Project Serum aspires to become a fully-fledged financial ecosystem that brings unprecedented speed and very low transaction costs to the world of Decentralized Finance (DeFi). At its core sits a decentralized exchange (DEX) which is designed around a fully on-chain central limit order book and matching engine.

Partners of Serum’s ecosystem can compose with this on-chain order book to share liquidity and match orders for both retail and institutional users.

Serum was originally founded by Sam Bankman-Fried (SBF) – CEO at one of the leading centralized crypto exchanges FTX, as well as other ecosystem partners, and is deployed on the Solana blockchain.

During BreakPoint 2021 in Lisbon, CryptoPotato had the chance to talk to Edward (Ed) Zuo, who is a senior advisor at Project Serum. We talked about the current status of Serum, some challenges, as well as what lies ahead for the project.

The Order Book that Will Power a Superstructure of Financial dApps

“Project Serum provides the underlying liquidity infrastructure for applications building on Solana that need trading-related features that could benefit from Serum’s central limit order book.” Explains Zuo. “And It’s one of the first order book-based decentralized exchanges to be deployed entirely on-chain.

The idea behind Serum is to provide the fundamental primitives that bring about a fully functional, centralized exchange experience to all of DeFi.

Serum is unique because you can build a DEX on it. You could build multiple DEXes on it, and because of the composability of DeFi, users can compose with the markets on Serum to unlock incredible synergies and bootstrap liquidity for their protocols.

You can imagine what happens when more and more of these applications compose with the same set of software – You can imagine how big that pool of shared capital becomes. This model, which is so simple yet elegant, can allow for this massive scaling up of DeFi.

Now, you have devs building dApps. You don’t need to reinvent the wheel every time they make a new protocol, hence, you don’t need to figure out how to get order matching working. You can now focus on the other stuff that’s critically important for your project, whether that’s building a risk engine or focusing on marketing or other partnerships or whatever.

So with Serum, it’s able to power a whole superstructure of financial dApps on Solana that can easily talk to each other – over time, we hope to quantify how much time it’s saving and how convenient this is for developers.

Importantly, it’s built on Solana, which brings about features like sub-second settlement and extremely cheap transaction costs. Whatever you build on Serum, you can achieve the user experience people are familiar with on centralized exchanges.”

Bring Solana and DeFi to the Rest of The World

Serum was launched in late 2020, aiming to be the first decentralized exchange with fast transaction execution and low fees.

It seems that Serum has managed to build what no one has created before, and in a reasonably short time. Is the team behind Project Serum now the same as the founding team?

“Project Serum was originally founded by FTX and Alameda Research. Nevertheless, they are now simply contributors to the Serum project and many others, and Serum has attracted many ecosystem supporters and contributors through its grantmaking process and its DAO.

There are many volunteers too who get involved just by seeing what Serum is doing, and it helps that Serum has always been open source. Everything is there. People just get involved.

The people who are, I suppose, most active on Serum now include both newcomers as well as contributors dating back to the end of ‘DeFi Summer’ in September 2020.

You also see this increasing trend of more and more developer activity, as well as more and more diversity among the people actively contributing to Serum.”

About a year post-launch, what are your midterm and long-term goals?

“We are doing all the necessary steps to take Solana and DeFi to bring it to the rest of the world.

That’s why I keep talking about the issue of scalability and the fully functional centralized exchange experience, the ultimate convenience for developers and retailers – something that can bring the benefits of DeFi to the everyday user and allow them to seamlessly use it and benefit from it without having to worry about complexities and technological issues.

These are ambitious milestones and long-term ones. I think there are a few steps to get us there. One is to get institutional capital, and institutional adoption of DeFiwhich Solana can provide.”

DeFi is Going Nowhere Without this Institutional Capital

Zuo continues, “There are several ways we’re doing this: One is to keep letting market makers, high-frequency traders, and other large institutions feel more comfortable coming on-chain and letting them do their own thing on Serum because, without this institutional capital, DeFi is going nowhere. That’s an absolute fact.

Familiarity is only one of the issues for these players. The other issue is regulatory. Even as we wait for more regulatory clarity, it’s also clear that all these institutions need to meet existing regulatory and compliance requirements.”

Because if you can think about what these institutions want: these are players with an ever-increasing appetite for DeFi exposure, but if they trade with the wrong counterparty, we all know to understand these risks reasonably well. They need to be careful, and they want to be compliant. I personally think it’s great that ecosystem players in Serum and Solana are finding ways to allow for the institutional adoption of DeFi and letting these players come in.”

Raydium is the first AMM on Solana, with the initial aim to settle trades on Serum order book and their platform.

Raydium’s daily volume is much higher than the volume on Serum DEX, which is consisted of trades from Bonfida, Mango Markets, Raydium, and others. We recently saw higher volumes on the Raydium platform. Do you think that users prefer to trade on AMMs rather than order books?

“Automated Market Makers are a very different type of market to a central limit order book. Each has its pros and cons. if you look at what Raydium is trying to offer, it’s an experience with reduced slippage, among other benefits, but how do they achieve that part? In part by composing deliberately with Serum and sending orders to Serum’s order books, they can provide their users the best of both worlds.

Raydium is only one among many very popular GUIs built on Serum, and the latter is powering not just Raydium but many apps out there that bring value and traffic to Serum.”

Maybe this means that the user experience on Serum is yet to be polished as much as a centralized exchanged experience?

