Invest Like the Best with Patrick O'Shaughnessy - Sam Bankman-Fried - Creating a Perfect Market - [Invest Like the Best, EP. 247]

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Starting point is 00:02:56 My guest today is Sam Bankman-Freet, founder and CEO of leading cryptocurrency exchange FTX. In a little over two years, FtX has registered 1.2 million users, grown to facilitate 10.9 billion of daily trading volume and reached an $18 billion valuation. Prior to FtX, Sam worked at Jane Street Capital before founding a quant trading firm of his own Alameda research. At just 29, Sam has packed a lot into a short period of time, and as I'm sure you'll hear, he has a special ability to harness uncertainty and think deeply across a range of topics. In our discussion, we cover the building blocks of a perfect market, the key areas of inefficiencies in today's exchanges, and Sam's North Stars of product design and effective altruism. We also talk about the fairness in

Starting point is 00:03:44 crypto markets, how FDX thinks about user acquisition, and derivatives as a key enablers of properly functioning markets. Please enjoy my great conversation with Sam Bankman Free. So Sam, I figured since this conversation is going to go all over the place, we have to begin with your why or true north, as sometimes scribble down some words that help me frame these conversations. And I wrote down markets, profit, progress, infrastructure, and philanthropy. And maybe you can just tell me what's motivating to you. Do you think True North is a useful concept? And if so, what is yours? Totally. And I think I maybe have a couple different True North, depending on what level you're talking at. One thing, it is basically how much do things motivate me on like the day-to-day basis? I wake up, I go to work, I get an email after respond to it, and what are sort of the things rattling around my head most frequently in making decisions there? And for that, I think that it's product design, product function, markets, technology, sort of efficient markets, just basically like,

Starting point is 00:04:46 how do you build a good product and a powerful efficient exchange and things like that? things that resonate with me the most are things like, does the risk engine work? Is this a well-designed risk engine that gives people flexibility while making sure that the platform is safe? And maybe another thing is, does the general design of products in the space makes sense? That's something that I think about actually quite a bit, is where are there places where you sort of look at how a space is being built out and just think, that's probably an accident of history that's probably not the chosen path, so to speak. And I think one example of this is markets not being 24-7, like equities markets not being 24-7. It's not the biggest deal in the

Starting point is 00:05:30 world, but I think it's sort of a pretty clear example of where to do it over again, they definitely would be 24-7. And the reason that they're not is sort of a historical holdover from a time when they were not electronic and when they're a physical pit specialists that were incredibly important to the functioning of the markets. And you had to give people time to sleep. Putting that aside for a second, you can then sort of like zoom out to, all right, but how about when I like reflect more generally on what I'm doing and think on sort of like a much higher level about what prioritizing. And on that side, you get more to philanthropy side, where it's not necessarily the most relevant thing day to day when I'm deciding how should this product be designed.

Starting point is 00:06:18 It's often pretty irrelevant. But when instead you're thinking about what should I be doing with my life, high level, what should I be doing and prioritizing? In the end, my true north there is effective altruism and utilitarianism. And basically what that means from my perspective is how can I maximize my positive impact on the world? And originally came from a perspective of you're going to donate $1,000, where can you give it to save the most lives? But since the E.A. movement has transitioned into a much broader scope and thinking more generally, what are the causes and what are the interventions that do the most good, given the resources that you have? For my perspective, thinking about what should I even be trying to do with my life?

Starting point is 00:07:02 I sort of ended up where I am earning to give, say, trying to make what I can so I can give as much as I can away, and then thinking about what the most effective ways to do that are. Why focus on the giving versus the building? And I wonder if you would agree that well-functioning markets, which is obviously a problem that you're working on or chosen to work on, have done more good for humanity, let's say, than any sort of philanthropic organization linearly taking in dollars and spending them on something versus organizing capital formation or market forces for good. Obviously, markets aren't perfect, but they seem to do a lot. Why think at all about philanthropy versus what I'll call reinvestment to build more infrastructure to do more good.

Starting point is 00:07:46 One thing, if you're thinking about generic charity type thing versus making markets efficient, and I think that they're like compelling arguments, as you said, for making markets efficient. Efficient markets having had a really, really big impact on the world. And you can just see the impact on various countries' economy of how efficient their markets are. You can even see things like the economic hit that country seemed to take just from having too high of stamp taxes on their stock markets, really killing liquidity, killing efficient markets. So I think that from that perspective, there has been really significant good done to economic development from having efficient markets and marketplaces. And I think that compares favorably

Starting point is 00:08:28 to a lot of relatively ineffective charities to a lot of places that are earnestly trying to do good in the world, but really not thinking very hard about how. But I think that there's a whole different ballpark of what you can accomplish if you think really hard about what the best thing to do is with your life and with your funds. And I think that you can find cases where there are organizations that I think are having lasting impact on the long run future of the world in a way that will multiply out the tens of trillions of people who might live after us and might really change the course of history. And I think I don't want to say that there's hundreds of thousands of organizations which are doing a really careful job of thinking about powerful things there.

Starting point is 00:09:12 But I think that some of them are. Maybe to give one example of this, one thing they think became really clear over the last year, last few years, I guess, is that we as a society have no fucking clue what to do about pandemics. No matter what you think the right approach is, everyone agrees that we get optimistically a C plus, I think, as a society for a response. And that's not restricted to one country. And I think as the COVID dragged on, even the countries that are thought to have done quite well on this, that starts to decay away a little bit. You see a lot of countries that did an amazing job of avoiding COVID, of not having many deaths from it.

Starting point is 00:09:50 Their economy stalled out, though, because they didn't allow anyone else and they kind of shut down. And it's not clear what their path forward is now. Then you can ask a question of, well, what would it have taken for us to be in a much better place in response to COVID? I think there really are things we could have done that would have just been like super, super effective. What are sort of things there? I mean, first of all, it took us about a year after COVID hit before we were ready to start distributing vaccine. That's a really expensive year.

Starting point is 00:10:18 That's basically what probably tens of trillions of dollars of economic damage and hundreds of thousands of lives lost. We didn't need to screw that up. Technologically, if we had been better prepared, we could have had vaccines pranking out two months maybe after COVID hit, people could have started getting doses February 2020 instead of November. So I think that's sort of a combination of early detection of new pandemics, having the infrastructure ready to start making vaccine, and having a less insane process for getting them legal. I mean, the amount of lives lost from delaying on certifying the vaccines

Starting point is 00:11:02 is just absolutely enormous and the amount of economic damage done. And this is a very trackable problem. This isn't sort of some pie in the sky. Yeah, if we could solve all society's ills, that would be great. It's kind of like you said with a risk model, like, is it getting better or not? Exactly. And now you look at the aftermath of this and how much effort right now is society putting in to having a better response to the next pandemic than we had this one?

Starting point is 00:11:26 Zero. I don't know. Basically can't find talk about the next pandemic, which is pretty crazy, especially given that, frankly, we got a little bit lucky that COVID-19 wasn't more deadly than it turned out to be. There are probably ways to use your time and your money and your resources to get us way better prepared for the next pandemic in a way which has a shot at saving tens of trillions of dollars and millions of lives. And that's absolutely enormous impact. And that's just one example. So I'd love to turn the conversation now to markets. You mentioned the one example of if we started

Starting point is 00:12:01 this from scratch, it'd be 24-7, instant settlement, whatever. Walk me through what you think the key functions and building blocks are of a perfect market. So if we could design this without any frictions, no technological limitations, like let's work backwards from the end. What does the perfect state of markets look like? What are the key functions and blocks? I think maybe I'm going to answer a very slightly different question, which is what would it take to get within 5% of perfection or something like that? What would it take to get markets, which are pretty close to the perfect one in ultimate value. And I think that that's like a useful framework to think of. And maybe just to start with one example question, what latency do we need? How low does the latency need to be in a market,

Starting point is 00:12:44 in an exchange plus all the infrastructure that the market data infrastructure connects to it, in order to basically get most of the economic value out of it? And I think the answer is that the latency has to be low compared to the release rate of new economic information. You want to avoid is case where like two different economic events happen and there hasn't been time to internalize the first. And what speed is that at? I mean, it's out a really wide variety of speeds. But I think that realistically speaking, by the time you're at milliseconds, you've basically got there. You don't usually really have two pieces of significant different economic information coming out less than a millisecond away from each other. But you actually do have two in the same day and two in the same hour.

