Unchained - The Chopping Block: SBF Wants to Win in the Court of Public Opinion. Will He? - Ep. 428

Episode Date: December 3, 2022

Welcome to The Chopping Block! Crypto insiders Haseeb Qureshi, Robert Leshner, Tom Schmidt, and Tarun Chitra chop it up about the latest news.  Show topics: highlights of Sam Bankman-Fried's interview with the New York Times whether SBF knew what was going on in his companies, and how that impacts potential prosecution why Genesis and DCG are in financial trouble whether Genesis will file for bankruptcy or go through a restructuring process revelations from BlockFi's bankruptcy filing new info on why FTX bailed out BlockFi last summer what is going on with Binance’s recovery fund  how Avi Eisenberg tried to pull off an attack on Aave  how the banking industry works and whether Changpeng Zhao is the closest thing to a central bank in crypto how DeFi responds in a crisis, and how it contrasts with CeFi’s recent implosions Hosts Haseeb Qureshi, managing partner at Dragonfly Capital Tarun Chitra, managing partner at Robot Ventures Robert Leshner, founder of Compound  Tom Schmidt, general partner at Dragonfly Capital Episode Links FTX: Unchained: FTX Bankruptcy Overseer Says Company’s Collapse Is Worst He’s Ever Seen NYT: Sam Bankman-Fried’s interview Bill Ackman’s tweet Interview with Tiffany Fong Previous coverage of Unchained on FTX: Jesse Powell and Kevin Zhou on How FTX and Alameda Lost $10 Billion Is the Collapse of Crypto Lending Over, or Is It Just Starting? Did the Bahamian Government Direct SBF and Gary Wang to Hack FTX? The Chopping Block: Why Lenders Didn’t Liquidate Alameda When It Was Underwater  Erik Voorhees and Cobie on Why FTX Loaned Out Customers’ Assets The Chopping Block: FTX: The Biggest Collapse in the History of Crypto? Sam Bankman-Fried on How to Prevent the Next Terra and 3AC BlockFi:  Unchained: Crypto Lender BlockFi Files for Bankruptcy as FTX’s Contagion Effects Continue Decrypt: FTX, Alameda Owe BlockFi More Than $1 Billion: Court Hearing Genesis: Ryan Selkis’ tweet on Genesis Unchained:  Genesis Warns of Bankruptcy If Funding Plans Fail: Report On-chain Analysts ID 432 GBTC Addresses After Grayscale Says No to Proof-of-Reserves WSJ: Crypto Lender Genesis Asks Binance and Apollo for Cash Decrypt: Digital Currency Group Says No Imminent Threat Despite Owing Genesis $575M Previous coverage of Unchained on Genesis: Why Genesis Could Very Well Be Insolvent, Not Just Illiquid ‘The Last Big Whale’: Why the Crypto Contagion of 2022 Eventually Hit Genesis DeFi Pancakeswap flipped Uniswap in TVL Unchained:  Mango Markets Exploiter Gets Liquidated But Leaves Aave With ‘Excess Debt’ Aave Freezes 17 Low-Liquidity V2 Pools and Votes to Migrate 26 Assets to Ethereum V3 Compound Finance Slashes Borrow Caps for 10 Markets Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two-quan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed trading firms who are very involved. D5.Eat is the ultimate pump. DFIPOTOC protocols are the antidote to this problem. Hello, everybody. Welcome to the chopping block. Every couple of weeks, the four of us get together and give the industry insider's perspective

on the crypto topics of the day. So quick intros, first we've got Tom, the Defy Maven and Master of Memes. Next up, we got Robert, the Crypto Connoisseur, and Captain of Compound. Then we've got Turun, Gigabrain, and Grand Puba at Gauntlet. And finally, we've got myself, I'm Hib, the Head Hype Man, at Dragonfly. All four of us are early-stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Okay, so for those of you who are not tuning in live, we just went live after the end of the New York Times interview with SBF. I think it's actually, I guess, the second interview that he's done, but certainly the most high profile.

and it seems like the most hard-hitting. I'm just going to give a very quick summary of some of the stuff he said, because a lot of it has kind of been repeats of things he's already been asserting publicly and in his tweets. So some of the key quotes that I pulled out from the conversation he had with Aaron Sorkin. First, he said, FtXUS and FTCS Japan are fully solvent, and he expects that they can pay back customers. He's surprised, but they haven't already,

and he's confused why they were pulled into the bankruptcy. He was asked at some length about the shibbolets and the game that Westerners play that he alluded to in the Vox article. And he tried to paint it as though this is talking about marketing. He's like, oh, you know, we do all these like dumb ESG marketing campaigns, blah, blah, blah, in order to get regular story stuff. Wait, wait, wait, wait. Don't forget that he was like, well, I'm sorry that a private conversation that I thought was the truth was revealed.

