Conversations with Tyler - Sam Bankman-Fried on Arbitrage and Altruism

Episode Date: March 9, 2022

Whether it's scaling an arbitrage opportunity or launching an ambitious philanthropic project, Sam Bankman-Fried has set himself apart. In just a few years, he's not only made billions trading crypto, but also become a leading practitioner of effective altruism, with the specific aim of making lots of money in order to donate most of it to high-impact causes. He joined Tyler to discuss the Sam Bankman-Fried production function, the secret to his trading success, how games like Magic: The Gathering have shaped his approach to business, why a legal mind is crucial when thinking about cryptocurrencies, the most important thing he's learned about managing, what Bill Belichick can teach us about being a good leader, the real constraints in the effective altruism space, why he's not very compelled by life extension research, challenges to his Benthamite utilitarianism, whether it's possible to coherently regulate stablecoins, the implicit leverage in DeFi, Elon Musk's greatest product, why he thinks Ethereum is overrated, where in the world has the best French fries, why he's bullish on the Bahamas, and more. Check out Macro Musings. Follow Macro Musings on Twitter. Subscribe to Macro Musings on your favorite podcast app. Read a full transcript enhanced with helpful links, or watch the full video. Recorded January 6th, 2022 Other ways to connect Follow us on Twitter and Instagram Follow Tyler on Twitter  Follow Sam on Twitter Email us: [e-mail] Subscribe at our newsletter page to have the latest Conversations with Tyler news sent straight to your inbox. 

Hi, everyone. This is Tyler of Conversations with Tyler. Another podcast produced here at the Mercatus Center is Macromusings, a weekly podcast dedicated to macroeconomic discussions, monetary policy, and the Fed. It's hosted by my colleague, David Beckworth. If you're interested in learning more about macroeconomic issues of the past, present, and future, please join the discussion on Twitter at Macro underscore Musings and subscribe to the show on your favorite podcast app. Conversations with Tyler is produced by the Mercatus Center at George Mason University,

bridging the gap between academic ideas and real world problems. Learn more at Mercadis.org. And for more conversations, including videos, transcripts, and upcoming dates, visit Conversationswithtyler.com. Hello, everyone, and welcome back to Conversations with Tyler. Today I'm chatting with Sam Bankman-Fried. Sam is the CEO and founder of FTX, a major cryptocurrency exchange, and the founder and head of Alameda Research, a major cryptocurrency trading firm. Sam has in a very short period of time gone from just being a person who believed in effect of altruism to being perhaps the world's leading practitioner of earning money to give it away.

Sam, welcome. Thanks for having me. Let me do this a bit in reverse and start with the Sam Bankman-Fried production. function, how it is you do what you do. So you had a lot of success arbitraging Bitcoin prices across Japan, other locales. What's the fundamental skill that you have that made you better at that than other people? So a lot of people are smart, a lot of people work hard. Right. Like, what's the extra factor X of Sam Bankman-Fried there? Quantum mechanics. How so? No. No. And it's an interesting question, and I think the most

interesting thing about it is that there isn't an obvious answer. Like, you know, good at trading is a thing could say, but then you break that down, like, all right, well, what's it mean to be good at trading? And it's not like you go to school for trading and get a trading degree. They don't really teach it in school. It's really a wide collection of things. But I think what they center around is like, here is a messy thing. Like the world is very messy. You know, math might look clean. But anytime that you jump out into how things really work, there's always going to be factors that you can't consider. But there's a huge amount of power in being quantitative. There's huge power in thinking about things, not just from qualitative angle, but putting numbers on

things, building statistical models. But doing that in a world where you know you're forgetting an enormous number of factors, how do you do that? I think that is one of the core things here, is like getting quantitative and numerical when it's really hard to do so. How do you think your early experience as a gamer feeds into what you've ended up doing professionally? So you played Magic the Gathering. You still play, right?

Yeah. How is that game different? and how does it relate to how you think about what you do in your business? I think that there are some overlaps, and I think that like as at Jane Street before I jumped into crypto, and a lot of the interviews that look like game-type questions or framed as games, and I think a lot of the reason is that a nice property of games is you're just put in front of a messy situation, and in the end, your directions are do the best you can, right?

The directions are like, here's how it works. Now just start playing it. And like, you can do whatever thinking you want, you know, whatever you think is helpful to get you to make the right moves. But in the end, what matters is making the best moves that you can, given whatever uncertainty that you have. You're constantly implicitly making probabilistic decisions, but in a world where you know you can't calculate everything out. And you need to make sure to include the important factors and not to spend all of your time worrying about factors that don't matter and sort of balancing those reasonably. And so I think

that's sort of one piece of this. And then I think another thing that I would say that I think was like really important for trading is really, really grinding until you do a good job. And like thinking of it in terms of my goal in the interior is to do a good job. My goal isn't like, you know, check this box. My goal isn't like send this email to this person telling them to do this thing. Like my goal is I need to make the money from having done the trade, whatever that takes and do everything that it takes to get there. And when you think about some of the trades, especially in crypto that we did, half of it was operational. And, half it was really annoyed. Like, you have to jump through some really bizarre Byzantine hoes in

order to get where you needed to go. And that meant that, like, you had to fight through bureaucracies. You could never sort of let them get the best of you, you know, to keep being creative and pushing for more and more solutions until you could get there. And so I think that's sort of like tenacity and ability to like think of potential solutions to problems and try them out is like another really important piece of it. So if you're 14 years old and you're arguing, with your mother about the repugnant conclusion and trolley problems. And she, as you know, is a famous consequentialist, right? Yep.

