WEBVTT - Sam Bankman-Fried and Matt Levine on How the Crypto Market Really Works 0:00:10.600 --> 0:00:14.080 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:14.160 --> 0:00:18.320 I'm Tracy Allaway and I'm Joe. WI isn't all so, Joe? 0:00:18.520 --> 0:00:21.040 It's been um. I mean, I think it's been a 0:00:21.120 --> 0:00:24.560 kind of a tough couple of weeks for crypto. We 0:00:24.680 --> 0:00:28.840 had the price of bitcoin go down below thirty thousand 0:00:29.320 --> 0:00:32.160 UM at one point, but it's shot up since then. 0:00:32.159 --> 0:00:35.040 I think it's closer to But on the other hand, 0:00:35.840 --> 0:00:40.800 we had some interesting developments around the sort of crypto ecosystem, 0:00:40.880 --> 0:00:44.920 around the market structure aspect of crypto. Well, it's interesting 0:00:45.000 --> 0:00:47.279 because all right, we did get this like sort of 0:00:47.600 --> 0:00:49.639 bare market, and I don't know if it's still in one, 0:00:49.680 --> 0:00:53.560 because as you mentioned, it's bounced back. But unlike say, 0:00:53.720 --> 0:00:56.520 you know, the sell off in or at the end 0:00:56.560 --> 0:01:00.520 of Seen, it doesn't feel like there's any slowdown at 0:01:00.560 --> 0:01:04.000 all in the pace of investment into this space, Like 0:01:04.400 --> 0:01:06.680 where is at the end of you know, is like 0:01:06.720 --> 0:01:08.639 all right, well, maybe this whole thing was a bubble 0:01:08.760 --> 0:01:12.279 or a fad. This time it feels like no one's 0:01:12.319 --> 0:01:15.360 thinking that it's like full steam ahead on various business 0:01:15.400 --> 0:01:18.560 plans and so forth, at least in these early months 0:01:18.880 --> 0:01:22.280 since the peak back in April or May. Yes, indeed, 0:01:22.319 --> 0:01:26.120 And as a sign of that investment interest, we just 0:01:26.240 --> 0:01:29.920 had the crypto exchange f t X, which we've talked 0:01:29.959 --> 0:01:33.360 about on the show before it completed. I think it 0:01:33.400 --> 0:01:37.360 was a Series B fundraising of nine hundred million that 0:01:37.640 --> 0:01:41.800 valued the company at eighteen billions. So to your point, 0:01:41.959 --> 0:01:45.759 I mean, the crypto ecosystem itself is clearly being valued 0:01:45.800 --> 0:01:50.640 by investors as a future investment. Eighteen billions pretty big, right, 0:01:50.680 --> 0:01:52.560 And of course f t X is the exchange we 0:01:52.680 --> 0:01:56.200 talked to the to the founder, it was not that 0:01:56.360 --> 0:01:59.280 long ago. I think it was either maybe like March 0:01:59.400 --> 0:02:04.840 or April, and it feels like his star, his significance 0:02:04.840 --> 0:02:07.960 within crypto has only probably like gone up like ten 0:02:08.160 --> 0:02:11.040 x uh since like literally like the last three or 0:02:11.040 --> 0:02:14.000 four months. Yeah, I think that's fair. So we're gonna 0:02:14.040 --> 0:02:16.440 be talking to the f t X founder of Sam 0:02:16.480 --> 0:02:19.800 Bankman Freed again on this episode, but we wanted to 0:02:19.840 --> 0:02:23.120 do it a little bit differently this time, so we've 0:02:23.160 --> 0:02:27.320 also brought on Bloomberg columnist Matt Levine, one of the best, 0:02:27.440 --> 0:02:30.680 probably the best financial writer out there if we're being honest, 0:02:31.040 --> 0:02:33.600 and he's going to join the conversation and we're just 0:02:33.639 --> 0:02:36.160 going to talk about what ft X has been doing 0:02:36.320 --> 0:02:39.079 and where it might go from here. Okay, wait, let's 0:02:39.120 --> 0:02:42.000 do it all right, Uh, Sam and Matt, thank you 0:02:42.080 --> 0:02:44.600 so much for coming on the show. Yeah, thanks for 0:02:44.639 --> 0:02:49.480 having us, Thanks for having me. So, Sam, nine nine 0:02:49.919 --> 0:02:52.600 million dollars is you know a lot of money. What 0:02:52.680 --> 0:02:55.280 are you going to be doing with that? Yeah? So 0:02:55.520 --> 0:02:59.040 it's um, I think we're looking good on the yacht front. 