He said that first before. Yes, true, true. So Aaron asked him about criminal liability, if he expects that he will have criminal liability. And Sam gave a very interesting answer to that. He said, look, there's a time and place for me to think about that, but right now is not it. Right now, I need to be focused on customers and what I can do to help make the situation better. Now, Aaron also asked him, when did he know that there was a problem at FTX? And Sam answered, he knew that there was a problem starting on November 6th.

November 6th was the day that CZ tweeted that they were going to sell their FTT. It was November 7th, the day afterwards, that Sam actually tweeted that FTA. X is fine. All assets are fine. We don't trade with customer funds. And so this seems like potentially an admission that Sam knew that things were not fine when he made that tweet. And that tweet, of course, was later deleted, which indicates probably what we already suspect, which is that he knew that that tweet was not knowingly correct at that time. He repeated again that he regretted that he allowed the bankruptcy process to come into place. And he felt that it was possible to potentially make all customers whole. And when he was

asked why, he sort of alluded to doing something like BitFenex, which presumably means issuing some kind of debt token and using that to, quote, unquote, make customers whole and just continuing to operate. And then lastly, he said, which he also said in another interview, that he has 100K left in his name. So he, you know, presumably doesn't have a whole lot of money left and is just hanging out in the Bahamas. So those are what I kind of perceive to be the highlights. reactions. We just got off the video. What did you guys think? Oh, yeah. I think he meant Andrew Ross Sorkin. Oh, I'm sorry, Andrew Ross Sorkin. My first point is that he said a lot of things and didn't bring the receipts for any of them. You know, he can claim or make any statement he wants.

He's done that for a long time. But a lot of things he said, you know, he didn't necessarily provide any evidence for him. How much money is he have? Who knows? Most of those entities have been in his name. How much crypto does he have? If you want me to believe that he's, you want me to believe that is no crypto, you know, I will answer with extreme skepticism. My take was, you know, he seemed to be framing his own defense, whether that's a defense in the court of public opinion or the court of the Department of Justice by framing everything from the beginning to the end as I'm innocent, I didn't know, things got away from me, you know, this was just a funny mistake. He. Yeah, so it does seem like he's continuing to assert the

defense that basically this was a margin position that went wrong. There was no clear decision or moment that he made to say, okay, we're going to take customer funds and give it to Alameda. He's continuing to assert that this was just kind of run-of-the-mill margining that went wrong and the risk systems didn't make this apparent to them. I think that's just partly the interviewer and not understanding how derivatives exchange works to realize how absurd it is to say that that's what happened. I think of Indira Oskirtswork and thought, you understood how clearing and settlement at derivatives exchanges works normally and like why this makes no sense to be like,

someone sent you money in your bank account. I'm going to credit you margin in my exchange. Like makes no sense at all. There's no settlement guarantee. I think like that that was probably the weakest question in some ways because it, he didn't like kind of press on like how, how could that even make sense that you did that at all? Yeah.

It's somewhat hard, you know, right now. for us to piece together everything that's happening because we're getting it, you know, in bits and pieces, looking externally. But I do feel like, you know, once like some of the actual internal communications come out, ideally in like discovery, like there should be a paper trail, like to show that this happened, right? I doubt they, you know, had everything done over phone calls or everything done in person. Surely at some point someone put in writing what would actually happen and then we'll have

sort of a smoking gun. Right now it feels like, you know, we're trying to sort of figure out how this system work from the outside just by seeing sort of what it's emitting. The fact that they had all these auto-deleting messages in all of their internal conversations, I think is going to make it very difficult for any kind of criminal investigation to get a smoking gun. Now, I mean, given, and also given the quality of the accounting, the accounting was so bad, that clearly it's going to be very difficult to actually do any forensics here to understand who was involved when these decisions were made.