Starting point is 00:13:28 And so I think that gives you some sense of what latency do you need markets have. The answer is less than an hour, certainly. And obviously, it's hilariously long compared to the latency that Nizier NASDAQ will claim. But that's being a little bit deceptive. Right now, yeah, NISI's latency is a fraction of a millisecond. But in five hours, it's going to be tens of hours. It's going to be closed overnight. Right now, it might be a federal holiday.

Starting point is 00:13:55 So it might not, I don't know, are marketing? Yeah, we're not even trading right now. Mike for a second, plus or minus hours. For days on the weekend. Four days. It's sort of insane. I think this interesting context of, I don't think that it's the most important thing to really get the architecture to be as low latency as possible.

Starting point is 00:14:13 But I think having it always open is actually pretty important. So I think that's one piece of it. Maybe going through some other things. Here's an easy win. You know what I think should be free and publicly available, the fucking order book. How insane is it that if you're not. willing to shell out tens of millions of dollars a year right now, they're supposed to trade blind into an order book. You're not allowed to see that the other players are. That's a pretty

Starting point is 00:14:36 weird property of exchanges. Large market data fees are pretty weird. You have to choose like a single thing to not be monetized in exchanges. I think you'd say the order book. Literally displaying what the order book is right now is the whole purpose of exchanges in some sense, other than allowing for trading, is to support price discovery, not price discovery for those willing to pay 50 million a year. Just describe how that works right now, that 50 million, like who's paying that and how that works in traditional markets? It's a mess. I mean, who's paying it? Well, the people directly connecting to an exchange's market data are literally paying it. If you're a sophisticated HFD firm, then you're paying it. But if you're a retail,

Starting point is 00:15:16 then probably some data feed firm is paying it, which is then passing that cost onto some broker, which is then passing that cost onto you or something like that. But you probably also, if you're retail don't if you get to see the orderbook, they'll only tell you the best bid and best offer. If you're lucky, maybe only the last traded price, maybe with five minutes delay or something, depending on how much they want to pay, totally different in different cases. But if you really want all the data, you're paying the exchange tens of millions of dollars a year for this. And that's what all sophisticated trading firms have to do. You can't be like a sophisticated trading firm without doing this, at least for the major exchanges.

Starting point is 00:15:52 And it is tens of millions and maybe more than that in some cases. And if you're retail, you just don't get most of the information and you pay some extra random fees and they just jack up your trading fees to compensate for this. And what's going on here, I think, is when you look at the monetization of a typical equities exchange today, it's a little weird. So in crypto, we are used to all the revenue coming from trading from fees on transactions. That is not true on equities exchanges. And a lot of the reason for this is they are commoditizable in terms of, the trading. If NISI started instituting a five basis point beyond trades, everyone would just use NASDAQ. There's no reason really to use one inside the other because all they are as a matching

Starting point is 00:16:36 engine. That's their whole function. You just plug into a different matching engine. So the only thing they have, which is really proprietary is their data. So they end up monetizing that. And what's going on here is the same company doesn't own the mobile app and the matching engine. All the trading fees end up in the mobile app and the various brokerages and prime brokers, including clearing and all the shit that happens in between the user and the exchange and the PFO firms and everything else, the exchanges get served of those fees and then they monetize their data, whichever one actually needs to pay for, even if they're not trading. It doesn't matter if you want to go use NASDAQ instead of NYSE. You still need to know NASDAQ's data.

Starting point is 00:17:12 You still need to know what's happening in markets to be able to actually efficiently price things. So odd business modeling is probably the wrong one for efficient markets. That's like one area where I think the United States at least could stand to improve quite a bit. Also just the user experience is pretty bad. Let's say that you want to buy Apple on NASDAQ. Everyone, if they hadn't actually tried to do this before, would tell you the same thing about what you do. Go to NASDAQ.com and try and create an account. And that doesn't work.

Starting point is 00:17:44 You can't even see the order for on NASDAQ.com. You can't do that. You got to go find like e-trade or something and go in this giant series. So the amount of intermediation is insane. and equities markets, and this leads to other weird things. One of the most popular things to do right now is this shit on people. A lot of politicians and regulators are taking a skeptical eye towards payment for order flow. I'm going to not take a position on it myself here. I think it's pretty similar to other things that you can do for better or for worse.

Starting point is 00:18:10 But let's talk about why PFOP exists in the first place. It exists because you're forcing people to go through six different companies from start to finish between like the mobile app, some clear custody, some ATS, ultimately ending up on some ACWAS exchange. There's some prime broker sitting in the middle there. Between each of these steps, there has to be a PIPAA firm, gluing things together. What sits between the retail customer and the mobile app, someone showing prices? But then that's not the exchange. That's also gets regurgitated onto the exchange and maybe onto a few layers. So you start to have these PFA firms intermediating because you have all these other intermediaries that need pricing,

Starting point is 00:18:48 connecting them together, and that makes it further messy and complicated. So I think creating clean, simple market infrastructures that are modular, but that don't require more parties than should be necessary is pretty valuable. And also you ask, why are none of these 24-7? Well, there's a lot of reasons, and one of them is you have to apply the SEC and then blah, blah, but one of them is, let's say some random equities exchange goes 24-7 tomorrow. Robin Hood's not going to be ready to support that. Whatever clearing firm people are using isn't going to be ready to support that.

Starting point is 00:19:22 The stock loan businesses aren't going to be ready to support that. It's really hard to innovate if there's a lot of other companies that are intimately involved in every single transaction that you're doing. There's a weakest link component or something. Exactly. That's right. You could take a step forward in something. It doesn't do anything unless everyone can be coordinate.

Starting point is 00:19:40 So it's another area where things could be substantially more efficient than they are today. what are other things here? And I mentioned these before, but when you talk about the finances here, I think having trading fees is pretty reasonable as a revenue model, but they have to be reasonable trading fees. And what does that mean? It means that they shouldn't be bigger than the amount of actual edge that firms are seeing. It shouldn't be so big that real economic moves get lost in the trading fee. If you charge just as an extreme thing, 10% trading fees to everyone who trades, then there could be economic news that moves market is 5%. and no trades will happen and no orderbook to update because it's not worth anyone paying 10% fees

Starting point is 00:20:20 just because markets went up 5%. Just because fair went up 5%. What does that mean? It means like, I don't know, what's sort of like the right unit of market moves that are economically relevant. In equities, I think a basis point is sort of the answer. I mean, I'm making that up. There's nothing sort of magical about that. But I think if markets have moved less than a basis point, it's kind of fair to say the world hasn't really changed. Right. And if they've moved many basis points, I think it's kind of fair to say like something's going on. Yeah, exactly. And so I think what that means is like if you're running an equities exchange and you want to have trading fees, what's a reasonable fee of basis point? I think that's a reasonable fee. Some of between 10th a basis point and two basis points or something. As soon as you get much beyond that, you're killing trade, you're killing liquidity. And we see this. Some countries have 10, 15, 20 basis point taxes on every trade. That is bigger than effective economic move. And equity might not even move 20 basis points in an entire session. And if you're charging 20 bibs on both sides as a fee, they won't trade.

