BRIEFLY NOTED: For 2022-11-11 Fr
BRIEFLY NOTED: For 2022-11-11 Fr
Because I moved the “focus” part or today’s post to “Slouching: Long Notes"
CONDITION: In Which I Am Relatively Quiet Today…
A bunch of things for y’all to read, most of which I have not yet fully processed…
One Audio: Money & Crypto:
Tracy Alloway, Sam Bankman-Fried, Matt Levine, & Joe Weisenthal: How to Make Money in Crypto <https://overcast.fm/+5AWMdOFdc>
Transcript Excerpts:
Transcript: Sam Bankman-Fried and Matt Levine on How to Make Money in Crypto
By Tracy Alloway and Joe Weisenthal
April 25, 2022 at 11:24 AM PDT
Matt: Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there's a more sophisticated understanding than that.
SBF: Let me give you sort of like a really toy model of it, which I actually think has a surprising amount of legitimacy for what farming could mean.... A company... builds a box.... They dress it up to look like a... world-altering protocol that's gonna replace all the big banks in 38 days.... You... take Ethereum... put it in the box... and... get... an IOU.... Then this protocol issues... X token... [that] promises that anything cool that happens because of this box is going to... be usable by... governance vote of holders of the X tokens.... So far we haven't... given a compelling reason for why there ever would be any[thing cool]... but... maybe there will be....
Each day they're gonna airdrop... 1% of the X token pro rata amongst everyone who's put money in the box.... X token... gets given away to the box people..... X token has some market cap, right? It's probably not zero. Let say it's... $20 million.... I acknowledge that it's not totally clear that this thing should have market cap, but empirically I claim it would....
So... X tokens [are] being given out each day.... Sophisticated firms are... "Huh, that's interesting.... If the ... money in the box is a hundred million dollars, then it's going to yield $16 million this year in X tokens.... That's pretty good. We'll put a little bit more in."... Maybe that happens until there are $200 million dollars in the box.... Sophisticated traders... Crypto Twitter or other[s]... put $200 million in the box... and... start getting... X tokens....
Now... everyone's.... "This is a valuable box as demonstrated by all the money that people have apparently decided should be in the box.... I love boxes as much as the next guy."... People are... recalibrating.... It's been... 48 hours and it already is $200 million, including from... sophisticated players.... They look at these ratios... [of] total value locked in the box... to [the] market cap of the box’s token.... "10x that's insane. 1X is the norm."... X token price goes way up.... Now it's $130 million market cap token because of... the bullishness of people's usage of the box.... Now... the smart money's.... "Wow, this thing's... yielding... 60% a year in X tokens.... So they go and pour another $300 million in the box." And you get a psych and then it goes to infinity. And then everyone makes money.
Matt: I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.
Joe: At no point did any of this require any sort of... economic case. It’s just... "other people put money in the box, and so I'm going to too", and then it's more valuable.... t no point in the cycle, did it... describe aAy... economic purpose?...
SBF: I'll stay on the cynical route.... What's the end game? This box is worth zero, obviously.... But... if everyone... now thinks that this box token is worth... a billion... that's what people are pricing it at and... [it] has that market cap.... You put X token in a borrow-lending protocol and borrow dollars with it. If you think it's worth like less than two thirds of that, you could even just like put some in there, take the dollars out.... If the world never decides that we are wrong... in... a coordinated way... you're... the guy... saying, "no, this thing's actually worthless", but in what sense are you right?....
Tracy: Are you saying that the value has to derive from everyone agreeing that it's worth something?.... There have been these different arguments about how it actually gets value.... Everyone's gonna start migrating stuff on blockchain, and then you're gonna have a real economic use attached to these assets.... But are you saying that it depends more on everyone just agreeing that these are worth something?...
SBF: It could come... from either. You can... get a market cap... because of cash flow.... Or you could... get market cap in the way that... Doge coin or SHIB coin have, where people are just... ‘ha ha’ and then they buy it. And if you're... "that's dumb, it has no cashflow flow, I'm gonna short sell it" you lose all your money.... AMC or Hertz or GameStop or meme stocks in general have... a very similar pattern.... Maybe people will pay something for it even though it doesn't seem traditionally valuable—[that] is not a crypto-specific concept. Although it certainly has become like….
