Cryptocurrency: Noting The Carnage

grarpamp grarpamp at
Wed Nov 9 14:20:58 PST 2022

FTX Post-Mortem: Bankman-Fried Admitted The "Ponzi Business" Of Crypto
Yield Farming Months Ago

Over the summer, I was stunned when a friend of mine sent me an
interview with FTX CEO and crypto billionaire Sam Bankman-Fried that I
had never seen before. In the interview, Sam, who I recently noted
knows more about the inner bowels of the defi/crypto space than
anybody, basically came out and admitted that crypto lending was one
giant Ponzi scheme.

Of course, many of us knew that the space was a ponzi scheme already -
as I have been adamantly outspoken about - but it was the sheer,
unadulterated, matter-of-fact-style, bald-faced admissions by
Bankman-Fried that caused my jaw to drop when I read it and listened
to it this week.

Now, looking back on it after FTX's collapse this week, it's even more
stunning that nobody saw it coming.

3 months before the collapse of crypto lending firms, it was literally
just…out there…in the public, from the man who knows the space best,
that such companies were, in essence, total Ponzi schemes. First,
here's a video of SBF explaining how DeFi works like a ponzi scheme.

Then, there were Bankman-Fried’s comments on the Odd Lots podcast with
Matt Levine.

Matt asked the same daring question that Peter Schiff asked of Celsius
CEO Alex Mashinsky back in November 2021: where does the extra cash
for yield farming actually come from?

While Mashinsky ducked the answer, at least Bankman-Fried tried to
describe it, though he did so as a “black box” where new investor
money pays back old investor money. Also known as a Ponzi scheme.

    “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,” Levine asks Bankman-Fried, per a Bloomberg transcript of the

Bankman-Fried responds:

    “You start with a company that builds a box and in practice this
box, they probably dress it up to look like a life-changing, you know,
world-altering protocol that's gonna replace all the big banks in 38
days or whatever. Maybe for now actually ignore what it does or
pretend it does literally nothing. It's just a box. So what this
protocol is, it's called ‘Protocol X,’ it's a box, and you take a
token. You can take ethereum, you can put it in the box and you take
it out of the box. Alright so, you put it into the box and you get
like, you know, an IOU for having put it in the box and then you can
redeem that IOU back out for the token.”

Later in the interview, when pressed on where the actual generated
value comes from to pay the yields by Levine, Bankman-Fried expounds
on his statements:

    “Describe it this way, you might think, for instance, that in like
five minutes with an internet connection, you could create such a box
and such a token, and that it should reflect like, you know, it should
be worth like $180 or something market cap for like that, you know,
that effort that you put into it.”

He continues:

    “In the world that we're in, if you do this, everyone's gonna be
like, ‘Ooh, box token. Maybe it's cool. If you buy in box token,’ you
know, that's gonna appear on Twitter and it’ll have a $20 million
market cap. And of course, one thing that you could do is you could
like make the float very low and whatever, you know, maybe there
haven't been $20 million dollars that have flowed into it yet.

    “Maybe that's sort of like, is it, you know, mark to market fully
diluted valuation or something, but I acknowledge that it's not
totally clear that this thing should have market cap, but empirically
I claim it would have market cap.”

One host responds cynically:

    “It shouldn't have any market cap in theory, but it practice, they
always do. Okay.”

Bankman-Fried confirms this and continues, calling the box “magic” and
explaining further:

    “That's right. So, and obviously already we're sort of hiding some
of the magic impact, right? Like some of the magic is in like, how do
you get that market cap to start with, but, you know, whatever we're
gonna move on from that for a second.

    So, you know, X tokens [are] being given out each day, all these
like sophisticated firms are like, huh, that's interesting. Like if
the total amount of money in the box is a hundred million dollars,
then it's going to yield $16 million this year in X tokens being given
out for it. That's a 16% return. That's pretty good. We'll put a
little bit more in, right?

    And maybe that happens until there are $200 million dollars in the
box. So, you know, sophisticated traders and/or people on Crypto
Twitter, or other sort of similar parties, go and put $200 million in
the box collectively and they start getting these X tokens for it.

    And now all of a sudden everyone's like, wow, people just decide
to put $200 million in the box. This is a pretty cool box, right? Like
this is a valuable box as demonstrated by all the money that people
have apparently decided should be in the box. And who are we to say
that they're wrong about that? Like, you know, this is, I mean boxes
can be great. Look, I love boxes as much as the next guy. And so what
happens now?

    All of a sudden people are kind of recalibrating like, well, $20
million, that's it? Like that market cap for this box? And it's been
like 48 hours and it already is $200 million, including from like
sophisticated players in it. They're like, come on, that's too low.
And they look at these ratios, TVL, total value locked in the box, you
know, as a ratio to market cap of the box’s token.

    And they’re like ‘10X’ that's insane. 1X is the norm.’ And so
then, you know, X token price goes way up. And now it's $130 million
market cap token because of, you know, the bullishness of people's
usage of the box. And now all of a sudden of course, the smart money's
like, oh, wow, this thing's now yielding like 60% a year in X tokens.

    Of course I'll take my 60% yield, right? 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.”

Bloomberg’s Matt Levine then sums it up at the end of Bankman-Fried’s comments:

    “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.”

Over the summer, I wrote about how these statements reaffirmed my
belief that there are more blowups taking place behind the scenes than
we knew about in crypto, as I pointed out in a piece. Today, in
November, it still remains a harbinger of bad news for the space, in
my opinion.

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