Starting point is 00:21:19 And you really do see massive decreases in liquidity and volume. And it's a lot hard to raise money. It's a lot harder to get efficient pricing and market moves in venues where the taxes plus fees are more than a couple bips. And so I think that's sort of like another thing which is important for efficient markets, the fees are reasonable. And when I say the fees, I don't just mean the matching engine fees. I mean every fee from start to finish in a trade.

Starting point is 00:21:41 The total net fees that are paid when one party passes, passes an asset onto the other, shouldn't really exceed a few basis points. If we go back to the order book concept, maybe it'd be helpful since it's already happening and you were on that side of the business prior to crypto to explain why those HFT firms are buying that data and what having full order book data, the depth of the order book, the specifics of it allows for relative to a retail trader that has none of those things. Why is that valuable? What would it mean for it to be open based on what's happening when it's not open? This is pointing to a bunch of things which are also somewhat related to each other, which is the value of market data.

Starting point is 00:22:19 And there's sort of maybe two different things. The one is complete market data and the other is fast market data. One thing, when you look at actually being able to see the order book versus just the last traded price, the order book probably updates you basis point or two about your fare for something beyond just knowing the last price that it traded at. If it last traded at 123.58, you see that there's a gigantic bid at 123.58 and the best offer is 1.2361. You probably don't think 1.2358 is fair. You probably think it's like 12360. One piece of this is just, yeah, there's probably about a basis point update on average from having full market data versus having like minimal market data. And again, I think that's not the biggest deal in the

Starting point is 00:23:01 world, but it's economically relevant, a factor that matters. And obviously, if you're an HFT firm, it's a norm. That's more than the whole game. You have no choice but to be all the data piece. You want to be a big, be a big HFT firm. But if you're not paying those data fees, you're always going to be like a basis point worse than everyone else, which means that you can never do trades that are barely good or do trades which are short time scale. Stock only doing trades which you think are good by like very large amounts, which is fine for a long-term investor. I don't think this matters. If you're looking at somebody who's trying to buy $20 million of some equity and hold it for a year. It does mean that only people showing out tens of millions can be involved in precise or short-term price discovery. The other thing that you got to that you sort of pointed out there is looking at peep off firms. The whole thing is complicated and it all gets bundled into one fee and they don't say, oh, yeah, well, we paid this many cents for this reason and we tacked on another this many cents for that reason.

Starting point is 00:24:00 But at its core, there's two things going on there. The first is just traditional liquidity writing. First is like, yeah, sure, I'll sell you shares of PESA on the offer right now. That's better than my fare, which is about midpoint. And that's part of what Pfop firms are doing, is the effective price that they show post fees is often just a little bit more skewed to the side they'd want. They make whatever happen on that. The other thing, though, which you pointed at, is that they're sort of buying data and what does that mean?

Starting point is 00:24:27 Well, it means that, let's say that Bob comes in to buy a share of Apple, and it routed straight to a P-POP firm, and they're asked for a price on it, and they do the trade, they now know that Bob, or that someone, I guess I don't know Bob's identity, maybe, but they know someone, and they know which worker came from. So you probably know what Bob looks like. They probably can guess whether he's a day trader or whether he's a long-term investor or an asset manager, just bought a little bit of Apple. They know that, and the rest of the world does not yet know that. Maybe they have some trade reporting duties, but probably that's seconds later. So they're often misunderstood as front-running that particular order, which in general people don't do and absolutely should not do,

Starting point is 00:25:08 where they hear that Bob wants to buy a share of Apple and they go frantically try and buy Apple and then choke out to Bob. But they don't need to do that because workflow is so correlated that if you know before everyone else that Bob just bought a share of apple from you, you settled on the price with him, you now have this information about the direction of flow and no one else does. And that's where you might get firms which are willing to do a trade, which would otherwise be bad, or at least not make any money. money because really what you're doing is you're buying yourself 20 seconds of prior warning that retail traders are starting to buy some stock or something like that.

Starting point is 00:25:41 So we've got this really cool big umbrella concept. Price discovery and clear prices are at the root of market capitalism. And it's one of the key markets, therefore, one of the key mechanisms that make capitalism interesting, at least historically. And then we've got this migration that maybe crypto markets represent towards closer to that perfect end state of always on open. open order book, more egalitarian, et cetera. I want to talk now about fairness. So there's a fairness spectrum where you could argue that modern electronic markets and stock market, let's say,

Starting point is 00:26:12 is fairly fair in the sense that there's reg FD. There's all sorts of regulations around who gets to see one information when. And then obviously in the crypto world, it's sort of Wild West still, meaning there's all sorts of the equivalent of insider information and front running and all this other stuff. Tell me about the state of fairness in crypto markets today. How do you assess it? How are you trying to work on it? So the first thing that I think is most important, frankly, and I think it's under-emphasized in these discussions. The most important thing is transparency about how much transparency there is. The most important thing is that everyone is on the same page about what the market structure looks like.

Starting point is 00:26:48 The most destructive thing is if everyone believes that front-running is illegal and then someone goes in and front runs. Because then everyone sort made a lot of decisions conditional on one set of rules for the game and just get blown out by the defense. So the most important thing is that everyone in the market knows what they're dealing with. And the other thing is actually having a level playing field to start with. When you look at crypto today, it is a total mess. It's a lot less of mess than it was three years ago. So it was an even bigger mess then. Just to give some numbers here, in late 2017, early 2018, a lot of Japanese residents got very excited about crypto. Actually, a lot of countries, but Japan particularly so. And if a lot of Japanese residents got excited about Apple and they found a way to buy Apple stock,

Starting point is 00:27:38 what would that mean? It would mean Apple stock goes up, probably. It doesn't exactly cause market inefficiencies or dislocations or trades or anything like that. What does it mean when they got really excited about Bitcoin? Well, then Bitcoin went up, but it particularly meant that it went up a lot in Japan. And that is a notion which is boring to global markets. Right. I mean, there's Reagan mass in the U.S., which prohibits arbitrage between different equities exchanges. In general, there's a canonical market for everything. It ever uses basically that market. And there's lots of capital keeping things, at least mostly in line with that. In crypto, not even a little bit, there's no natural forces that make it need to be the case that a

Starting point is 00:28:17 Bitcoin is worth the same amount on every venue. And in fact, in late 2017, early 2018, if you're trying to buy Bitcoin in Japan, you would end up paying about 10% more than if you're buying it in the United States. It's an absolutely massive arbitrage. You just never, ever see numbers like that. You could spend your life trading equities. 10% arbitrage is just like not a concept. And it's trading a billion dollars a day. Not small. No liquidity problem. What's happening there? Well, there's no formal regulatory relationship between a Japanese exchange and a US exchange. But in addition to that, there is like whatever, $100, $200,000 of net flow per day coming probably from Japan. How much money was there providing to that? Well, like 2017,

Starting point is 00:28:59 less than $100 million a day. None of the large liquidity riders were in the space. It was actually very difficult to provide liquidity to that arbitrage. You had to get banking setup that was crypto-friendly in Japan and the United States. You had to get accounts every, to be capitalities. He was a massive production. The amount of full liquidity that people had gotten effectively set up there was less than the total demand. The market has just diverged and stayed diverged for months.

Starting point is 00:29:26 That's sort of like an extreme example. And we don't see things that extreme anymore. But that's the example of the thing that could happen in crypto. You could have Coinbase trading a percent higher than Gemini for Bitcoin for week straight. If somehow there's so much flow on one of them and not the other and not enough liquidity Friday, trying to keep those in line. And that will happen when crypto markets get stressed. So when there's a big move, you will start to see some arbitrages of curing in for a bit. What this means is that basically the active traders are getting bad prices.