How does that affect your attitude toward arbitrage? Isn't the trolley problem a kind of arbitrage? Yeah, I think that there's something there. And I think that, like, more generally, even if it's not framed in terms of like thinking heard about numbers necessarily, there's something very quantitative about how you view the world. If you're thinking about things from a utilitarian perspective, from a car, consequentialist perspective, there's this really big notion of like, you know, in the end,

you turn things into numbers and you decide which number is the biggest. And it might be really messy to get there. But that thought of like trying to take a messy system and do the best things you can when ultimately you care about some quantitative property, even if you can never be sure that you're calculating it right, you do the best you can. And both of your parents are famous law professors at Stanford. I actually knew who they each were. I just hadn't known they were your parents.

But in which respects have you brought a legal mind to your endeavors? It's becoming increasingly important over time. And if you talk to a random financial regulator, say, a year ago or two years ago and said, you know, what fraction of your time each day do you spend thinking about cryptocurrencies? Right. They'd probably say like, yeah, basically literally zero. You know, not quite saying I've literally never thought about them, but this is like a total laughter thought. If you ask a random financial regulator somewhere in the world today,

what fraction of your time do you spend thinking about crypto? Ah, 50%. Like an enormous fraction. You look at discourse. I tell you that the Senate is having a hearing on something related to finance today. What do you think the odds are that it's about blockchain? Yeah, you know, 50-50. It's an enormous fraction of the discourse in the policy world and in the regulatory world in a way that it wasn't. And what that means is that, you know, a huge fraction of the industry and of our business right now is understanding the nuances of the regulatory system, understanding the intentions of regulators, understanding which directions it might go in, understanding what would solve for the various things that people care about,

and trying to find ways to get there in a really messy world, again, where, like, how many countries are, 200, roughly, countries in the world? That's a lot of countries. And each one of them is trying to figure out what they're going to do to regulate cryptocurrencies. And so it's not Like, you know, you just like read that one law book on cryptocurrencies and you're done. Like there's 200 of them and half haven't been written yet. Like half the law book is effectively empty. But that doesn't mean that there's no regulatory framework. It means that they're still kind of thinking about it.

But, you know, you can't just like ignore it and assume everything's going to be okay. It's just from a large number of perspectives like incredibly messy right now and also just incredibly important for our business and the future of the industry to manage that process well. Now, you didn't start as a manager at all, and you now manage what must be hundreds of people. What's the non-obvious thing you've learned along the way that is important to you? A ton. And I thought when I started, that I was pretty good at managing. I think it would give myself like an A minus to an A, probably honestly speaking an A.

Like, for being honest, that's how I would have created myself. Before I started up, I'll meet a... And in retrospect, I think like B-minus maybe was the appropriate grade for me. And in particular, I think it's like a pretty good manager. when everything was going really well. Like conditional on there being no real problems. I think it's like pretty good at like making things happen, you know,

talking to people what they were doing, motivation, things like that. As soon as shit hit the fan, I had no idea what to do. And like I had no idea what do you do when two employees just vehemently disagree with each other about what to do and no amount of talking causes those disagreements to come together.

So what do you do? Yeah, so what do you do? Well, I mean, query whether I'm, to when you want to take advice from, but I think I know a decent amount of by now. I've had a lot of experience thinking about this and, you know, acknowledging that it's messy and that nothing is perfect here. What I think about now is basically like, first of all, the most important thing and embarrassingly,

a thing that I think a lot of people forget about and forget to do well is, first of all, try to get the right object level answer. Like, before you get into like management disputes and things like that, like understand what the truth is. And that is legitimately, I think, like the biggest weakness of a lot of managers is that they jump straight into how to manage without first thinking, well, what's the right answer in terms of the object level problem we're trying to solve? Like, what coding practices should we use? Should we run this advertisement? Whatever the question is.

So first of all, find the right answer. Do whatever research you need to do to find that answer. And then I think that I think is really important, at least how we function, is having a company culture that that is what matters. and making it clear that, like, in the end, that's what we care about. That's what we're going to push on. And like, you know, we're going to be pretty ruthless on that, caring about, you know, making the right ultimate decision. And, you know, no other arguments are going to win over that one when push comes to show up.

And everyone has to be aligned on that fact. But then putting that aside for a second, you know, you've done that. Now what do you do to actually resolve disputes? If there is a dispute, you know, one thing that I think I didn't realize at the beginning was that, first of all, like, it's great if everyone's aligned and if everyone thinks the same things. But in the end, there has to be some process by which everyone agrees you're going to come to a conclusion that like there's some way to ultimately resolve these disputes. There's some person, odd number of people, probably one person honestly, who like ultimately makes that final call

and everyone knows it. So that if a civil war were to break out, everyone can just look at how it's going to end. And now there's no civil war. And there are downsides that, but I think they're outweighed by the upsides from it. So I think that's one important piece of this. And I think that's something that I've changed my thoughts on a lot over time and become a lot more cognizant of. What accounts for the Miami Heat being such a well-managed team so consistently? I mean, it's probably the coaching advice we're giving them. No. Actually, honestly, that's an interesting question that I would be interested in talking with them about. But you do see this. With some teams, I do have a sense of what the answer is. I have a sense of like, you see some

sports teams, they outperform year after year after year. And I mean, whatever, the Patriots probably the most notable example of that, right? And I think everyone knows it's Belichick and the staff that he's built and the culture that he's built centered around, A, outthinking some other coaches, but also a big thing there is doing the right thing, right? Like, what's he known for? It being kind of gruff. But like in the end, like he'll make the right play. He'll come up with, like, wacky new formations, it'll be good. And like, he doesn't care that much what's popular. He doesn't care that much about like how things quote unquote are done. Like he cares about like what's the play that will optimize our chances of winning and how do we do that? And you can

