Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wish and I'm Tracy Allowaite Tracy the coins.
Speaker 1: Time's time to talk about the coins again. The coins
Speaker 1: you mean, like you know, fiat coins, right, No, the
Speaker 1: electronic digital coins? People are you know what? It feels
Speaker 1: like It's been a while, isn't it. Well, so this
Speaker 1: is the crazy thing. This is my like, what what
Speaker 1: what makes the crypto difficult for me? Which is that
Speaker 1: if you like, and I've said maybe you said this before,
Speaker 1: but if you step away for like a month, then
Speaker 1: you like some other stuff like the price of corn
Speaker 1: or wheat or oil or something, Russia's invasion of Ukraine. Yeah,
Speaker 1: and then you come back to crypto and it's like
Speaker 1: the entire narrative has completely changed. It's all this new terminology,
Speaker 1: new tokens that you've never heard of, Like you can't
Speaker 1: step away from for a minute, let alone a month,
Speaker 1: and feel like you have any sort of hope of
Speaker 1: understand what's going on. It does feel like it requires
Speaker 1: a certain intensity to make it in crypto. And then
Speaker 1: after that month, it's like, well, I'm already so behind,
Speaker 1: I don't want to come back and actually, you know,
Speaker 1: you're like fore or four months behind, so we have
Speaker 1: to reverse it. We can catch back up with what's going. Yeah,
Speaker 1: we need to reverse that. I mean, I am vaguely
Speaker 1: aware of some of the big picture stuff that has
Speaker 1: been happening. So I'm looking at the price of bitcoin
Speaker 1: at the moment, it's just under forty thousand. It is weird,
Speaker 1: and I think he wrote about this, It is kind
Speaker 1: of strange that in this environment bitcoin hasn't been doing better.
Speaker 1: I know. So you know, here's what I've been thinking about,
Speaker 1: which is that the prices of especially the big ones.
Speaker 1: You know, there's always tokens going to the moon, but
Speaker 1: the prices of like the big ones overall market cab
Speaker 1: rough year kind of gone sideways in the last year
Speaker 1: or more down. But um, the interest in the space
Speaker 1: continues to be on debated and it feels like every
Speaker 1: day someone is leaving a big bang, big fund to
Speaker 1: do something new in crypto, crypto hedge fund, crypto VC.
Speaker 1: Interest in investing in the space does not seem to
Speaker 1: have abated at all, even with the price of big
Speaker 1: coins out of going sideways to down. No, absolutely, And
Speaker 1: also the other thing that's sort of happened is rather
Speaker 1: than crypto going off and being its own ecosystem, which
Speaker 1: if you think back to bitcoin and its origins, that
Speaker 1: was really kind of the point of the whole thing.
Speaker 1: But it feels like crypto as a whole is becoming
Speaker 1: more and more integrated with the existing financial system, or
Speaker 1: at least with Wall Street. Uh. And so you know,
Speaker 1: you see people who are collecting n f T s
Speaker 1: and now they're talking about the bond market in interest rates,
Speaker 1: which is kind of funny, but you're right, we haven't
Speaker 1: spoken about it for a while, and we should definitely
Speaker 1: rectify that. So I want to know basically what all
Speaker 1: this new money entering the space is doing. Something I've
Speaker 1: been thinking about is that you could make a fortune
Speaker 1: essentially just buying bitcoin or maybe buying bitcoin in the US.
Speaker 1: And still I get in Japan because the market was
Speaker 1: so inefficient that there were like multiple prices around the world,
Speaker 1: and you can make a ton of money doing that.
Speaker 1: These days, I suspect that the market is vastly more
Speaker 1: efficient than it was back then. On the flip side,
Speaker 1: I also get the impression that, compared to trad fied
Speaker 1: that the spreads are still a mile wide and that
Speaker 1: there's still big opportunities for all this money coming into
Speaker 1: the space. So I'm very let's have a conversation about
Speaker 1: how to make money in crypto? All right, I'm really excited.
Speaker 1: We're gonna be bringing back into his third time on
Speaker 1: the show, the one and only Sam Bankman Fried SPF.
Speaker 1: He's the co founder of f t X, And we're
Speaker 1: also going to be joined by Matt Levine, Bloomberg opinion columnist.
Speaker 1: We had them both on last fall. Everyone liked hearing
Speaker 1: them discuss the state of the markets together, so we
Speaker 1: figured let's have them both back on. So Sam and Matt,
Speaker 1: thanks to both of you for coming back on odd
Speaker 1: lots of course, thanks for having me back absolutely So, uh, Sam,
Speaker 1: let's start with you. Actually, you guys have a big
Speaker 1: conference coming up at the end of April, the FTX
Speaker 1: Salt Conference Crypto Bahamas, the Bahamas being your new your
Speaker 1: new corporate home, which sounds pretty nice, am I am?
Speaker 1: I basically right that there is a sort of still
Speaker 1: this huge essential tidal wave of money coming into the space,
Speaker 1: Like well, how would you characterize very big picture the
Speaker 1: all the interest right now in crypto, There is a
Speaker 1: huge tidal wave of money trying to come into the space,
Speaker 1: is what I would say, just sort of you know,
Speaker 1: gobs and gobs of it that that sort of has
Speaker 1: been desperately you know, sort of like trying to to
Speaker 1: to like find its way in over the last few years.
Speaker 1: Every month another sort of like nice little pile of
Speaker 1: that of that you know, larger gob nags to make
Speaker 1: it in. So one thing I saw recently is that
Speaker 1: you took a stake in i X, which I think
Speaker 1: a lot of people will recognize as the firm that
Speaker 1: was founded by Brad katsu Yama, who's the guy who
Speaker 1: was written about in Michael Lewis's book Flashboys, all about
Speaker 1: the evils of high frequency trading and stuff like that.
Speaker 1: What exactly is the thinking there? And you know, I
Speaker 1: guess I understand some of the maybe the ideological alignment
Speaker 1: or the stated ideological alignment there, But what exactly are
Speaker 1: you going to be doing together? Yeah, and you know,
Speaker 1: obviously we'll have to see what happened, because is you know,
Speaker 1: highly regulatorily dependent space. But the core of it is
Speaker 1: like some digital assets are our securities. Different people might
Speaker 1: give different quotes for exactly attraction of them are, but
Speaker 1: but certainly some fraction of them are. Let's say that
Speaker 1: you want to offer trading in a digital asset security,
Speaker 1: what would you do right now? This is not a
Speaker 1: problem that people have really confident, regular right solutions for.
Speaker 1: It's something that there's certainly a lot of thought going
Speaker 1: into from the regulatory perspective, you know, at its core,
Speaker 1: like we're experts in in you know, things to do
Speaker 1: with with tokens and offering trading and tokens I x
Speaker 1: er know, experts in offering trading insecurities and more generally,
Speaker 1: they're also really good at being creative and sort of
Speaker 1: building out new market structures that might not be exactly
Speaker 1: the same as what they're sort of used to doing.
Speaker 1: And that's exactly what we need to do right now,
Speaker 1: is to build out a new market structure that is
Speaker 1: consistent with our existing rules and regulations in coordination with
Speaker 1: the SEC and other regulators for digital docity securities, and
Speaker 1: that is our big goal with them. It's something you said,
Speaker 1: Sam in your first answer I thought is really interesting.