Starting point is 00:29:56 What this means is that if you want to sell your Bitcoin during a crash, you might end up losing an extra percent or two on it because you're selling it wherever else is selling it and you're selling it below what a Bitcoin is actually worth. At the moment, because there isn't enough buy side liquidity providing to it, things are more in line than they used to be. If you take a major cryptocurrency right now, it's probably within two basis points on most major exchanges. It's not a huge loss that you're facing, but there are a lot of idiosyncratic times where that number gets. bigger. And what serve is driving that? One, no regina mess, no anti-arotrach principles. Number two, not enough total liquidity in the space. Just the market makers aren't big enough compared to the flow. And number three, a lot of assets that are a little bit funky. An example of this is tether. A lot of people have disagreed on whether tether is

Starting point is 00:30:47 a dollar or whether it's kind of like a dollar, but not really. Reasonable people have decided it's worth a dollar. Reasonable people have decided to decide it's worth 99 cents. reasonable people sometimes say it's worth a dollar in a penny. Now of a sudden you have a percent of one percent spread or arbitrage potentially popping up if different people are pricing a tether differently. And so you see things like that that can lead to discrepancies here. You can see just exchange problems. Like an exchange is having tech problems, accepting deposits of a cryptocurrency,

Starting point is 00:31:16 that might trade way too high on that exchange because no one can get it there to sell. And one of the things that exacerbates this is in many places, including, crucially the United States, there's effectively no leverage or margin for financing to anyone in crypto. And what that means is that if you physically run out of dollars, if you're a marketmaker and you run out of dollars on BitSam, and there's a big seller, you know, they'll be like, yeah, it'll be a day, a day before I can buy another Bitcoin here. I have to wait for a wire transfer to land.

Starting point is 00:31:46 If you're allowed to use margin, you can imagine basically margin buying there against selling somewhere else and then closing that spread down when wire transfer is cleared the next day. with no margin, you can't do that. And so, like, unless you want to have $10 million sitting there and your BitSamp account doing nothing, most of the time, when you get someone who's trying to sell $10 million of Bitcoin, you can't provide them. You can only provide how much you have there.

Starting point is 00:32:08 And so that sort of, like, is another contributing factor to the capital cost of frying liquidity in crypto, especially across venues. And because of that, the inefficiencies that you can see across markets that can last for any work from a second, to a weekday. It makes me kind of think back in that example of the problem of relying on all this different chain of firms, these intermediaries, to make anything progress better. Does that mean that the same as basically said here, but with Fiat systems or ramps as the same problem again,

Starting point is 00:32:39 like crypto can only go as fast as the Fiat system keeps up or something? To some extent, yes. It is legitimately the case that sometimes the hardest thing about buying a cryptocurrency is sending a wire transfer. Even though it's supposed to be a non-fiat system, But places where that seeps in still end up being the hardest. And the biggest blockers, when I was first getting set up in crypto, that was the biggest blocker. I spent like two weeks. I had some dollars in my bank account and it's like I had like a Bitcoin fees. Took me two weeks.

Starting point is 00:33:07 Sunday that wire transfer is legit hard. The banks don't want to deal with it. Wire transferences don't work very well. That's a huge pain. What else is causing pains here? Well, maybe I should say it's their way around this, really? Because there is. There is a way to potentially, at least partially ameliorate this, which is stable.

Starting point is 00:33:23 point. This is a beautiful thing about stable coins. 24-7s are on the blockchain. So if everyone in the crypto industry used USCD-SDC instead of USC, that you can move 24-7, that you can move instantly, and that removes the reliance on wired transfers. And that's one of the reasons why stable points are so big in crypto. It's just legitimately an easier and better way. Where does that fall down, though? So we don't have to go into like the tether dispute. It's just too complicated for our conversation today. But if tether is a dollar, let's just say it's a digital dollar that moves like you want it to, itself has the same problem. Like, it needs some sort of backing or collateral, which moves at the old speed. So how does that work? The way it works,

Starting point is 00:34:01 the advantage that you get from it is that sometimes you don't need to go into a bank account. Let's say you're trying to just send your dollars from Coinbase to Bitstamp. You, in theory, could just send USC from Coinbase to BitStamp. If there's no stable coin, you have to wire it out from Coinbase to bank account and then in from your bank account to BitStamp. So it's the wiring and wiring out where you're not actually trying to hash out, but it's the only way to move it around. So the advantage of stable coins is when you're not trying to exit the crypto ecosystem. You're just trying to move within it. And so you don't need to do the creation or redemption of the stable coin gets sent there. But yeah, if you're trying to pay a bill, you got a problem.

Starting point is 00:34:36 Yeah. It doesn't help. Sure, you could buy a stable point seven dollar, but then you just have to go redeem that stable coin. And now you're back at the same old place of meeting a wire transfer. Do you have a sense for how much fiat inflow relative to market value there's been in the crypto ecosystem? And how do you see that trending over time? Like, is there a point at which there's an escape velocity here? I've thought about this. I don't know the answer, but let's get some bounds on this. And the thing is working here.

Starting point is 00:35:02 Right now, crypto market happens about like $2.5 trillion or something like that. That does not mean that people have wired $2.5 trillion into crypto to buy. Because as you buy crypto, price goes up and everyone's crypto appreciates. It's not just the crypto you just purchase. But let's get some bounds on it. So there's something like $100 billion of stable points outstanding. That, I think, is like a lower bound on the amount of fiat inflows that led to that $2.5 trillion of market cap. In addition to that I'm guessing, there's another $100 billion of fiat currency sitting on exchanges.

Starting point is 00:35:31 That's a few hundred billion. And then there's some other places that aren't going to be as easily tracked as that what's my guess, I don't know, four or $500 billion or so of actual legitimate fiat inflows that have gone into this space. So something like 25% of the market cap, 20% of the market cap, I don't know, something like that, which doesn't seem like an insane ratio to me. I don't really know what I think the fair one is, but I don't know, it seems plausible. What's going to change that ratio? Well, right now, everyone knows that most financial institutions are planning to buy Bitcoin at some point. somehow, maybe on their own behalf, maybe on their investors behalf, their clients, if you talk to basically any big bank, pension fund, it doesn't matter what, they'll also say the same thing, which is, yes, we have a mandate, not just the green light, but a mandate to get involved in the crypto ecosystem. They will also almost all say, but we're not ready yet. We have a mandate to do it, but compliance is going to take somewhere between six and 24 months. Compliance, custody, all this stuff, yeah. Basically, substantial, expected fiatian flows into the crypto ecosystem.

Starting point is 00:36:36 system over the next few years, which haven't really materialized yet, but probably will. That is something that could really fill out the capital base of crypto and start to get those dollars into the ecosystem, make the capital in the ecosystem to market cap ratio get closer to one. Is that necessarily mean that prices go up? If more fiat comes into the system, probably, but not necessarily. Why would it not? If it's over prepositioned. So I don't think this is really happening. But to some extent, you could imagine maybe the world has expected $200 billion of inflows from institutional players over the next three years. And in fact, there's going to be $50 billion of inflows. And the world has already bought $100 billion in anticipation of that,

Starting point is 00:37:21 playing to flip out to the inflows. But in fact, there's only 50 of them. So the flip people are going to be selling 100, trying to flip out to inflows of only 50 net selling prices go down. I wouldn't guess that would be what happened. I would guess that people are under a preposition for it. But you could imagine. So you came late to this ecosystem, and I don't mean the word mercenary in a negative way at all, but in a world that was previously filled with so many pure missionaries like zealots for crypto as the solution, everything, which I wouldn't characterize you as that, because you had this late, relatively speaking late and sort of pragmatic you on this entire space, what has you so excited?