0:02:59.040 --> 0:03:03.919 Don't need any more are but no I acquisitions to 0:03:03.960 --> 0:03:07.120 serve the based answer? And you know, I think especially 0:03:07.160 --> 0:03:09.520 as crypto starts to bleed into the rest of the 0:03:09.560 --> 0:03:13.360 financial ecosystem, there's more and more points of overlap and 0:03:13.560 --> 0:03:18.040 potential uh you know, potential collaboration could expand what you 0:03:18.200 --> 0:03:21.120 mean by that? So what do you say crypto is 0:03:21.160 --> 0:03:25.080 going to bleed more into the rest of the financial system? 0:03:25.160 --> 0:03:28.120 How much of that is? Okay, we know that all 0:03:28.160 --> 0:03:32.200 of the big banks or traditional brokerages they're like thinking 0:03:32.240 --> 0:03:34.840 about like, well, what is their crypto play? How are 0:03:34.840 --> 0:03:37.360 they going to get in on this action? How much 0:03:37.400 --> 0:03:39.640 of it is? Are you talking about that? And every 0:03:39.680 --> 0:03:43.120 day there's some new uh announcement from like a legacy 0:03:43.120 --> 0:03:45.960 institution about something they're doing in the space, as opposed 0:03:46.000 --> 0:03:52.680 to crypto itself encroaching on areas of business, lines of 0:03:52.720 --> 0:03:56.080 business that we think of as traditional, where perhaps crypto 0:03:56.160 --> 0:03:59.640 has a potential to userve some of that activity. It's 0:03:59.680 --> 0:04:02.720 pride merrily so far been the former. And some of 0:04:02.760 --> 0:04:05.480 this is the you know, sort of traditional highly regulated 0:04:05.520 --> 0:04:08.640 financial institutions starting to get their toes in. Some of 0:04:08.680 --> 0:04:11.240 this is also fintech, and so you know, I mean 0:04:11.400 --> 0:04:13.920 when people say fintech, they're sort of an increasing chance 0:04:13.960 --> 0:04:16.440 that they're referring to, you know, a crypto company over time. 0:04:16.480 --> 0:04:18.920 But but even outside that, many of the definitely not 0:04:19.000 --> 0:04:23.040 crypto companies in fintech, a very large fraction of those 0:04:23.440 --> 0:04:27.719 are reaching out to you talk about like like and 0:04:27.880 --> 0:04:31.520 imagine that you're some customer facing fintech business right and 0:04:31.800 --> 0:04:34.599 you know you don't offer a bitcoin right now? Like, what, 0:04:34.600 --> 0:04:37.080 what do you think the most frequent requests you get 0:04:37.080 --> 0:04:40.880 from your customers is? But he's definitely to add bitcoin, Matt, 0:04:40.960 --> 0:04:44.479 what's your understanding of what FTX actually does? Because you know, 0:04:44.560 --> 0:04:46.800 Joe and I have spoken to sam Um a few 0:04:46.839 --> 0:04:49.280 times before. Now I think we have a decent idea 0:04:49.400 --> 0:04:53.400 but what's your impression of it? I like this question 0:04:56.480 --> 0:05:00.680 exposing my ignorance question. Uh, my understanding is FTX is 0:05:00.720 --> 0:05:02.680 like one of the biggest crypto exchanges and that it's 0:05:02.720 --> 0:05:08.400 a particularly like uh, derivatives and structured product focus crypto exchange. 0:05:09.440 --> 0:05:13.280 Is that like about right? Yeah, that's that's that's pretty good. 0:05:13.320 --> 0:05:16.120 And you know, we're one of the newer exchange, certainly 0:05:16.120 --> 0:05:18.440 the newest of the big ones, you know, started up 0:05:18.440 --> 0:05:20.840 a couple of years ago, and more than half our 0:05:20.880 --> 0:05:23.520 volume historic based been derivatives. I think the big reason 0:05:23.600 --> 0:05:26.159 for that is basically, like they're the harder products to 0:05:26.200 --> 0:05:28.359 get right. And you know, I think a lot of 0:05:28.360 --> 0:05:32.760 the exchanges had serious issues when we started up and uh, 0:05:33.000 --> 0:05:36.719 and those issues just became much more transparent and played 0:05:36.720 --> 0:05:39.520 a much more devastating role when they tried to manage 0:05:39.560 --> 0:05:42.400 you know, margin and drivetives than with SPOT products, which 0:05:42.400 --> 0:05:45.560 are relatively simpler, although we do have a pretty wide 0:05:45.640 --> 0:05:48.240 range of products on the site. So I mean, I 0:05:48.279 --> 0:05:52.800 saw Sam someone made a joke on Twitter the other 0:05:52.920 --> 0:05:55.719 day that like, you know, you weren't even like a 0:05:55.760 --> 0:06:00.240 real player or active in the industry, like you know, 0:06:00.680 --> 0:06:03.360 the last bullmarket. I mean I don't think that's totally true, 0:06:03.360 --> 0:06:05.800 because on the last episode you told us the story 0:06:06.120 --> 0:06:09.880 of the U the Japan Premium, which is an incredible 0:06:09.880 --> 0:06:12.279 story and people should listen to it. But so much 0:06:12.320 --> 0:06:15.440 of your success really has come like in the last 0:06:15.800 --> 0:06:17.760 year or year and a half, and now f t 0:06:17.960 --> 0:06:21.080 X is this huge thing. What do you explain, like, 0:06:21.160 --> 0:06:23.240 what was it? It just sort of broadly and then 0:06:23.240 --> 0:06:25.600 we'll get into like the details, but you sort of 0:06:25.640 --> 0:06:28.560 mentioned some of the operational aspects of running a derivatives 0:06:28.600 --> 0:06:31.080 exchange versus just a pure spot exchange. You know, in 0:06:31.080 --> 0:06:34.960 the US people really know coin based globally people really 0:06:35.040 --> 0:06:38.440 know buyinance. But what was it in your view that 0:06:38.640 --> 0:06:40.480 you know, you have this thing, Okay, we're going to 0:06:40.560 --> 0:06:43.840 create a product for traders. What was it that f 0:06:44.000 --> 0:06:47.920 t X had that really allowed it to just explode 0:06:48.080 --> 0:06:52.839 seemingly out of nowhere, uh, in the last year or so. Yeah, 0:06:52.920 --> 0:06:54.360 And I think a lot of these things were things 0:06:54.360 --> 0:06:56.880 you might even just assume with TRUF all exchanges things 0:06:56.880 --> 0:07:00.080 for two, but that isn't And so one example is 0:07:00.080 --> 0:07:03.159 when you look at margining, the norm in crypto was 0:07:03.200 --> 0:07:05.320 you isolate everything, And what that means is if you 0:07:05.360 --> 0:07:08.599 want to go trade if against USD futures, you have 0:07:08.680 --> 0:07:11.000 to go like by Spot etherory and move it into 0:07:11.000 --> 0:07:15.400 your USD futures wallet and use that as margin. Trade 0:07:15.440 --> 0:07:17.560 your each features. If you then want to trade you know, 0:07:17.960 --> 0:07:21.040 Bitcoin against US Spot, you have to go move that 0:07:21.120 --> 0:07:23.600 e thout sell it for US or Bitcoin, move that 0:07:23.600 --> 0:07:27.160 into your US you know Bitcoin Spot margin wallet and 0:07:27.240 --> 0:07:29.160 use this collateral there. You had a margin you know, 0:07:29.360 --> 0:07:32.720 managing literally hundreds of wallets on one venue, each of 0:07:32.720 --> 0:07:36.560 which basically only supports one product um as this massive 0:07:36.600 --> 0:07:38.920 minigame to manage to be liquidated on any one of 0:07:38.920 --> 0:07:41.280 them independent if your collateral on others, you have no 0:07:41.400 --> 0:07:44.640 flexibility on margining. The liquidation engines were not up to 0:07:44.640 --> 0:07:47.120 the task, Like they're losing millions of dollars per day 0:07:47.160 --> 0:07:50.760 of customer assets um to failing to liquid eight in time. 0:07:51.040 --> 0:07:54.200 You know, there was just like match engines fault fell 0:07:54.240 --> 0:07:57.040 over whenever markets got volatile, and so it's just like 0:07:57.560 --> 0:08:00.000 all over the place that was like not a great 0:08:00.080 --> 0:08:02.640 customer experience, and you know in sort of like really 0:08:02.680 --> 0:08:07.160 significant ways. So this is like raised the question that 0:08:07.200 --> 0:08:08.840 I have. So you come from a sort of like 0:08:09.400 --> 0:08:12.840 high tech, traditional finance background, you're a chain street and 0:08:12.960 --> 0:08:17.120 like one story you could tell here is like this 0:08:17.200 --> 0:08:21.440 is about like applying sort of best practices from traditional 0:08:21.480 --> 0:08:25.080 finance to like the wild West of crypto exchanges, where well, 0:08:25.280 --> 0:08:28.200 portfolio margining is a totally well understood thing, but to 0:08:28.360 --> 0:08:31.800 portfolio margining for crypto products. Um, But I'm curious, Like 