# Financial compute markets need physical settlement first Markdown copy of https://realalpha.app/s/financial-compute-markets-need-physical-settlement-first/ on Real Alpha, the best minutes from long interviews with the people building AI. Cite and link the page, not this copy. - Speaker: [Evan Conrad](https://realalpha.app/people/evan-conrad/) · SF Compute - Host: [Shawn Wang (swyx)](https://realalpha.app/people/swyx/) · Co-founder, AI Engineer · Wrote “The Rise of the AI Engineer” and founded Smol AI, maker of AI News. - Show: Latent Space - Episode: [The Programmable Data Center — Evan Conrad, SF Compute](https://realalpha.app/v/EAtLq9_vrE0/), Oct 20, 2026 - Moment: 23:23 to 26:52 of the episode (3 min), playing on https://realalpha.app/s/financial-compute-markets-need-physical-settlement-first/; the episode from there: https://realalpha.app/v/EAtLq9_vrE0/?t=1403 ## Quote > “there's a very similar problem where you can **manipulate an index**.” > — [Evan Conrad](https://realalpha.app/people/evan-conrad/) at [26:19](https://realalpha.app/v/EAtLq9_vrE0/?t=1579) · Latent Space ## Takeaways 1. Compute capacity differs in ways that affect its real-world value. 2. Cash-settled products should be built from physical market data. 3. A thin index may not reflect the price of new capacity. ## About this segment Evan Conrad argues that compute is not yet fungible enough to support financial contracts detached from delivery. Without a physical market, prices can be manipulated or disconnected from capacity buyers can actually get. From “The Programmable Data Center — Evan Conrad, SF Compute”, Oct 20, 2026. [Watch the full episode](https://realalpha.app/v/EAtLq9_vrE0/) ## Transcript Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there. [23:29](https://realalpha.app/v/EAtLq9_vrE0/?t=1409) about the state of the compute trading market as you've developed it? Because effectively you guys are defining it. Mainly just the requirement for physical settlement. We think that if you... We spent three years learning why you need physical settlement. And our entire conversation today is that these things are not as fungible as you think. We're going to try and make them fungible. That's the industry's job to do that. [23:57](https://realalpha.app/v/EAtLq9_vrE0/?t=1437) But without that, you run a lot of... risks. If you try to build too much financialization before the industry has had time to build out the physical settlement, then I think what you have is you have a market that's very easy to manipulate and a market that has a lot of basis risk, where the price you may be hedging against actually has nothing to do with the price that the market you can actually buy the capacity for. [24:26](https://realalpha.app/v/EAtLq9_vrE0/?t=1466) Yeah. So for listeners, we talked about this briefly last time, but people are often shocked to find out that, let's say, the market for credit default swaps is 12 times the size of the bonds that they insure, something like that. Or like the market for mortgage sort of reinsurance or all that is larger than the underlying physical settlement. So that's why physical versus cash settled. And basically cash settlements are exactly the kind of side bet that you see in the big short where they may or may not have anything to do with the underlying thing itself. [25:02](https://realalpha.app/v/EAtLq9_vrE0/?t=1502) And it may be used as a proxy for overall other stuff. And you don't want that to go out of control? Yeah. So to be clear, we think cash settlement as a future concept is a great idea. We just think it should be derived from physical settlement. because, as you said, it's a side bet. And it would be kind of like if you made a cash-level future before you made the physical settlement, which I think people are kind of doing already. [25:30](https://realalpha.app/v/EAtLq9_vrE0/?t=1530) Yeah, totally. People are trying to make cash-level before you make the physical settlement. And people do that for all sorts of things, including startup stock. Yes. Right? Like, you can buy and sell a made-up share of OpenAI, but it's nothing to do with the actual share. Yes. And lots of those go very poorly. It would be kind of bad if you started selling the derivative on a stock that doesn't exist yet. [25:57](https://realalpha.app/v/EAtLq9_vrE0/?t=1557) Yeah. So, I mean, one thing that we do, so I used to be a currency trader, right, and interest rates as well. And one thing we do is you have a board that gets together and says, like, this is the London Interbank Offered Rate, LIBOR. And we all agree, like, this is the monthly fixing, and we all trade to that fixing. Yes. Is that even meaningful at some point in three years from now? So critically, LIBOR was manipulated. [26:20](https://realalpha.app/v/EAtLq9_vrE0/?t=1580) Yes. Our concern at the moment is... Is there 12 banks? Yes. Well, our concern is there's a very similar problem where you can manipulate an index. Our impression is why you can manipulate that index is because a lot of the indexes are based on a very small amount of data that has not a lot of correlation with the actual price of buying a new reserve contract. That's what we're concerned about. Okay. [26:47](https://realalpha.app/v/EAtLq9_vrE0/?t=1607) Interesting.