Decoding Variational: How a No-Order-Book Exchange Became the Dragon Behind Hyperliquid?

This article is from: Duldul (@Duldul_Capital)

Compiled by｜Odaily Planet Daily ( @OdailyChina ); Translator｜Azuma ( @azuma_eth )

The first time I opened Variational, I completely didn’t understand why anyone would want to use an exchange without an order book. I was used to order books and accustomed to seeing who my trading counterpart was.

Months later, I returned, this time to execute a delta-neutral trade on Lighter via Variational. As a result, I changed my perspective.

You only need to click to place an order, and the system will provide a quote for your entire trading volume, execute the trade, and then finish. Additionally, the cost of this trade was significantly lower than during my first attempt.

Based on weekly trading volume, Variational is currently the second largest Perp DEX after Hyperliquid. The platform has over 570 trading markets covering assets such as stocks, crude oil, and gold, and implements a zero-fee policy.

The native token of Variational, VAR, is scheduled to launch in the fourth quarter, with an estimated valuation of approximately $1.5 billion in the current OTC pre-trading market.

This article aims to explore ------ is this pricing reasonable?

First, I will introduce the team behind Variational and how it operates, then discuss what impressed me, what concerns I have, and what I believe it is worth.

Who Operates Variational?

Variational was founded by two quantitative traders. Since 2017, what they have been doing is what they now hope to move on-chain ------ market making and OTC (over-the-counter) trading.

Two Alumni Living Next Door

Lucas Schuermann (CEO) and Edward Yu met during their freshman year at Columbia University, living in the same dormitory designed for entrepreneurs, with rooms right next to each other.

Schuermann can be considered a prodigy; he began studying mathematics at the University of Oklahoma at the age of 12. He later attended Columbia University to study computer science and interned at Goldman Sachs and Google X.

Yu graduated from Columbia University with a degree in applied mathematics, previously worked at Facebook, and published papers on Bayesian statistics.

In 2017, the two co-founded Qu Capital, a fund focused on statistical arbitrage in cryptocurrency, which raised funds from institutional investors. In 2019, the fund was acquired by Digital Currency Group (DCG), founded by Barry Silbert.

As a result, they entered Genesis. At that time, Genesis was one of the largest OTC trading platforms in the crypto industry. Schuermann served as Vice President of Engineering, responsible for building the infrastructure of the OTC trading platform; Yu served as Head of Quantitative Research, responsible for market making in linear contracts and options markets.

The two left Genesis in 2021. Two years later, in 2023, Genesis collapsed, but they were long gone by then.

This detail is worth mentioning because having Genesis on a resume today inevitably raises some questions.

Trade First, Protocol Later

Variational was not initially a DEX.

Before officially launching the product, the team operated in stealth mode for about two years, actively trading as a proprietary market maker on major centralized exchanges (CEX) and decentralized exchanges (DEX).

This experience led the founding team to summarize three lessons, which directly influenced the current product design:

• Building an order book from scratch is very slow; every new trading pair means negotiating separately with market makers;
• Exchanges cede a significant portion of their value to market makers, and this value ultimately flows out of the ecosystem;
• OTC derivatives trading is still rife with lawyers, endless communication, bank wire transfers, and a large number of operational staff. In Schuermann's words, that's how it is.

Omni (the current core product of Variational) addresses the first two issues, while Pro (the upcoming product planned by Variational) targets the third issue.

Team Size

As of May 2026, Variational has 24 employees, a significant expansion from 7 in 2024, with developers and quantitative researchers coming from companies like Google, Meta, Virtu, IMC, and Jane Street.

The company is registered in the Cayman Islands, with the team operating out of New York.

Interestingly, the team’s attitude towards profitability is noteworthy. Schuermann states that revenue is their most important metric. The reason is simple: unlike competitors with large VC funding reserves, they cannot afford to operate at a loss for years to compete for users.

This is also why, before the TGE, Variational's treasury had accumulated nearly $12 million.

Investors

Variational has raised approximately $62 million through three rounds of financing. The list of investment institutions is not long, but the lineup is quite impressive.