It seems that, you know, Sam is asserting very clearly that, look, I didn't know. and if I had known I would have stopped it. And yeah, he's saying that, look, this is my responsibility because I'm the CEO and I messed up. But he's also asserting that he was not knowledgeable. And ultimately, that is almost always the key element of a criminal prosecution is the state of mind of the person who's committing the crime. If they didn't know that it was happening, then generally speaking, you're going to get civil liability, not criminal liability. Now, there are certain things I think that are pretty slam dunk, like that he made misrepresentations to customers when he said that FTCS is fine, that they broke the terms of service in a knowing way,

and or that they made misrepresentations to investors. It seems now that many investors are raising their hands and saying, look, we were made assertions about the relationship between Alameda and FTX that were not true and that were demonstrably not true. Even with respect to just the detail that we learned, which is that Alameda had a special status in their liquidation engine. There was another interview that Sam did recently with Tiffany Fong, which is actually the very first interview, I guess he's done,

in that interview other than Kelsey Piper's, you know, leaked DMs. And in that interview, he was asked directly about the backdoor that the Wall Street Journal reported on. And Sam's claim was that, no, there's no backdoor. Like, I can't even code. How would I make a back door? That seemed very confusing to me. Like, wasn't he a quanted Jane Street?

How would be able to code? You know, I remember once, I remember when I interviewed there, when I left college, one of the jokes that one of my interviewers made was, our founders only know two programming languages, VBA or Excel and O'Kammel and nothing in between. And so, like, I could kind of, it, there's actually some reasons philosophically for them, that I could, most of the quants actually don't do a lot more like picking up the phone and pricing things rather than purely, like, tech-based. Yeah, I guess even if you're writing a lot of O Camel,

that doesn't mean you know how to write an accounting system. It doesn't object Gary from having done this, right? Like, let's be fine, Sam, can't code. Clearly the CTO could. Right. If he just told one of his close allies within the company to do this in secret, like it doesn't change the fact that he ordered there to be a backdoor button. Look, the polychial has one person who could have done it.

That's all that matters. Sure. At least one. I mean, so, okay, so I think we're, it feels like the whole world is kind of on the same page at this point. Other than Bill Ackman, I don't know if you guys saw Bill Ackman live tweeted during the talk that he said, call me crazy, but I think SBF is telling the truth. It seems like everybody except Bill basically thinks that, okay, we kind of roughly know what happened. And I think we see the defense that Sam is trying to make.

honestly what impressed me the most in this conversation with Sam is the fact that, like, there is no upside for him in doing these interviews. And he's very clearly now at the point where he's like back to his old self. And actually was one of the things that the New York Times had this like live, live blogging of, you know, different snippets from the conversation. And one of the things they said, which I found very interesting, it was like New York Times wrote this themselves, which is that they said like something like, you know, Sam is kind of back to his charismatic self, and he's using his intelligence to try to, you know, kind of win over

the audience and his vulnerability. And it's very clear, like, Sam knows that this, he's very good at this, right? It's kind of what made FTCS so successful. And he's basically ignoring the obvious advice of any of his lawyers. And he seemed like potentially seemingly, you know, the stuff that he said in this interview will almost certainly come out in a criminal trial if and when he has one. And so it does seem like I don't think there's an n-dimensional chess here. Like this is just clearly bad for him to be doing these kinds of interviews and directly answering questions that potentially implicate him on criminal liability. Like I think he just genuinely believes what he's saying, at least with respect to, you know, this is not the time for me to go in a hole and just disappear. You know who agrees with you?

Bill Ackman. Well, Bill Ackman might believe the details of the story. I don't know that I believe the details of the story. but in terms of Sam's just sense that like, look, I just, I can't just go and do what's in my blind self-interest because I feel like a strong sense of responsibility. Like, it's hard to get like what is his motivation if, like, if you think it's all Machiavellian with respect to getting on the New York Times deal book interview, which is basically, I mean, what happened there was like a cross-examination.

This was the most unfriendly interview I have seen. I don't know. What do you guys think about that? I mean, I think leaking some of the specifics, like, you know, sort of around the November 6th date seems like a big fuck up. But it does seem like, hey, you know, so far, you know, from all the leaks that have come out, as soon Sam said nothing, it seems extremely criminal, right? It seems like, hey, there was, there was, you know, malice behind these actions. And so all of his, you know, interviews so far have been trying to spin this like plausible deniability story, right? Oh, I fucked up. There's a mistake.

