FTX/ Defi: When it looks like a duck and quacks like a duck. . .

Levine:

Can you give me an intuitive understanding of agriculture? I mean, to me, farming is like selling structured puts and collecting premiums, but maybe there's a more nuanced understanding than that.

Sam Bankman Fried:

Let me give you something like a real toy model that I think has a surprising amount of legitimacy for what farming could mean. You know, where do you start? They start with a company that builds a box, and in practice they probably dress that box up to look like a life-changing, you know, world-changing protocol that's going to replace all the major banks in 38 days or whatever. Maybe you'll actually ignore what it's doing for now, or pretend it's doing literally nothing. It's just a box. So what this protocol is, it's called "Protocol X", it's a box, and you take a token.You can take Ethereum, you can put it in the box and you take it out of the box. All right, you put it in the box and you get, like, an IOU for putting it in the box, and then you can redeem that IOU for the token again.

What we have described so far is the world's dumbest ETF or ADR or something like that. It doesn't do anything except let you put things in it if you wish.And then this protocol issues a token, whatever we call it “X-Token”. And X-Token promises that everything cool that happens because of this box can ultimately be used through the governance vote of the holders of the X-Tokens.They can vote on what they do with proceeds or other cool things that happen from this box. And of course, we haven't given a compelling reason yet as to why there would ever be any proceeds from this box, but I don't know, you know, maybe there will be, so start with that.

And then you say, all right, well, you have this box and you've explained X tokens and the box protocol, or maybe votes through on-chain governance, or, you know, something like that, what they're going to do is they're going to take half of all the Maybe two-thirds will, two-thirds will offer X tokens, and they'll give them away for free to anyone who uses the box.So everyone who goes, takes some money, puts it in the box, will drop 1% of the X token every day proportionally among everyone who put money in the box. That's what X-Token does for now, it's given away to the box people.And what happens now? Well, X-Token has some market cap, right? It's probably not zero. Let's say it's a $20 million market...

Levine:

Wait, wait, wait, it was supposed to be zero to begin with, but okay.

SBF:

Uh, sure. OK. Totally reasonable comments.

Levine:

I mean, that's not entirely true, but when you describe it in this completely cynical way it sounds like it should be zero, but move on.

SBF:

Describe it like this, you might think, for example, that you could create such a box and token in about five minutes with an internet connection, and that it should reflect, you know, it should be worth about $180 or some market cap for something like that, you know, that effort that you put into it. In the world we're in, everyone will be like, "Ooh, Box Token, if you do that. Maybe it's cool. If you buy a Box Token, it will appear on Twitter and have a market cap of $20 million."And of course you could keep the float very low and whatever, you know, maybe $20 million hasn't gone in yet. Maybe this is some kind of mark-to-market valuation or something, but I admit that it's not entirely clear that this thing should have a market cap, but empirically I argue that it would have a market cap.

Levine:

I agree.

Weisenthal:

In theory it shouldn't have a market cap, but in practice they always do. OK.

SBF:

True. So, and obviously we're kind of hiding some of the magic, right? Like part of the magic is how you get that market cap to start with, but, you know, whatever, we'll move on from that for a second.So, you know, X tokens [are] being issued every day, all these sophisticated companies are like, huh, that's interesting. For example, if the total amount in the box is a hundred million dollars, then this year it will bring in 16 million dollars in X tokens spent on it. That's a return of 16%. This is very good. We're going to put in a little bit more, right?And maybe that will happen until $200 million is in the box. So, you know, experienced traders and/or people on Crypto Twitter or other similar parties go and put a combined $200 million in the box and they start getting these X tokens in return.

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

SBF:

And they're like '10X', that's crazy. 1X is the norm.’ And then, you know, the price of the X token goes way up. And now it's a $130 million market cap token because, you know, people's bullish use of the box. And now, of course, all of a sudden the smart money is like, oh, wow, this thing is now yielding 60% a year in X tokens. Of course I take my 60% yield, right? So they go and pour another $300 million into the box and you get a psycho and then it goes on to infinity. And then everyone makes money.

Levine:

I consider myself a pretty cynical person.And that was so much more cynical than I would have described agriculture. You just think, well, I'm in the Ponzi business and it's pretty good.

Weisenthal:

At no point did this require any economic argument, it's just like other people putting money in the box. And I will, and then it will be more valuable. So you're going to invest more money, and at no point in the cycle did it seem to describe any kind of economic purpose?

SBF:

On the one hand I think that's a pretty reasonable answer, but let me play around with it a bit. Because that is a framework of it. And I think there's a kind of depressing amount of validity...

Levine:

Can you say something about sustainability? Because, you know, on the one hand you think, well, a trillion dollars of institutional money is going to flow into Bitcoin. And on the other hand, you're like, there's basically a lot of Ponzis that have done really well.