Sam Bankman-Fried and Matt Levine on How to Make Money in Crypto

what makes the crypto difficult for me? Which is that if you like, and I've said maybe you said this before, but if you step away for like a month, then you like some other stuff like the price of corn or wheat or oil or something, Russia's invasion of Ukraine. Yeah, and then you come back to crypto and it's like

the entire narrative has completely changed. It's all this new terminology, new tokens that you've never heard of, Like you can't step away from for a minute, let alone a month, and feel like you have any sort of hope of understand what's going on. It does feel like it requires a certain intensity to make it in crypto. And then after that month, it's like, well, I'm already so behind, I don't want to come back and actually, you know, you're like fore or four months behind, so we have

to reverse it. We can catch back up with what's going. Yeah, we need to reverse that. I mean, I am vaguely aware of some of the big picture stuff that has been happening. So I'm looking at the price of bitcoin at the moment, it's just under forty thousand. It is weird, and I think he wrote about this, It is kind of strange that in this environment bitcoin hasn't been doing better. I know. So you know, here's what I've been thinking about, which is that the prices of especially the big ones.

You know, there's always tokens going to the moon, but the prices of like the big ones overall market cab rough year kind of gone sideways in the last year or more down. But um, the interest in the space continues to be on debated and it feels like every day someone is leaving a big bang, big fund to do something new in crypto, crypto hedge fund, crypto VC. Interest in investing in the space does not seem to have abated at all, even with the price of big

coins out of going sideways to down. No, absolutely, And also the other thing that's sort of happened is rather than crypto going off and being its own ecosystem, which if you think back to bitcoin and its origins, that was really kind of the point of the whole thing. But it feels like crypto as a whole is becoming more and more integrated with the existing financial system, or

at least with Wall Street. Uh. And so you know, you see people who are collecting n f T s and now they're talking about the bond market in interest rates, which is kind of funny, but you're right, we haven't spoken about it for a while, and we should definitely rectify that. So I want to know basically what all this new money entering the space is doing. Something I've been thinking about is that you could make a fortune essentially just buying bitcoin or maybe buying bitcoin in the US.

And still I get in Japan because the market was so inefficient that there were like multiple prices around the world, and you can make a ton of money doing that. These days, I suspect that the market is vastly more efficient than it was back then. On the flip side, I also get the impression that, compared to trad fied that the spreads are still a mile wide and that there's still big opportunities for all this money coming into the space. So I'm very let's have a conversation about

how to make money in crypto? All right, I'm really excited. We're gonna be bringing back into his third time on the show, the one and only Sam Bankman Fried SPF. He's the co founder of f t X, And we're also going to be joined by Matt Levine, Bloomberg opinion columnist. We had them both on last fall. Everyone liked hearing them discuss the state of the markets together, so we

figured let's have them both back on. So Sam and Matt, thanks to both of you for coming back on odd lots of course, thanks for having me back absolutely So, uh, Sam, let's start with you. Actually, you guys have a big conference coming up at the end of April, the FTX Salt Conference Crypto Bahamas, the Bahamas being your new your new corporate home, which sounds pretty nice, am I am?

I basically right that there is a sort of still this huge essential tidal wave of money coming into the space, Like well, how would you characterize very big picture the all the interest right now in crypto, There is a huge tidal wave of money trying to come into the space, is what I would say, just sort of you know, gobs and gobs of it that that sort of has been desperately you know, sort of like trying to to to like find its way in over the last few years.

Every month another sort of like nice little pile of that of that you know, larger gob nags to make it in. So one thing I saw recently is that you took a stake in i X, which I think a lot of people will recognize as the firm that was founded by Brad katsu Yama, who's the guy who was written about in Michael Lewis's book Flashboys, all about the evils of high frequency trading and stuff like that.

What exactly is the thinking there? And you know, I guess I understand some of the maybe the ideological alignment or the stated ideological alignment there, But what exactly are you going to be doing together? Yeah, and you know, obviously we'll have to see what happened, because is you know, highly regulatorily dependent space. But the core of it is like some digital assets are our securities. Different people might give different quotes for exactly attraction of them are, but

but certainly some fraction of them are. Let's say that you want to offer trading in a digital asset security, what would you do right now? This is not a problem that people have really confident, regular right solutions for.

It's something that there's certainly a lot of thought going into from the regulatory perspective, you know, at its core, like we're experts in in you know, things to do with with tokens and offering trading and tokens I x er know, experts in offering trading insecurities and more generally, they're also really good at being creative and sort of building out new market structures that might not be exactly the same as what they're sort of used to doing.

And that's exactly what we need to do right now, is to build out a new market structure that is consistent with our existing rules and regulations in coordination with the SEC and other regulators for digital docity securities, and that is our big goal with them. It's something you said, Sam in your first answer I thought is really interesting.