“Well, Serum wants to provide something that allows people to build whatever they want to build, whether it’s a DEX or a derivatives protocol or another kind of trading dApp.

Derivatives are actually quite interesting because  Serum Core (a new upgrade developed by Bonfida) unlocks a lot more flexibility for developers building these products.

There are all kinds of teams building incredible derivatives and risk hedging tools that are going to bring more and more interest and value into Solana and Serum ecosystems. So that’s something to look forward to. It’s not just about one or two key players. It’s really about having the whole suite of offerings for anyone coming to Serum.”

Leveraged Trading Operated on DEX

When talking about derivatives, leverage trading is a point that comes up naturally as it has become very popular among Bitcoin and crypto traders.

As of now, the volume of leverage trading is much higher than spot trading. Asking whether he sees leverage trading coming up soon on Serum, Zuo replies:

“There are people building things like margin solutions, and this is the kind of fun part about Serum because everyone kind of sees their own place in the ecosystem.

You have primitives like an on-chain order book (that’s Serum), you have wallets, you have AMMs. Okay, cool. What’s next?

Well, I think it sounds to me like borrow-lending was the next step, and then margin services afterward that will allow for leveraged trading. After that, how about perpetual futures? Your futures require margin. Now you have, not just futures on crypto underlying, but also cross-chain underlying when you bring bridges into the mix, or perhaps even real-world underlying when you bring in oracles.

It’s not just about Serum doing everything – it’s about what Serum inspires. It helps get all of us there, but we leave it to the expertise, wisdom, and guidance of the community.”

SRM’s Enormous Supply Problem

The total supply of SRM is 10 billion, though the circulating supply is around 130M. The fully diluted valuation of Serum is approximately 80 billion USD as of today (data by Coingecko).

Currently, 100% of the fees from traders on the exchange go to buy, burn, and staking yield. It seems the volume on the Serum exchange needs to be high to justify the fully diluted valuation of the project.

Keeping in mind the project was constructed in the best interest of the token holders and the community, we can’t ignore the enormous non circulating supply. How do you see it moving forward? Are there any plans to address this issue?

“There’s a number of reasons that governance has been put up. Part of it is to tap into the wisdom of the community, and I guess the question then becomes, well, what is up for governance? What is up for voting? It’s a lot of things, a lot of important aspects about Serum.

It could be the fee parameters, for instance. It could be about default settings on the GUI. It could be about the tokenomics and the form of the utility and the governance of SRM tokens, and this is critical.

People have been discussing issues like this for a very long time. They matter to Serum’s community, its volunteers and contributors, and users. And SRM, of course, matters for things like grant-making and other critical initiatives by Serum to inspire and guide further ecosystem development.

So people have passionate, strong, well-founded, and often very mixed feelings about tokenomics. That’s to be expected. I think that’s the case with many projects.  Serum offers a venue now for people to discuss this and to really come up with whatever it is that makes the community most excited and most empowered. These things can be iterative, and they take time.”

Do you not see it as a risk for the short term for Serum?

“Well, I think it depends who you ask. Some people are very bullish on the amount of volume that SRM can generate, while other people are perhaps more conservative, and that’s fine. That’s why we take it to the forum for discussion.”

No One Could Predict the NFT Craze

One of the greatest virtues of blockchain is its composability aspect. The ability for project Serum to use Solana’s blockchain in a permissionless way, or the ability for dapps to use Serum’s order book to settle trades and get a cut of the fees.

How do you expect the ecosystem around Serum to evolve? What will it look like in 5 years?

“It’s a very good question. I’ll try not to let myself digress too much. When you look at what an ecosystem needs versus what direction it may end up taking, you find that those are actually two slightly different questions.

I think it’s fair to say that, in the future, we’re going to need risk hedging solutions. People are building great examples of that. We’ll also need increasingly sophisticated wallet solutions and more TradFi-like solutions for non-crypto native users – maybe something like borrow-lending that also kind of interfaces like a bank account with a fixed period yield generation, which is being explored in the Serum and Solana ecosystem already.

People are building all of these ‘obvious’ things, borrow-lending, oracles, bridging, margin services, options, and futures and perps. These things are very easy to predict. But other things like the NFT craze, no one could have predicted that.

Also, the play to earn model derivatives on top of NFTs and all the augmented reality and other immersive interactive app supported by Web3 innovations. Some of these things you just can’t predict at all, and that’s why it’s best to leave it to the community and help steer resources towards the right places to build all these cool things.”

Anyone Should Be Able to Use DeFi

“I look forward to a world where these different dApps, whether they’re financial services or something else, are all kind of powered by Serum and Solana in the background, but their users are not necessarily DeFi native,” Zuo concludes.

“So, what do we do to get there? I think a lot of it is what you can call ‘uninformed flow.’ Anyone should be able to use DeFi, including people like my parents or people who just don’t care about the blockchain.

I couldn’t give you a good lecture on how the internet works. I’m not an expert, but nevertheless, I benefit from it. I enjoy the internet. So the next wave of applications, I think will be more and more user-friendly and immediate benefits to any user.

The UX challenge is not easy to get right. You want the app to feel extremely seamless to pick up and start using. This applies whether it’s e-commerce or mobile gaming, or whatever. So it’s not about pushing new technologies onto people. It’s all about getting people to come and use it without realizing.”