FTX/ Defi: If it seems to be like a duck and quacks like a duck . . . 

Honk honk! Here comes the crypto clown automobile.

Sam Bankman-Fried, chief govt and founding father of Bahama-based crypto-exchange FTX, appeared on Bloomberg’s glorious Odd Lots podcast Monday, and was joined by the Borg’s Matt Levine alongside common hosts Joe Weisenthal and Tracy Alloway.

Bankman-Fried is broadly considered one the neatest and most establishment-friendly fellows in all of cypto-dom, having not too long ago been wooed by Goldman Sachs in what would possibly doubtlessly be a Pac-Man takeover defence. Levine took the chance to ask SBF concerning the mechanics of “yield farming”, which includes staking cash or tokens in trade for some type of curiosity.


Can you give me an intuitive understanding of farming? I imply, prefer to me, farming is such as you promote some structured places and acquire premium, however maybe there’s a extra subtle understanding than that.

Sam Bankman-Fried:

Let me provide you with type of like a very toy mannequin of it, which I truly assume has a shocking quantity of legitimacy for what farming may imply. You know, the place do you begin? You begin with an organization that builds a field and in follow this field, they in all probability gown it as much as seem like a life-changing, you understand, world-altering protocol that’s gonna exchange all the large banks in 38 days or no matter. Maybe for now truly ignore what it does or fake it does actually nothing. It’s only a field. So what this protocol is, it’s known as ‘Protocol X,’ it’s a field, and you are taking a token. You can take ethereum, you possibly can put it within the field and you are taking it out of the field. Alright so, you set it into the field and also you get like, you understand, an IOU for having put it within the field after which you possibly can redeem that IOU again out for the token.

So far what we’ve described is the world’s dumbest ETF or ADR or one thing like that. It doesn’t do something however allow you to put issues in it when you so select. And then this protocol points a token, we’ll name it no matter, ‘X token.’ And X token guarantees that something cool that occurs due to this field goes to finally be usable by, you understand, governance vote of holders of the X tokens. They can vote on what to do with any proceeds or different cool issues that occur from this field. And after all, up to now, we haven’t precisely given a compelling purpose for why there ever could be any proceeds from this field, however I don’t know, you understand, perhaps there will probably be, in order that’s type of the place you begin.

And you then say, alright, properly, you’ve acquired this field and also you’ve acquired X token and the field protocol declares, or perhaps votes by on-chain governance, or, you understand, one thing like that, that what they’re gonna do is they’ll take half of all of the X tokens that have been re-minted. Maybe two thirds will, two thirds will provide X tokens, and so they’re going to offer them away totally free to whoever makes use of the field. So anybody who goes, takes some cash, places within the field, every day they’re gonna airdrop, you understand, 1% of the X token professional rata amongst everybody who’s put cash within the field. That’s for now, what X token does, it will get given away to the field folks. And now what occurs? Well, X token has some market cap, proper? It’s in all probability not zero. Let say it’s, you understand, a $20 million market …


Wait, wait, wait, from like first ideas, it needs to be zero, however okay.


Uh, certain. Okay. Completely cheap feedback.


I imply, that’s not fairly true, however, like, while you describe it on this completely cynical means, it sounds prefer it needs to be zero, however go on.


Describe it this fashion, you would possibly assume, as an example, that in like 5 minutes with an web connection, you might create such a field and such a token, and that it ought to replicate like, you understand, it needs to be price like $180 or one thing market cap for like that, you understand, that effort that you simply put into it. In the world that we’re in, when you do that, everybody’s gonna be like, ‘Ooh, box token. Maybe it’s cool. If you purchase in field token,’ you understand, that’s gonna seem on Twitter and it’ll have a $20 million market cap. And after all, one factor that you might do is you might like make the float very low and no matter, you understand, perhaps there haven’t been $20 million {dollars} which have flowed into it but. Maybe that’s type of like, is it, you understand, mark to market totally diluted valuation or one thing, however I acknowledge that it’s not completely clear that this factor ought to have market cap, however empirically I declare it might have market cap.


I agree.


It shouldn’t have any market cap in concept, however it follow, they all the time do. Okay.


That’s proper. So, and clearly already we’re type of hiding among the magic influence, proper? Like among the magic is in like, how do you get that market cap to begin with, however, you understand, no matter we’re gonna transfer on from that for a second. So, you understand, X tokens [are] being given out every day, all these like subtle corporations are like, huh, that’s attention-grabbing. Like if the overall sum of money within the field is 100 million {dollars}, then it’s going to yield $16 million this yr in X tokens being given out for it. That’s a 16% return. That’s fairly good. We’ll put slightly bit extra in, proper? And perhaps that occurs till there are $200 million {dollars} within the field. So, you understand, subtle merchants and/or folks on Crypto Twitter, or different type of comparable events, go and put $200 million within the field collectively and so they begin getting these X tokens for it.

And now swiftly everybody’s like, wow, folks simply resolve to place $200 million within the field. This is a reasonably cool field, proper? Like this can be a beneficial field as demonstrated by all the cash that folks have apparently determined needs to be within the field. And who’re we to say that they’re incorrect about that? Like, you understand, that is, I imply packing containers may be nice. Look, I like packing containers as a lot as the subsequent man. And so what occurs now? All of a sudden persons are type of recalibrating like, properly, $20 million, that’s it? Like that market cap for this field? And it’s been like 48 hours and it already is $200 million, together with from like subtle gamers in it. They’re like, come on, that’s too low. And they take a look at these ratios, TVL, whole worth locked within the field, you understand, as a ratio to market cap of the field’s token.

And they’re like ‘10X’ that’s insane. 1X is the norm.’ And so then, you understand, X token value goes means up. And now it’s $130 million market cap token due to, you understand, the bullishness of individuals’s utilization of the field. And now swiftly after all, the sensible cash’s like, oh, wow, this factor’s now yielding like 60% a yr in X tokens. Of course I’ll take my 60% yield, proper? So they go and pour one other $300 million within the field and also you get a psych after which it goes to infinity. And then everybody makes cash.


I consider myself as like a reasonably cynical particular person. And that was a lot extra cynical than how I might’ve described farming. You’re identical to, properly, I’m within the Ponzi enterprise and it’s fairly good.


At no level did any of this require any type of like financial case, it’s identical to different folks put cash within the field. And so I’m going to too, after which it’s extra beneficial. So they’re gonna put extra money in, and at no level within the cycle, did it appear to love, describe any type of like financial objective?


So on the one hand, I believe that’s a reasonably cheap response, however let me mess around with this slightly bit. Because that’s one framing of this. And I believe there’s like a type of miserable quantity of validity…


Can you touch upon just like the sustainability of that? Because, you understand, on the one hand you’re like, properly, a trillion {dollars} of institutional cash goes to return into Bitcoin. And however you’re like mainly there are a whole lot of Ponzis which have accomplished very well.

There actually is nothing extra so as to add.

Nevertheless, when you’d like to realize better perception about “valuable boxes” with no financial use case that go “to infinity” due to “the bullishness of people’s usage of the box”, don’t overlook to join for the FT’s Crypto and Digital Assets Summit starting Tuesday.

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