see that in a lot of areas, right? Like look at the running backs that New England has employed over the years. It's sort of this random motley crew of people who everyone would have said like are sort of like, you know, randos and like unlikely to be that good or important. And then they like lead the league in rushing. And then those running backs go get some payday somewhere else. And they have some new running back, no one's ever heard of. Again, they leave the league in yards per carry at least, or some tandem of them. And I think there's a lot of things going on there. So I think that that's an important piece of this. And frankly, I think for sports teams in general, like a lot of the fruit is low hanging. And it's like consistently picking the low hanging fruit,

doing a good job, thinking carefully about what the right thing to do is not getting too sidetracked by what the convention is for what to do somewhere. I think that gets you a lot of the way. Now, let me ask you a few questions about effective altruism. a movement where you've been a leader and major supporter. Thanks to people like you and also open philosophy, effective altruism seems to be moving away from being funding constrained to now being talent constrained or people or organization constrained. A, is that true? And B, if it's true, what does that mean for strategy?

Yeah, I think it's sort of true, but I think it's true a lot less than most people think it's true. That is the meme right now. Like, that is what most people will say is that, like, effective altruism is now not funding constrained because of my, myself because of Dustin Moskowitz with Open Philanthropy and a few other things. That's been a pretty big update. There certainly is a lot more funding than there was before. But I think saying it's not funding and strained, I think people to go too far in that.

And I think to some extent that's a symptom of not thinking hard enough about great ways to spend money. I think that like there needs to be more innovation in ways to spend money before there's going to be the capacity to spend the amount of money that effective algorithm is going to have. But I also think that like that innovation is happening and it will happen. And so I just think that like there is billions a year that I can see spent extremely effectively. So that's one thing I'll say. But you know, to the extent that it is funding constrained and it certainly is more so now than it was before, the biggest thing that's missing is I think a weird thing. If it's not funding constrained, then it has to be something else constrained.

Right. Like that sort of makes a question of like what is sort of the limiting factor on growth of the movement. And I think people will say like people. But okay, you can talk to a lot of effective altruists who aren't sure what they should. do with their life, which I think makes you wonder what people means exactly. It's not that there aren't people anywhere. But those people are maybe not project drivers, right? Like they would be an okay number 17 in an organization, but they're not going to make things

happen. They're not the Sam Bankman-Fried arbitrageeurs of the world. That is scarce. You must think it's scarce, right? I do, I do. And I do think that that is probably one of the most scarce pieces is someone who can start something and drive it and lead it and take responsibility for it. and be the pursuers, like, if this doesn't go great, that's on me.

Like, I will do whatever it takes to make sure this thing goes great, and I can get it there. And like, I'm not allowed to blame anyone else for failing. If it fails, that means I failed to find a way to route around whatever problems it was happening. I think that's a big piece of it. I think there's maybe another thing, which is a little bit of a variant on that, but I think maybe an interesting variant, which is like I constrain on everyone getting together and doing the thing. Like, what's it take for a new project to start up, right? A new altruistically minded project.

It takes funding. It takes founders. It takes employees. It takes ideas. And they all have to come together at the same place and the same time and meet them. And I actually think that that is quite hard and quite difficult. And that often that is actually what is blocking something. It's like the funding is there.

The people are there. Maybe the founders are even there somewhere. Like, I think sometimes they are. But what happens is like, I don't know, they can't just like cross paths in the night, so to speak. So coordinators are scarce? Coordinators are scarce, but it's easy to be a coordinator and like have that feel kind of lame like, oh boy, like I'm directly a coordinator, but like not really coordinating anything right now. Like, I don't know. I think that's a dangerous position to choose to hold in a lot of ways.

So I want to be like, you're cautious about saying that that is the blocker. I think that like, although I think it is a blocker, it's sort of coordinators, but it's sort of someone who just puts the flagpole. down and says this is happening. This is happening tomorrow in Redwood City and the funding is there. I know it will be there. I guarantee it is there. And I found a person and he will be there because I'm going to make him be there. And thus, I know it's happening. I can prove it's happening. And when you do that, the interesting thing is everyone shows up. And so I think that there's a little bit of this like getting everyone to take that leap together that's necessary for a project to really start up. So let's say you had a magical capital gain of a million dollars and you had already decided to give it away.

This happens to you all the time. But at the margin, the next million, where do you give it? So I think that there are a lot of good places to give it, first of all. You know, I think that there is no shortage of good answers. And, you know, you can look at any of the sort of standard ones that I think people will talk about. Let's talk about great answers. Like what would be something that I think would sort of like go above and beyond what people can you usually think of to do with money. I think there are things there. But to some extent, I think that

they need more than just money. I think money is an important piece of it, but it's not the only piece. They also need that drive to exist and to happen and to happen right and well. What I think I would do is do one of two things. And I don't want to say these are the causes that necessarily matter the most long term. I do think that they are the most important for long term of humanity maybe right now, but others might develop really great ways to innovate soon. Right now, the things I'm most excited about, I think one of them is pandemic preparedness. This is probably the one I've been thinking about the most recently. I think the single clearest takeaway from COVID is that we don't have our shit together as a world. Like that's what's become clearest is that there's no

magical wizard behind the curtain who makes everything go okay. It's actually a mess. And everyone can agree that we screwed up the COVID response in every possible way. But I think one of the more depressing things is it also kind of seems like we're not really ready for next time now. thing. Not at all. We haven't improved anything as far as I can tell. Right. Other than getting common knowledge that things suck, we haven't actually like made them not suck, you know? We've just sort of agreed that they suck. And so that's not great. And we got a little lucky with COVID, frankly. We got lucky because it could have been much worse. For all of its ills, COVID was not the, like, most lethal disease ever. And the next one might be more leif. You know, the next one might be

a lot nastier. And I don't think we'd be ready for that one either. I think we fall on our pace just as much, but death tolls could be way higher. You could imagine something to be stabilizing for society. I'm still not sure we could get our shit together. And we seem to have only one mode, and that mode is like freak out and do kind of some stuff in a disorganized way. Like shut the economy down. We're good at that. And that will really good at dragging on in particular, like as long as possible. We can eventually make a vaccine. Actually, you can make vaccines quickly. But it still takes a year to get them out, which is fast by vaccine standards, but slow by everyone is dying right now standards. If it was actually that type of scenario, a year is not necessarily okay.