0:08:32.040 --> 0:08:33.520 I've always thought that like a lot of the appeal 0:08:33.600 --> 0:08:35.760 of crypto is like all these people from like backgrounds 0:08:35.760 --> 0:08:38.720 like yours, who like work in like the coal mines 0:08:38.800 --> 0:08:42.920 of market structure and whatever and have like a list 0:08:42.960 --> 0:08:45.800 of things or like this is this like traditional financial 0:08:45.840 --> 0:08:47.480 thing is stupid and I could do it better if 0:08:47.480 --> 0:08:49.760 I were designing the system from scratch. And you kind 0:08:49.760 --> 0:08:51.640 of went and designed the system from scratch, right like 0:08:51.640 --> 0:08:54.000 you started like a big exchange in a in a 0:08:54.000 --> 0:08:57.079 product universe that is not really beholden to any traditional 0:08:57.760 --> 0:09:01.199 rules or you know, customs. And I'm wondering, like are 0:09:01.240 --> 0:09:04.440 there places where you were like like what we do 0:09:04.520 --> 0:09:06.000 here at chanceer it or what we do and like, 0:09:06.040 --> 0:09:08.280 you know, the stock market is really dumb. Like if 0:09:08.280 --> 0:09:10.320 I were doing it, I'd do it differently where you 0:09:10.320 --> 0:09:13.680 actually went and did that at f t X totally, 0:09:14.000 --> 0:09:16.120 and I do think the answer is really sort if 0:09:16.160 --> 0:09:17.920 you look at each place and you're like, who's doing 0:09:17.920 --> 0:09:19.920 it right? You know, it's sort of like the crypto norm, correct, 0:09:19.960 --> 0:09:22.680 the crypto exchanged norm, or like the traditional exchanged harm 0:09:22.679 --> 0:09:24.440 and kind of sometimes it was one and sometimes it 0:09:24.480 --> 0:09:26.800 was the other. So like some examples of places where 0:09:26.800 --> 0:09:29.440 I think crypto has like at least an argument for 0:09:29.520 --> 0:09:31.679 doing it right now, I personally think they probably are. 0:09:32.080 --> 0:09:34.720 One of these is moving funds around. This is obviously 0:09:34.800 --> 0:09:36.400 one of the first things that comes up with crypto, 0:09:36.480 --> 0:09:38.839 But I at least sort of just assumed it was 0:09:38.880 --> 0:09:42.000 easy to get your money wherever you wanted before I'd 0:09:42.040 --> 0:09:44.679 ever tried to do that. But as soon as I 0:09:44.679 --> 0:09:46.920 I tried to ever move money around, I realized how 0:09:46.960 --> 0:09:49.760 difficult it was. Anyone who sent an int like an 0:09:49.800 --> 0:09:53.320 international wire transfers immediately regrets having to do it. And 0:09:53.360 --> 0:09:54.760 then you look at like a c H and credit 0:09:54.800 --> 0:09:58.440 card payments to take months to finalize, and so either 0:09:58.600 --> 0:10:01.600 these all these limits huge, he's on them. There's so 0:10:01.640 --> 0:10:04.040 many roadblocks in the system because like there's two months 0:10:04.040 --> 0:10:07.000 of fraud risk there, and so just doing things like 0:10:07.080 --> 0:10:09.599 funding your account or what do you what if that 0:10:09.679 --> 0:10:12.520 even needs to find your account on traditional exchanges is 0:10:12.559 --> 0:10:15.920 like very messy and can take a while, whereas on crypto, 0:10:16.240 --> 0:10:18.520 like the goals to make it as clean as possible, 0:10:18.520 --> 0:10:21.760 and when you're sending cryptocurrencies in that's obviously like basically 0:10:21.760 --> 0:10:24.920 instant on sort of you know, the wire transferred time scale. 0:10:25.200 --> 0:10:29.120 But even with with fiat sort the emphasis is like anyone, 0:10:29.160 --> 0:10:31.360 whether you're you have two hundred dollars to your name 0:10:31.440 --> 0:10:33.280 or you're the world's second biggest d F t F, 0:10:33.920 --> 0:10:37.120 you can go to the website, submit kyc infote, create 0:10:37.160 --> 0:10:39.600 an account directly with the exchange, and then there's like 0:10:39.640 --> 0:10:41.920 the deposit button and it has like as many options 0:10:41.920 --> 0:10:44.040 as possible for how you can fund your account. And 0:10:44.040 --> 0:10:47.280 so it's just like a massively easier process. And you know, 0:10:47.360 --> 0:10:49.760 when when you're serve in crypto, what you quickly realize 0:10:49.800 --> 0:10:51.600 like you never want to send FIAT that's like the 0:10:51.640 --> 0:10:54.440 hardest thing to do, and like everything gets settled with 0:10:54.480 --> 0:10:56.760 stable points if if you can get away with it. 0:10:57.360 --> 0:11:01.240 Another thing I'll bring up is it's different nature of 0:11:01.320 --> 0:11:03.240 the products. So when you think of what he's like 0:11:03.360 --> 0:11:06.720 Nazi or cem me or something like they're mostly matching engines, 0:11:07.120 --> 0:11:09.720 like you know, they sort of match bids and offers 0:11:09.720 --> 0:11:13.079 from like a few institutions against each other, but they 0:11:13.080 --> 0:11:15.720 don't do anything else in the trade process. Right, There's 0:11:15.760 --> 0:11:19.400 like separate companies that do like custody clearing, m ok 0:11:19.600 --> 0:11:23.920 I see customer on boarding, branding, advertising, mobile app, website 0:11:24.160 --> 0:11:28.080 a p I. All of those are like different companies, 0:11:28.080 --> 0:11:30.520 and you end up with like, you know, ten companies 0:11:30.520 --> 0:11:32.640 stacked together. And first of all, that means you have 0:11:32.679 --> 0:11:35.320 ten rounds of fees stacked together on trades. But but 0:11:35.400 --> 0:11:37.360 second of all, it means you if this really fractured 0:11:37.400 --> 0:11:42.520 experience where you know, access to the actual ultimate liquidity 0:11:42.600 --> 0:11:45.520 and order books is basically restricted to like a very 0:11:45.600 --> 0:11:49.040 very small number of institutional trading firms going through some 0:11:49.160 --> 0:11:51.920 prime broker, and everyone else sort of has this like 0:11:52.360 --> 0:11:55.760 very abstracted away experience going through you know, two peef 0:11:55.800 --> 0:11:58.400 off firms in a dark pool and a broker. You know, 0:11:58.559 --> 0:12:02.000 so somewhere in the middle. In crypto exchanges are full 0:12:02.000 --> 0:12:05.400 stack products and so everything I mentioned from you know, 0:12:05.920 --> 0:12:09.480 rereading an account, submitting m l k C information, depositing funds, 0:12:10.000 --> 0:12:14.000 um using wold lack gooey website submitting in order, all 0:12:14.120 --> 0:12:17.040 those go straight through the exchange. And so you have 0:12:17.160 --> 0:12:21.640 like small retail customers and giant HFD firms all having 0:12:21.640 --> 0:12:25.160 the same exact access to the ultimate you know, order 0:12:25.200 --> 0:12:27.560 books and and and system. And I think that creates 0:12:27.960 --> 0:12:32.240 in some cases and much much more streamlined and frankly 0:12:32.280 --> 0:12:37.600 fair experience. So can I ask just on the margining idea. 0:12:37.840 --> 0:12:40.240 So one of the things you did, um, I think 0:12:40.240 --> 0:12:42.320 it was just in the past week er two, but 0:12:42.440 --> 0:12:45.600 you changed, um the amount of leverage that you allow 0:12:45.880 --> 0:12:49.280 on the platform. So I think the maximum people can 0:12:49.320 --> 0:12:52.680 do now is twenty times, which seems like a lot 0:12:52.800 --> 0:12:55.520 to me still, but like it's a vast reduction from 0:12:55.520 --> 0:12:58.560 what it was. Uh, walk us through the thought process 0:12:58.640 --> 0:13:02.119 on that, And would you consider changing the margin requirements 0:13:02.160 --> 0:13:07.080 as well? Yeah, so I guess maybe on your last point, 0:13:07.240 --> 0:13:09.320 we talked about changing that the marginal requirements, and when 0:13:09.320 --> 0:13:11.800 we talked about margin leverage, we usually think of them 0:13:11.880 --> 0:13:14.079 is basically the same thing, like one is just one 0:13:14.120 --> 0:13:16.720 divided by the other one. And yes there's like initial 0:13:16.800 --> 0:13:19.360 versus maintenance, like how big of a position you're allowed 0:13:19.400 --> 0:13:22.160 to put on versus at what point your account actually 0:13:22.160 --> 0:13:26.520 starts getting liquidated. But but this this sort of affected 0:13:26.559 --> 0:13:28.600 both of those um and so you know