The seed round used standard equity financing, along with a 1:1 token subscription right (Token Warrants), meaning the number of tokens investors receive corresponds to their equity stake.

There are several noteworthy points:

• Dragonfly is the most noteworthy. It led Variational's Series A financing, with funds coming from a new fund of $650 million. Schuermann has also publicly stated that Dragonfly can help him open channels for cooperation and integration in traditional finance (TradFi).
• The same group of investors previously supported dYdX. Dragonfly and Bain Capital Crypto also participated in dYdX's Series A financing in 2018. dYdX was once the king in the perpetual contract field, but its token price has now dropped 97% from its historical peak. Excellent investment institutions do not necessarily guarantee excellent token performance.
• Brevan Howard signals a traditional financial background. This institution is one of the largest macro hedge funds globally. Its presence aligns with Variational's narrative of wanting to connect traditional financial market makers, but not all information sources confirm this investment relationship.
• The relationship with JPMorgan has not yet been officially confirmed. According to unofficial sources, Variational has a direct credit line with JPMorgan. However, I could not find any public information to confirm this.

How Does Omni Work?

Omni is more like a currency exchange counter rather than a traditional exchange.

In a traditional exchange, you need to place orders into a shared order book and wait for others to execute. In a currency exchange counter, you only need to ask for a price, and the counter provides a quote; you can choose to accept or reject it.

In Omni, this counter is the Omni Liquidity Provider (OLP), which is the market maker owned by the protocol itself.

The process of each transaction is roughly as follows:

• You input the asset you want to buy or sell and the trading volume;
• OLP provides a quote for your entire trading volume;
• You accept the quote, and OLP becomes your trading counterpart;
• Subsequently, OLP will hedge its position in places with liquidity, such as Binance, Hyperliquid, or traditional bank traders.

Omni does not charge fees. Its revenue comes from the spread between the quoted price and the actual hedging price, with about 20% of this revenue currently entering the protocol treasury.

This means Omni does not need to build liquidity from scratch for each trading market. It can launch perpetual contracts for Apple stocks or Brent crude oil because the liquidity for these assets already exists in other markets.

This is also why Variational can have over 570 trading markets, with RWA trading volume currently accounting for more than half of the platform's total trading volume.

Schuermann states that in his view, Hyperliquid is not a competitor but one of his sources of liquidity. Compared to traditional exchanges, Variational's positioning is actually closer to Robinhood.

What Impressed Me?

No One Can Hunt Your Orders

In traditional order books, large orders and stop-loss orders are visible, allowing market makers to exploit this information for targeted trading.

In Omni, apart from OLP, no one can see your orders. This is a real advantage for those who need to trade large positions. Of course, to be fair, OLP can see everything ------ your positions, trading volume, and even liquidation prices.

This feels more like a broker relationship rather than a completely anonymous dark pool.

Convenient and Cheap

The entire order only requires accepting one quote, without needing to split into multiple small orders for execution.

Currently, the spread for ETH is about 1.3 basis points, while the spread for indices and crude oil markets is even below 1 basis point.

The Treasury Already Holds Real Money

As of October 28, Variational's treasury holds approximately $11.8 million USDC, with about $2.5 million flowing in just in September.

According to the team's plan, all treasury income will be used for repurchasing and burning tokens.

In comparison, Lighter did not have similar financial support on TGE day. It only started repurchasing about a week after TGE, at which point the treasury funds were around $1.35 million.

Traditional Financial Resources Are Not Just Verbal Narratives

When the perpetual contracts for stocks and indices went live, traditional financial traders promised to provide over $1 billion in open interest (OI) capacity.

Within a week of launch, the trading volume for these contracts reached $2.8 billion.

Everyone Has Independent Capital Pools

Each trader's position is stored in a contract established separately with OLP. If a neighboring trader gets liquidated, their losses will not be transmitted to your account.

This contrasts with the situation that occurred on October 10, 2025, when the market experienced a sharp decline, and other trading platforms faced similar issues.

Smart Contracts Audited

The protocol has passed security audits by Zellic and Spearbit, and there have been no reported hacking incidents to date.