Speaker 1: You said there's always some money and it tries to
Speaker 1: get into this space, which I sort of took as
Speaker 1: to me, and there's like some constraint or that it's
Speaker 1: not easy, it's easy to just sort of jump into
Speaker 1: crypto as perhaps people imagine, what is the country, Why
Speaker 1: why is it that the money is just trying to
Speaker 1: get in? Yeah, I mean it's a really good question
Speaker 1: and the answer is a little bit different for different
Speaker 1: lots of money. But the high level structure if it
Speaker 1: looks somewhat you know, similar, which is basically your let's
Speaker 1: say a big bank, right, and all of your clients
Speaker 1: are asking you, can you please get into the digital
Speaker 1: assets space. We want to invest and we want to
Speaker 1: access token through you, and all of your traders are saying, hey,
Speaker 1: we want to be trading crypto, you know, as for
Speaker 1: the prop desk for the firm, and you know, random
Speaker 1: employees are are coming up to you, the strategy person
Speaker 1: or or whatever at this bank every day and think, hey,
Speaker 1: why aren't we doing the crypto thing yet? And um,
Speaker 1: And so you go to compliance basically and you say, hey,
Speaker 1: we'd really like to do with the crypto thing, like
Speaker 1: I know, last time we asked you sort of groaned, well,
Speaker 1: like could you give you know, maybe give us a
Speaker 1: little bit more than a grown right, like like put
Speaker 1: some words that grown and it's sort of like growing
Speaker 1: really loudly, and they say, can you tell me what
Speaker 1: regulatory framework are we going to be under? You know,
Speaker 1: Compliance comes back and says, well, okay, like you want
Speaker 1: to have this conversation, sure we'll have it. Talk to
Speaker 1: me about why you think we are allowed to do this? Right,
Speaker 1: and uh, you know, at its heart, people are sort
Speaker 1: of like, oh boy, like you know what, why are
Speaker 1: we allowed to do this? Well, people bush track and say, well,
Speaker 1: what regulation are we breaking? And Compliance is like, you
Speaker 1: know what, understand like we're the first ones who are
Speaker 1: going to get sued if there's anyone who's gonna get
Speaker 1: sued here by a regulator. We can't point to a
Speaker 1: regulation we're breaking here. We need to know what regulatory
Speaker 1: framework are we a part of? What licenses are necessary
Speaker 1: to play different roles in this space? Right and and
Speaker 1: and the answer is as it is right now basically
Speaker 1: like we're working on it right from like as a country,
Speaker 1: like as as as a global society, we're working on it.
Speaker 1: That's not that's not a great answer. And that's like
Speaker 1: roughly where the money gets trapped. So when you say money,
Speaker 1: is that like I mean what you're describing sounds like
Speaker 1: the sort of regulatory environment that a bank lives in.
Speaker 1: I'm less convinced that's like what an asset manager lives in.
Speaker 1: Like do you mean, do you mean mostly banks are
Speaker 1: like sort of everyone in trad fun Well, yeah, it's
Speaker 1: a good question. It certainly isn't everyone in trad by
Speaker 1: and and in particular, the closer that you get to
Speaker 1: something that looks like proprietarily owned and controlled money, the
Speaker 1: more you are able to do something here, right. And
Speaker 1: so when you look at, for instance, a prop trading
Speaker 1: firm that is trading I mean on wine extreame, you know,
Speaker 1: take one, this trade entirely for its own book, so
Speaker 1: it doesn't even have customers, doesn't have LPs, does not
Speaker 1: have anything right from their perspective, this is this is
Speaker 1: a lot clear right from their perspective, The answer is
Speaker 1: a lot closer to like, oh, well, you know, here's
Speaker 1: our deal, Like we trade things, that's what we do.
Speaker 1: We're going to trade this other asset class. And the
Speaker 1: often see of themselves is like, look, we're not showing
Speaker 1: this customers or anything. We're not sort of in the
Speaker 1: line of fire here. So that is the area that
Speaker 1: we've seen sort of most come in early to the space,
Speaker 1: but if you sort of take a step back, actually
Speaker 1: even a lot of other money managers end up in
Speaker 1: the more concerned bucket. Shall we say, take a look
Speaker 1: at like a giant et F company, right, Like, that's
Speaker 1: an example of like an asset manager. A lot of
Speaker 1: assets are in our in our in ets and other
Speaker 1: sort of similar funds. How many ETFs currently have cryptocurrencies
Speaker 1: in them? Well, the answer is like two or something
Speaker 1: like that. And again you're getting back to questions of well,
Speaker 1: what are these are these commodities? Are these securities under
Speaker 1: which statute are we putting them in the fund? Do
Speaker 1: we need to register them? They're having active conversations with
Speaker 1: regulators about this, and and there's obviously been a lot
Speaker 1: of back and forth about attempts to have a bit
Speaker 1: poin ETF which have only sort of come together so far.
Speaker 1: There are now big when futures ets which or something,
Speaker 1: but they're certainly this is not a solved problem. Even
Speaker 1: if if you sort of like allied the specific you know,
Speaker 1: registered creation requirements around a publicly listed et F and
Speaker 1: you look at sort of like private mutual funds for
Speaker 1: high net worth individuals. Most of those are sort of
Speaker 1: sitting there thinking, like, are we going to get in
Speaker 1: trouble somehow for this compliance to somewhat on, you know,
Speaker 1: uncertain and nervous about it. And so I think they're
Speaker 1: you know, you're you're still in a pretty messy situation
Speaker 1: all things consider. The thing you're describing sounds like incredibly
Speaker 1: bullish for like the prices of crypto assets, because basically
Speaker 1: you're saying, there's a title wave of trillions of dollars
Speaker 1: of institutional money that they all own up at ten
Speaker 1: percent into crypto and they can't but they'll figure it out,
Speaker 1: and then like crypto assets will expect Like is that
Speaker 1: the right way to read it? Or is there like
Speaker 1: I mean, like the counter narrative would be like you know,
Speaker 1: the sort of prop traders and and like retail speculators
Speaker 1: have gotten so far ahead of that trend that like
Speaker 1: prices already reflect that demand. How do you think about it?
Speaker 1: I think those two sides are the right way to
Speaker 1: think about it. And I do think this is the
Speaker 1: thing that makes me the bullish about like crypto asset
Speaker 1: pricing is just the amount of money that isn't able
Speaker 1: to access it today or able to that that isn't
Speaker 1: accessing it today, you know, one way or another, but
Speaker 1: directly could be and very well might start doing so
Speaker 1: over the next few years. That that is I think
Speaker 1: the most bullish trend going on in the space. And
Speaker 1: on the flip side, right there's this question of will
Speaker 1: has that already been priced in? And that can only
Speaker 1: be the narrative in some sense for like so many
Speaker 1: years in a row before at some point you have
Speaker 1: to start saying, well, the way, isn't that why people
Speaker 1: were buying last year and holding you know, anticipation of this.
Speaker 1: I mean, in the end, it's messy, like there's lots
Speaker 1: of reasons that people would be and I don't think
Speaker 1: that there's a very clean tally of this, and I
Speaker 1: think I'm still not bullish because of it, but I
Speaker 1: definitely do think this has already been prepositioned for a
Speaker 1: decent amount. Now there's a limit to how prepositioned it
Speaker 1: could be, right because if you think about it, the
Speaker 1: scale of what could roll into crypto. If you think
Speaker 1: that a few trillion dollars of actual capital is what
Speaker 1: could happen, that's the entire market cap ofcrypto right now.
Speaker 1: If a few trillion dollars rolled into crypto, I'm guessing
Speaker 1: it would ten x in price roughly speaking from where
Speaker 1: it is. And so if you think that the odds
Speaker 1: of that are at least ten percent, that alone can
Speaker 1: sort of justify And it's sort of like an argument
Speaker 1: that it sort of probably hasn't been fully prepositioned for
Speaker 1: by the world, which I think, I like, roughly believe
Speaker 1: in expected value terms also like in median terms, what
Speaker 1: are the odds crypto will go up or down versus
Speaker 1: like how much we'll go up or down? You know,
Speaker 1: I certainly don't think it's like anything close to conclusive
Speaker 1: argument that like it's you know, very likely to go
Speaker 1: off you say crypto, Like, I mean, my impression of
Speaker 1: like giant institutional interest is like the idea of having
Speaker 1: some portion of your portfolio in bitcoin is very attractive.