Accounting issue. And I think that I hope is that you repeat that enough times and people begin to believe that that was actually Sam's state of mind, especially, again, if we don't actually have those that written evidence. So if that is sort of the message that's being spammed out, you have this voice of the group that's actually pushing that versus, you know, everything else that's being leaked out about the backdoor and, you know, all these other sort of intentional acts that he took. I think it's also possible he just can't help it. That, you know, like the, he's so used to the spotlight and he's so used to being a part of the conversation that maybe he just can't

resist continuing to interject himself into that conversation. He got hooked on crypto Twitter. I know how that feels. It was more funny. His way of like, when asked about the stimulants, he was just like, well, I didn't drink alcohol until after I was 21. It's like, what kind of reflection is that? And then he like started being like, oh, I needed help focusing.

But clearly I wasn't focusing enough. My head exploded when I got up. be fair, I thought that was a legitimate answer, which is like, look, I mean, the guy is like, he was twitch, his leg was twitching. He plays World of Warcraft on calls. Clearly has a problem with focusing, right? So I can understand that like, this guy for everything we know about and probably does need some medication for his lack of focus. So I thought that was a, I honestly thought that was a reasonable answer, but it's still funny. I thought that was, that was like, to me, that was the best part, right? He didn't even like, he could have just been like, no.

Next question, right? Or yeah. And instead, we like learned about. And instead, we like learned about the fact that he was like boring in high school. Weirdly, I got recommended a, like, a talk that he gave in like 2018 on, on YouTube, just like through the algorithm or whatever. And it was, it's, it sort of reminds me of watching like old Trump videos of like, like, this person was actually a very charismatic, you know, well-spoken person. And then, and so it's so hard to sort of square that with sort of this like weird twitchy goblin that we now see on, on screen.

But like, you know, At the time, yeah, it was, it's a very sort of different version of Sam. So, like, I think, you know, maybe it was, you know, partly because of this. But, yeah, it's strange to see him again on screen. Yeah, I thought, it seemed like maybe he'd set that up himself. I mean, I doubt he was getting a lot of help on it. He did a camera crew. That thing looked like a guilty definition.

It looked so bad. Just like that angle. He was looking down and constantly, you know, doing this thing as he was answering questions. And I was like, it does not, this does not seem like a good way. to make yourself seem innocent. So, yeah, especially in the court of public opinion. All these clips are going to be replayed over and over and over again. It does look like you're in a confession booth the way that was filmed.

That is 100%. That is 100% the vibe of watching that interview. Well, okay, I think we should kind of zoom out a bit and talk about some of the broader backdrop of what's been happening over the last week. So when we left things off in the last episode, we were talking about. about Genesis and some of the fears around the Genesis insolvency. And I believe last week, we said that we thought Genesis was probably going to be okay. And now a lot more details have come to light and we've learned a valuable lesson. I think I alluded to very briefly last time.

I was like, oh, you know, after FTX, I don't feel like I should be that confident about anything. Now we learned why is that it looks like there was a lot of funny business in the accounting at Genesis. Very, very high level. The understanding that we now have from different things that have been reported to the press, is that DCG, the parent company of Genesis, made a loan to Genesis, sorry, not a loan. What they did was they bought out Genesis's bad debt in three arrows.

So Genesis had, I believe, $2.1 billion of exposure to three arrows. And DCG, the parent company of Genesis, bought that debt at par, meaning that we are going to make you whole for that $2.1 billion. And so we're going to pay $2.1 billion for this debt, but we're not going to pay it in cash, but we're going to pay it in a promissory note that pays out over 10 years.

So basically they're going to get some annuity effectively for the next 10 years. But supposedly there's some term in that promissory note such that if Genesis goes into liquidation, then DCG would be forced to pay the full value of the promissory note.

So the note would come due immediately if there's a liquidation of Genesis, which I assume at the time they weren't thinking was a serious possibility. And that was the reason why you can say we're solvent because yeah okay we don't have the cash but we have the ability to call all the cash that would otherwise be necessary if and when we you know kind of you know we have to go to the mat on this because of a liquidation so that's now happening is you're now in a

situation where DCG has to do something with this promissory note now that Genesis is stuck we realize hey when we were told the Genesis was solvent we were including this promissory note DCG does not have 2.1 billion dollars in cash to pay the value of the three promissory note. And so either one, Genesis files and then pulls DCG into bankruptcy because DCG will be called on for this $2.1 billion liability, which obviously they're not going to pay $2.1 billion in cash. They don't have that. So either one, both entities go into some super complicated bankruptcy procedure or the other possibility is that Genesis goes under and then the note is itself auctioned off at some value less than par, but somehow it's prevented from DCG going under

because maybe the creditors would find that to actually be a worse outcome. I don't exactly understand. I think this is a lot of what people are trying to figure out right now. But TLDR, it looks very, very likely that Genesis, either one, is going to have to file for bankruptcy or two, they're going to have to go through a restructuring such that the creditors of Genesis are going to have to collectively agree that, like, hey, let's agree to get some, you know, let's basically reduce our claims at Genesis in order to avoid a bankruptcy, just because the bankruptcy would be so deleterious to the big creditors to, to James.