But to boost pandemic preparedness, you have your million dollars. To whom do you write the check? Or to what? Whom do I write the check? So I will say that I have been giving some funding to an org guarding against pandemics, I guess conflict of interest note. My brother is heavily involved in it. So take that for what you will. But basically, it's doing. a number of things, but the biggest of them is basically lobbying Washington for more spending on pandemic preparedness. This is something where there's actually a lot of interest in doing this, but getting across

the finish line is quite difficult. But I think that like a dollar can turn into way more than that when done effectively there. And that's where I have been giving. The other thing that I think I would be really excited by, and this one I don't have an organization name for, but is funding efforts to build up vaccine capacity. vaccine stockpiles, distribution networks, early detection systems, and other things that could be done rapidly. That could be done within a couple days of a new pandemic appearing and be distributed.

And I think maybe over the next year I'll have some actual organization names on that one, none for now. But that's like one of the things that I would like heavily think about doing and in fact am doing right now with that marginal dollar or a marginal million dollars. As I understand your views, you're a fairly pure. or a benthamite utilitarian. Is that correct? That's correct. And given that that's the case, as I see it, the replacement costs of human life are pretty low. So you could spend a modest amount of money and get people to have more kids. So why then should we ever spend a whole lot of money on life extension, since we can just

replace people pretty cheaply? We can grow utals more easily than save them, is another way to put it. Yeah, I agree. Then why isn't the priority, you know, birth subsidies, maybe in some roundabout highly in direct manner. Speaking for myself here, I will say that I find that I'm not very compelled by Life Extension Research for the exact reason you said. I think that it is really cool, like, it's really cool.

But I'm not sure it's the most pressing problem for the world because, yeah, as you said, like, we've been getting on okay without it. There are real human costs to it. It would be great to have, but I don't think it's necessary for the flourishing of the world. So on the surplus subsidy side, you know, there are a lot of things you can do to try and influence population rate up or down. And I actually want to look into that a little bit more and like develop a more refined opinion on it. I will say that like at some point feedback mechanisms might start kicking in. At some point, you might have some births replacing others.

And at some point you have to think hard about like the factors in both directions there. And what does it do to international coordination? I don't know the answer to this. I will say that whenever companies start to get bigger, they become a shit. They really shouldn't necessarily mean that that's true of like the world or countries. But it is true of countries. The best governed countries tend to have fewer than 20 million people, right?

Yeah, I think that's right. And so I don't want to make a strong statement here. I guess I'll say is like that's something that points in the opposite direction. And on net, I just haven't thought about this hard enough to feel confident in my thoughts on like fertility as it relates to, you know, current fertility as it relates to the sign of the world. The other thing is if, and this isn't if, but if you think that the next few years are extremely crucial for the world, you know, the next 20 years, the next 30 years, anything relating to birth is going to be delayed by 25 years in impact on the world. And so depending on what your

timelines are for sort of earth-changing technology, that'll sort of influence to some extent how much of a discount rate you apply on that. And I don't think it's obvious what the right number is there. Let's say we can raise animals so they have positive utility. I've seen Swiss cows. They look pretty happy. Yep. The final moment is not so great. Why shouldn't we just do that and eat meat and it's good to eat meat because we support them, but we ban factory farming?

Why doesn't a benthamite believe in that? Or does he? I'd be totally fine with me. But you're a vegan, right? I am vegan. Eat Swiss cows. Isn't that a moral imperative? So first answer is I have no problem with people eating happy meat.

If it really is net happy, that is fine with me. And I don't personally do it. The reason I don't personally do it is like, basically, it's too consistent. confusing for me. The cognitive load. So when I first trying to go vegetarian and then vegan, it took me six months to make any progress. Like, it was really unpleasant, made no progress at all for six months. And basically, each day I'd go to the cafeteria and be like, what good vegetarian thing do I want to eat? Think for four minutes and then get a steak and cheese sandwich. And such didn't go so well. And then finally, one day, I was with my friend who had just gone

vegetarian. And mutual fund said, oh, hey, you know, are you vegetarian now to him? He said, yes. I was eating tofu that night. And she said, oh, you vegetarian too? And I said, yes. I'd had a burger for lunch that day. So yes was not a very factually supported answer at the time. But I have not eaten meat since. And it was way easier for me once I went cold turkey.

Then it was for me to try to wean myself off it because just the cognitive load of every time that I went to eat, having to decide what I couldn't, couldn't eat and shouldn't eat, was just overwhelming me. And it's way easier to say, yeah, I don't eat meat. It's a similar thing here. Like, I don't want to have to, like, sit down at the dinner table and, like, think for 30 minutes about what life a particular animal lived and whether it was, like, net positive or net negative. It's just for me in particular, that's a big cost. I would prefer just not to eat meat than to have to go through that process.