Speaker 1: My impression is that there's a sort of like sharp
Speaker 1: falloff where like they're not sort of thinking about the
Speaker 1: difference between other black chains and like how to you know,
Speaker 1: yield farm and stuff like that. Because that your impression
Speaker 1: as well, or do you think that a lot of
Speaker 1: this institutional money is like you know, wants to actively
Speaker 1: trade lots of different cryptocurrencies. Yeah, I don't think they've
Speaker 1: decided is the real answer, right, Like, I think the
Speaker 1: real answer is that, like, you know, if you ask them,
Speaker 1: they would say something like I don't know, you know,
Speaker 1: if you like what you mean by crypto, like what crypto?
Speaker 1: I think they're honest answers like I don't know, you know,
Speaker 1: the crypto thing, right, like there's bitcoin, Like yeah, they're
Speaker 1: more like yeah, totally there are more like are you
Speaker 1: you know, intending to trade more? You know, I don't know,
Speaker 1: Like I certainly want to consider that, you know, down
Speaker 1: the road, Like right now, our focuses on finding a
Speaker 1: way to get bitcoin access and maybe ethereum access to
Speaker 1: users like you know, but like absolutely, you know, we considered,
Speaker 1: you know, would be we'd be potentially interested in offering more.
Speaker 1: I think that's a sort of like messy confused answer
Speaker 1: that that you would here in practice, which is just
Speaker 1: another example of like, you know, things are not very
Speaker 1: orderly right now in in sort of like money looking
Speaker 1: at the space just on this point, and Joe kind
Speaker 1: of touched on it in the intro, but I guess
Speaker 1: this is sort of an existential question, but it feels
Speaker 1: like the market is in the process of maturing, And
Speaker 1: it also seems like f t x's whole purpose is
Speaker 1: to improve liquidity and crypto trading, and some of that
Speaker 1: should happen naturally as more money comes in, but some
Speaker 1: of it is you making a conscious effort to do so.
Speaker 1: But at the same time, it seems like a lot
Speaker 1: of the opportunity in crypto has historically been from illiquidity
Speaker 1: and frictions and fragmentation in the market. Is there attention there, like,
Speaker 1: does the attractiveness of the crypto world start to ebb
Speaker 1: away as the market actually matures. It depends on how
Speaker 1: mature is in theory, and this this might not happen,
Speaker 1: but certainly I think you would ask most of the
Speaker 1: traders in the market what they think. What they would
Speaker 1: say would be something like, well, yeah, we do think
Speaker 1: that pian l in basis points you know portrayed will
Speaker 1: will sort of like go down over time, but we
Speaker 1: also think volume will go up, and that that certainly
Speaker 1: has been what we've seen so far. Work you compare
Speaker 1: today to right. You know, I was busy trying to
Speaker 1: to make money arbitraging bitcoins here versus Japan, and those
Speaker 1: trades were good by many per cent um. But you know,
Speaker 1: there's a billion dollars a day of volume going on
Speaker 1: in each side, which is a whole lot if you're
Speaker 1: making many percent on it. But you know, what do
Speaker 1: things look like today, Well, there's one or two hundred
Speaker 1: billion dollars a day of volume that are trading in crypto,
Speaker 1: and so I think volumes are probably up like fifty
Speaker 1: x or so since then spreads on the other hand,
Speaker 1: or down, and they're down sort of a comparable you know, ratio,
Speaker 1: And so I think that's so far like the story
Speaker 1: of crypto has sort of been like spreads are coming
Speaker 1: in and at the same time volumes are going up
Speaker 1: such that actually the arbitrageures are making about as much
Speaker 1: as they always did, although it's it's maybe harder than
Speaker 1: it was before. And you can imagine the future that
Speaker 1: like that continues, that that things continue to get more efficient.
Speaker 1: But that as part of you know, the asset class
Speaker 1: getting more institutionalized, like you know, volume and liquidity goes
Speaker 1: up a therapy which increases the sort of like scale
Speaker 1: of activity people can have. That being said, and and
Speaker 1: part of me doesn't believe that, but but not all
Speaker 1: of me, because it is also the case that like,
Speaker 1: at least as of today, we are probably over indexed
Speaker 1: on you know, volume relative to liquidity. And I think
Speaker 1: one way to look at that is just looking out
Speaker 1: ratio daily trading volume to market cap they're trading, you know,
Speaker 1: comparable amounts to how much US stocks trade each day,
Speaker 1: but you know, have the market cap of Amazon. But
Speaker 1: I would definitely guess on the margin that like we
Speaker 1: are going to see compression in that Rob people who
Speaker 1: haven't listened to last April was the first time we
Speaker 1: had you and Sam, and we talked a lot about
Speaker 1: that trade whereas like really difficult sort of operationally to execute,
Speaker 1: but just these crazy spreads between the price of bitcoin
Speaker 1: in the US and Japan four or five years ago,
Speaker 1: and how you could just you know, how simple that
Speaker 1: that sort of opportunity was once you found a way
Speaker 1: to make that trade. As you've described, volumes way up,
Speaker 1: spreads way down. Where are you know? And you mentioned
Speaker 1: too that there's like a range of sophistications. So there
Speaker 1: are some entities that I just want to have Bitcoin exposure,
Speaker 1: I want to have etherorum exposure, and then there's other
Speaker 1: tread five that's clearly way more sophisticated, like entities like
Speaker 1: jump trading or doing all kinds of wild stuff. And
Speaker 1: we had their head of crypto on the podcast last
Speaker 1: year kind of Korea. But what you know, like where
Speaker 1: are the current frictions as you see them or the
Speaker 1: arbitrarge ores entering this market are seeing, like what kind
Speaker 1: of things? Obviously it's gonna be way morephisticated than just
Speaker 1: by USL Japan. Like where are the existing inefficiencies sort
Speaker 1: of broadly in crypto right now? Yeah, I mean they're
Speaker 1: a little all over the place, although obviously way smaller
Speaker 1: in particular. I think it's a lot less well you
Speaker 1: buy on this echanges on that exchange. As you said,
Speaker 1: it's it's a lot less identifiable in some sense, is
Speaker 1: what it is? So what is it if it's not that?
Speaker 1: You know, some of this is just traditionally jef T stuff.
Speaker 1: You know, there's a hundred fifty billion dollars a day
Speaker 1: of volume that traded. It's trading on a bunch of
Speaker 1: different order books. And when you say how efficient is it, right,
Speaker 1: like how much price might be order books be? Well,
Speaker 1: I don't know, take two bitcoin or bitcoin futures order
Speaker 1: books right now, they probably each have these of a
Speaker 1: couple of basis points and a spread of a basis
Speaker 1: point or you know, some fraction of basis point or
Speaker 1: something like that. And you know, given sort of like
Speaker 1: the funding rates and the premiums of futures and things
Speaker 1: like that, and the time and costed to do one
Speaker 1: of these ARBs, they can absolutely be a few BIPs,
Speaker 1: you know, out of line with each other. And so
Speaker 1: in theory you can sort of do out the math.
Speaker 1: Let's say that you know, you made one basis point
Speaker 1: on each side, which would be a lot and would
Speaker 1: be like, you know, an impressive amount to make on
Speaker 1: on the third volume, on fifty of volume in crypto,
Speaker 1: giving the extreme of like you were the arbit charger,
Speaker 1: you're the h f T firm, then you know, how
Speaker 1: much is that a day will a bip on you know,
Speaker 1: fifty billion dollars of volume is five million dollars of
Speaker 1: profit a day, which is you know, what what a
Speaker 1: billion and a half a year, And so that gets
Speaker 1: some sense for and again obviously I'm sort of like
Speaker 1: putting a lot of corners in that, like I don't
Speaker 1: want to sort of imply that that's like you know
Speaker 1: that is the amount that could be made. But but whatever,
Speaker 1: maybe that gives some sense for like what the available
Speaker 1: scale here is of arbor charge profit in the space,
Speaker 1: and it is like substantial, and so that's part of
Speaker 1: what they're doing. You know what other things are there? Well,
Speaker 1: farming is actually probably I hesitate to say that it's
Speaker 1: been the biggest source of but it might be like
Speaker 1: I wouldn't be shocked if you added up all the
Speaker 1: civicate firms together and said, like, over the last couple
Speaker 1: of years, have they made more from farming or trading?