You said there's always some money and it tries to get into this space, which I sort of took as to me, and there's like some constraint or that it's not easy, it's easy to just sort of jump into crypto as perhaps people imagine, what is the country, Why why is it that the money is just trying to get in? Yeah, I mean it's a really good question and the answer is a little bit different for different

lots of money. But the high level structure if it looks somewhat you know, similar, which is basically your let's say a big bank, right, and all of your clients are asking you, can you please get into the digital

assets space. We want to invest and we want to access token through you, and all of your traders are saying, hey, we want to be trading crypto, you know, as for the prop desk for the firm, and you know, random employees are are coming up to you, the strategy person or or whatever at this bank every day and think, hey,

why aren't we doing the crypto thing yet? And um, And so you go to compliance basically and you say, hey, we'd really like to do with the crypto thing, like I know, last time we asked you sort of groaned, well, like could you give you know, maybe give us a little bit more than a grown right, like like put some words that grown and it's sort of like growing really loudly, and they say, can you tell me what

regulatory framework are we going to be under? You know, Compliance comes back and says, well, okay, like you want to have this conversation, sure we'll have it. Talk to me about why you think we are allowed to do this? Right, and uh, you know, at its heart, people are sort of like, oh boy, like you know what, why are we allowed to do this? Well, people bush track and say, well,

what regulation are we breaking? And Compliance is like, you know what, understand like we're the first ones who are going to get sued if there's anyone who's gonna get sued here by a regulator. We can't point to a regulation we're breaking here. We need to know what regulatory framework are we a part of? What licenses are necessary

to play different roles in this space? Right and and and the answer is as it is right now basically like we're working on it right from like as a country, like as as as a global society, we're working on it. That's not that's not a great answer. And that's like roughly where the money gets trapped. So when you say money, is that like I mean what you're describing sounds like the sort of regulatory environment that a bank lives in. I'm less convinced that's like what an asset manager lives in.

Like do you mean, do you mean mostly banks are like sort of everyone in trad fun Well, yeah, it's a good question. It certainly isn't everyone in trad by and and in particular, the closer that you get to something that looks like proprietarily owned and controlled money, the

more you are able to do something here, right. And so when you look at, for instance, a prop trading firm that is trading I mean on wine extreame, you know, take one, this trade entirely for its own book, so it doesn't even have customers, doesn't have LPs, does not have anything right from their perspective, this is this is a lot clear right from their perspective, The answer is a lot closer to like, oh, well, you know, here's our deal, Like we trade things, that's what we do.

We're going to trade this other asset class. And the often see of themselves is like, look, we're not showing this customers or anything. We're not sort of in the line of fire here. So that is the area that we've seen sort of most come in early to the space, but if you sort of take a step back, actually even a lot of other money managers end up in the more concerned bucket. Shall we say, take a look at like a giant et F company, right, Like, that's

an example of like an asset manager. A lot of assets are in our in our in ets and other sort of similar funds. How many ETFs currently have cryptocurrencies in them? Well, the answer is like two or something like that. And again you're getting back to questions of well, what are these are these commodities? Are these securities under which statute are we putting them in the fund? Do

we need to register them? They're having active conversations with regulators about this, and and there's obviously been a lot of back and forth about attempts to have a bit poin ETF which have only sort of come together so far. There are now big when futures ets which or something,

but they're certainly this is not a solved problem. Even if if you sort of like allied the specific you know, registered creation requirements around a publicly listed et F and you look at sort of like private mutual funds for high net worth individuals. Most of those are sort of sitting there thinking, like, are we going to get in trouble somehow for this compliance to somewhat on, you know,

uncertain and nervous about it. And so I think they're you know, you're you're still in a pretty messy situation all things consider. The thing you're describing sounds like incredibly bullish for like the prices of crypto assets, because basically you're saying, there's a title wave of trillions of dollars of institutional money that they all own up at ten percent into crypto and they can't but they'll figure it out, and then like crypto assets will expect Like is that

the right way to read it? Or is there like I mean, like the counter narrative would be like you know, the sort of prop traders and and like retail speculators have gotten so far ahead of that trend that like prices already reflect that demand. How do you think about it? I think those two sides are the right way to

think about it. And I do think this is the thing that makes me the bullish about like crypto asset pricing is just the amount of money that isn't able to access it today or able to that that isn't accessing it today, you know, one way or another, but directly could be and very well might start doing so over the next few years. That that is I think the most bullish trend going on in the space. And on the flip side, right there's this question of will

has that already been priced in? And that can only be the narrative in some sense for like so many years in a row before at some point you have to start saying, well, the way, isn't that why people were buying last year and holding you know, anticipation of this.

I mean, in the end, it's messy, like there's lots of reasons that people would be and I don't think that there's a very clean tally of this, and I think I'm still not bullish because of it, but I definitely do think this has already been prepositioned for a decent amount. Now there's a limit to how prepositioned it could be, right because if you think about it, the

scale of what could roll into crypto. If you think that a few trillion dollars of actual capital is what could happen, that's the entire market cap ofcrypto right now. If a few trillion dollars rolled into crypto, I'm guessing it would ten x in price roughly speaking from where

it is. And so if you think that the odds of that are at least ten percent, that alone can sort of justify And it's sort of like an argument that it sort of probably hasn't been fully prepositioned for by the world, which I think, I like, roughly believe in expected value terms also like in median terms, what are the odds crypto will go up or down versus

like how much we'll go up or down? You know, I certainly don't think it's like anything close to conclusive argument that like it's you know, very likely to go off you say crypto, Like, I mean, my impression of like giant institutional interest is like the idea of having some portion of your portfolio in bitcoin is very attractive.