However, Variational operates on Arbitrum, and thus must also bear the associated risks of Arbitrum itself.

Who are Variational's Competitors?

RWA is not a blue ocean without competition, and Variational is not the largest player in this market.

After Hyperliquid opened external market deployers (HIP-3), RWA accounted for more than half of its total trading volume for two consecutive weeks in July, with one of the largest deployers being trade.xyz.

According to data from DefiLlama Research in September, trade.xyz's trading volume was approximately three times that of Variational, reaching $255 billion compared to $80 billion.

However, Variational is quickly catching up. In late July, Variational accounted for about 14% of the total trading volume across two platforms; by September, this proportion had risen to approximately 36%.

Additionally, there are Ostium (also deployed on Arbitrum), Lighter independently deployed on the Robinhood Chain, and an increasing number of regulated brokers launching perpetual contract products.

Thus, Variational's real advantage is not RWA itself, but rather its method of acquiring liquidity. Hyperliquid and trade.xyz must attract market makers for every new market, while Variational can directly connect with traders who already possess relevant liquidity.

If this model can be replicated across hundreds of markets, the advantage may persist long-term, but if traditional financial traders begin quoting directly on Hyperliquid, this advantage may disappear.

What Concerns Me?

Potential Sell-off After Airdrop

At TGE, it is expected that the entire initial circulation will come from airdrops ------ 32% of the total supply, fully unlocked from the first minute. At a valuation of $1.5 billion, this means approximately $480 million worth of tokens will go directly into the hands of "yield farmers." For many, this is a life-changing amount of wealth, so they are likely to choose to sell.

In contrast, the treasury funds of about $11.8 million only account for 2.5% of this circulating supply. The buying pressure at TGE must come from exchanges, funds, and market narratives, not from the protocol itself.

Historical data provides some comfort. After Lighter's TGE, about two-thirds of the airdropped tokens remained in holders' wallets; however, looking back, a year later, 50% of the tokens held by the team and investors will begin to unlock.

It is worth mentioning that the actual circulating supply after TGE may also exceed 32%. Excluding airdrops, investor shares, and team allocations, the remaining 18% of tokens belong to ecological reserves held by the Variational Foundation, which can decide how to use them, and no specific release schedule has been announced. If part of this is allocated to market makers at TGE or used for exchange listings, the actual circulating token quantity could exceed the scale implied by the airdrop itself.

Some airdropped tokens may also be burned. Variational's terms exclude users from the U.S., Canada, Taiwan, and sanctioned countries. Users must sign VAR terms when claiming tokens, and unclaimed tokens will be burned. If some tokens belong to users who do not meet the claiming criteria, the actual circulating supply will be even smaller. However, I do not believe this number will be particularly significant ------ after all, everyone can use a VPN.

We do not know who the tokens are concentrated in. I have not found public data on the concentration of token distribution. If dozens of whales hold half of the airdrop, it presents a very different selling pressure compared to thousands of small yield farmers holding tokens.

Currently, the VAR token has only one announced use, which is to use treasury income to buy back tokens. It does not have governance, staking, or fee discount functions, and more details are expected to be announced before TGE. Therefore, buying VAR now essentially means purchasing an expectation of buybacks supported by about 20% of OLP spread income.

How Much Trading Volume Will Remain After Yield Farming Ends?

Currently, a significant portion of Variational's trading activity comes from yield farming.

Referring to the performance of other perpetual contract DEXs after launch, trading volume typically declines by about 54% in the first month after TGE. I expect Variational's OI and trading volume may decrease by 30% to 60%.

However, I believe its product has found a market fit (PMF), and users will continue to farm points on other perpetual contract DEXs, so a considerable portion of trading volume will remain, using Variational as a hedging trading venue.

In traditional exchanges, a decline in trading volume usually triggers a vicious cycle ------ fewer traders, wider spreads, leading to more traders leaving. Omni can somewhat avoid this issue because OLP hedges in other markets, and this cost does not depend on Variational's own trading volume.