SBF: I was being a little facetious, although I do think it's...an important way to understand part of what's going on.... It's not really the case that the biggest of these claim to be a box that is nothing but a box. They claim to be a bit more than that.... You can query how much you believe the story that their value at its heart is coming from them being more than just a box, but people certainly perceive them to be more than that.... Maybe it's gonna be like the preeminent DEX... maybe it's gonna be the preeminent borrow-lending protocol on chain.... This... starts out as just this... side show to the bigger story of we're gonna change the world with the protocol.... Now, sometimes that sideshow becomes the main show.... Sometimes... in the end what really happens is that like the box plus yield nature of it becomes more popular than the original use case....
Joe: How big is the farming industry?... How big is this... ecosystem and how sophisticated are the trades... beyond just... simple crude ‘put money in the box’?...
SBF: Rough ballparking.... Total value locked on chain... maybe a hundred billion.... Yields are certainly down a fair bit.... We might be talking $5 billion a year that sort of like traders are making from farming....
Joe: What's your take on the rise of either algorithmic or partially algorithmic partially backed stable coins. One of the most interesting phenomenon happening right now is the rise of Luna and UST, and Luna has this Treasury Reserve consisting of a lot of Bitcoin, which seems a little dicey, but some people say any idea of like an algorithmically-backed stable coin is a perpetual motion machine. It's only a matter of time before it fails. Do you believe there can be like a truly sort of like decentralized stable coin? What do you make of these projects?
SBF: I think they're really cool. I do have some sympathy to the perpetual motion machine crowd here.... If you do zoom out... and... say, this is a stable coin, backed by volatile assets, what's gonna happen in a big market move.... The goal isn't for someone to sit there and hold it for five years, the goal is for it to be used briefly for like transactions on chain and get created and redeemed on chain.... Answers like that can make sense. I think there's ... versions of ‘algorithmic stablecoins’ that do have risk... but that also have massively enhanced yield because they're taking that risk on in order to do a trade that makes money effectively....
Joe: I'm... curious.... What are the different approaches... that either institutional money or quasi-sort of like VC money has taken to... find the next big thing? How do like people know?...
SBF: I want to... zoom out.... How do VCs find the next anything that they're gonna invest in, right? Like how do they find the next company they're gonna invest in?... When you break it down... you get a bizarre process... that does not look like the paragon of efficient markets.... They... see what all their friends are chattering about, and they start FOMOing and then their LPs are like, "yo, have you made us a lot of money off of this company or token yet?"... "No, we haven't invested in it"... is not a good answer given what question your LPs just asked. So instead you're... "oh boy, you're gonna be excited about what we have done and/or will do." And then you find a way to get into that token and/or company.... It's bizarre processes like that ultimately that are like shaping VC's investments in both traditional equities and in cryptocurrencies....
Joe: Tracy, I loved that. The highlight was definitely Sam's description of yield farming that even a sort of crypto cynic…
Tracy: As a magic box that you put money into and more money comes out?
Joe: And even Matt Levine was like, I would've never described it this way because I thought it would be too cynical.
Tracy: Yeah. I don't really know what to say about that.... This idea of like the value either coming from actual economics and use cases versus everyone just agreeing.... Everyone just agreeing something is valuable. Sometimes it works.... The fact that it's been working for so long certainly has surprised many people myself included....
Joe: That's the thing.... This is ridiculous. This is a perpetual motion machine. And yet here we are in 2022 and the industry’s still going.
Tracy: Yeah, the machine's still going.
Joe: So the way DeFi works is: you put in a money in a box that you think more people will put money into.... And the way VC works is: you hear what your friends in the industry are investing in based on 2027 numbers. And then you also wanna get on that. So it's really just FOMO all the way down.