My impression is that there's a sort of like sharp falloff where like they're not sort of thinking about the difference between other black chains and like how to you know, yield farm and stuff like that. Because that your impression as well, or do you think that a lot of this institutional money is like you know, wants to actively

trade lots of different cryptocurrencies. Yeah, I don't think they've decided is the real answer, right, Like, I think the real answer is that, like, you know, if you ask them, they would say something like I don't know, you know, if you like what you mean by crypto, like what crypto? I think they're honest answers like I don't know, you know, the crypto thing, right, like there's bitcoin, Like yeah, they're more like yeah, totally there are more like are you

you know, intending to trade more? You know, I don't know, Like I certainly want to consider that, you know, down the road, Like right now, our focuses on finding a way to get bitcoin access and maybe ethereum access to users like you know, but like absolutely, you know, we considered, you know, would be we'd be potentially interested in offering more.

I think that's a sort of like messy confused answer that that you would here in practice, which is just another example of like, you know, things are not very orderly right now in in sort of like money looking at the space just on this point, and Joe kind of touched on it in the intro, but I guess this is sort of an existential question, but it feels like the market is in the process of maturing, And it also seems like f t x's whole purpose is

to improve liquidity and crypto trading, and some of that should happen naturally as more money comes in, but some of it is you making a conscious effort to do so. But at the same time, it seems like a lot of the opportunity in crypto has historically been from illiquidity and frictions and fragmentation in the market. Is there attention there, like, does the attractiveness of the crypto world start to ebb

away as the market actually matures. It depends on how mature is in theory, and this this might not happen, but certainly I think you would ask most of the traders in the market what they think. What they would say would be something like, well, yeah, we do think that pian l in basis points you know portrayed will will sort of like go down over time, but we also think volume will go up, and that that certainly has been what we've seen so far. Work you compare

today to right. You know, I was busy trying to to make money arbitraging bitcoins here versus Japan, and those trades were good by many per cent um. But you know, there's a billion dollars a day of volume going on in each side, which is a whole lot if you're

making many percent on it. But you know, what do things look like today, Well, there's one or two hundred billion dollars a day of volume that are trading in crypto, and so I think volumes are probably up like fifty x or so since then spreads on the other hand, or down, and they're down sort of a comparable you know, ratio, And so I think that's so far like the story of crypto has sort of been like spreads are coming in and at the same time volumes are going up

such that actually the arbitrageures are making about as much as they always did, although it's it's maybe harder than it was before. And you can imagine the future that like that continues, that that things continue to get more efficient. But that as part of you know, the asset class getting more institutionalized, like you know, volume and liquidity goes up a therapy which increases the sort of like scale

of activity people can have. That being said, and and part of me doesn't believe that, but but not all of me, because it is also the case that like, at least as of today, we are probably over indexed on you know, volume relative to liquidity. And I think one way to look at that is just looking out ratio daily trading volume to market cap they're trading, you know, comparable amounts to how much US stocks trade each day,

but you know, have the market cap of Amazon. But I would definitely guess on the margin that like we are going to see compression in that Rob people who haven't listened to last April was the first time we had you and Sam, and we talked a lot about that trade whereas like really difficult sort of operationally to execute, but just these crazy spreads between the price of bitcoin in the US and Japan four or five years ago, and how you could just you know, how simple that

that sort of opportunity was once you found a way to make that trade. As you've described, volumes way up, spreads way down. Where are you know? And you mentioned too that there's like a range of sophistications. So there are some entities that I just want to have Bitcoin exposure, I want to have etherorum exposure, and then there's other tread five that's clearly way more sophisticated, like entities like

jump trading or doing all kinds of wild stuff. And we had their head of crypto on the podcast last year kind of Korea. But what you know, like where are the current frictions as you see them or the arbitrarge ores entering this market are seeing, like what kind of things? Obviously it's gonna be way morephisticated than just by USL Japan. Like where are the existing inefficiencies sort

of broadly in crypto right now? Yeah, I mean they're a little all over the place, although obviously way smaller in particular. I think it's a lot less well you buy on this echanges on that exchange. As you said, it's it's a lot less identifiable in some sense, is what it is? So what is it if it's not that? You know, some of this is just traditionally jef T stuff. You know, there's a hundred fifty billion dollars a day of volume that traded. It's trading on a bunch of

different order books. And when you say how efficient is it, right, like how much price might be order books be? Well, I don't know, take two bitcoin or bitcoin futures order books right now, they probably each have these of a couple of basis points and a spread of a basis point or you know, some fraction of basis point or

something like that. And you know, given sort of like the funding rates and the premiums of futures and things like that, and the time and costed to do one of these ARBs, they can absolutely be a few BIPs, you know, out of line with each other. And so in theory you can sort of do out the math.