Starting point is 00:37:57 Like, why have you devoted your time and attention, which we talked about at the beginning? you know, you're allocating meaningfully for some larger goal. What is it about this ecosystem that has attracted you and so many other talented people? And do you anticipate staying in it a long time? There are a bunch of things leading to that. First of all, just huge, huge demand in this space and not enough supply. And I mean that on many levels. I've met that historically in terms of buying versus selling cryptocurrency.

Starting point is 00:38:24 It's still today the case that one thing you can look at, for instance, is on FTCS, which is the crypto exchange I started. We have a spot borrow lending book where there's market forces determining the interest rates of the various assets. And right now, if you want to borrow a Bitcoin, which you can use to short sell, you're paying a little bit less than a percent a year in interest. And there's $700 million of open interest there. If you want borrow a dollar, which you could use to get long crypto, you're paying 10% a year. And there is $2 billion of open interest.

Starting point is 00:38:57 So it's still the case today that there's more demand to buy cryptocurrency. cryptocurrency, then there is a supply of dollars in the space by cryptocurrency. But I also mean this in terms of infrastructure. There's huge demands being placed on all the infrastructure and crypto and not enough supply of great infrastructure. And that ratio is off by sort of a comical amount, especially rewind a few years. Exchanges were crashing daily because they couldn't handle the load. Risk engines were incinerating a million dollars a day of customer funds because they couldn't margin call on time. It was a total. fucking mess because it was massive, massive interest, demand, excitement, capital volume in the

Starting point is 00:39:38 crypto industry. And it just hadn't had time to mature enough for the infrastructure to catch up with that. So one part of this is just like business opportunity. It seems like there's a lot demand for a new business here. And someone's got to do it. And it didn't seem like the existing players were going to get their act together. Another piece of this is, you pointed this out, But when I first tried to do a crypto trade, the hardest part of the crypto trade was the wire transfer. And I think that's super instructive for me. I think what it sort of made me think was like, wow, the existing financial infrastructure we have has some issues. Sucks.

Starting point is 00:40:12 Somehow, despite the fact that this space seems like a total shit show, it still is actually easier to use than a bank. And there's like obvious ways to make this space a lot more efficient. And so it just sort of felt like, yeah, boy, payments must be real bad. And when you sort of start to dig into it, it's like, yeah, they are. We often don't notice it. but we're bleeding 3% of our GDP each year to payments. Every time you go to a supermarket and buy a banana, you're paying 3% to a credit card company

Starting point is 00:40:36 to cover up the fact payments don't really work. If you're trying to wire running to Nigeria, you're losing tens of percent. And I think that there's a substantial opportunity to start fresh, the natively digital and natively online approach. The nice thing about decentralized ledgers is that it allows international cooperation, it allows operation between companies on sending value between each other. There's a lot of economic opportunity in crypto rails.

Starting point is 00:41:03 And when you look at the potential of something like DFI, here's one cool thing you can do with DFi. You could put social networks on chain. What does that mean? It means you build a protocol on chain for sending encrypted messages. Maybe they're DMs, maybe they're public, depending on whatever setting you choose. Every social network could draw from that same protocol, that same set of messages. What that means is that if you're doing, if you. you tweet, someone else can like it on Facebook, because they're both accessing that same

Starting point is 00:41:30 underlying set of messages and that same underlying protocol, that's extremely valuable. It solves this network issue where no one wants to use a social media company and tell all their friends are using it because it makes them interoperable with each other. And it also allows cool approaches to censorship, have a permissionless underlying protocol layer, and then anyone can build their own user interface on top of that, and you can make their own decisions about whether to censor it. And if you're sort of upset with the censorship level on some platform, you can start your own,

Starting point is 00:42:06 and you already have access to all the messages that are floating through there. So I think that's sort of like it's another example, a pretty cool application of blockchain tech, which I think could actually be better than the existing products, but would take a lot of work to build out. Obviously, you're sequencing, you don't strike me as an ad, accidental guy. And so the sequencing, it's very interesting, starting with Almeda, which is a trading firm, explicitly trying to earn profits in an inefficient market, which has gone very well.

Starting point is 00:42:33 Then it's FTCS and serum. And like you said, infrastructure in this space. Talk to me about sequencing. My suspicion is you're not done and we'll keep sequencing in other directions. How do you think about that challenge of what to do when and when to do next? A lot of this has to be dynamic, because a lot of it has to be super responsive to the global environment. Right now, if you're a crypto company and you're not thinking extremely hard about regulation and compliance, you're making a mistake. I don't think it was as obvious a year ago. I mean, a year ago, a lot of crypto companies didn't really have compliance departments.

Starting point is 00:43:08 I think we thought it was a little bit predictable, but that would run into problems and that some people being a little bit out there. There is some responsiveness here. But putting that aside, what are the next steps? I'll give a few, and I don't want to say these are definitely the next steps. I think what I would say is these are steps that we are very strongly considering and or working towards. But we'll decide dynamically what the right thing to prioritize is. So one of them, and I mean, this is something where I think we've basically laid our parts on the table.

Starting point is 00:43:38 Let's just get some statistics from today. By the way, crypto trades a lot. I think some people underestimate this. Crypto trades almost as much as U.S. equities do. It's still a lot of volume. So in the last day, there's been about $200 billion of volume globally and crypto. If you want to divide that up, internationally, it's about $130 billion of derivatives volume and something like $55 billion of spot volume.

Starting point is 00:44:05 So a little more than two to one. And now let's look at the United States. So in the U.S., there's something like $10 billion of spot volume, 1.5 billion. of derivatives volume. So the ratio, rather than being like two, two and a half to one, it's zero point one to one. And if you sort of extrapolate out, there is something like $25 billion of missing volume right now, which should be derivative volume coming from the United States. That's big.

Starting point is 00:44:37 If you had that and nothing else, that would make you the second biggest exchange globally. And why is that? It's because no major crypto exchanges are CFTC. license. None of them have the regulatory ability to offer futures in the United States. We recently acquired LedgerX. It's a CFTC licensed crypto derivatives platform. It's pretty straightforward what we want to do with that. And we're really excited to work with the CFTC on that and to talk about ways to develop that platform over time. But that's just a massive, massive missing market. Before we go on, just a broader question on countries competing with regulatory

Starting point is 00:45:17 environment for economic activity. Like, if you think about the U.S. as history, you could argue that its success was its system settings. The rule of law and the Declaration of Independence, everything that was the agreed upon rules, to use your point earlier, was what made this such an amazing place to do business and remains an amazing place to do business. How do you think about that in this new kind of Web3 world, where it seems like perhaps the U.S. is on the wrong side of what made it so great historically? Is that true? Do you think that will change? How do you think about countries competing with regulatory environments for this new industry? I'm optimistic it will change.

Starting point is 00:45:51 And I think the biggest thing is crypto came out very quickly and how new it is. This isn't like it's a new type of CME future with a different index. This is a totally new settlement layer. It's a totally new asset class. It's a totally new role. It's a really profoundly different product. Five years ago had very little attention. And so in five years, a very, very different asset class has been born.

Starting point is 00:46:16 and become as large as the largest existing asset classes in volume. That's pretty wild. That's faster than regulatory systems move in most countries. And see, look at what's happening in the United States. The U.S. does not generally try and roll out completely new financial regulatory frameworks every three to five years. This is like break-neck base on that standard. And I think that that's a lot of what's been caught here is right now, there are real interesting

Starting point is 00:46:42 questions about what the framework will be for a lot of assets. what regulatory department has jurisdiction over them, what licenses will ultimately end up being necessary for some action. And that's not to say that there's confusion over everything. There is clarity around some things in the U.S. regulatory space, but there are other things where there isn't. And it's a big topic of discussion. If you talk to someone on Capital Hill right now and ask about what their views are on finance, like a third of what they'll tell you about is crypto. This is like top of mind for regulators. I'm optimistic that there's going to be sort of fuller frameworks built out over the next few years in the U.S.