Tracy: The other thing I would say.... Momentum trading is not... entirely unknown in finance.... It has been a very profitable strategy, arguably, since 2008 and the finance crisis. I don't know how to feel about it. I feel weird
Joe: We all feel weird.
Must-Read: I Confess I Did Not Expect to Learn Þt U.C. Berkeley Was Seriously Long FTX:
Jake Curtis: Welcome to Cal's FTX Field, a Naming-Rights Deal Funded by Cryptocurrency: ‘Former Golden Bears walk-on football player is the Chief Operating Officer of the company partnering with Cal on landmark 10-year deal: Cal announced on Monday that it has reached agreement on the first-ever collegiate cryptocurrency naming-rights sponsorship, a 10-year, $17.5 million deal that will be paid in full in cryptocurrency, with the result being that the Golden Bears’ football field will now be known as FTX Field at California Memorial Stadium. So, Cal fans, welcome to FTX Field for the Bears’ Sept. 4 opener against Nevada, knowing the name is paid for by virtual currency. An interesting note to this story is that the head of FTX (Sina Nader) was a walk-on football player at Cal two decades ago. The deal will also include on-field branding and branding on athletics press backdrops and social integration and will initiate a community-service platform that will support philanthropic causes…
Very Briefly Noted:
Max Kennerly: My uncle was innocent!…
Dan Primack: Sequoia Capital tells investors it did proper due diligence on FTX…
Ed Luce: Joe Biden is still Donald Trump’s worst nightmare read: ‘The fact that the red wave became a red ripple suggests the anger of America’s voters does not equate to recklessness…
Kate Clark: FTX’s Bankman-Fried Quietly Invested More than $500 Million in Sequoia and Other VCs: ‘Bankman-Fried was not only a tireless fundraiser from venture capital firms including Paradigm and Sequoia Capital, but also quietly made investments in those same funds… how entangled Silicon Valley VC firms are in Bankman-Fried’s collapsing crypto empire…
FRBNY: Underlying Inflation Gauge (UIG)…
Diane Coyle: The end of growth: ‘When I ask DeLong what he thought of the pandemic, his answer is: “Well, it was better than the Black Death.” There is some humour among the bleakness. But the challenge of solving our economic problems is immense. My conversation with DeLong, like his book, was enjoyable but hardly comforting…
Bobby Ghost: Republicans May Not Be Able to Stop Biden’s Agenda: ‘With a narrower-than-expected House majority, speaker-in-waiting Kevin McCarthy will have to manage the GOP’s far-right faction…
George Steer: J.P. Morgan's "Transitory" Intransigence: ‘Opining on the data as if the past 12 months (and boss Jamie Dimon’s hawkish April letter to shareholders) were all just a bad dream…. “The October report supports the idea that we are moving past the firmest period for inflation and that a decent amount of the inflation we have seen over the past year will prove to be temporary or transitory in nature”…E ven so, economist Brad DeLong writes that Team Transitory would be looking “pretty good right now” were it not for Russia’s invasion of Ukraine…
Anton Howe: The Beacons are Lit!…
¶s:
Matt Levine: FTX Is Still Looking for Money: ‘The obvious question… is: Is it a liquidity problem, or a solvency problem?… A nice clean distinction in theory but very hard to see in practice. For one thing, if a financial firm is facing a liquidity crisis, it’s usually because people are worried about solvency…. Still the distinction matters. Roughly it comes down to: If someone gave you enough time to sell all your assets — whatever that means exactly — would you be able to sell them for enough money to cover your debts? If the answer is yes, then you have a liquidity crisis, and someone can probably fix it…. There is a long history of scams and Ponzis in crypto, so if you have a liquidity problem everyone is going to assume that you are running a scam or a Ponzi…. One thing to consider is that if FTX is solvent, and Binance has the opportunity to buy it for $0, then that’s in Binance’s best interests…. If Binance walks away, it mostly gets contagion, as crypto prices fall and customers lose confidence in the whole industry. Binance had some incentives to conclude that FTX is solvent, but it couldn’t get there…