Speaker 1: The answer might be farmed. Can you give me an
Speaker 1: intuitive understanding or farming? I mean, like, to me, farming
Speaker 1: is like you sell some structured puts and collect premium.
Speaker 1: But perhaps there's a more sophisticated understanding than that. Let
Speaker 1: me give you sort of like a really a toy
Speaker 1: model of it, which I actually think has a surprising
Speaker 1: amount of legitimacy for what farming could mean. You know,
Speaker 1: where do you start. You start with a company that
Speaker 1: builds a box, and in practice this box they probably
Speaker 1: dress it up to look like a life changing, world
Speaker 1: altering protocol that's gonna replace all the big banks in
Speaker 1: thirty eight days or whatever. Maybe for now actually ignore
Speaker 1: what it does or pretend it does literally nothing. It's
Speaker 1: just a box. So what this protocol is, It's called
Speaker 1: protocol X. It's a box that you can take a token,
Speaker 1: you can take a theory, and you can put it
Speaker 1: in the box and take it out of the box
Speaker 1: like you put it in the box, and you get like,
Speaker 1: you know, an IOU for for having to put it
Speaker 1: in the box, and then you can redeem that IOW
Speaker 1: you back out for the token. So so far, what
Speaker 1: we've described is the world's dumbest e t F or
Speaker 1: a d R or something like that. It's a It
Speaker 1: doesn't do anything but let you put things in it
Speaker 1: if you so chose. And then this protocol issues a
Speaker 1: token we'll call it whatever X token, and X token
Speaker 1: promises that anything cool that happens because of this box
Speaker 1: is gonna ultimately be usable by you know, governance vote
Speaker 1: of holders of the X tokens. They can vote on
Speaker 1: what to do with any proceeds or other cool things
Speaker 1: that happened from this box. And of course, so far
Speaker 1: we haven't exactly given a compelling reason for why there
Speaker 1: ever would be any proceeds from this box, but I
Speaker 1: don't know, you know, maybe maybe there will be. So
Speaker 1: that's sort of where you start. And then you say,
Speaker 1: all right, well yeah, this box and yeat X token,
Speaker 1: and the box for a call declares or or maybe
Speaker 1: votes byonunting governance or you know something like that. That
Speaker 1: what they're gonna do is they are going to take
Speaker 1: half of all the X tokens that will as remnted,
Speaker 1: maybe two thirds of two thirds well ever X tokens,
Speaker 1: and they're going to give them away for free to
Speaker 1: everyone uses the box. So anyone who goes takes some
Speaker 1: money puts in the box. Each day they're gonna air drop,
Speaker 1: you know, one percent of the X tokens pro rata
Speaker 1: among sephron who's put money in the box. That's for now,
Speaker 1: what X token does. It gets given away to the
Speaker 1: box people. And now what happens, Well, X token has
Speaker 1: some market cap, right, it's it's probably not zero, but
Speaker 1: let's say it's you know, twenty million dollar market cap
Speaker 1: and a bunch of arbitreasures from from like first principles
Speaker 1: that should be zerre But okay, sure, okay, I completely
Speaker 1: resmall comments like I mean, like that's not quite true.
Speaker 1: But it like, when you describe it in this totally
Speaker 1: cynical way, it sounds like it'd beasier. But go describe
Speaker 1: it this way. You might think, for instance, that in
Speaker 1: like five minutes with an Internet connection, you can create
Speaker 1: such a box in such a token, and that it
Speaker 1: should reflects like, you know, it should be worth like
Speaker 1: a hundred eighty dollars or something market cap for like that,
Speaker 1: you know, that effort that you put into it. In
Speaker 1: the world that we're in, if you do this, everyone's
Speaker 1: gonna be like box token. Maybe it's cool if you
Speaker 1: got in box token, you know, that's gonna appear on
Speaker 1: Twitter and all have a twenty million dollar market cap.
Speaker 1: And of course one thing that you could do is
Speaker 1: you could like make the float very low and whatever.
Speaker 1: You know, maybe maybe there haven't been twenty million dollars
Speaker 1: that flowed into it yet. Maybe that's sort of like
Speaker 1: is it's you know, mark to market fully diluted valuation
Speaker 1: or something. But I acknowledge that it's not totally clear
Speaker 1: that this thing should have market cap, but but empirically
Speaker 1: I claim it would have market cap. Agree it should
Speaker 1: any series, but that's right, So and obviously already we're
Speaker 1: start of hiding some of the magic in that, right,
Speaker 1: Like some of the magic is in like how do
Speaker 1: you get that market gap to start with? But you know, whatever,
Speaker 1: we're what We're going to move on from that for
Speaker 1: a second. So you know X tokens being given out
Speaker 1: each day all these like sophisticated firms, Like that's interesting,
Speaker 1: Like if the total amount of money in the box
Speaker 1: is a hundred million dollars, then it's gonna yield sixteen
Speaker 1: million dollars this year in X tokens being given out
Speaker 1: for it. That's a sixteen percent return. That's pretty good.
Speaker 1: We'll put a little bit more in, right, and and
Speaker 1: maybe that that happens until there are two million dollars
Speaker 1: in the box. So you know, sophisticated traders and or
Speaker 1: people on crypto Twitter or or other sort of similar
Speaker 1: parties go and put two hundred million dollars in the
Speaker 1: box collectively, and they start getting these ex tokens for it, right,
Speaker 1: And now all of a sudden, he's like, wow, people
Speaker 1: just decided to put two hundred million dollars in the box.
Speaker 1: This is a pretty cool box, right, Like this this
Speaker 1: is a valuable box as demonstrated by all the money
Speaker 1: that people have apparently decided should be in the box.
Speaker 1: And who are we to say that they're wrong about that? Like,
Speaker 1: you know, this is I mean, boxes can be great.
Speaker 1: Look I love boxes as much as the next guy, right,
Speaker 1: And so what happens now all of a sudden people
Speaker 1: are kind of recalibrating, like, well, twenty million dollars, that's it,
Speaker 1: like that market cap for this box and it's been
Speaker 1: like forty eight hours and it already has two hundred
Speaker 1: million dollars, including from like sophisticated players in it, Like
Speaker 1: come on, that's too late, right, like, and and they
Speaker 1: look at these ratio TVL total value walked in the box,
Speaker 1: you know, as a ratio to market cap of the
Speaker 1: boxes token, and they're like ten x. That's insane. One
Speaker 1: x is the norm. And so then you know, X
Speaker 1: token price goes way up and now it's a hundred
Speaker 1: thirty million dollar market cap token because of you know
Speaker 1: the bullishness of people's usage of the box. And now
Speaker 1: all of a sudden, of course, the smart money it's
Speaker 1: like go wow, like this thing is now yielding like
Speaker 1: sixty year in next tokens. Of course, I'll take my
Speaker 1: sixty percent yield, right, so they go they were another
Speaker 1: three million dollars in the box, and you get a
Speaker 1: site and then it goes to infinity and then everyone
Speaker 1: makes money. I think of myself as like a fairly
Speaker 1: cynical person, and yep, that was so much more cynical. Yes,
Speaker 1: I described farming like you're just like, well, I'm in
Speaker 1: the ponzi business and it's pretty good. And did any
Speaker 1: of this require any sort of like economic case is
Speaker 1: just like other people get money in the box and
Speaker 1: so I'm going to two and then it's more valuable,
Speaker 1: so they're gonna put more money in. And at no
Speaker 1: point in the cycle did it seem to like describe
Speaker 1: any sort of like economic purpose. So, on the one hand,
Speaker 1: I think that's a pretty reasonable response. But let me
Speaker 1: play around with this a little bit, right, because that's
Speaker 1: one framing of this, and I think there's like a
Speaker 1: a sort of depressing amount of ablidity. Can you can
Speaker 1: you comment on the sustainability of that, like, because like
Speaker 1: you know, on the one and you're like, well, in
Speaker 1: dollars money is going to come into a pit ground.