Let's say that you know, you made one basis point on each side, which would be a lot and would be like, you know, an impressive amount to make on on the third volume, on fifty of volume in crypto, giving the extreme of like you were the arbit charger, you're the h f T firm, then you know, how much is that a day will a bip on you know, fifty billion dollars of volume is five million dollars of profit a day, which is you know, what what a billion and a half a year, And so that gets

some sense for and again obviously I'm sort of like putting a lot of corners in that, like I don't want to sort of imply that that's like you know that is the amount that could be made. But but whatever, maybe that gives some sense for like what the available scale here is of arbor charge profit in the space, and it is like substantial, and so that's part of

what they're doing. You know what other things are there? Well, farming is actually probably I hesitate to say that it's been the biggest source of but it might be like I wouldn't be shocked if you added up all the civicate firms together and said, like, over the last couple of years, have they made more from farming or trading? The answer might be farmed. Can you give me an

intuitive understanding or 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. Let me give you sort of like a really a 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, world altering protocol that's gonna replace all the big banks in thirty eight 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 that you can take a token, you can take a theory, and you can put it in the box and take it out of the box like you put it in the box, and you get like, you know, an IOU for for having to put it in the box, and then you can redeem that IOW you back out for the token. So so far, what we've described is the world's dumbest e t F or a d R or something like that. It's a It doesn't do anything but let you put things in it

if you so chose. 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 gonna 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 happened 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 maybe there will be. So that's sort of where you start. And then you say, all right, well yeah, this box and yeat X token, and the box for a call declares or or maybe votes byonunting 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 will as remnted, maybe two thirds of two thirds well ever X tokens, and they're going to give them away for free to

everyone uses the box. So anyone who goes takes some money puts in the box. Each day they're gonna air drop, you know, one percent of the X tokens pro rata among sephron 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 it's probably not zero, but let's say it's you know, twenty million dollar market cap and a bunch of arbitreasures from from like first principles that should be zerre But okay, sure, okay, I completely resmall comments like I mean, like that's not quite true. But it like, when you describe it in this totally cynical way, it sounds like it'd beasier. But go describe

it this way. You might think, for instance, that in like five minutes with an Internet connection, you can create such a box in such a token, and that it should reflects like, you know, it should be worth like a hundred eighty dollars 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 box token. Maybe it's cool if you got in box token, you know, that's gonna appear on Twitter and all have a twenty million dollar 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 maybe there haven't been twenty million dollars that flowed into it yet. Maybe that's sort of like is it's 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 but empirically I claim it would have market cap. Agree it should any series, but that's right, So and obviously already we're start of hiding some of the magic in that, right, Like some of the magic is in like how do you get that market gap to start with? But you know, whatever, we're what We're going to move on from that for

a second. So you know X tokens being given out each day all these like sophisticated firms, Like that's interesting, Like if the total amount of money in the box is a hundred million dollars, then it's gonna yield sixteen million dollars this year in X tokens being given out for it. That's a sixteen percent return. That's pretty good. We'll put a little bit more in, right, and and maybe that that happens until there are two million dollars

in the box. So you know, sophisticated traders and or people on crypto Twitter or or other sort of similar parties go and put two hundred million dollars in the box collectively, and they start getting these ex tokens for it, right, And now all of a sudden, he's like, wow, people just decided to put two hundred million dollars in the box. This is a pretty cool box, right, Like this 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, right, And so what happens now all of a sudden people are kind of recalibrating, like, well, twenty million dollars, that's it, like that market cap for this box and it's been like forty eight hours and it already has two hundred million dollars, including from like sophisticated players in it, Like come on, that's too late, right, like, and and they look at these ratio TVL total value walked in the box, you know, as a ratio to market cap of the

boxes token, and they're like ten x. That's insane. One x is the norm. And so then you know, X token price goes way up and now it's a hundred thirty million dollar 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 it's like go wow, like this thing is now yielding like

sixty year in next tokens. Of course, I'll take my sixty percent yield, right, so they go they were another three million dollars in the box, and you get a site and then it goes to infinity and then everyone makes money. I think of myself as like a fairly cynical person, and yep, that was so much more cynical. Yes, I described farming like you're just like, well, I'm in

the ponzi business and it's pretty good. And did any of this require any sort of like economic case is just like other people get money in the box and so I'm going to two 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. So, on the one hand,

I think that's a pretty reasonable response. But let me play around with this a little bit, right, because that's one framing of this, and I think there's like a a sort of depressing amount of ablidity. Can you can you comment on the sustainability of that, like, because like you know, on the one and you're like, well, in dollars money is going to come into a pit ground.

