the 3rd of last month, Nunchi CEO John Doherty said, "Korean investors, who rank No. 1 in the world in virtual asset transaction volume, have a strong understanding of derivatives and are increasingly interested in perpetual futures decentralized exchanges (DEX·Decentralized Exchange). We are in talks with several projects to enter Korea."
A DEX is a platform where virtual assets can be transacted directly without a central institution. Virtual asset exchanges such as Upbit and Bithumb, which many domestic investors use, are called centralized exchanges (CEX·Centralized Exchange). A DEX entails higher risk because the trader bears all responsibility, but it also enables a wider variety of derivatives to be created.
CEO Doherty majored in mathematics at the University of Pennsylvania and handled trading of collateralized loan obligation securities at alternative investment manager Pretium. Nunchi aims to trade derivatives that productize real-world asset token (RWA·Real-World Assets) interest rates or staking (staking·depositing virtual assets for a set period to contribute to network operation and receive rewards) yields. RWA refers to tokenizing real assets into digital form. Nunchi, the name of the exchange, is a pure Korean word meaning the ability to sense an unspoken atmosphere. The following is a Q&A with CEO Doherty.
─What led a former Wall Street trader in the United States to build a Blockchain-based exchange?
"The virtual asset market prioritizes yields more than the traditional financial sector, yet there is no market where yields can be transacted. On a Blockchain without intermediaries, we can create various derivatives that were impossible in traditional markets, so we are taking on a new challenge."
─What does it mean to transact yields?
"Transacting yields means not simply receiving interest, but turning the very stream of interest to come into a product and trading it. If interest rates rise, the person who bought the yield profits, and if rates fall, the person who sold the yield profits."
─Is there strong demand to transact yields?
"We feel demand growing as decentralized finance (DeFi·Decentralized Finance·a system that provides virtual asset transactions and various financial services without intervention from central financial institutions or administrators) expands. In traditional financial markets, banks and institutional investors buy and sell interest rate swaps (swap·a contract exchanging fixed and floating rates) to hedge against rate changes. Volatility is much higher in the virtual asset-based derivatives market, so hedge demand naturally exists."
─What problems faced by virtual asset derivatives investors is Nunchi trying to solve?
"One of the areas with strong demand for Nunchi is staking users, but unlike bank products, staking does not have a fixed rate and it takes considerable time to unstake. From the perspective of investors with assets, when they stake, the asset price and the rate move together, and there is no way to hedge that.
For example, if the annual rate on staked ether drops from 4% to 2%, the only way to defend the yield is to unstake. But by opening a short position on staking rates on Nunchi, the rate decline can be offset."
─What does Nunchi see as the future of finance?
"Markets operate as a function of time and future expectations, and differences in people's views appear as volatility, creating value. Yield is the invisible force that moves everything. If yields are low, it is a bear market; if high, a bull market. Nunchi plans to expand into a yield exchange that transacts the future."