you have 0:13:28.640 --> 0:13:32.319 to post five percent margin now on all positions, and 0:13:32.480 --> 0:13:34.599 at least in many cases much more than that I 0:13:34.640 --> 0:13:37.960 would deserve, equivalent to saying twenty leverage. The thought process 0:13:37.960 --> 0:13:39.959 behind it, the first thing is that it's actually not 0:13:40.080 --> 0:13:42.360 that big of a change for the site. Less than 0:13:42.440 --> 0:13:45.480 one percent of the volume was trading with leverage higher 0:13:45.520 --> 0:13:48.920 than that before. And the reason is that basically your 0:13:48.920 --> 0:13:51.240 margin requirements go up as your position size goes up. 0:13:51.400 --> 0:13:52.840 So if you want to put on a big position, 0:13:52.920 --> 0:13:54.520 you need to post way wey weay more than that 0:13:54.720 --> 0:13:57.720 collateral anyway, and you're only able to put on really 0:13:57.760 --> 0:14:00.760 tiny positions with very high leverage. And so it's served 0:14:00.800 --> 0:14:03.079 by definition, not where most of the volume or open 0:14:03.120 --> 0:14:06.760 interest or users were coming from. And so so it 0:14:06.880 --> 0:14:09.480 wasn't like a big part of the exchange. It wasn't 0:14:09.600 --> 0:14:12.480 super relevant to to us or to most of our 0:14:12.559 --> 0:14:16.520 users or their experience. It's also not super economically like 0:14:16.960 --> 0:14:19.600 useful frankly, like when when you talk about you know, 0:14:19.760 --> 0:14:22.960 hedging something or having on some spread or or one 0:14:23.000 --> 0:14:24.200 of the many reasons that you might want to do 0:14:24.240 --> 0:14:28.200 a margin trade. If you get down to one collateral left, 0:14:28.600 --> 0:14:30.800 you can't really use that to hedge something because you 0:14:30.840 --> 0:14:34.520 can get liquidated in like a print, like in like 0:14:34.600 --> 0:14:37.480 fifteen seconds. You know, markets could move enough that you're 0:14:37.480 --> 0:14:40.480 out of margin, and so it doesn't make sense for 0:14:40.560 --> 0:14:43.640 any like long or even medium term position that you're 0:14:43.640 --> 0:14:46.120 planning to hold for any reason. You're sort of like 0:14:46.360 --> 0:14:50.240 almost definitely opening yourself up to serious liquidation risks if 0:14:50.320 --> 0:14:52.680 you get anywhere close to that amount of leverage. And 0:14:52.720 --> 0:14:54.000 it's like most of the things that I think, like 0:14:54.080 --> 0:14:57.400 frankly could justify as like the more economically useful parts 0:14:57.840 --> 0:15:02.120 like don't require high like super high leverage anyway. And 0:15:02.160 --> 0:15:04.400 then the last species frankly, like it's something that a 0:15:04.480 --> 0:15:06.360 lot of people look on a scans like you know 0:15:06.400 --> 0:15:08.960 when when you talk about I mean reporters, but regulators 0:15:09.000 --> 0:15:12.200 as well, like not that they're like specific regulations around 0:15:12.240 --> 0:15:15.520 this in most jurisdictions, but like there probably will be eventually, 0:15:16.160 --> 0:15:18.160 and and it's sort of like clearly the direction of 0:15:18.160 --> 0:15:20.600 the world's going in and so start of combining all 0:15:20.640 --> 0:15:23.640 those together, like it wasn't important important part of the 0:15:23.640 --> 0:15:26.200 site wasn't super healthy part of the site necessarily. It 0:15:26.400 --> 0:15:29.000 was like a part that was going to start receiving 0:15:29.040 --> 0:15:32.440 a lot of negative attention, and it just seemed like 0:15:32.640 --> 0:15:34.520 it was like it was time to get rid of it. 0:15:50.480 --> 0:15:52.920 Talk to us a little bit more about the technical 0:15:53.600 --> 0:15:57.960 aspects of building um a system in which there was 0:15:58.320 --> 0:16:00.520 you know, as you describe it, the one wallet where 0:16:00.560 --> 0:16:04.560 everything is you know, cross margin, and so you don't have, okay, 0:16:04.680 --> 0:16:07.880 your bitcoin futures wallet and your future's wallet and so 0:16:08.120 --> 0:16:11.840 forth two things. So like how hard is that to build? 