Speaker 1: On the other hand, you're like, basically there are a
Speaker 1: lot of ponzis that have done really well, right, so
Speaker 1: let me okay, cool, I'll sail on the cynical route,
Speaker 1: think about, like cynically what could happen here? Well, okay,
Speaker 1: so you've got things boxes kind of dumb, but like
Speaker 1: what's the end game? Right? Because boxes where zero obviously,
Speaker 1: and like that, you know, you can't like keep this
Speaker 1: market cap or something like the other hand, if everyone
Speaker 1: kind of now thinks that this box token is worth
Speaker 1: about a billion dollar market cap, that's when people are
Speaker 1: pricing it at and sort of has that market cap,
Speaker 1: everyone's gonna market to market. In fact, you can even
Speaker 1: finance this, right, and you put x token in a
Speaker 1: borrow lending protocol and borrowed dollars with it. If you
Speaker 1: think it's worth like less than two thirds of that,
Speaker 1: you you can even just like put some in there,
Speaker 1: take the dollars out never never, you know, give the
Speaker 1: dollars back and get liquidated eventually. And it is sort
Speaker 1: of like real monetize herbal stuff in some senses. And
Speaker 1: you know, at some point, like if the world never
Speaker 1: decides that we were wrong about this in like a
Speaker 1: coordinated way, right, Like you're kind of a guy calling
Speaker 1: bullshit and saying no, this thing is actually worthless. But
Speaker 1: in what sense are you right? Sorry? Can I just
Speaker 1: ask on this point? I mean, so, are you saying
Speaker 1: that the value has to derive from everyone agreeing that
Speaker 1: it's worth something? And I know, like, on the one hand,
Speaker 1: that seems like a simple point about crypto, but on
Speaker 1: the other hand, throughout crypto's history there have been these
Speaker 1: different arguments about how it actually gets value. You know,
Speaker 1: use cases for the underlying technology for blockchain, Everyone's going
Speaker 1: to start migrating stuff on blockchain and then you're going
Speaker 1: to have a real economic use attached to these assets,
Speaker 1: and that's where the value is going to come from.
Speaker 1: But are you saying that it depends more on everyone
Speaker 1: just agreeing that these are worth something? So really, what
Speaker 1: I'd say is that it could come in theory from
Speaker 1: either you can sort of get a market cap either
Speaker 1: because of cash show right, and then like Warren Buffets
Speaker 1: like fun this, like I'm going to buy this if
Speaker 1: it's at too cheaper price, result just buy it and
Speaker 1: own it and get cash flor from it and that's great.
Speaker 1: Or you could see something get market cap in the
Speaker 1: way that I don't know, Dodge point or ship coin
Speaker 1: have right where people just kind of like ha ha,
Speaker 1: and then they buy it and if you're like that's dumb,
Speaker 1: it has no cash flow, I'm gonna short sell it.
Speaker 1: You lose all your money, and h you know that
Speaker 1: those like at least like over the last few years,
Speaker 1: those are booth in ways that like assets have gotten
Speaker 1: market cap, and I I sort of like, I think
Speaker 1: that this starts to hint at like at least some
Speaker 1: interesting angles on this, because like it's not just cryptocurrencies
Speaker 1: that have had this dynamic, right, Like how about like
Speaker 1: you know, a m C or hurts or game stop
Speaker 1: or meme. Stocks in general have like a very similar
Speaker 1: pattern to this, And and the sort of like concept
Speaker 1: of like maybe people will pay something for it even
Speaker 1: though it doesn't seem traditionally valuable is not a crypto
Speaker 1: specific concept, although it certainly has become Like I mean,
Speaker 1: I've seen game stuff though it's like usually that's the
Speaker 1: perception and I'm not judging, but the perception is that
Speaker 1: that it's sort of like a perversion of what the
Speaker 1: whole point of like the stock market is as opposed
Speaker 1: to like this is going to be like the basis
Speaker 1: of this yeah, I've written that sort of thing before,
Speaker 1: Like I would have I would have sort of drawn
Speaker 1: the causality the other way, like I would I've said that, like,
Speaker 1: you know, the rise of bitcoin allowed for things like
Speaker 1: game stop at AMC. But I also think that like
Speaker 1: there's a difference between something like bitcoin where people are like, well,
Speaker 1: this thing is the story of value, and enough people
Speaker 1: accept that that it becomes a story of value and
Speaker 1: the box that you're describing, where like, like no one
Speaker 1: has an emotional attachment to the box in your description,
Speaker 1: and I think also empirically, like what they have is
Speaker 1: and and an a p y number, right, what they
Speaker 1: have is they're like, oh, this box is paying us
Speaker 1: a lot of money, so we're gonna stay in it.
Speaker 1: And so there's like with bitcoin, you know, you can
Speaker 1: sort of say there's a sustainable value because of like
Speaker 1: just sort of like a broad social acceptance. But like
Speaker 1: I feel like with a lot of this like farming
Speaker 1: stuff like the kid his box act, like no one
Speaker 1: knows the name from day to day. It's just like
Speaker 1: this is the box that is yielding the most today,
Speaker 1: So I'm gonna put money in and I'm sort of
Speaker 1: curious about the sustainability of that. Yeah, so certainly some
Speaker 1: of them are unsustainable and some of them are, you know,
Speaker 1: many of them by number, and exactly the way you
Speaker 1: think that they work, right, Like the way these end
Speaker 1: is that like eventually people decide that this is no
Speaker 1: longer today's school box, this is yesterday's lane box, and
Speaker 1: they go down a lot in price, and then people
Speaker 1: start move on to box number two. And if everyone
Speaker 1: did a careful accounting of where they ended up, I
Speaker 1: don't know, you know, what they've made money? Would they not?
Speaker 1: If it's a whole unclear like some people would have,
Speaker 1: some people wouldn't have. It's a messy And that's like,
Speaker 1: certainly how some of these quickly end up, but it's
Speaker 1: not how all of them do. And in particularly, let's
Speaker 1: let's be revisit one of the earliest assumptions about this, right,
Speaker 1: the point where I said, this is a box that
Speaker 1: does nothing but be a box, right, And that was like,
Speaker 1: I think a little facetious er, although I do think
Speaker 1: it's like an important way to understand part of what's
Speaker 1: going on. But it's not really the case that the
Speaker 1: biggest of these claimed to be a box that is
Speaker 1: nothing but a box. They claim to be a bit
Speaker 1: more than that. And you know, you can query how
Speaker 1: much you believe the story that their value at its
Speaker 1: heart is coming from them being more than just a box.
Speaker 1: But people certainly perceive them to be more than that.
Speaker 1: And you know examples of this, right I Well, let's say,
Speaker 1: you know, what are some of the most popular steaking programs.
Speaker 1: They're like, you know, historically unite swap of a compound.
Speaker 1: These are various boxes that have an actual product tied
Speaker 1: to them that has like a narrative about why it
Speaker 1: might become the world's next big thing. You know, maybe
Speaker 1: it's gonna be like the preeminent depths. You know, maybe
Speaker 1: it's going to be the preeminent borrow lending protocol and chain.