On the other hand, you're like, basically there are a lot of ponzis that have done really well, right, so let me okay, cool, I'll sail on the cynical route, think about, like cynically what could happen here? Well, okay, so you've got things boxes kind of dumb, but like

what's the end game? Right? Because boxes where zero obviously, and like that, you know, you can't like keep this market cap or something like the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that's when people are pricing it at and sort of has that market cap, everyone's gonna market to market. In fact, you can even finance this, right, and you put x token in a

borrow lending protocol and borrowed dollars with it. If you think it's worth like less than two thirds of that, you you can even just like put some in there, take the dollars out never never, you know, give the dollars back and get liquidated eventually. And it is sort of like real monetize herbal stuff in some senses. And you know, at some point, like if the world never decides that we were wrong about this in like a coordinated way, right, Like you're kind of a guy calling

bullshit and saying no, this thing is actually worthless. But in what sense are you right? Sorry? 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 going to start migrating stuff on blockchain and then you're going to have a real economic use attached to these assets, and that's where the value is going to come from. But are you saying that it depends more on everyone

just agreeing that these are worth something? 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 show right, and then like Warren Buffets like fun this, like I'm going to buy this if it's at too cheaper price, result just buy it and own it and get cash flor from it and that's great.

Or you could see something get market cap in the way that I don't know, Dodge point or ship coin have right where people just kind of like ha ha, and then they buy it and if you're like that's dumb, it has no cash flow, I'm gonna short sell it.

You lose all your money, and h you know that those like at least like over the last few years, those are booth in ways that like assets have gotten market cap, and I I sort of like, I think that this starts to hint at like at least some interesting angles on this, because like it's not just cryptocurrencies that have had this dynamic, right, Like how about like you know, a m C or hurts or game stop

or meme. Stocks in general have like a very similar pattern to this, And and the sort of like concept of like 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 I mean, I've seen game stuff though it's like usually that's the perception and I'm not judging, but the perception is that that it's sort of like a perversion of what the whole point of like the stock market is as opposed

to like this is going to be like the basis of this yeah, I've written that sort of thing before, Like I would have I would have sort of drawn the causality the other way, like I would I've said that, like, you know, the rise of bitcoin allowed for things like

game stop at AMC. But I also think that like there's a difference between something like bitcoin where people are like, well, this thing is the story of value, and enough people accept that that it becomes a story of value and the box that you're describing, where like, like no one has an emotional attachment to the box in your description, and I think also empirically, like what they have is and and an a p y number, right, what they have is they're like, oh, this box is paying us

a lot of money, so we're gonna stay in it. And so there's like with bitcoin, you know, you can sort of say there's a sustainable value because of like just sort of like a broad social acceptance. But like I feel like with a lot of this like farming stuff like the kid his box act, like no one knows the name from day to day. It's just like this is the box that is yielding the most today, So I'm gonna put money in and I'm sort of

curious about the sustainability of that. Yeah, so certainly some of them are unsustainable and some of them are, you know, many of them by number, and exactly the way you think that they work, right, Like the way these end is that like eventually people decide that this is no longer today's school box, this is yesterday's lane box, and they go down a lot in price, and then people start move on to box number two. And if everyone did a careful accounting of where they ended up, I

don't know, you know, what they've made money? Would they not? If it's a whole unclear like some people would have, some people wouldn't have. It's a messy And that's like, certainly how some of these quickly end up, but it's

not how all of them do. And in particularly, let's let's be revisit one of the earliest assumptions about this, right, the point where I said, this is a box that does nothing but be a box, right, And that was like, I think a little facetious er, although I do think it's like an important way to understand part of what's going on. But it's not really the case that the biggest of these claimed to be a box that is nothing but a box. They claim to be a bit

more than that. And you know, you can query how much you believe the story that their value at its heart is coming from them being more than just a box. But people certainly perceive them to be more than that. And you know examples of this, right I Well, let's say, you know, what are some of the most popular steaking programs. They're like, you know, historically unite swap of a compound. These are various boxes that have an actual product tied to them that has like a narrative about why it

might become the world's next big thing. You know, maybe it's gonna be like the preeminent depths. You know, maybe it's going to be the preeminent borrow lending protocol and chain. And it's like you know, weird box sticking things starts out is just this sort of like side show. So the bigger story of we're going to change the world

with the protocol that we just built. Now, sometimes that side show becomes the main show itself because sometimes you know, in the end, what really happens is that like the box plus yield nature of it becomes more popular than the original use case of it. But it makes it at least seem a bit less dumb and a bit less circular and a bit more like, you know, there's something real that many of these are drawing on and a real hope that it's going to become itself a

valuable protocol. So obviously, okay, maybe defied crypto will become very important, but I'm still just sort of like curious, you know, just the sort of pure making money side of this. You estimated that sort of the arbitrage market for bitcoin, maybe there's potential one and a half billion dollars and profits out there for the taking. Like how big is the farming industry when you talk about like this is a news besides trading? This is the other big way. How big is the putting money in a

box industry getting? And I'm also curious, Like, you know, one of the things that people in this space talk about is you can, thanks to ft x specifically and thanks to the perpetual futures that it lists for so many coins, I could buy the coin farm it short the future on ft X so that I don't even have to take a directional position on the coin itself

and just sort of milk the farming yield. So can you just describe like how big is this sort of like ecosystem, and how sophisticated are the trades getting beyond just sort of like the naive or simple like CREWD put money in the box trade. Well, let's do like some rough ballparking. There's something two billion dollars of quote unquote TVL quote value locked on chain, and now a lot of that is basically irrelevantly lost on chain, and

you can sort of ignore. Maybe a hundred billion is sort of like the real number or something a little bit less than that. Yields are certainly down a fair bit, but I think we're looking at like, you know, mid to high single digit percents on average or something like that.