0:16:12.160 --> 0:16:13.880 But also we know that like with a lot of 0:16:13.960 --> 0:16:16.720 the legacy or it's weird to talk about legacy, the 0:16:16.840 --> 0:16:20.120 legacy crypto exchanges, they tend to go down a lot 0:16:20.280 --> 0:16:23.479 during periods of high volatility, which is a source of frustration, 0:16:23.680 --> 0:16:26.120 and we see it We've seen with coin based for example, 0:16:26.200 --> 0:16:29.200 where everyone's starting to like slam into one thing and 0:16:29.240 --> 0:16:33.160 suddenly social media has lit up. You like to point out, 0:16:33.280 --> 0:16:36.520 like on Twitter it's like, well, ft X another another 0:16:36.640 --> 0:16:39.480 day of a hundred percent up time or whatever it is. 0:16:39.920 --> 0:16:42.680 How much are those things connected? This sort of like 0:16:42.960 --> 0:16:46.960 the difficult stress of legacy liquidation books versus and just 0:16:47.440 --> 0:16:51.880 keeping the site going up. Yeah, So the thing that 0:16:52.000 --> 0:16:54.320 really causes the stress there is actually the interaction between 0:16:54.360 --> 0:16:58.720 two different effects, one of which is cross margining. One 0:16:58.760 --> 0:17:01.640 advantage of isolated eargining, and one reason that some exchanges 0:17:01.720 --> 0:17:06.080 do this is you can completely parallelize different products, right. 0:17:06.160 --> 0:17:07.959 You can just like completely separately, say like all right, 0:17:08.000 --> 0:17:11.280 there's our bitcoin EOS market, here's our eight futures. They 0:17:11.320 --> 0:17:14.040 have nothing to do with each other, Like, are none 0:17:14.080 --> 0:17:15.879 of our systems need to look at the other one. 0:17:16.200 --> 0:17:19.080 You have completely parallel margin checks, risk checks, order books, 0:17:19.400 --> 0:17:22.879 and it's easy to rent another server, Like if you 0:17:22.920 --> 0:17:26.000 could scale up your business just by buying ton of servers, 0:17:26.480 --> 0:17:28.760 that is the easiest thing to do, and like we 0:17:28.800 --> 0:17:30.680 would do that in a second. The problem that you 0:17:30.800 --> 0:17:32.960 run into is that doesn't increase increase like the clock 0:17:33.040 --> 0:17:35.840 speed of any one process. And so whenever you have 0:17:36.000 --> 0:17:39.680 these bottlenecking things where everything needs to feed through one process, 0:17:40.240 --> 0:17:43.720 like buying more computers doesn't help because there's just the 0:17:43.800 --> 0:17:46.760 one computer that's computing that one bottle necking thing. And 0:17:46.880 --> 0:17:50.000 the worry with cross margining is if I send an 0:17:50.080 --> 0:17:55.000 order in an bitcoin US order book, that immediately affects 0:17:55.080 --> 0:17:57.439 the amount of margin that I have available for an 0:17:57.600 --> 0:18:01.520 ethereum futures position, and so you can't treat them as 0:18:01.840 --> 0:18:04.399 completely separable from each other, and you sort of have 0:18:04.640 --> 0:18:07.840 in the end this one process, which is keeping track 0:18:07.880 --> 0:18:10.000 of the master amount of margin and collateral that each 0:18:10.000 --> 0:18:14.000 account has available, and that thing has to like every 0:18:14.080 --> 0:18:16.560 single order on every order world has to feed through 0:18:16.640 --> 0:18:20.440 that process, and all of a sudden paralyzation is way harder. 0:18:20.880 --> 0:18:24.040 And that means that your risk of that process falling 0:18:24.080 --> 0:18:26.680 over when things get busy, and if that process gets 0:18:26.720 --> 0:18:29.080 bottle lets, you can't accept orders in any order book 0:18:29.280 --> 0:18:31.640 because you don't know if the person has enough margin corps. 