Starting point is 00:47:21 That will make it a much more robust place to new crypto business. How do you think of about the centralized nature of most regulation historically that it's far easier to regulate, say, bank charters and a limited number of them than a decentralized ledger. And the decentralized ledger provides so many of the interesting properties. There's this weird tension here between what you can regulate, whether it's the exchanges or the wallets or whatever it might be. what the right point is, that seemed to naturally have to then centralize versus the benefits

Starting point is 00:47:51 of a decentralized ledger. Like, how do you square this circle in terms of innovation? I have some thoughts, but I don't know what the answer will ultimately be. And I do think that's something that regulators are very much struggling with and trying to figure out how to approach. What could you do there? Well, here's one example. I think a reasonable thing to do is to try to find strategic parts of the ecosystem to put the bulk of the regulation in. And as an example, I think centralized exchanges and anyone who's running a fiat to cryptocurrency conversion business is like a really good place to start looking for at the very least anti-money laundering, anti-financial crimes regulation and also market integrity regulation and things like that.

Starting point is 00:48:35 I think with stable points, I don't know what the perfect approach is. Here's something which I think would be like a substantial step forward from where we are on the regulatory side without endangering the product would be a registration regime based around reporting and transparency where you have to say exactly what assets you're holding. And there have to be periodic audits confirming that. And you have to have policies around redemptions and honoring those. And maybe some blacklist for addresses known to be associated with financial crimes. Maybe the assets have to be held in a U.S. bank account, some sort of regime like that, which I think would address a lot of the consumer protection and financial crimes,

Starting point is 00:49:13 worries that exist with some regularities with stable coins, well, still allowing the space to thrive. And I think that I almost explicitly want to say, I don't know what the perfect thing is. I sort of think that's a really hard question. It depends on how the space develops over time. And rather than shooting for the perfect here, I think the right thing to do is take steps in the right direction. Start to build out frameworks that protect consumers that prevent financial crimes without killing the industry.

Starting point is 00:49:42 Start with that, take steps forward. And then, yeah, in three years, maybe there's going to be a second round of things. With a regime like that with stable points, that addresses most of the large points and concerns while allowing USD stable coins to thrive, which I think is really valuable from an economic efficiency perspective for the crypto ecosystem.

Starting point is 00:50:03 Also, frankly, for like dollar dominant. There are going to be stable coins in the world. And if you ban USC stable coins, then it's going to be Euro stable points or it'll be CNY stable points. It's not a question of whether there will be stable points. It's a question of which country they come from and which currency they're backed by. I was going to go back to why derivatives are such a key function, just in general. Maybe this is an overly simplistic question, but the ratio internationally makes me think,

Starting point is 00:50:33 look, this is just like a key central function that we need in properly functioning markets. And you've done a lot, obviously you spent your career kind of in this space. What is it about derivatives for the uninitiated that are so important for markets? One thing to note, which I think you're sort of alluding to there, is that this isn't a crypto-specific thing. In almost every asset class, more volume trades and derivatives and spot, why is that if you don't need delivery, they're more economically efficient. The big thing about, let's just compare a futures contract with spot contract.

Starting point is 00:51:02 In order for Alice to buy a Bitcoin from Bob, Alice needs dollars sitting there on the exchange, and Bob needs a physical Bitcoin sitting there on the exchange for that transaction to happen. Now, that's very important if Alice's goal is to go send that Bitcoin to her friend, where Bob's goal is to go take those dollars and pay his bills with it. But most volume doesn't actually require physical delivery. Most of the volume that you look at, it's people trading in and out. It's people putting on a position that they want, people hedging something. The average trade doesn't require. It's not actually. actually important to either person to get physically delivered the thing. It's the financial

Starting point is 00:51:43 exposure that they're looking for. And frankly, you can trade out of that later if you need to. If you buy a Bitcoin feature but later decide you need the Bitcoin, you can later go sell that Bitcoin future against buying a spot Bitcoin to get into that. But if you don't require delivery, which is what happens with futures, that's just your financial transaction, you don't require nearly as many specific types of assets sitting on the right people. accounts in the right place at the right time in order to do a transaction, people instead trade freely as long as they have enough total collateral that they're not going to blow out and then figure out settlement on their own schedules. It just makes markets more efficient. It makes them easier to use.

Starting point is 00:52:22 It lowers transaction costs. It lowers capital requirements. And people could trade with spot if they had to. They usually don't want to. Usually they prefer not to because it just, yeah, you end up paying twice as high fees and you're often unable to do the trade you want to do. You're in the space, obviously. So I'm curious what you think the competitive frontiers are between derivatives exchanges. So five derivatives exchanges are competing for your business. What are the battlegrounds between them to win over the user's business? Dank memes on Twitter.

Starting point is 00:52:53 It's funny but true. Right. If you ignore the things that most influence people's decision making and said, look, the underlying products, which is not the direction of this world has been going in, but sure, sort of an antiquated thing, but probably still quite important. Here's one thing, cross-margining. So let's say that you want to buy here in the future.

Starting point is 00:53:13 What do you need to have in your account and where in order to do that? On FTCX, the answer is anything. You can have anything in your account and you just have one account. There's no where is not a meaningful thing. You can deposit euros, dollars, Ethereum, Bitcoin, Heather, USDC, Microsoft, Spy.

Starting point is 00:53:32 Any of those work is collateral. Computed is collateral value. Herodded to the extent it's a larger liquid. and make sure that your position doesn't exceed its bounds, and you'll trade whichever features you want in whatever combination you want. On some other platforms, what does it look like? Well, the only way to do this is to sell whatever you have, tether, use tether to buy Spot Ethereum,

Starting point is 00:53:51 move your Ethereum into the Ethereum Futures margin wallet, and use that as collateral to trade Ethereum futures. So first of all, they require you to trade spots, trade futures, which defeats the whole fucking point of futures. Second of all, you then want to go buy a Bickmine feature, top lock. You can move your Ethereum out. sell it for Tether, you use a Tether by Bitcoin.

Starting point is 00:54:08 Bitcoin is your Bitcoin futures margin wallet. You're literally managing hundreds of thousands of wallets on a single platform, moving assets, doing stupid spot trades out the right collateral in the right place at the right time. It's this massive mini game that doesn't need to exist. It increases risk and get liquidated on any one of them. You have no flexibility on it. The whole system is a mess. And so that's, I think, like, one of the biggest differences is how cross-clateralize the margin system is.

Starting point is 00:54:34 Back to Dank memes on Twitter. one of the things that's interesting, and I'm just curious because, again, it seems like you make decisions in a very rational way. You spend a lot of money on marketing. I see FTCs all over the place and in the obvious places where your users might be. How do you think about that? Like paid acquisition in this world, it's like such a traditional concept, marketing dollars. It seems like very non-crypto in some ways. Like, how do you process a decision like this and prosecute it? There's a really interesting question of whether we should be buying Facebook ads or Google ads. Right now, we're not, really. And I don't know.