But I don't, in principle, have a problem with that. The other thing I will say is that, and this is specific to the environment today, this needn't be true. But today, almost all meat is inhumane meat. If you look by count, a very, very tiny fraction of it is actually happy. And again, that doesn't need to be true necessarily. You can imagine a world where most meat was happy meat, which just don't happen to live in it. And so that's sort of another reason that, like, right now it just wouldn't buy you that much. But that might change in 20 years.

I think there's really interesting questions of like between like humanely raised meat, synthetic meat and fake meat products, like what the race between those three will look like. Should a benthamite be risk-neutral with regard to social welfare? Yes, that I feel very strongly, that. Okay, but let's say there's a game, 51%, you sort of double the earth out somewhere else. Yeah. 49% it all disappears. Would you play that game, and would you keep on playing that double or nothing?

So with one caveat. So let me give the caveat first, to be a party cooper, which is, I'm assuming these are in non-interacting universes, is that right? Because the extent they're in the same universe, right? Then maybe duplicating doesn't actually double the value. because maybe they would have colonized the other one anyway eventually. But holding all that constant. So you're actually getting two Earths,

but you're risking a 49% chance of it all disappearing. So, and again, I feel compelled to say like, have you a answer of like, you know, how do you really know? That's what's happening. Blah, blah, blah, whatever. Put that aside. Take the hypothetical, pure hypothetical. And then you keep on playing the game.

So what's the chance we're left with anything? Don't I just St. Petersburg paradox you into non-existence? Well, not necessarily. Maybe St. Petersburg paradox into. an enormously valuable existence. That's the other option. Are there implications of benthamite utilitarianism where you yourself feel like that can't be right? You're not willing to accept them. What are those limits, if any? I'm not going to quite give you a limit because my answer is somewhere between I don't believe

them and if I did, I would want to have a long hard look at myself. But I will give you something a little weaker than that, which is like an area where I think things get really wacky and weird and hard to think about. And it's like not clear what the right framework is, which is infinity. All this math works really nicely as long as all the numbers are finite. As soon as you say, like, what are the odds that there's a way to be infinitely happy, right? What if infinite utility is a possibility? Well, you can kind of figure out what that would do to expected values. And now of a sudden, like, we're comparing hierarchies of infinity, like linearity kind of breaks down a little bit here, like adding two things together doesn't work so well.

a lot of really nasty things happen when you go to infinite numbers from an expected value point of view. And there are some people who have thought about this. By knowledge, no one has thought about this and come away feeling good about where they ended. People generally think about this and come away feeling more confused. Derek Parfit once told me the same thing. He said no one has a good account of infinities. Yeah. And he was suspicious of them.

No one does. And my instinct here is it matters, is that this isn't like a no one has a good account. of it, whatever, ignore it, this all bullshit type thing. It's like, yeah, no one has a good account of it. And like, that's kind of too bad. And it'd be better if people did. And I think it is a relevant unknown. I have some crypto questions for you. Yeah. Is there in fact any way to coherently regulate stable coins? So I see what the proposal say. It's all about capital requirements, deposit insurance, treated as like a bank account, sort of like a new kind of money market fund. Can that possibly work? Doesn't it end up having to be applied to all of crypto, all paying

payments companies, PayPal, whatever else. Like, what's really there that they can do? That's a really interesting question. So, first of all, I will say, I think there is something that does work compared to the current environment. But I'll get to your point in a second, which is I think that, like, if you just said, look, all stable coins have to be fully backed by the dollar and have to have to have audits to convert that they are in a bank account.

That would get, I think, a pretty safe product that was well understood, well regulated. And frankly, would be, from product perspective, just as good as current stable coins. That's what all the stable coins are doing today. It's just, it's a mess because there is no clear regulatory framework for them to fit into and have oversight of that. So part of my answer there is basically, yeah, I think that like that framework would solve the current problems that people have in a pretty clean way. But you have a good point there, which is like, well, how about PayPal?

Like, there are all these things that we don't call stable money right now, that we call something else. And PayPal promises me a dollar. And they give it to me. I'm happy, right? Exactly. And in fact, a lot of these, they kind of look a lot like stable coins when you drill into it. Like, when you really dig into it, what is the difference between PayPal and USDC?

I guess there are some differences, but I kind of think there are more similarities than there are differences, to be honest. What does that imply for PayPal? You could say whatever it applies stable coins, not PayPal, that's how it is. I think it would be a big improvement of the current world, where it's the same thing, but without regulatory oversight and with a lot of random drama because of this. But I do think that it gets to this question of like, well, wait, but banks are allowed to re-hypothecate dollar. Banks are allowed to do all many of wacky things with their deposits? Like, are stablepoint companies allowed to?

And if not, is it obviously shouldn't be allowed to? How should that be governed and regulated? And I think like sort of maybe the answer is like whatever, the banks will do that on their behalf, the banks where they hold their assets and then pay them interest for the right to do that. Although, of course, right now, like banks aren't actually paying interest really. Maybe that'll change, you know. Not to me. But also, how stable does a stable coin have to be to be regulated as such? So if there's any regulatory definition, won't a lot of people just camp their crypto assets to be just slightly more volatile than wherever the line is drawn? Or you just end up regulating all

of crypto. How does that work? Yeah. So, and is your thought, well, I mean, this could go in a few ways, is your thought that, like, people will attempt to get just barely into the regulatory system or just barely out of it? Maybe both, but a lot of people will go out of it. So I, I'll issue something, I'll call it a not stable coin, but de facto, it'll be very stable, right? But also, oh, this isn't. It's just sort of an accident. Oh, who knows what the market's going to do today. And it's just stable for decades. How do you regulate that? Yeah. Oh, it's a really good question. Of course, like, what it gets to is this question of like, well, what if a stable coin didn't promise to be a stable coin? Is it bad that it's backed by the dollar? Like,

does that somehow make it worse from a regulatory perspective? Like, why is it being held to a higher standard. So exactly. I do think there's a little bit of an answer here, although I also think that like this is getting at another point, which is like you could reasonably say like, look, you know, are consumers doing what they're doing with their eyes wide open? If there's sufficient disclosures and transparency, shouldn't people be allowed to use stable coins with some risk in them? I think that would be a reasonable thing to think. But if you put that aside for a second, you say, no, absolutely not. Here's one difference between that and a stable coin, which I think is relevant is that a stable coin is not just stable in one direction.