The real problem lies elsewhere. Yield farmers are actually the ideal clients for market makers because their trading behavior often lacks regularity. After TGE, the remaining users will mostly be more knowledgeable traders. OLP will earn less from them, and may even lose money. Ultimately, the trading spreads for everyone may widen as a result.

API and Toxic Order Flow

This is my biggest concern.

Variational has announced that it will open a public API before TGE. There will always be some participants faster than OLP in the market, such as institutions like Jane Street. They may capture opportunities after price changes on Binance, while OLP has not yet updated its quotes.

I do not believe this situation can be 100% prevented. The real question is whether the resulting losses are within an acceptable range.

Deliberately setting delays before order execution (e.g., 200 milliseconds) does not have much effect here. Studies show that such artificially set speed barriers can only slightly suppress the speed race among participants. However, Variational does have a more powerful tool ------ the so-called Last Look.

If the price changes unfavorably before execution, OLP can reject the order. It can also offer worse quotes to accounts that continuously profit from it. Forex brokers have been using this mechanism for years. It is indeed effective, but it comes at a cost.

If OLP starts rejecting orders every time the market price fluctuates, the originally convenient exchange counter will become one that only sells when it wants to. In the forex market, the abuse of the Last Look mechanism has led to banks being fined.

I have worked at a zero-fee exchange, so I do not believe the claim that "our algorithm will be superior." There will always be someone faster and better than you. The real question is whether the losses the platform ultimately needs to bear from these toxic order flows are acceptable.

Who Bears the Cost When OLP Loses Money?

OLP is the counterparty to every transaction on Omni, meaning all the platform's risks are concentrated in one place. If OLP goes bankrupt, the profits accumulated by traders from the point of bankruptcy will not be paid. The protocol documentation clearly states this.

But we currently do not know OLP's actual operating performance; it has not disclosed its positions, hedging results, or historical profit and loss records.

I also have not found data on how it performed during previous significant market fluctuations. Currently, OLP's funds are provided by the team, but Variational plans to open deposits to external funds in the future, similar to HLP on Hyperliquid.

Once this happens, some risks will also be transferred to depositors, including the risks brought by toxic order flows.

Additionally, there is a conflict of interest that few people discuss; the protocol itself is the counterparty to its own users' trades ------ when users pay spreads, the protocol makes money; when users profit, the protocol may lose money. This is normal for brokers, but when you see Omni promoting itself as "zero-fee," it is best to keep this in mind.

Pro: The Ace in 2027

Omni is a product aimed at traders, while Pro is aimed at banks and funds, scheduled for launch in 2027.

The Variational team believes that, in the long run, Pro's scale will eventually surpass Omni.

Pro targets the markets that the founding team is familiar with from their past at Genesis: over-the-counter derivatives trading, including options, interest rate swaps, forex swaps, and structured products. This is a market worth hundreds of trillions of dollars, but it still primarily relies on phone calls to bank trading desks, Telegram chats, and manual bank wire transfers to complete transactions.

On Pro, institutions only need to send quote requests for a certain structured product to multiple market makers simultaneously, and market makers will compete on price and trading terms. Once a quote is accepted, both parties will deposit collateral into a shared contract, after which the protocol itself will be responsible for monitoring margin, settlement, and clearing.

Pro is an important scoring item in Variational's valuation logic, as there is currently no data to reflect the potential value it may bring in the future.

There are several areas that also warrant caution:

• Pro has been referred to as the "next step" since 2023. A demo version has existed for three years, but the official launch date has been repeatedly postponed, now pushed to 2027.
• Institutional finance relies on credit systems. Banks that have signed ISDA agreements are usually reluctant to lock 100% of collateral in stablecoins.
• Competitors already exist. Paradigm and Deribit have been providing similar services in the crypto options space for years.
• It remains unclear how Pro will generate income for VAR holders. In Omni, OLP makes money through spreads; but in Pro, OLP is not the counterparty, and the team has not yet disclosed a specific revenue model.

If the rumors about Morgan Stanley's credit line are true, then this resource may be the most valuable in the Pro business.

