Crypto markets, EA funding and optics

Thanks for taking the time to comment. The details of the interaction between Alameda and FTX were very hard to pinpoint. And the timing was such that it was very hard to profit off of the collapse, even if you were very skeptical of cryptocurrencies to begin with. Hence, the whole misplaced discussion on the forum of, "Institutional investors, who have a profit motive, didn't foresee this. How could we have?" For example, exchanges like Binance have not experienced similar meltdowns.  

But to make money, you not only have to be right, but be right at the right time. Imagine you saw  the COVID pandemic in 2018 and shorted the market starting in 2018. By 2020 you would be broke and have no more cash.

On the other hand, EA is not trying to make money. So, the EA community doesn't care about the timing as much as a trader does. EA cares about preparation. If we know that the COVID pandemic is going to happen in 2018, we start preparing in 2018, and when it does happen, in 2020, we are prepared. 

Thus, for the EA community, what was really more salient to prediction was the quotation by Paul Krugman:

stablecoins...resemble 19th-century banks,...when paper currency was issued by largely unregulated private institutions. Many of these banks failed, in some cases due to fraud but mostly due to bad investments.

don't see where you get the 99.9% number, but yes, it does seem crypto is commonly used in scams.

I'm guessing this isn't a huge deal, they just have to stop saying either (a) false things about customer deposits being FDIC-insured, or (b) true statements about customer deposits being FDIC-insured without specifying which bank, both of which the FDIC seems to prohibit.

Here's a news article on this: https://www.msn.com/en-ca/money/topstories/crypto-exchange-ftx-ordered-to-halt-false-and-misleading-claims-by-us-bank-regulator/ar-AA10QJdY

An excerpt:

The Federal Deposit Insurance Corporation said a July tweet by Brett Harrison, head of FTX's U.S. operations, contained misleading claims that funds held at and stocks purchased through FTX were FDIC insured, and ordered the company to remove any misleading language from its social media accounts and websites.

In the tweet, which Harrison has since deleted, he stated that direct deposits from employers to the crypto exchange are “stored in individually FDIC-insured bank accounts” and that stocks purchased via FTX US “are held in FDIC-insured” brokerage accounts. The FDIC said in its cease and desist letter to FTX US that those statements implied that FDIC insurance was available for cryptocurrency and stock holdings, and that the agency does not insure brokerage accounts.

In a tweet on Friday, FTX CEO Sam Bankman-Fried emphasized FTX is not FDIC-insured, and apologized if anyone misinterpreted previous comments.

This NY Post story also struck me as  odd: https://nypost.com/2022/07/06/sam-bankman-fried-has-few-billion-to-help-crypto-industry/

On one or two occasions, Bankman-Fried, who made billions arbitraging cryptocurrency prices in Asia beginning in 2017, said he has used his own cash to backstop failing crypto companies when it didn’t make sense for FTX to do so.

“FTX has shareholders and we have a duty to do reasonable things by them and I certainly feel more comfortable incinerating my own money,” he said.

Since when do people go to such lengths (including their own personal cash!) to bail out other people's Ponzi schemes or securities fraud? 

I agree that SBF wasn't talking about Bitcoin or all crypto, but it's still worth noting that he did describe yield farming as a Ponzi scheme. 

Here's the conversation in more detail. The gist is that when asked to explain something called yield farming, SBF describes it as a Ponzi scheme with no underlying value, leaving his conversation partners stunned. I'm liberally adding bold and underline to make it easier to skim:

Matt Levine: (21:17)
Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there's a more sophisticated understanding than that.

Sam Bankman-Fried: (21:28)
Let me give you sort of like a really toy model of it, which I actually think has a surprising amount of legitimacy for what farming could mean. You know, where do you start? You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that's gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It's just a box. So what this protocol is, it's called ‘Protocol X,’ it's a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.

So far what we've described is the world's dumbest ETF or ADR or something like that. It doesn't do anything but let you put things in it if you so choose. And then this protocol issues a token, we'll call it whatever, ‘X token.’ And X token promises that anything cool that happens because of this box is going to ultimately be usable by, you know, governance vote of holders of the X tokens. They can vote on what to do with any proceeds or other cool things that happen from this box. And of course, so far, we haven't exactly given a compelling reason for why there ever would be any proceeds from this box, but I don't know, you know, maybe there will be, so that's sort of where you start.

And then you say, alright, well, you’ve got this box and you’ve got X token and the box protocol declares, or maybe votes by on-chain governance, or, you know, something like that, that what they're gonna do is they are going to take half of all the X tokens that were re-minted. Maybe two thirds will, two thirds will offer X tokens, and they're going to give them away for free to whoever uses the box. So anyone who goes, takes some money, puts in the box, each day they're gonna airdrop, you know, 1% of the X token pro rata amongst everyone who's put money in the box. That's for now, what X token does, it gets given away to the box people. And now what happens? Well, X token has some market cap, right? It's probably not zero. Let say it's, you know, a $20 million market …

Matt: (23:56)
Wait, wait, wait, from like first principles, it should be zero, but okay.

SBF: (23:59)
Uh, sure. Okay. Completely reasonable comments.

Matt: (24:04)
I mean, that's not quite true, but, like, when you describe it in this totally cynical way, it sounds like it should be zero, but go on.