It's stable in both directions. In particular, if you're an investor and you buy a stable coin, you have downside risk, but not upside, right? Like, if somehow the stable coin company makes money, you're probably not going to get any of that. But if it loses money, somehow, you're probably on the hook for that. So there is something a little asymmetric going on here for the consumer. And so I think it wouldn't be crazy from that perspective to think about, you know, that there should be some protection here and that like consumers, you know,

maybe there should be regulation if consumers are only given one side of exposure. But I don't think that's obviously true. Like I think you're making a decent point. Now, if we look at defy, there's some forms of obvious explicit leverage, like people borrow money to participate in the system. Put those aside. I've learned over my life. If you look at any system, any institution, typically there are forms of hidden implicit leverage

in those institutions. Might be good, might be bad, but it's there. And in a sense, you don't understand the institution until you understand where is the implicit leverage in this game. So in Defi, where is the implicit leverage? Is it re-hypothication or where is it? What is it? Ignoring the explicit leverage of like Burland. Yeah, which is easy to see, right?

Which is easy to see, yeah. So what happened in 2008? Like, what caused the collapse? And a lot of things did, whatever. That's sort of dumb question. But what was one of the things that led to this is that no one knew how much leverage there was really in the system, right? Like, as you said, there's always implicit leverage. And in this case, there's all of these bespoke OTC swaps between banks that basically didn't get reported anywhere.

And in fact, those got re-hypublicated again and again and again. And no one was keeping track of the total notion of these. It's impossible to if they weren't public. One thing you could do is look for a similar thing in crypto. You can look for OTC transactions, look for OTC swaths for Lep on. You could look at OTC borrow lending. those are in crypto. Are they in Defi?

It's sort of ambiguous. They touch all areas of the crypto ecosystem. But that's an area where, yeah, I think there's some like dubiously accounted for leverage. So I think that's one answer to that question. Where else is there leverage? That sort of is implicit. Rehypification sometimes, although in Defi, because it's all sort of on chain,

it has to be pretty explicit if it's going to be rehypublicating. But it's hard to see, right? Like if you traced everything, you could find it. but no one's actually watching it, or are they? Well, they're sort of half-heartedly watching it, maybe is how I put it, which is it's not great, maybe full-heartedly watching it. I could imagine one arguing for people wholeheartedly watching it. That would be a reasonable thing for them to be arguing for.

But in particular, someone releases a protocol. Like, there's a question of like, well, is that protocol re-hypublicating? And you just look at the code and see if you can re-hypublicate, right? And so, like, in general, people actually often do know whether each protocol individually can re-hypothecate, which is a separate question from whether they as a group can or whether they are or something, but in fact, most of these aren't. Most D5 protocols are not doing things beyond what they literally say they're doing. And so the amount of leverage they introduced into the system mostly is what they say they are. But here's some hidden things. So first of all, you take

one leverage thing, you put it in another leverage thing. So die. Die is a algorithmic stable like other algorithmic stable coins, it is not perfectly stable. It's not perfectly stable because it's not backed by the US dollar, it's backed by crypto assets that could have price movements. And it's in theory over collateralized. Dye can then be used as collateral on some borrow lending protocols in crypto. And so that's one form of free hypothesis in defy markets that you can trace through. It is in theory public, but it's not super easy necessarily to trace through. Now, for mathematical finance, as you know, we at least pretend we can rationally price equities and bonds. So people started with CAPM.

It's much more complicated than that now, but based on similar kinds of ideas, ultimately arbitrage, right? So if you think of crypto assets, do we even have a pretense that we have a rational theory of how they're priced? With a few of them, not with most. And in particular, like let's talk about Doge Point for a second, right? Which I think is sort of the purest of a type of point. of the meme coin. I think the whole thing with Dogecoin is that it does away with that pretense, is that there is no sense in which any reasonable person could look at Dogecoin and be like, yeah, you know, discounted cash flow. And I think that there's something bizarre and wacky and dangerous,

but also powerful about that, about getting rid of the pretense. And so I think that that's one example of a place where, yeah, there is no pretense anymore, that there is any real sense of like, how do you price this thing other than supply and demand? So like memes versus, I don't know, anti-meams. And I think that like more generally, though, that's happened to a lot of assets. It's just less explicit in a lot of them, right? Like, what is Elon Musk's greatest product ever? Or what's his most successful product ever? I don't think it's an electric car. I don't think it's a rocket ship. I think like one product of his has outperformed all of his other products in demand. And that's TSLA, the ticker. Right. That is his masterpiece. And how is that? How is that?