Starting point is 00:55:06 if it's right not to be. But let's put that aside for a second, because that's usually what user acquisition means. Frankly speaking, most of this money is usually spent on like square that says buy X here, a big buy button, you click on and takes you to the website. And that's not what we're doing. Why is it not? On the one hand, most user acquisition happens through social media. How did we get most of our users? They saw a post on Twitter and they're like, oh, wow, this person who's a picture of a frog, I generally think it's good in the instincts on crypto products. And they said that FTCX is really dope. So I should go test it out. That is actually legitimately. A lot of communication happens in the space. Yeah, we could buy

Starting point is 00:55:47 Facebook ads. It doesn't really like intersect with how most of our important customer acquisition has actually happened. Now, maybe this is a mistake. Maybe we're just missing out a long because you're not doing it. But there's a second thing we're trying to do, I think much more than that, which is when you exit the core, nothing that we're doing for marketing is going to matter for someone who spends five hours a day trading crypto. Those users have all looked at the major venues, and we will win or lose them based on primarily our product. But if you're someone who spends five hours a year thinking about crypto,

Starting point is 00:56:20 brand matters now. Right, you're not trying out 10 products. You're not clear you're trying out two products. It might just be one. So name recognition certainly matters, and we are way behind on that. Versus, for instance, Coinbase, We have about four times their daily trading volume and about three percent of their user base.

Starting point is 00:56:39 So it's a factor of a hundred difference in volume per user. Like they have done spectacularly at the long tail retail consumer. And we have done much better at the more sophisticated, more highly engaged users who trade larger volume each. But the other thing that matters, I sort of went out marketing into name recognition and brand. one thing that I think about with our marketing is how do we get as many people as possible to have heard of us? And another is how do we get people to know who we are, who we really are, to get some sense of that.

Starting point is 00:57:13 And that's hard. That is the thing that we're really thinking about with our marketing. And a lot of the endorsements that we're doing are aimed at not just getting people to literally see the letters FTX somewhere, but to create a more powerful association. And to convey that we're here for the long term, we're a legitimate exchange, or a legitimate product. that people who have a lot of reputation to lose and don't want to lose it have done a lot of research and due diligence on us. But more generally, we're looking to pack a lot more punch with a lot of the marketing that we're doing rather than spreading it out as much. What does that mean in practice? It means thinking about what are the few things in the world that really matter

Starting point is 00:57:54 and that really matter from a branding perspective or from an endorsement perspective. There just aren't that many. Look at basketball players. How many basketball players, if you heard that they had some association with a product, would that be like, oh, that's kind of interesting. It's really a short list of things. And if you look at which endorsements matter for a sports team, there actually just aren't that many that matter that much. When you think about what properties that sports team endorsement, you have heard of and resonated with you and you can remember The idea is then that you want to be extremely choosy on quality and impact, and that that's an interesting optimization challenge just in and of itself.

Starting point is 00:58:39 I'm really enamored with a concept of the first part of the web being user-generated content defined and the next as being user-generated asset defined, spin-up NFTs, companies can issue tokens. And I'm curious how you think about this big trend. What opportunity it represents, how it will change the world? We could talk about the FTT token and its utility if you want. What is your thought on this like user-generated asset era that we may be entering and leaving an old era? Super interesting. It goes hand-in-hand with disintermediation where a lot of these assets are things which in theory are sort of user-generated and sort of always have been, but like only in theory. As an example, how about a book? Are books user-generated content? I mean, yes, sort of. They're like author-generating content.

Starting point is 00:59:27 But historically, what gate keeps them, it's not demand and it's not supply. It's like publishing houses and bookstores. And then like all these things which take ultimately user-generated content, get it in the hands of consumers, but with a lot of weird distortion and a lot of weird bottlenecking and gatekeeping. And now what are we starting to see? More and more people sell publishing new book. And it's saying like, wait, I can upload a PDF to my blog. And now I've published a book, I guess, so much for getting an agent to find a publisher.

Starting point is 01:00:03 And I think we're not quite there yet for mass market, but I think we probably will be. You kind of reflect on what is the role of a publishing house. I think that we are seeing that shift in a lot of areas. I think that sometimes it's all at once and sometimes it's bit by bit. But it used to be the case that when people were trying to decide what companies to buy, they would all outsource it to the same seven asset managers. mutual funds, pension funds, and that's what moved markets. It still happens to some extent, but all people dig it into their own hands.

Starting point is 01:00:34 And they go on social media, they make decisions about what companies buy, and they buy them. And it's a very different dynamic. And you get some things that look like more efficient markets and some things that look like less efficient markets. On the one hand, you get AMC and GameSoft and Hertz. On the other hand, I think you get some companies where there is probably much faster price discovery because of this. I think Tesla is probably an example of that, where that happened way faster than if the old institutions were gatekeeping it. And that's probably not the type of content you're thinking of, but I think it's the same

Starting point is 01:01:06 phenomenon of people taking their lives into their own hands and the web enabling that. And so now you can talk about, okay, well, have a real content content. Well, NFTs, that's user-generated content, direction consumer, with sort of lightweight platforms facilitating that transaction in a competitive market. We should choose a different platform if you wanted. How about tokens with different token economic models? In most countries in the world, right now it's a flourishing industry, not really in the United States because of questions around whether some of these are securities.

Starting point is 01:01:39 You can look at user-built applications, which, okay, that's what a startup is. But again, the amount of hassle and intermediation usually put into that is like massive. Very hard. High friction to start a company. High friction. You need to know the right BC firms to have a shot at getting the funding necessary. Now you see people from their basement starting an app online. And that's another variant on the same thing. And I think ultimately it's going to be good. I think ultimately it disintermediates, it creates more efficient markets.

Starting point is 01:02:10 It removes friction. It allows things to move much faster. It's also a bit of a rocky road. It means that there isn't natural duration points. And the world has to, in a somewhat ad hoc way, figure out how to do that. If we think about like some of the layer one blockchain salon or whatever, Ethereum, probably the best two examples, as developer toolkits more than anything else that address the problem you just laid out. You just get to get going right away tomorrow, tonight,

Starting point is 01:02:37 rather than go through the arduous process of starting a company. What does that mean in terms of how many of these layer one blockchains there need to be? Like today, there's a couple dominant ones. What do you think? I don't see a reason there need to be too. That's not saying there won't be. But why do there need to be two? Why not one? It's not immediately obvious. I think what I'd say is right now there should be many because there should be competition as platforms. There should be competition driving them all to keep getting better and driving the world to figure out which they want to use. I don't know for sure what the answer is going to be there, but I do think that the world is starting to understand better than they did before. I think you're

Starting point is 01:03:21 starting to see a lot more sophisticated thinking than even six months ago about layer ones where I think there's just some really obvious important questions you have to be asking. What's the end game here? What's the end game that matters the most? What's the really important end game? The really important end game is a billion users using some blockchain, right? It's trillions of dollars using some blockchain. And what goes along with tens of trillions of dollars and billions of users, and you should just look

Starting point is 01:03:50 a lot of examples. The answer is millions of transactions per second. That's sort of how it is. And I think that it's just like you can't scale if you're not going to get to a million. I think you sort of need to get to that level. And if you don't, you're almost proofably never going to be a big part of the picture in terms of actually facilitating the bulk of the economic activity or non-economic activity happening on blockchains. So I think that's like an incredibly important piece of this. And really the question is, how did you build infrastructure that can support that and that least somewhat composable. So you don't want to take a single orderbook and shard it. That doesn't work. Two people try and lift the same offer at the same time.

Starting point is 01:04:28 It's a mess. In fact, a single exchange chart is pretty bad. So I think you need 100,000 TPS per shard eventually. And really within an industry, you don't want to break composability. You want to be able to seamlessly move capital between one application and another one that are both financial trading application. I think you're starting to look at something like a million TPS per natively composable single shard, single thread unit. And maybe you have to shard it after that or use layer twos or side chains or whatever you want to call it. But I think you want to maximize how much you can get into one composable blockchain first. And I think you want to shoot for like a million or so. My honest sense here is that like it's a lot of values

Starting point is 01:05:14 and getting a single natively composed of a million TPS blockchain. You vote with your wallet or with your code and you built on top of Solana. Probably no surprise to people listening that that's the one with the most transactions per second and scalability in that way. What does that mean you think about Bitcoin? So much of this ecosystem is still Bitcoin. Obviously, like, that is not the platform. Bitcoin is not the developer tool that anyone would want it to be. It doesn't support any of what you just said.