And so I don't know, you know, mid to high single digit billions of dollars a year of quote unquote profit that that are being made by farmers actually doesn't sound insane to me as as a ball park of this, which that's a big number to the extent that this is real profit, it's you know, we might be talking five billion a year that sort of like traders are making from farming. So yeah, that the numbers are not are not tiny, and and they're plausibly bigger, probably bigger

and aggreeate than treading returns and group im not. I don't want to like a hundred percent square by that comparison, but I am might be right, is not out of line with like my my sort of instincts and prior and and did some pieces of knowledge I have here? So it's a lot one I think one thing which is worth noting here, right. One parallel is well, okay, let's say that you have a company, right, and this

company delivers food. Right, what it does is it it goes to restaurants and picks up food and takes it to houses and puts the food there. And there's a few of these, right, what would be like how you would think this company would do during a pandemic? You think spectacular? Right? In fact, the pandemic was a very trying period for some food delivery companies because their unit

economics were negative, like they were. They were running out of loss and it had been for years, and the pandemic meant more business, which meant more loss for them, so paradoxically it was negative. And how did that happen? Well, what's the actual whole well a funds there if you take a step back, Well, the company, why are they

running out a loss? Well, vcs keep funding them, right, People keep putting money into the company here, and the company then has stock price goes up because this metric business revenue, a metric that isn't actually profit, goes up. And you know, as long as sort of like that keeps happening, right, people keep putting more and more money

into the box. And the associated security in this case is because it is tied to the ultimate profit or something like that of this company goes up and up, and you know, it keeps spending more money than it's making on things that are causing it to make that money in the first place, like negative unit economics or or just hip tons of advertising or something like that. And and then it gets more and more business. And because it gets more business, people like, that's great, using

even more money, bigger numbers. Let's put more money in the goal here being collect all the money in your box, you look a lot bigger than your competitors, and they started give up, and you win, and then in the end you get all the real business and and and and basically it's all an advertising budget, right, as much as anything else This is all a way for like, you know, your box to get more notoriety and ultimately end up getting real business six years later because of that.

That's sort of like standard operating procedure frankly for startups right now. And it's very similar to what we're talking about in some ways with these high verticals. Can I ask, I mean, what we're talking about here is basically circularity and the circularity of defy And there's one other aspect of it that I've been thinking a lot about lately, and I'm trying to think how to phrase this, But it's pretty clear in crypto that you want to avoid

dealing with FIAT currencies as much as possible. So onboarding is tough, or there are tax reasons to avoid doing that or whatever. So the way everyone gets around that is through stable coins. But stable coins are basically just trying to replicate the dollar for the most part, right So you're not really getting away from FIAT, You're just replicating it in a way that fits into the crypto ecosystem. Is is that a problem for crypto or like, at

some point conceptually should stable coins go away? What I guess the question is, like, what is the point of crypto if everything is eventually underpinned by the dollar anyway, there is an interesting question of, like what happens to the price of bitcoin and other digital assets in the face of stable coins if they obviate they need to have an actual asset that is not tied to the dollar in the first place, right if just like dollarization takes over service fool Like, I think that's sort of

an interesting question. I think when you look at well, is it bad to have a dollar like guess in the system? I think no, I think it's super powerful. And I think what I'd say is like, I'll try and send a hundred thousand dollars to the guy saying next to me, um or is the woman saying next to me? And you know, you'll try and send a hundred thousand dollars the person sitting next to you. And we'll have a race. And I'm going to use USDC

and you're gonna use USDC or USD rather. And I have a guess as to who's gonna win that race. I have a guest as to whose money is going to get there first. And if we want to do some you know, a race to someone who's sitting in Nigeria. Boy, do have a strong guest about you know, whose money is going to get there first and who's gonna have spent more doing it? And so I think that to some extent right away you can see this is can

you unpack that a little? Like when you get the u s DC to the guy in Nigeria and then he wants to buy a sandwich with it, what happens right, So right now there's a sense in which it doesn't accomplish all that much if the next thing he has to do is CD to cash out USDC for a USD wire transfer anyway, right, and then like by the time he's bought the sandwich, you know your crypto transfer did nothing because it all bottomed out in the same place. Anyway.