that priced? I don't know, it's worth Tesla. You know, it's a product. People want Tesla stock. But the prevalence of memes, Dogecoin, your point about Musk, which I would all accept, does that then make you go back and revisit how everything else is priced, the stuff that was supposed to be more rational in the first place? Is that actually now quite general? And you've seen it through crypto or not? Absolutely. Like, absolutely forces you to go back and say, well, okay, like, that's how cryptocurrencies are priced. Is it really just crypto? That's price that? way or maybe are there other asset classes that may claim to have some pricing or report to or people may often assume does, but which in practice is not exactly that. And I think the answer

that is a pretty straightforward. Yes. It's a pretty straightforward answer that, you know, I mean, you look at like Tesla, right? You look at a lot of stocks right now. Anything about like what determines their market cap with discounted cash flow? Yeah, sort of. That plays a role in it. You know, it's like 30% of the answer. You know, and it's when we look at the meme stocks and the mean points that we feel like we can sort of see the answer for ourselves for the first time, but it was always there in the other stocks as well. And social media has been amplifying this all over the place. So is this a new account of how your background as a gamer with memes has made you the appropriate person for pricing and arbitrage in crypto? Yeah, yeah, there's probably

some truth of that. There's a mental game people play when they're trying to price Bitcoin. I'm sure you've heard it, done it, like, well, gold is worth some amount. And Bitcoin. could become a quarter of gold and then to support that amount of the market, the price of Bitcoin has to be X. Is that a useful game or you think it's BS? I actually do think it's quite useful. I think it's like straightforwardly useful and that like it's not the only thing that matters, certainly. But I think it's a piece of it and that like, you know, it is a piece of how I think about Bitcoin. Like I do think about like, well, you know, right now Bitcoin is trading at what like 10% of gold or something like that depending on whether you're kind of like gold in the ground right now or whatever.

And I think that like if you told me that Bitcoin was currently trading at 1% of gold, I would just be like, fucking I'm going to buy. Like I don't know. I kind of need to know anything else. Like what are the odds Bitcoin becomes a new goal? Is it 1%? No, it's more than 1%. I don't know what the percentage is.

One isn't the right number. So there's that. And that's one piece of this. And you know, if you told me that it was worth 10 golds right now, 10 times what would I think? I think I'd be like, I don't know, maybe. I can't just prove that. It's no longer just filling the role.

gold filled. That's certainly true. So I think that that's sort of how we think about it. And maybe another thing to think about it as important as what world's currency. Right. Like when you think about sort of like impact on the world, I think this sounded like kind of like a wacky investigation two years ago. And I worry that some people still think it's a wacky investigation. Saff and father to like recoup whether it's bizarre. But actually it just totally makes sense. Like I don't know, Swiss Frank or Bitcoin, which you think has more impact on the world right now. I just don't think it's crazy to say Bitcoin. No, it's obvious that it's Bitcoin. It's crazy. It's crazy. you just like the Swiss rank.

Exactly. Even though three years ago, you would probably said the opposite, right? Or it was five years. At some point you would have. And so I think that that's another kind of metric I use is like, how does this rank on the world currency list? And I think like, you know, we're on the scale from like, you know, Polish lot to Euro. Again, I don't want to claim that this gives you the right answer.

But I think it gives you like some like three order of magnitude wide band of like what the right answer might live in what it might not live in. And it's a nice standing to check on like a trillion dollars for Bitcoin. Yeah, it's not a crazy number. Again, I don't know if it's too high or too low, but like it certainly is plausible to me. That's the right answer. Why do you think Ethereum is overrated? Yeah.

So this is a flagging for anyone who doesn't know. I have strong opinions on this. My opinions are not the same as everyone else is. Take that for it you will. Basically, if you look at like, what would it take to have a global scale blockchain that was replacing substantial fractions of the world's infrastructure? If that's where you start, you can just sort of look at like, well, okay, what scale would that have to be at? Like, pick your favorite big thing.

I don't know, big internet thing, right? Like you could say Twitter or Facebook, you could say, you know, New York Stock Exchange or NASDAQ, say, Visa, see Google, Amazon. And kind of like whatever you say, like, how many things per second does it have to compute? And, you know, the answer any varies some, but like you're generally going to hear answers that sounds sort of like a million. somewhere like 100,000 and 10 million, depending on which thing we're thinking about. And it sort of makes sense, right? If you have a billion users, for instance,

which is the kind of thing you might expect of like a gigantically successful internet thing, then a billion users, if there's what, 100,000 seconds in a day, if each user does 10 clicks per day on average, then I think that gets you a million transactions per second, ballpark. It's like whatever.

It's the math kind of works out as a sandy check there. So, you know, big thing, I think means like millions of transactions per second ideally. And maybe you can get away with a little bit less, but like it's got to be a lot. And then you say, well, okay, what's that mean for a blockchain? Well, it means that if you want a blockchain to really get to a truly global scale, kind of want that blockchain to be processing. Like millions of transactions a second. Like, that'd be great if you could do that.

And what does that require then? Well, straightforwardly requires technology that can parse that. And we kind of like don't have that on very many blockchains right now. If you look at most blockchains today, they cannot support millions of transactions per second. And, you know, Ethereum cannot support millions of transactions per second. Today, it can support 10. 10 is the number of transactions per second they can support. 10 is like off by like six orders of magnitude from where it needs to get.

Like it's not close. Now, it's going to get upgraded to ETHU sometime over the next few years, let's say. At which point it's going to get to something like thousands of transactions per second per shard. So the first point I want to make is thousands is still not nearly enough. Like thousands would mean that it could not post a single active order book on FTCS for the entire blockchain, let alone like Facebook. So thousands isn't going to get you there. But it's going to shard. And what sharding means basically is there's going to be like a bunch of them running in parallel and periodically syncing up with each other.

If you had a hundred of those, you had a thousand of those, I guess. You're at millions of transactions a second collectively. But they don't talk to each other super well. And so you've got like single digit thousands per shard, millions overall. Does that work? Is that not? Maybe I would be pretty nervous about that. And the reason is that, you know, basically you can't take a single order book and shard it.