Speaker 1: And it's like you know, weird box sticking things starts
Speaker 1: out is just this sort of like side show. So
Speaker 1: the bigger story of we're going to change the world
Speaker 1: with the protocol that we just built. Now, sometimes that
Speaker 1: side show becomes the main show itself because sometimes you know,
Speaker 1: in the end, what really happens is that like the
Speaker 1: box plus yield nature of it becomes more popular than
Speaker 1: the original use case of it. But it makes it
Speaker 1: at least seem a bit less dumb and a bit
Speaker 1: less circular and a bit more like, you know, there's
Speaker 1: something real that many of these are drawing on and
Speaker 1: a real hope that it's going to become itself a
Speaker 1: valuable protocol. So obviously, okay, maybe defied crypto will become
Speaker 1: very important, but I'm still just sort of like curious,
Speaker 1: you know, just the sort of pure making money side
Speaker 1: of this. You estimated that sort of the arbitrage market
Speaker 1: for bitcoin, maybe there's potential one and a half billion
Speaker 1: dollars and profits out there for the taking. Like how
Speaker 1: big is the farming industry when you talk about like
Speaker 1: this is a news besides trading? This is the other
Speaker 1: big way. How big is the putting money in a
Speaker 1: box industry getting? And I'm also curious, Like, you know,
Speaker 1: one of the things that people in this space talk
Speaker 1: about is you can, thanks to ft x specifically and
Speaker 1: thanks to the perpetual futures that it lists for so
Speaker 1: many coins, I could buy the coin farm it short
Speaker 1: the future on ft X so that I don't even
Speaker 1: have to take a directional position on the coin itself
Speaker 1: and just sort of milk the farming yield. So can
Speaker 1: you just describe like how big is this sort of
Speaker 1: like ecosystem, and how sophisticated are the trades getting beyond
Speaker 1: just sort of like the naive or simple like CREWD
Speaker 1: put money in the box trade. Well, let's do like
Speaker 1: some rough ballparking. There's something two billion dollars of quote
Speaker 1: unquote TVL quote value locked on chain, and now a
Speaker 1: lot of that is basically irrelevantly lost on chain, and
Speaker 1: you can sort of ignore. Maybe a hundred billion is
Speaker 1: sort of like the real number or something a little
Speaker 1: bit less than that. Yields are certainly down a fair bit,
Speaker 1: but I think we're looking at like, you know, mid
Speaker 1: to high single digit percents on average or something like that.
Speaker 1: And so I don't know, you know, mid to high
Speaker 1: single digit billions of dollars a year of quote unquote
Speaker 1: profit that that are being made by farmers actually doesn't
Speaker 1: sound insane to me as as a ball park of this,
Speaker 1: which that's a big number to the extent that this
Speaker 1: is real profit, it's you know, we might be talking
Speaker 1: five billion a year that sort of like traders are
Speaker 1: making from farming. So yeah, that the numbers are not
Speaker 1: are not tiny, and and they're plausibly bigger, probably bigger
Speaker 1: and aggreeate than treading returns and group im not. I
Speaker 1: don't want to like a hundred percent square by that comparison,
Speaker 1: but I am might be right, is not out of
Speaker 1: line with like my my sort of instincts and prior
Speaker 1: and and did some pieces of knowledge I have here?
Speaker 1: So it's a lot one I think one thing which
Speaker 1: is worth noting here, right. One parallel is well, okay,
Speaker 1: let's say that you have a company, right, and this
Speaker 1: company delivers food. Right, what it does is it it
Speaker 1: goes to restaurants and picks up food and takes it
Speaker 1: to houses and puts the food there. And there's a
Speaker 1: few of these, right, what would be like how you
Speaker 1: would think this company would do during a pandemic? You
Speaker 1: think spectacular? Right? In fact, the pandemic was a very
Speaker 1: trying period for some food delivery companies because their unit
Speaker 1: economics were negative, like they were. They were running out
Speaker 1: of loss and it had been for years, and the
Speaker 1: pandemic meant more business, which meant more loss for them,
Speaker 1: so paradoxically it was negative. And how did that happen? Well,
Speaker 1: what's the actual whole well a funds there if you
Speaker 1: take a step back, Well, the company, why are they
Speaker 1: running out a loss? Well, vcs keep funding them, right,
Speaker 1: People keep putting money into the company here, and the
Speaker 1: company then has stock price goes up because this metric
Speaker 1: business revenue, a metric that isn't actually profit, goes up.
Speaker 1: And you know, as long as sort of like that
Speaker 1: keeps happening, right, people keep putting more and more money
Speaker 1: into the box. And the associated security in this case
Speaker 1: is because it is tied to the ultimate profit or
Speaker 1: something like that of this company goes up and up,
Speaker 1: and you know, it keeps spending more money than it's
Speaker 1: making on things that are causing it to make that
Speaker 1: money in the first place, like negative unit economics or
Speaker 1: or just hip tons of advertising or something like that.
Speaker 1: And and then it gets more and more business. And
Speaker 1: because it gets more business, people like, that's great, using
Speaker 1: even more money, bigger numbers. Let's put more money in
Speaker 1: the goal here being collect all the money in your box,
Speaker 1: you look a lot bigger than your competitors, and they
Speaker 1: started give up, and you win, and then in the
Speaker 1: end you get all the real business and and and
Speaker 1: and basically it's all an advertising budget, right, as much
Speaker 1: as anything else This is all a way for like,
Speaker 1: you know, your box to get more notoriety and ultimately
Speaker 1: end up getting real business six years later because of that.
Speaker 1: That's sort of like standard operating procedure frankly for startups
Speaker 1: right now. And it's very similar to what we're talking
Speaker 1: about in some ways with these high verticals. Can I ask,
Speaker 1: I mean, what we're talking about here is basically circularity
Speaker 1: and the circularity of defy And there's one other aspect
Speaker 1: of it that I've been thinking a lot about lately,
Speaker 1: and I'm trying to think how to phrase this, But
Speaker 1: it's pretty clear in crypto that you want to avoid
Speaker 1: dealing with FIAT currencies as much as possible. So onboarding
Speaker 1: is tough, or there are tax reasons to avoid doing
Speaker 1: that or whatever. So the way everyone gets around that
Speaker 1: is through stable coins. But stable coins are basically just
Speaker 1: trying to replicate the dollar for the most part, right
Speaker 1: So you're not really getting away from FIAT, You're just
Speaker 1: replicating it in a way that fits into the crypto ecosystem.
Speaker 1: Is is that a problem for crypto or like, at
Speaker 1: some point conceptually should stable coins go away? What I
Speaker 1: guess the question is, like, what is the point of
Speaker 1: crypto if everything is eventually underpinned by the dollar anyway,
Speaker 1: there is an interesting question of, like what happens to
Speaker 1: the price of bitcoin and other digital assets in the
Speaker 1: face of stable coins if they obviate they need to
Speaker 1: have an actual asset that is not tied to the
Speaker 1: dollar in the first place, right if just like dollarization
Speaker 1: takes over service fool Like, I think that's sort of
Speaker 1: an interesting question. I think when you look at well,
Speaker 1: is it bad to have a dollar like guess in
Speaker 1: the system? I think no, I think it's super powerful.
Speaker 1: And I think what I'd say is like, I'll try
Speaker 1: and send a hundred thousand dollars to the guy saying
Speaker 1: next to me, um or is the woman saying next
Speaker 1: to me? And you know, you'll try and send a
Speaker 1: hundred thousand dollars the person sitting next to you. And
Speaker 1: we'll have a race. And I'm going to use USDC
Speaker 1: and you're gonna use USDC or USD rather. And I
Speaker 1: have a guess as to who's gonna win that race.