That being said, I think there's like two reasons that that I don't fully buy that response, one of which is, you know, eventually you can imagine a world where the sandwich guy accepts USDC, right, and what's the sandwich guy accepts it, then he actually never needs to go into you know, into fat directly, right? Can you just stay in in cryptoland the whole time? And I think that it is in some ways actually just more efficient. So

that's that's one answer to your question. But another answer to your question is, you know there are services of text is one of them that can convert easily between dollars and currencies and connect as you know, point of sale converters there, so that people could go to a sandwich store and like, hey with so, but the Sandward store receives local fiat currency, and there still does have

to be a conversion involved. But now what we're saying is that like one, a few companies have to figure out how to do that conversion in large bulk size, you know, netting it all out somewhat efficiently, which is a lot easier than if you're trying to live in a world where like person had to figure out how to do this in order to send money to like

their aunt back home. And you can still end up in a world where, like, for almost everyone, this system is extremely easy, and like, there are a few points that deal with the converting back and forth, but like removes eight of difficult parts that would have needed to happen. What's your take on the rise of either algorithmic or partially algorithmic partially backed stable clients One of the most interesting phenomenons happening right now is the rise of Luna

and Ust. And Luna has this treasury reserve consisting of a lot of bitcoin, which seems a little you see, But some people say, any idea of like an algorithmic back stable coin is a perpetual motion machine. It's only a matter of time before it fails. Like do you believe there can be like a truly sort of like decentralized stable coin, Like what do you make of these these projects? I think they're really cool. I do have some sympathy to the perpetual motion machine crowd here they

consider some useful purposes. But if you do zoom out right and you say, this is a stable coin backed by volatile assets, what's going to happen in a big market move right? Like you know how this plays out? It certainly seems like that's only asking for trouble eventually. But yeah, I think that's I think that's right now. Again, you could say, like, look, we want like this on chain algorithmic coin for these reasons and like the goals and for someone to sit there and hold it for

five years. The goals start to use briefly for like transactions on chain, and they created and redeemed on chain really frequently, and I think answers like that can can make sense. I think there's all of versions of quote unquote algorithm makes stable points that do have risk in them, but that also have massively enhanced yield because they're they're taking that risk on in order to do a trade

that makes money effectively. Right there, They're almost like money market funds in some sense, you know, that cross of them, and that can make sense as well from sort of like an economic perspective. But but I am skeptical of, you know, thinking that like a typical person is going to want to for long periods of time hold a typical algorithmic stable coin that isn't paying interest because it's just like you know, someone said, hey, great, it's it's new things kind of like a bank, and put your

money on it. But every four years it might go to zero. And that's the difference. It's not it's not super compelling. So we've covered straightforward h F two arbitrage type stuff, covered yield farming. If you ask how people are making money in equities, right, like one of those things that is true anyway, But then like a lot of it is options and structured products and like kind of packaging stuff in weird ways. Where are we in

that part of the ecosystem and crypto? I know there's things where like people are doing like kind of defy structured products where like you can like kind of put your money into butt and sell options. How should I think about that as being part of the ecosystem. Yeah, it's a good question, and I think the answer here is actually a little bit weird and surprising given everything else that's going on, which is not that much Like it's not that surprising when you like listen to the

description of field farming. But okay, right, I didn't thinking about mechanically does clarify a little bit why options haven't taken off, But they really haven't. Volume and options is very small compared to volume in futures. I you know, when you look at most these defy primitives that have taken off, most of them are way simpler than a

typical launch options contract would be. By and large. I do think it's the case right now in crypto that like sort of more complex structured products are just are not that big compared are to this sort of like simplest pseudo perpetual motion machine you put vision Because you read all these stories about like Goldman doing OTC options trades, I mean, is that like kind of oh no volume? I mean, yeah, I don't move for sure, but I

strongly suspect that where that's coming from. You know, I don't think that that's coming from Goldman sitting there and saying we're gonna go like, do OTC options in crypto, because that's where all the money is. Like, everyone's just printing money doing OTC options in crypto. Why are they doing OTC options in crypto? What's the actual reason that that's the thing they're doing? In advertising? Can I guess, yeah, go for it. My guess is that someone at Goldman

was like, let's put money into a box. That's a Ponzi scheme, and someone else at Goldman is like, We're absolutely not going to put money in a box. It's a Ponzi scheme. And then someone the Goldman was like, what's our comparative advantage? Well, is this with a bunch of hedge funds, we uh, you know, we can present option.

Let's let's try to like, you know, rub some sticks together and drum up an OTC options business, because then we'll have we'll have, you know, have customers for that, whereas like the actual money making place is a little too insane for for our kind of regulated, uh somewhat risk averse situation. So that's absolute a lot of it, But at the end you touched upon a key part of it, which which is regulation. Right, if you're a Goldman and you're trying to think, like what crypto things

can I definitely do? What will my compliance department just sort of stammer if they try to object to, like what do they just not have a case on? The answer is, well, CFTC listed cash settled products where I never ever ever have to have the physical where I never have to actually have on me any cryptocurrencies. And why is that important that you never have to have

any cryptocurrencies on you? Well, it's because if you need to actually hold a cryptocurrency, you start thinking about things like Bossel's capital requirements right and other sort of like fun notions like that, and it becomes a ship show really fast. But if you do nothing but cash settle derivatives, you never have to touch physical, you don't have to figure out the security of it. You don't have to figure out capital requirements, you don't have to figure out

the regulation of doing that. And like SEEFTC structured products which are cash settled. I mean, there's the exchange side that you can trade, but also there's a well developed regulatory framework for OTC cash settled derivatives, contracts for institutional counterparties, training with other institutional counterparties, using is to that sort of like is another well understood, really clean operational concept

to do. And so it's lamp posting as much as anything else, right, it's them saying, like, what is the one thing regulatorially that we feel comfortable doing in this space, Let's go do that on the top of making money.

