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Our investment in Skew

29 Apr 2020 By Zihao Xu

We’re extremely excited to have led the latest $5m funding round into Skew. In doing so, we join Seedcamp and Firstminute in supporting Emmanuel and Tim as they build out critical markets infrastructure to open up crypto to institutions. This post gives an overview of how we thought about this investment.

Building blocks

How we conceptualise money and how it interacts with the real world evolved over millennia. Fungibility, durability, portability, and a bunch of other “bilities” that we now take for granted as fundamental characteristics of money were never designed in from the outset – they emerged across continents and over generations, and the history of their evolution is often a mirror to the rise and fall of nations, in which the character of money usually played its part. As society has evolved, we have by and large figured out how we need our money to behave to support our economic system, and we’ve built sophisticated infrastructure around it to help us decide what, how and for whom to produce. There are a few (gaping) holes still left to fill, but we’ve come a long way…

Along the road that led from barter through to various forms of trading shells, clay tokens, crude forward contracts, metals, metal-backed paper, fiat paper, bank deposits and e-money, societies built granaries, marketplaces, banks, exchanges, brokerage houses, investment structures, software tools and data platforms, and myriad other pieces of infrastructure that participants in today’s financial markets take for granted as critical to how business is done.

New assets, same incentives

When a new form of money/new asset like crypto comes along, it will likely have characteristics that spark new kinds of infrastructure, and we’re already seeing this play out in the DeFi and Web3 ecosystems. But at the same time the way people (and in particular those at regulated institutions) interact with a money/an asset is rooted in the real world that exists around it – in existing incentive structures and institutions that govern behaviour. We know that grown up institutions want to trade at regulated venues, that derivatives can be used to manage risk and that its data can help assess spot markets. We also know that MiFID II encourages electronic trading, and that institutions need access to high quality liquidity networks. Taken together, we can make a bet that the same forces that led to the rise of the likes of Tradeweb and MarketAxess in traditional asset classes could drive the crypto ecosystem to jump off from a vaguely similar position. We get to skip through all the experimentation that came before and start building based on what we already know about how we like to interact with money and assets. It’s hard to predict what will drive cryptoassets into the mainstream, but we believe that in order to help it along the way we will need to see some of the same tools and capital markets infrastructure around it that’s proven so useful in other asset classes, at least to begin with. First there were the spot market offerings, and then folks like the CME and ICE paved the way in futures and options markets by offering listed contracts, but so much more needs to be built out.

Enter Skew

Emmanuel and Tim, the co-founders of Skew, have spent the majority of their careers trading flow options and exotic derivatives at the world’s most prestigious institutions. In doing so they’ve become intimately familiar with the infrastructure required to encourage institutional participation. Applying their experience to crypto, they started by building the world’s most highly respected source of data on crypto futures and options, skewAnalytics, helping more than 600 institutions so far gain insight and intelligence into market movements. With the launch of skewTrading they will give professional market participants access to a regulated electronic brokerage platform to trade crypto derivatives, making Skew a natural choice for financial institutions looking to delve into crypto.

We came across Emmanuel and Tim having already spent some time in capital markets infrastructure with previous investments in Vega-Chi, Mosaic Smart Data and Calastone, as well as some experience in the crypto data world with our investment in Elliptic. While I’m still getting up the curve on how to read 25-delta skew charts, I found it a lot easier to be impressed with the team’s focus on building strong product for a highly professional audience and the ease with which they attracted high-calibre admirers and collaborators, in particular Kyte Broking who last year executed about $10tr notional of exchange-listed derivatives contracts and counts over 3,000 institutional trading counterparties onboarded. Kyte’s willingness to partner with Skew and make the company one of its Appointed Representatives with the UK FCA reflects the rigour and sophistication with which Skew’s 9-person team has approached their mission.

Looking ahead

More than ten years since the Bitcoin white paper (and six years since I first sold sunglasses for Bitcoin online…) we still find ourselves at the very start of the crypto adoption curve. With proper institutional adoption still ahead of us, we believe that Skew is well-positioned to become the trusted gateway for sophisticated financial institutions to access crypto analytics and liquidity networks and from there it can help define the next generation of capital markets infrastructure.

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