SBF: (24:10)
Describe it this way, you might think, for instance, that in like five minutes with an internet connection, you could create such a box and such a token, and that it should reflect like, you know, it should be worth like $180 or something market cap for like that, you know, that effort that you put into it. In the world that we're in, if you do this, everyone's gonna be like, ‘Ooh, box token. Maybe it's cool. If you buy in box token,’ you know, that's gonna appear on Twitter and it’ll have a $20 million market cap. And of course, one thing that you could do is you could like make the float very low and whatever, you know, maybe there haven't been $20 million dollars that have flowed into it yet. Maybe that's sort of like, is it, you know, mark to market fully diluted valuation or something, but I acknowledge that it's not totally clear that this thing should have market cap, but empirically I claim it would have market cap.

Matt: (24:57)
I agree.

Joe: (24:59)
It shouldn't have any market cap in theory, but in practice, they always do. Okay.

SBF: (25:03)
That's right. So, and obviously already we're sort of hiding some of the magic impact, right? Like some of the magic is in like, how do you get that market cap to start with, but, you know, whatever we're gonna move on from that for a second. So, you know, X tokens [are] being given out each day, all these like sophisticated firms are like, huh, that's interesting. Like if the total amount of money in the box is a hundred million dollars, then it's going to yield $16 million this year in X tokens being given out for it. That's a 16% return. That's pretty good. We'll put a little bit more in, right? And maybe that happens until there are $200 million dollars in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or other sort of similar parties, go and put $200 million in the box collectively and they start getting these X tokens for it.

And now all of a sudden everyone's like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they're wrong about that? Like, you know, this is, I mean boxes can be great. Look, I love boxes as much as the next guy. And so what happens now? All of a sudden people are kind of recalibrating like, well, $20 million, that's it? Like that market cap for this box? And it's been like 48 hours and it already is $200 million, including from like sophisticated players in it. They're like, come on, that's too low. And they look at these ratios, TVL, total value locked in the box, you know, as a ratio to market cap of the box’s token.

SBF: (26:43)
And they’re like ‘10X’ that's insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it's $130 million market cap token because of, you know, the bullishness of people's usage of the box. And now all of a sudden of course, the smart money's like, oh, wow, this thing's now yielding like 60% a year in X tokens. Of course I'll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.

Matt: (27:13)
I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.

Joe Weisenthal: (27:27)
At no point did any of this require any sort of like economic case, it’s just like other people put money in the box. And so I'm going to too, and then it's more valuable. So they're gonna put more money in, and at no point in the cycle, did it seem to like, describe any sort of like economic purpose?

SBF: (27:42)
So on the one hand, I think that’s a pretty reasonable response, but let me play around with this a little bit. Because that's one framing of this. And I think there's like a sort of depressing amount of validity…

Matt: (27:53)
Can you comment on like the sustainability of that? Because, you know, on the one hand you're like, well, a trillion dollars of institutional money is going to come into Bitcoin. And on the other hand you're like basically there are a lot of Ponzis that have done really well.

SBF: (28:06)
Right. So let me, okay, cool. I'll stay on the cynical route, think about like cynically, what could happen here? Well, okay. So you've got this boxes and it’s kind of dumb, but like what's the end game, right? This box is worth zero obviously. And like that, you know, you can't like keep this smart cap or something. But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that's what people are pricing it at and sort of has that market cap. Everyone's gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it's worth like less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back. You just get liquidated eventually. And it is sort of like real monetizable stuff in some senses. And you know, at some point if the world never decides that we are wrong about this in like a coordinated way, right? Like you're kind of the guy calling and saying, no, this thing's actually worthless, but in what sense are you right?

Tracy Alloway: (29:15)
Can I just ask on this point, I mean, so are you saying that the value has to derive from everyone agreeing that it's worth something? And I know like on the one hand, that seems like a simple point about crypto, but on the other hand, throughout crypto's history, there have been these different arguments about how it actually gets value, you know, use cases for the underlying technology — for blockchain. Everyone's gonna start migrating stuff on blockchain, and then you're gonna have a real economic use attached to these assets. And that's where the value's gonna come from. But are you saying that it depends more on everyone just agreeing that these are worth something?

SBF: (29:53)
So really what I'd say is that it could come in theory from either. You can sort of get a market cap either because of cash flow and then Warren Buffett's like f*ck this. Like, I'm going to buy this if it's at too cheap of a price, because I'll just buy it and own it and get cashflow from it. And that's great. Or you could see something get market cap in the way that, I don't know, Doge coin or SHIB coin have, where people are just kinda like ‘ha ha’ and then they buy it. And if you're like, that's dumb, it has no cashflow flow. I'm gonna short sell it. You lose all your money. And, you know, those like, at least like over the last few years, those have both been ways that assets have gotten market cap. And I sort of like think that this starts to hint at like, at least some interesting angles on this, because it's not just cryptocurrencies that have had this dynamic, right? How about like, you know, AMC or Hertz or GameStop or meme stocks in general have like a very similar pattern to this and the sort of concept of maybe people will pay something for it even though it doesn't seem traditionally valuable, is not a crypto specific concept. Although it certainly has become like…

Perhaps it was intentionally provocative, but from the transcript of the interview, you can read SBF admitting that cryptocurrencies are like a useless box that gains value because other people want to profit off of said useless box...

current EA spending is a small percentage of EA wealth

I would tend to disagree. This is like saying to an individual that donates 5% of their income that since 5% of annual income is a small percentage of their total wealth (which might include their house and other assets) that a 90% decline in their income would not affect future donations. Of course it would.

I agree that there are massive benefits to having big donors on EA's side. But that's like saying of a politician there are massive benefits to have pharma or oil donating to your election campaign. I don't really have a particular solution here, but one can simultaneously be cognizant of the risks and benefits at the same time.

I think this ignores the central thesis of this post.