Genesis. So this is a live situation. We don't really know exactly what's happening, but it seems like markets are now pricing in that there's going to be some relatively calm resolution that doesn't involve a bankruptcy, but involves the creditors kind of renegotiating what's happening at Genesis. Robert, I know you're closer to this than we are. Any further insider? I don't know if you're not able to share. I mean, you know, I'm only closer because I think out of the four of us, I'm the only one who's a creditor to Genesis. So it's the embarrassing being closer to the situation. I have more empathy with everyone who got wrecked with FTX.

I'm wrecked with Genesis. You know, I don't have any more information than that. What's been discussed there. Ryan Selkis tweeted out a weird financial model earlier today saying like, DCG is healthy, everybody. Like, take a look at this financial model. You know, full story coming tomorrow. That could be, you know, more optimistic than, you know,

reality, but if you're looking for something interesting, go find that tweet. I think the thing that I'm looking for is, you know, whether or not they're pushed into bankruptcy involuntarily. I think at this point, you know, any number of, you know, creditors could push them into bankruptcy. You know, if their obligations are in default, they halted withdrawals. There's a lot of customers that, you know, had positions that matured and that could ask for their funds back. or whether, you know, they're able to work things out without filing a bankruptcy petition. So, you know, I think the odds are high, let's say 80%. But the thing I want to ask about press you on, Haseeb, is you said the markets are indicating, you know, a gentle resolution.

I'm actually curious, what markets are you referring to? I believe, okay, I could be mistaken, but I believe after the news was reported that the Genesis creditors were seeking a, non-bankruptcy resolution that markets rebound if i'm not mistaken did that not happen i mean markets went up today this was a few days ago that that's the rate that's the rate stuff yeah that that's like jerome how that's that's today that this happened a few days ago did not okay whatever i take everything that i just say with granisal i have no idea what markets think although i i i would be curious if anyone is actually trading like eccg credit default swaps because like those could actually exist.

That was what I was kind of curious if you knew that if that existed. Yeah. If anyone listening is trading DCG or Genesis credit the false swaps or derivative somehow, please tweet at us after the show. Let us know. That's super interesting. I mean, certainly it's interesting for people who are creditors in case they want to hedge.

Yeah. You know, I've heard of people buying and trading bankruptcy claims. You know, obviously there's been a huge amount of activity at FTX and people trading bankruptcy claims. Back in the day, there was a huge amount of Mount Gox bankruptcy claims being traded. I know it was like Fortress, the hedge fund made a huge business buying Gox bankruptcy claims. I don't know if you can even trade the claims prior to bankruptcy. Maybe you can.

Maybe there is already activity in Genesis claims that would be really interesting. You can make up like a warrant, right? That's like only exercisable when the event happens. And like if not, then it goes to just worthless. Yeah, there's a lot of folks who are buying out FTCX claims as well. I think Genesis is a bit early for there to be a market for claims, but I guess possible. The FTC claims are crazy, though.

Like, I feel like, yeah, they're like five to ten cents or something. I think they've gone up. I think they've gone up. Yeah, they were initially closer to five cents. In the audio interview that Sam did, he said he expects creditors to get about 25% back, which is also where I imagine, you know, a lot of people who are buying these claims to expect these to land. No, no, no, no.

Because when you're buying the claims, you're, first of all, you're taking all the risk away, and also you get your money immediately, right? So these claims are going for, like, maybe of what I saw was like 12 cents roughly. That was a few days ago. Right. I'm saying Sam is expecting when this is finally finished that you will get back 25 cents of the dollar, which is what I said. Which may take many, many years and obviously there's a lot more risk.

Correct. To double your money in like five years betting on an FTX recovery seems insane. Like if that's the risk you want, everything in place a better risk. Shout out to Laura. Actually, I forget exactly who it was, but she had someone on recently who bought a lot of Mount Gok's claims, I believe on Unchained, who like walked, walks you through the entire process of like what it's like to buy a claim. What's like the process?

So like highly recommend listening to that. I forget the guy's name. It's like Thomas something. But it was like very interesting instructive. Right. So, okay. So besides Genesis, which is still an ongoing story, the other big thing was that BlockFi finally filed for bankruptcy.