Starting point is 01:05:38 So how do you think about the original asset in this space that got the whole thing going? I don't think of it as a general purpose blockchain. As you said, it's got what? 510 TPS. That is not enough to be general purpose medium for exchange. What it does let you do, though, is move Bitcoin's around. And that's sort of my sense. The point of the Bitcoin blockchain is to move Bitcoin's around.

Starting point is 01:06:06 It's not to facilitate general financial. And then I think that question is based down to, I don't know, how cool is Bitcoin is an asset set. And I think that it's like, has potentially a large role in the world. And I don't want to say that it doesn't. But I do think it's just sort of like worth acknowledging explicitly that it's a different thing than what I think Ethereum and Salon are trying to do. How do you think about the future of everything on a blockchain? Like, do you think that we'll reach a state where every meaningful financial asset trades 24-7, you can see it by an open order book, all the things that we spent the first chunk of our conversation talking about? because that's the future that we're heading towards, and if not, like, what gets in the way, what stops it?

Starting point is 01:06:46 Not everything. So, blockchains are not the most economically efficient thing in the world. The most economically efficient thing is a single-circle, a centralized server. And how much more efficient, well, you probably have like 10,000 servers, if you're a decentralized blockchain, all compute the same thing, the minimum latency of like 100 milliseconds. So that's not only takes light to travel around the world, which you need to do if you want how to geographically decentralized blockchain.

Starting point is 01:07:09 The question is like which things are not strongly constrained by latency or compute cost. Robin Hood, not at all constrained by those. Totally fine to be on a blockchain. Two HFT firms trading with each other, absolutely constrained by those. HFT firms are probably always going to be mostly trading against each other on centralized servers. If you think about NETSys, communicating about which movie you'd like to watch what the recommendations are, selecting it, featuring out where to download it from, all of that can happen on a blockchain, actually moving the video file way too massive, not going to be economically efficient to

Starting point is 01:07:51 on-chain, but you might have something like a torrenting type protocol, where you have effectively an on-chain protocol to communicate, and then some off-chain protocol to actually send files to each other, or IPFSERDA. That's what it's my sense, is that the most compute-constrained things will happen off-chain, but that there's a world. And I don't want to say this will happen, but it might happen, where most things that are not compute constrained and not latency constrained end up at least partially on-chain. And that blockchain also forms the connection layers between all of these things. I've seen you right before about you personally having more RAM than hard drive space.

Starting point is 01:08:28 Describe what you mean by that. And whether or not you think more of the sort of key builders or entrepreneurs in the future will be defined in that same way. So what I mean by is basically like, I suck at trivia. I'm not good at it. And so we look like a raw number of total facts that I can recall. I don't think I'm particularly good. I think where I'm a lot stronger is like a number of concepts I can hold in my head

Starting point is 01:08:53 at once, make a decision that references many things at once in sort of like a nuanced way. I think that's why I'm much stronger at is like much more relatively large amount of actively accessible memory and knowledge, relatively less sort of long-term storage of facts to be able to dredge up when needed. I sort of think it's pretty useful for being in a position where you have to be on top of a lot of things and you have to make sure not to lose important threads, which I think fits entrepreneur role pretty well or the trader role for that matter. I think if you look like a research role, it's less clear that that's the relevant. archetype, it's more like focusing on one problem and diving deep into it.

Starting point is 01:09:39 So RAM is flexibility, and that's rewarded in the world of entrepreneurship. Strange question is you've amassed wealth faster than arguably anyone in history, except maybe Zuckerberg. Has that felt weird? Does it affect you in unexpected ways? Do you care much? People I know you might get hit by at the least, but hard not to imagine getting hit by it somewhat.

Starting point is 01:10:00 What has that been like psychologically to be on this? I think it hits me less than it would most people. I don't want to say it doesn't hit me at all, but I think it doesn't change how I feel about most things that much. It certainly changes how other people interact with me sometimes, especially people I don't know very well. And so that's taken some justing to, but I don't think it's like a huge change in my day-to-day life.

Starting point is 01:10:26 What have we not talked about that's consequential about the future, in your opinion? We've covered a lot of ground. There's 40 of my questions that we didn't get to, and we're almost out of time. So maybe we'll do it again. But what major muscle movements have we missed that you think are really important for people interested in this trend to consider or think about? One of the general themes that have become more and more convinced by over time is that all the opposite is in all the expected values in the upside tails, not in the median outcomes usually. And you should take that seriously.

Starting point is 01:11:00 And it implies weird things, which I think are true, like that often the right path is one that very well might fail. You really should be thinking the whole time about what is the upside. What does it look like? Where is it? What can you do that will keep that in mind, even if you're not using it to make everyday decisions, but like from a high-level strategy perspective. And I think that that's sort of like, as the world speeds up and gets wackier, that becomes more and more powerful and more and more important. and I think it becomes like more and more important to take that seriously and to acknowledge that sometimes things that sound crazy and unlikely, might be unlikely, but maybe not so unlikely that they're not super valuable in expectation. I think a lot of the crypto industry has played out that way.

Starting point is 01:11:51 I think that like a lot of how I now, who did not always think about what I do plays out that way. I think it's a pretty fundamental shift in how you think about what you're going to do. I think it is super important. Is there a single decision that comes to mind when you think about this idea of kind of power laws ruling everything around us that most exemplifies this idea, some decision you made because you were respecting this concept? When I started up at TX, I was the most optimistic, I think, of people on the team. And I thought there was a 20% chance of success and other people were lower. sort of like did some math and it's like, oh, wow, it seems like very high upside. It's plausible it could work. Very high expected value. I think that math turned out to be way too conservative. I think as it turns out, I was still massively not appreciating the upside enough. But it was still way way, way kind of more extremes than I think what it was easy to get to. And just in general, I think that's sort of one of the clearest cases of like, go for it. It seems high upside. Most of it was. thought it wouldn't work. And it turned out that the straightforward analysis, expected value analysis,

Starting point is 01:13:01 was the correct one. So in the digital era, be bold, be different. Seems to be the right strategy. Yeah. And be smart and do it well, obviously. This has been such an interesting conversation. I literally do have like 40 questions. I wasn't able to ask just because of time constraints, but so appreciate your time. I ask the same closing question of everybody. What is the kindest thing that anyone's ever done for you? There are maybe a few things there, but I think, and it's sort of the boring answer

Starting point is 01:13:27 of like supporting me, you know, what I've been doing, I think sort of believing that this might work when most people didn't and encouraging it, maybe the thing that actually resonates

Starting point is 01:13:37 a little bit more with me, I think it's been like a lot of the people in the effect of altruism community who have totally independent of me or anything been incredibly dedicated. And,

Starting point is 01:13:51 selfless with what they're doing with their life and achieve really spectacular things in a way that sort of involved making personal sacrifices and seeking the altruistic upside, if not the personal one. And that those are the ones I think resonate more with me in some sense. Sam's been so much fun. I cannot wait to do round two with you. I'm sure in a year we'll have enough to talk about or something. This has been a blast. Thanks so much for your time. Thank you. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning.

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Invest Like the Best with Patrick O'Shaughnessy - Sam Bankman-Fried - Creating a Perfect Market - [Invest Like the Best, EP. 247]

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