The other obvious thing that's sort of like from the beginning of crypto and we talked about arbitrage and farming and all this is obviously they're still smaller tokens all the time flying, and so I'm just curious, like, what are the different approaches essentially that either institutional money or a closet I sort of like VC money is taking

to essentially like find the next big thing. How do you like people know, Like I mean, at this point, I think I want to sort of like hume out a little bit and say, what, let's even put crypto aside for a second. How do vcs find the next anything that they're going to invest in? Right? Like, how did they find the next company they're going to invest in?

And I think am I answered that is like when you break it down mechanically to what's happening, you get a bizarre fucking process, Like you get something that does not look like the paragon of efficient markets that you

might expect, where it's like, what was mechanically happening? Well, they like see what all their friends are chattering about, right, And their friends keep talking about this company or this token or something, and they start foe mowing And then their LPs are like, yo, have you made us a lot of money off of this company or token yet? And you're you're kind of like the answers, No, we haven't invested in it, but you know that's not a

good answer given what question your LPs just asked. Instead, you're like, oh boy, you're gonna be excited about what we have done and or will do. And then you find a way to get into that token and or company, and all the while you're like, how do we justify is this a good investment? Like all the models are made up right, like things are currently being valued off of right, but it's not yet. It's sort of like an interesting property of trying to value things off right.

You're buying them off of a model built by a person who owns the thing that's being sold. So like, of course the numbers you can go off between now and right, it's gonna go up an arbitrary amount, and you can justify anything by just like you know, backgraft goes up and off and eventually like holy shit, LPs, boy, are you gonna be excited about the stuff that we're buying on your behalf? It's like bizarre processes like that ultimately that are like shaping VCS investment decisions, both in

traditional equities, uh and in in cryptic currencies. Well, there's tons more to talk about, but we're gonna have to pick it back up. Sam and Matt thank you both so much for coming on novel. Yeah, that was great. Thanks thanks so much, guys. That was that was great, Yeah, Tracy, I love that the best. The highlight was definitely Sam's description of yield farming that even the sort of crypto synic is a magic box that you put money into

and more money comes out. And even Matt Levine was like, I would have never described it this way because I thought to be too cynical. Yeah, I don't really know what to say about that. That was a little bit surprising. Um, but it does, I mean, it does clear up a lot of questions that I had about D five. He's sort of hinted at this idea of like the value either coming from actual economics and use cases versus everyone

just agreeing. And I think, honestly, one thing we've seen, one thing we've learned over the past ten years is that everyone just agreeing something is valuable sometimes it works. Um, And like I wouldn't necessarily say that it's going to work for all the coins in existence, but the fact that it's been working for so long certainly has surprised many people, myself included. Yeah. No, there's the thing like

it's like, oh, this is ridiculous. There's a perpetual motion machine, and yet here we are in twenty two in the industry, troops going, machines are still going. So the way defy works is you put in a money in a box that you think more people will put money into the box. And the way VC works is you hear what you're friends in the industry are investing in based on seven numbers, and then you also want to get on that. So

it's really just all the way down. Well, so here's the other thing I would say, and Matt kind of touched on this too, But the idea of momentum trading is not you know, that is not entirely unknown in finance. In fact, it has been a very profitable strategy, arguably since two thousand eight and the financial crisis. So I don't know how to feel about it. I feel weird. We all feel weird. Well, I mean, one thing is clear, which is there is just a lot going on in

the space. But in the meantime, shall we leave it there? Let's leave it there? Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't Thought? You can follow me on Twitter at

the Stalwart. Follow our guests Sam Bankman Freed He's at SBF Underscore f t X, and Matt Levine He's at Matt Underscore Levine, follow our producer Carmen Rodriguez at Harmon Arman, followed the Bloomberg head of podcast Francesca Levi at Francisco Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. Hey, there are add Thoughts listeners. We are very excited to let you know that Odd Thoughts is nominated for a Webby Award.

You know, Tracy, I'm not normally like a big awards person or get excited about that, but now that I saw that we were nominated for the Webby for Best Business Podcast, suddenly I'm feeling very competitive and I want to win. You really want it? Yeah? Okay, Well, on that note, listeners, if you enjoy Add Lots, if you like what we do, we would really appreciate it. If you take two minutes of your time and head over to vote dot Webby Awards dot com. You can find

Odd Lots in the Business Podcast category. Thanks so much to