A $1.5 billion OTC valuation implies that the market assumes Variational will lose about one-third of its trading activity after the TGE; considering the premium brought by Pro, the market has actually factored in an expected decline of about 44% in business activity.

My valuation method is based on Lighter's market valuation on the day of the TGE. Specifically, I apply Lighter's valuation multiple to three metrics of Variational:

• Open Interest (OI);
• Daily Trading Volume;
• Total Value Locked (TVL).

Among these, OI carries the highest weight because it is the hardest to artificially inflate through liquidity mining compared to trading volume and TVL. I deliberately did not include revenue in the valuation model, which does not mean revenue is unimportant, but because, before the TGE, revenue will also be distorted by liquidity incentives, just like trading volume.

For reference, Variational's treasury currently generates about $30 million in annual revenue, Lighter about $64 million, and Hyperliquid reaches about $694 million. Based on a $1.5 billion valuation, Variational's valuation is approximately 50 times its annual revenue. In contrast, the average valuation multiple for perpetual contract DEXs at TGE was about 6 times.

As of October 15, Variational's total open interest was $1.98 billion, daily trading volume was $4.14 billion, and total locked value was $241 million. Below is my valuation calculation based on this data.

The above calculation includes an assumption that the total number of points is about 10.5 million, with airdrops accounting for 32% of the total token supply.

It should be noted that DefiLlama only calculates unilateral OI, so according to its statistical standards, all valuation results will be about 40% lower, but regardless of the statistical method used, a $1.5 billion valuation cannot be considered cheap.

Why Might My Judgment Be Wrong?

The strongest evidence against my judgment is Lighter's historical performance.

When Lighter launched, its price was initially about 23% lower than the OTC pre-trading price, but a few days later, about two-thirds of the airdropped tokens remained in holders' wallets, and some airdrop recipients even chose to continue buying. Liquidity farmers do not always sell their tokens immediately upon receipt as we fear.

Secondly, my valuation model is based on a precedent. If Variational demonstrates a strong commitment to large-scale buybacks or increases the share of revenue from spread income that the treasury receives, the market may be willing to grant it a premium beyond the model.

Investors like Dragonfly and Coinbase Ventures also have the capacity to assist in these areas. It is also worth noting that Variational has previously raised $50 million in funding, which could theoretically be used to support related plans.

As for whether it will list on major exchanges on TGE day, I am indifferent. Major exchanges always have various operational flexibilities, and I would prefer that Variational not pay a cost equivalent to 1% of the total token supply just to list on Binance.

The third factor is market timing. In mid-October, the U.S. inflation rate rose to 3.7%, and the market began to factor in interest rate hike expectations. At that time, the price of HYPE had fallen about 17% from its historical peak, while LIT dropped 29% within a month.

If Variational happens to have its TGE when market sentiment is better, then even if the fundamentals do not change, the valuation may rise; conversely, if market sentiment worsens further, a 60% decline could become the baseline expectation.

Final Judgment

Variational is one of the most noteworthy perpetual contract projects in recent years, but its token has already been assigned a rather optimistic valuation before launch.

The team knows how to operate the business, the investor lineup is impressive, and the product indeed has real users, but the current OTC valuation still assumes that two-thirds of trading activity will remain after the points end. In my view, the final loss of trading activity may be greater ------ my prediction is that about 40% of trading activity will be lost.

After the TGE, I will focus on the following four indicators.

First is the OI 30 days after launch. This is the key data for ultimately judging who is right or wrong. If OI is above about $1.35 billion, it indicates that the OTC market's valuation judgment is correct; if OI drops to about $1.1 billion or lower, then the token valuation should gradually align with a $1.2 billion FDV.

Second is the trading spread. Variational's public API will publish quotes for order sizes of $1,000, $100,000, and $1 million. If the spread widens after the TGE, it indicates that those difficult-to-handle order flows are still remaining on the platform.

Third is the buyback situation. Focus on the scale and frequency of buybacks, as well as whether the treasury's share of OLP income exceeds the current 20%.

Fourth is the first batch of named clients for Pro. Until the first public clients actually appear, Pro remains just a promised blueprint.