Speaker 1: I have a guest as to whose money is going
Speaker 1: to get there first. And if we want to do
Speaker 1: some you know, a race to someone who's sitting in Nigeria. Boy,
Speaker 1: do have a strong guest about you know, whose money
Speaker 1: is going to get there first and who's gonna have
Speaker 1: spent more doing it? And so I think that to
Speaker 1: some extent right away you can see this is can
Speaker 1: you unpack that a little? Like when you get the
Speaker 1: u s DC to the guy in Nigeria and then
Speaker 1: he wants to buy a sandwich with it, what happens right,
Speaker 1: So right now there's a sense in which it doesn't
Speaker 1: accomplish all that much if the next thing he has
Speaker 1: to do is CD to cash out USDC for a
Speaker 1: USD wire transfer anyway, right, and then like by the
Speaker 1: time he's bought the sandwich, you know your crypto transfer
Speaker 1: did nothing because it all bottomed out in the same place. Anyway.
Speaker 1: That being said, I think there's like two reasons that
Speaker 1: that I don't fully buy that response, one of which is,
Speaker 1: you know, eventually you can imagine a world where the
Speaker 1: sandwich guy accepts USDC, right, and what's the sandwich guy
Speaker 1: accepts it, then he actually never needs to go into
Speaker 1: you know, into fat directly, right? Can you just stay
Speaker 1: in in cryptoland the whole time? And I think that
Speaker 1: it is in some ways actually just more efficient. So
Speaker 1: that's that's one answer to your question. But another answer
Speaker 1: to your question is, you know there are services of
Speaker 1: text is one of them that can convert easily between
Speaker 1: dollars and currencies and connect as you know, point of
Speaker 1: sale converters there, so that people could go to a
Speaker 1: sandwich store and like, hey with so, but the Sandward
Speaker 1: store receives local fiat currency, and there still does have
Speaker 1: to be a conversion involved. But now what we're saying
Speaker 1: is that like one, a few companies have to figure
Speaker 1: out how to do that conversion in large bulk size,
Speaker 1: you know, netting it all out somewhat efficiently, which is
Speaker 1: a lot easier than if you're trying to live in
Speaker 1: a world where like person had to figure out how
Speaker 1: to do this in order to send money to like
Speaker 1: their aunt back home. And you can still end up
Speaker 1: in a world where, like, for almost everyone, this system
Speaker 1: is extremely easy, and like, there are a few points
Speaker 1: that deal with the converting back and forth, but like
Speaker 1: removes eight of difficult parts that would have needed to happen.
Speaker 1: What's your take on the rise of either algorithmic or
Speaker 1: partially algorithmic partially backed stable clients One of the most
Speaker 1: interesting phenomenons happening right now is the rise of Luna
Speaker 1: and Ust. And Luna has this treasury reserve consisting of
Speaker 1: a lot of bitcoin, which seems a little you see,
Speaker 1: But some people say, any idea of like an algorithmic
Speaker 1: back stable coin is a perpetual motion machine. It's only
Speaker 1: a matter of time before it fails. Like do you
Speaker 1: believe there can be like a truly sort of like
Speaker 1: decentralized stable coin, Like what do you make of these
Speaker 1: these projects? I think they're really cool. I do have
Speaker 1: some sympathy to the perpetual motion machine crowd here they
Speaker 1: consider some useful purposes. But if you do zoom out
Speaker 1: right and you say, this is a stable coin backed
Speaker 1: by volatile assets, what's going to happen in a big
Speaker 1: market move right? Like you know how this plays out?
Speaker 1: It certainly seems like that's only asking for trouble eventually.
Speaker 1: But yeah, I think that's I think that's right now. Again,
Speaker 1: you could say, like, look, we want like this on
Speaker 1: chain algorithmic coin for these reasons and like the goals
Speaker 1: and for someone to sit there and hold it for
Speaker 1: five years. The goals start to use briefly for like
Speaker 1: transactions on chain, and they created and redeemed on chain
Speaker 1: really frequently, and I think answers like that can can
Speaker 1: make sense. I think there's all of versions of quote
Speaker 1: unquote algorithm makes stable points that do have risk in them,
Speaker 1: but that also have massively enhanced yield because they're they're
Speaker 1: taking that risk on in order to do a trade
Speaker 1: that makes money effectively. Right there, They're almost like money
Speaker 1: market funds in some sense, you know, that cross of them,
Speaker 1: and that can make sense as well from sort of
Speaker 1: like an economic perspective. But but I am skeptical of,
Speaker 1: you know, thinking that like a typical person is going
Speaker 1: to want to for long periods of time hold a
Speaker 1: typical algorithmic stable coin that isn't paying interest because it's
Speaker 1: just like you know, someone said, hey, great, it's it's
Speaker 1: new things kind of like a bank, and put your
Speaker 1: money on it. But every four years it might go
Speaker 1: to zero. And that's the difference. It's not it's not
Speaker 1: super compelling. So we've covered straightforward h F two arbitrage
Speaker 1: type stuff, covered yield farming. If you ask how people
Speaker 1: are making money in equities, right, like one of those
Speaker 1: things that is true anyway, But then like a lot
Speaker 1: of it is options and structured products and like kind
Speaker 1: of packaging stuff in weird ways. Where are we in
Speaker 1: that part of the ecosystem and crypto? I know there's
Speaker 1: things where like people are doing like kind of defy
Speaker 1: structured products where like you can like kind of put
Speaker 1: your money into butt and sell options. How should I
Speaker 1: think about that as being part of the ecosystem. Yeah,
Speaker 1: it's a good question, and I think the answer here
Speaker 1: is actually a little bit weird and surprising given everything
Speaker 1: else that's going on, which is not that much Like
Speaker 1: it's not that surprising when you like listen to the
Speaker 1: description of field farming. But okay, right, I didn't thinking
Speaker 1: about mechanically does clarify a little bit why options haven't
Speaker 1: taken off, But they really haven't. Volume and options is
Speaker 1: very small compared to volume in futures. I you know,
Speaker 1: when you look at most these defy primitives that have
Speaker 1: taken off, most of them are way simpler than a
Speaker 1: typical launch options contract would be. By and large. I
Speaker 1: do think it's the case right now in crypto that
Speaker 1: like sort of more complex structured products are just are
Speaker 1: not that big compared are to this sort of like
Speaker 1: simplest pseudo perpetual motion machine you put vision Because you
Speaker 1: read all these stories about like Goldman doing OTC options trades,
Speaker 1: I mean, is that like kind of oh no volume?
Speaker 1: I mean, yeah, I don't move for sure, but I
Speaker 1: strongly suspect that where that's coming from. You know, I
Speaker 1: don't think that that's coming from Goldman sitting there and
Speaker 1: saying we're gonna go like, do OTC options in crypto,
Speaker 1: because that's where all the money is. Like, everyone's just
Speaker 1: printing money doing OTC options in crypto. Why are they
Speaker 1: doing OTC options in crypto? What's the actual reason that
Speaker 1: that's the thing they're doing? In advertising? Can I guess, yeah,
Speaker 1: go for it. My guess is that someone at Goldman
Speaker 1: was like, let's put money into a box. That's a
Speaker 1: Ponzi scheme, and someone else at Goldman is like, We're
Speaker 1: absolutely not going to put money in a box. It's
Speaker 1: a Ponzi scheme. And then someone the Goldman was like,
Speaker 1: what's our comparative advantage? Well, is this with a bunch
Speaker 1: of hedge funds, we uh, you know, we can present option.