0:18:32.040 --> 0:18:34.800 So that that's sort of like the fundamental tension that 0:18:34.880 --> 0:18:37.399 you that you get too quickly when you frost margin, 0:18:37.960 --> 0:18:40.920 and inherent in that is like then you say, well, okay, 0:18:40.920 --> 0:18:44.320 how about traditional exchanges, like don't they cross margin? And 0:18:44.440 --> 0:18:46.680 the real answer is that it gets back to a 0:18:46.720 --> 0:18:50.000 previous point. In traditional finance, the exchanges aren't the primary 0:18:50.119 --> 0:18:54.560 risk check. The exchanges aren't like analyzing correlations between different 0:18:54.560 --> 0:18:57.880 assets and someone's portfolio. Generally, the exchanges are just processing 0:18:57.960 --> 0:19:00.440 the orders. And then you have things like prime brokers 0:19:00.880 --> 0:19:03.960 who are the actual risk check engines. They're not doing 0:19:04.000 --> 0:19:06.240 it in real time really, at least not like tick 0:19:06.320 --> 0:19:08.760 by tick or order by order. They don't have to 0:19:08.880 --> 0:19:12.000 be as high throughput. They're just sort of like periodically 0:19:12.119 --> 0:19:15.239 checking on people's portfolios. And then you say, okay, well, 0:19:15.240 --> 0:19:18.240 why can't we take it out of this critical process 0:19:18.280 --> 0:19:20.600 and just check it every hour or something. And the 0:19:20.680 --> 0:19:23.760 reason is, well, what if they went bankrupt in that hour? Right, 0:19:24.280 --> 0:19:27.760 which you now get to surface other piece, which is 0:19:27.800 --> 0:19:31.080 the fact that we allow everyone access to the site, 0:19:31.440 --> 0:19:33.720 including people who aren't like, you know, one of the 0:19:33.760 --> 0:19:35.760 five biggest trading firms in the world that you definitely 0:19:35.800 --> 0:19:38.639 have legal recourse over and they have tons of assets 0:19:38.720 --> 0:19:41.000 outside of your exchange that you can claim if they 0:19:41.040 --> 0:19:43.680 want net negative Like that's not how it works in 0:19:43.720 --> 0:19:46.040 crypt and crypto. We have everyone, and so if any 0:19:46.080 --> 0:19:50.280 account goes net negative value, like realistically speaking, we might 0:19:50.400 --> 0:19:53.520 never be able to like proclaim that, and and you know, 0:19:53.760 --> 0:19:56.840 we just end up eating that. And so we have 0:19:57.000 --> 0:19:59.520 to be real time monitoring the risk of all of 0:19:59.600 --> 0:20:01.840 the used years and and that's sort of like one 0:20:01.880 --> 0:20:04.399 of the easier parts to accidentally get sort of bottle 0:20:04.440 --> 0:20:07.119 necked on. Can you talk about that from like a 0:20:07.200 --> 0:20:11.439 perspective of your capital So, like, you know, exchanges are 0:20:11.480 --> 0:20:13.280 sort of notably thinly like in the in like the 0:20:13.320 --> 0:20:15.840 traditional finance where all the exchanges are not like particularly 0:20:15.880 --> 0:20:19.200 capitalized because they're not particularly capital intensive. Clearing houses have 0:20:19.359 --> 0:20:24.280 like weird capital you know, positions and drawing rights. And 0:20:24.359 --> 0:20:26.639 then prime brokers are giant banks who are who are 0:20:26.760 --> 0:20:30.359 like very heavily capitalized. Um, Like for you, like, do 0:20:30.400 --> 0:20:32.919 you have billions and billions of dollars to cover customer 0:20:33.000 --> 0:20:34.960 losses or is it more like you're a sort of 0:20:35.000 --> 0:20:38.920 technological situation where you can you're confident you can blow 0:20:39.000 --> 0:20:41.840 people out fast enough that like customer losses are not 0:20:41.960 --> 0:20:44.560 your problem? Or am I just thinking about it round? No, 0:20:44.840 --> 0:20:47.280 that you're thinking about exactly right? Um. And that's a 0:20:47.359 --> 0:20:50.520 really good question to ask. And different exchanges come to 0:20:50.600 --> 0:20:52.920 different answers that questions. Let me give you a little 0:20:52.920 --> 0:20:55.760 bit of a palette of like how one could answer it. 0:20:56.359 --> 0:20:58.880 One answer, which used to be very popular is that's 0:20:58.920 --> 0:21:01.359 not our problem, that's are you years problem? And you 0:21:01.480 --> 0:21:03.640 might say, what you mean if users negative, you can't 0:21:03.680 --> 0:21:06.280 get funds from them? Twix respond sure, but that means 0:21:06.320 --> 0:21:09.160 some other users positive, and maybe you consider of see 0:21:09.160 --> 0:21:11.280 where that's going. You know, there are these things called 0:21:11.520 --> 0:21:15.120