You can't have like two people trying to lift the same offer from different shards and 30 minutes later figure out what happened. And in fact, like if you tweet, that's always like I can't see your tweet. I'm on Twitter shard number 78 or Twitter shard number 331. Of course I can't see your tweet. It's not a great user experience. I think, like, certainly companies and maybe even industries you kind of want on a single shard. So I think you want millions of TPS per shard if you are going to shard it. And that basically gets me to where I am, which is like, I think that when you're looking at the type of things that could scale to support gigantic billion person applications online.

I think you're looking at a very limited number of blockchains that are focusing very heavily on their scaling. I think the best French rise in the world are in southern Argentina and Paddy. Where do you think they are? Oh, I got to say, I like a lot of French fries. So do I. I'm probably going to like him. Growing up McDonald's was my answer. Like that was my favorite place when I was growing up.

It no longer is. But it was once. I think that New York has a lot of very good French fries. I think that in Europe, sometimes, very good French fries. I think you could potentially find them everywhere. But I think that it is sort of like the places you would stereotypically associate with them are the places I've had the best ones. I've never been to Argentina though.

And so I'm pretty. probably just missing the best, and I would go with your place over mine. You know, I think the Andes have the best potatoes, but maybe not the best French fries, because the food isn't always that European. So southern Argentina, you have basically Andean potatoes, but European cooking techniques. In Europe, I would say France and Belgium are the best. But try Patagonia. The Belgium is quite good.

I will try Patagonia because, I mean, a big problem, like, well, okay, I think a lot of people make others, you know, feel free to disagree, is not drenching them in salt and oil. Sometimes you kind of light on the salt and oil, I think, like, the, the, whole point of the French fries. So I agree with that. Like sometimes in Asia, I think they're like really good potato products. I know. They're kind of only sort of like good french fries. And it's hard to find this sort of like thing that I'm exactly looking for done well there. But Belgian fries are quite good. Yeah. What's your favorite food in the Bahamas? Beyond burgers. I'm meaning about a beyond burger a day right now. And what is that?

So that is one of the two very popular veggie burgers that has come out over the last five years or or so it's beyond and impossible burgers or the other ones. And in the last few years, is there's been a real step change in fake meat from like pretty mediocre to like pretty decent. And beyond an impossible of them kind of meeting the way in that, they're now like a huge traction of all veggie burgers sold locally or beyond burgers and possible burgers. They're just better than most other ones. Like they've done a lot of research on how to make them taste pretty meaty. And I'm not going to say they taste like as good as the best beef burger I've never had,

but like they taste a lot better than most veggie burgers. Now if you try to imagine a scenario where the Bahamas starts having economic growth of 10% a year, maybe not every year, but pretty frequently. What does that scenario look like? Yeah. And by the way, I think there's a real chance of that. I'm like somewhat bullish on the Bahamas. And so the things I'm going to say, I think like, I don't mean these as disagreements with the policy of the Bahamas. I think that they are doing reasonable things from some perspectives, from law perspectives. I think that it's embracing what they're great at. And, you know, what is it? Well, it's been a really great place for us to be from a lot of angles. And I think there are a lot of other

businesses, it's a great place for. And I hope that we can have a lot of really positive impact on the economy. And the people here more generally, we're investing a lot in the island, in the schools and the health infrastructure here. I think that the biggest things that I would say, other than those, really health infrastructure is a big one. I think massively operating it on all fronts. We go a long way towards improving quality of life for everyone here and making it an international hub while also helping the population a ton. That's maybe the single biggest thing I'd say. And then the other thing is, for example, if the Bahamas closes their borders for COVID, in general, I think where we're closing for COVID, I'm not a huge fan of. But especially, I think it's just like

would kill a lot of what makes it special here. And they're not doing that, to be clear. And I'm pretty excited about that fact. If you think about underlying factors there, deep cultural roots or norms or whatever, what's the positive thing about the Bahamas that most outsiders wouldn't know about or not see. So like here's one interesting thing. It has a strong democracy. One joke that more than one person told me when I first got here was, you know, Sam, of our two countries, one of them just had an extremely peaceful transfer of power promptly following an election. It wasn't my country. That's not true of a lot of other places I think people would often put in a similar category, but I think it's the combination of like a nimble, small state that has a lot going for it and a lot to

offer and also is like robustly democratic is, I think, fairly powerful. The people here, which is really nice. That's kind of cool. It's just like it's such a stark difference from a lot of other places that have been and really conveniently located. Like it really is a 30-minute flight from Miami. And the infrastructure here is pretty decent and it is getting better pretty quickly. And last question.

I'm sure you face this already. But let's say you have an extra million dollars or $10 million to give away to improve life in the Bahamas, Bahamas only. Not you change the whole world in the Bahamas benefits. Just improve the Bahamas. What do you do with it? Yeah. I think that health is where I would focus probably.

And I think it depends on exactly the amount because some things have scaling different directions here. I think the bigger the amount is the more that you'd want to set up like build up the hospital system, for instance, here. And I think that that sort of is a bigger project. But I think, you know, working out the health care infrastructure or obviously, especially on the lower end, like, I mean, direct cash transfers are always like within an order of magnitude of the best thing you could do. Like those are pretty effective, just giving to Bahamians. I think that we've spent some money buying COVID relief supplies for the island, and we're sort of monitoring what those stockpiles look like. And if that becomes a limiting factor, we'll sort of put more into it, although I think it's looking okay from a stockpile perspective right now. Sam Bankman-Feed, thank you very much. My pleasure.

Of course. Thanks for having me. Thanks for listening to Conversations with Tyler. You can subscribe to the podcast in iTunes, Stitcher, or your favorite podcast app. And if you like this podcast, please consider rating it on iTunes and leaving a review. This helps other people find the show.