Speaker 1: Let's let's try to like, you know, rub some sticks
Speaker 1: together and drum up an OTC options business, because then
Speaker 1: we'll have we'll have, you know, have customers for that,
Speaker 1: whereas like the actual money making place is a little
Speaker 1: too insane for for our kind of regulated, uh somewhat
Speaker 1: risk averse situation. So that's absolute a lot of it,
Speaker 1: But at the end you touched upon a key part
Speaker 1: of it, which which is regulation. Right, if you're a
Speaker 1: Goldman and you're trying to think, like what crypto things
Speaker 1: can I definitely do? What will my compliance department just
Speaker 1: sort of stammer if they try to object to, like
Speaker 1: what do they just not have a case on? The
Speaker 1: answer is, well, CFTC listed cash settled products where I
Speaker 1: never ever ever have to have the physical where I
Speaker 1: never have to actually have on me any cryptocurrencies. And
Speaker 1: why is that important that you never have to have
Speaker 1: any cryptocurrencies on you? Well, it's because if you need
Speaker 1: to actually hold a cryptocurrency, you start thinking about things
Speaker 1: like Bossel's capital requirements right and other sort of like
Speaker 1: fun notions like that, and it becomes a ship show
Speaker 1: really fast. But if you do nothing but cash settle derivatives,
Speaker 1: you never have to touch physical, you don't have to
Speaker 1: figure out the security of it. You don't have to
Speaker 1: figure out capital requirements, you don't have to figure out
Speaker 1: the regulation of doing that. And like SEEFTC structured products
Speaker 1: which are cash settled. I mean, there's the exchange side
Speaker 1: that you can trade, but also there's a well developed
Speaker 1: regulatory framework for OTC cash settled derivatives, contracts for institutional counterparties,
Speaker 1: training with other institutional counterparties, using is to that sort
Speaker 1: of like is another well understood, really clean operational concept
Speaker 1: to do. And so it's lamp posting as much as
Speaker 1: anything else, right, it's them saying, like, what is the
Speaker 1: one thing regulatorially that we feel comfortable doing in this space,
Speaker 1: Let's go do that on the top of making money.
Speaker 1: The other obvious thing that's sort of like from the
Speaker 1: beginning of crypto and we talked about arbitrage and farming
Speaker 1: and all this is obviously they're still smaller tokens all
Speaker 1: the time flying, and so I'm just curious, like, what
Speaker 1: are the different approaches essentially that either institutional money or
Speaker 1: a closet I sort of like VC money is taking
Speaker 1: to essentially like find the next big thing. How do
Speaker 1: you like people know, Like I mean, at this point,
Speaker 1: I think I want to sort of like hume out
Speaker 1: a little bit and say, what, let's even put crypto
Speaker 1: aside for a second. How do vcs find the next
Speaker 1: anything that they're going to invest in? Right? Like, how
Speaker 1: did they find the next company they're going to invest in?
Speaker 1: And I think am I answered that is like when
Speaker 1: you break it down mechanically to what's happening, you get
Speaker 1: a bizarre fucking process, Like you get something that does
Speaker 1: not look like the paragon of efficient markets that you
Speaker 1: might expect, where it's like, what was mechanically happening? Well,
Speaker 1: they like see what all their friends are chattering about, right,
Speaker 1: And their friends keep talking about this company or this
Speaker 1: token or something, and they start foe mowing And then
Speaker 1: their LPs are like, yo, have you made us a
Speaker 1: lot of money off of this company or token yet?
Speaker 1: And you're you're kind of like the answers, No, we
Speaker 1: haven't invested in it, but you know that's not a
Speaker 1: good answer given what question your LPs just asked. Instead,
Speaker 1: you're like, oh boy, you're gonna be excited about what
Speaker 1: we have done and or will do. And then you
Speaker 1: find a way to get into that token and or company,
Speaker 1: and all the while you're like, how do we justify
Speaker 1: is this a good investment? Like all the models are
Speaker 1: made up right, like things are currently being valued off
Speaker 1: of right, but it's not yet. It's sort of like
Speaker 1: an interesting property of trying to value things off right.
Speaker 1: You're buying them off of a model built by a
Speaker 1: person who owns the thing that's being sold. So like,
Speaker 1: of course the numbers you can go off between now
Speaker 1: and right, it's gonna go up an arbitrary amount, and
Speaker 1: you can justify anything by just like you know, backgraft
Speaker 1: goes up and off and eventually like holy shit, LPs, boy,
Speaker 1: are you gonna be excited about the stuff that we're
Speaker 1: buying on your behalf? It's like bizarre processes like that
Speaker 1: ultimately that are like shaping VCS investment decisions, both in
Speaker 1: traditional equities, uh and in in cryptic currencies. Well, there's
Speaker 1: tons more to talk about, but we're gonna have to
Speaker 1: pick it back up. Sam and Matt thank you both
Speaker 1: so much for coming on novel. Yeah, that was great.
Speaker 1: Thanks thanks so much, guys. That was that was great, Yeah, Tracy,
Speaker 1: I love that the best. The highlight was definitely Sam's
Speaker 1: description of yield farming that even the sort of crypto
Speaker 1: synic is a magic box that you put money into
Speaker 1: and more money comes out. And even Matt Levine was like,
Speaker 1: I would have never described it this way because I
Speaker 1: thought to be too cynical. Yeah, I don't really know
Speaker 1: what to say about that. That was a little bit surprising. Um,
Speaker 1: but it does, I mean, it does clear up a
Speaker 1: lot of questions that I had about D five. He's
Speaker 1: sort of hinted at this idea of like the value
Speaker 1: either coming from actual economics and use cases versus everyone
Speaker 1: just agreeing. And I think, honestly, one thing we've seen,
Speaker 1: one thing we've learned over the past ten years is
Speaker 1: that everyone just agreeing something is valuable sometimes it works. Um,
Speaker 1: And like I wouldn't necessarily say that it's going to
Speaker 1: work for all the coins in existence, but the fact
Speaker 1: that it's been working for so long certainly has surprised
Speaker 1: many people, myself included. Yeah. No, there's the thing like
Speaker 1: it's like, oh, this is ridiculous. There's a perpetual motion machine,
Speaker 1: and yet here we are in twenty two in the industry,
Speaker 1: troops going, machines are still going. So the way defy
Speaker 1: works is you put in a money in a box
Speaker 1: that you think more people will put money into the box.
Speaker 1: And the way VC works is you hear what you're
Speaker 1: friends in the industry are investing in based on seven numbers,
Speaker 1: and then you also want to get on that. So
Speaker 1: it's really just all the way down. Well, so here's
Speaker 1: the other thing I would say, and Matt kind of
Speaker 1: touched on this too, But the idea of momentum trading
Speaker 1: is not you know, that is not entirely unknown in finance.
Speaker 1: In fact, it has been a very profitable strategy, arguably
Speaker 1: since two thousand eight and the financial crisis. So I
Speaker 1: don't know how to feel about it. I feel weird.
Speaker 1: We all feel weird. Well, I mean, one thing is clear,
Speaker 1: which is there is just a lot going on in
Speaker 1: the space. But in the meantime, shall we leave it there?
Speaker 1: Let's leave it there? Okay. This has been another episode
Speaker 1: of the All Thoughts podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway and I'm Joe
Speaker 1: Why Isn't Thought? You can follow me on Twitter at
Speaker 1: the Stalwart. Follow our guests Sam Bankman Freed He's at
Speaker 1: SBF Underscore f t X, and Matt Levine He's at
Speaker 1: Matt Underscore Levine, follow our producer Carmen Rodriguez at Harmon Arman,
Speaker 1: followed the Bloomberg head of podcast Francesca Levi at Francisco Today,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening. Hey, there are
Speaker 1: add Thoughts listeners. We are very excited to let you
Speaker 1: know that Odd Thoughts is nominated for a Webby Award.
Speaker 1: You know, Tracy, I'm not normally like a big awards
Speaker 1: person or get excited about that, but now that I
Speaker 1: saw that we were nominated for the Webby for Best
Speaker 1: Business Podcast, suddenly I'm feeling very competitive and I want
Speaker 1: to win. You really want it? Yeah? Okay, Well, on
Speaker 1: that note, listeners, if you enjoy Add Lots, if you
Speaker 1: like what we do, we would really appreciate it. If
Speaker 1: you take two minutes of your time and head over
Speaker 1: to vote dot Webby Awards dot com. You can find
Speaker 1: Odd Lots in the Business Podcast category. Thanks so much
Speaker 1: to