Now, this one, I think everybody sort of saw coming. I think there was no question when FTX went under that BlockFi was, you know, a goner. But it turned out, we sort of learned a few things from the BlockFi bankruptcy. So for one, we learned that among the biggest creditors, so FTX is one of their creditors. We also saw that the SEC apparently had a, $30 million credit to their name as well. Also, apparently the reason why BlockFi was taking so long to file, because everyone kind of knew that, okay, blockfi is toast.

I mean, given their exposure to FTX, this is not going to end well. But apparently they were selling all of their crypto, which was about $250 million worth of crypto that converted into dollars before filing. They also are, apparently there's like now claims going around about Sam's Robin Hood steak, which was pledged to BlockFi. I didn't totally fully understand how this. relationship works, but there's all these kind of, you know, kind of Spider-Man finger-pointing meme going on right now between BlockFi, Alameda, FTX. So it's all, it's all a bit of a shit

show. But BlockFi itself has a bunch of funds stuck on FTX. FTCS is accreditor of BlockFi thing. So I'm all around. I'm pretty confused about what exactly is going on here. And I don't think we have a clear picture yet of the assets versus liabilities of BlockFi either. So we don't have a good sense of what recovery would look like. I think the thing was that like some of the borrowed from BlockFi were used to buy the Robin Hood shares from emergent technologies, which is like this other entity. And then later, I believe that company's shares were used as like either part of the bankruptcy purchase and pledged effectively.

And so there's this very weird thing where like BlockFi's money went to buy Robin Hood shares, which came back to BlockFi as collateral. But unlike Defi, you know, you can't like loop. You don't know what loops, how many times it's been looped. It does seem like there's a lot of loops in this whole thing between Alameda and FTCS and BlockFi and all this. One of the things that came out also in the interview just now is that Andrew Ross-Orycan asked SBF like, okay, so why did you spend all this money trying to buy BlockFi and Voyager?

And we previously speculated on the show that the answer was that he was trying to essentially save his own bank because if, you know, FTA, sorry, if Alameda allowed BlockFi and Voyager to go under, well, they were two of his largest lenders and that would have, like, exploded the whole thing much earlier. That was, that was a theory anyway. It turns out, a few things have come to light. One, supposedly that it was reported or really speculated that the purchase price for BlockFi was in FTT. It turns out not to be the case. BlockFi claimed that actually the purchase was in cash. And so they had, I guess, minimal FTT exposure or no FTT exposure. But then second, so in the interview, what Sam said is that like, look, by the time that we actually made these purchases, they had already margin called us.

We had very little loans coming from BlockFi or Voyager. And so the reason why we were buying them was purely to kind of stem contagion in crypto, which was at the time his stated goal. I don't know what you guys think of this story. And again, it's probably hard to put together the truth just because it was so long ago. and it doesn't seem like they're keeping records on any of the stuff. But what's your perception of that, the recasting of the purchases he made over the summer? Well, the one that I read,

and I don't know how much truth there is to this, and this is for like the sluice out there, was that, you know, with things like BlockFi in particular, you know, by acquiring BlockFi, they moved a number of BlockFi customer assets to FTX after the fact. And it's possible that it was cash, positive for the

FTX broader organization. And it also moved assets from the U.S. entity into the offshore entity. So, you know, the example of how this worked is the U.S. entity provided a loan to BlockFi with the U.S. entity's dollars. The U.S. entity is the one that's highly regulated and everything is kosher, blah, blah, blah, right?

Then BlockFi moved its customer money to FTX International. and more money than FTX U.S. put in. And the net impact of this was money positive for the commingled Alameda FTX international organization to help buy them time. That's my understanding, but I could be mistaken. There's one other thing that was funny in this interview,

which I thought was hilarious, was like he was like, yeah, in all the jurisdictions where we were forced to follow the rules like the U.S. and Japan, And like, people are solving. And he basically said that, which was just basically saying, like, if we were forced to follow the rules, we follow the rules, which implies, you know, if not forced to follow the rules, then we don't have to do anything. And I guess this idea of, like, moving all these U.S. assets offshore in that vein of, like, trying to avoid any needing to kind of deal with the rules. So not to shift gears too much, but one thing that I also feel like is somewhat damning or confusing about the FTA. is like opting, like being a lender on FTX is opt-in.

Like, you can have your funds on the platform, but not have them being lent out. And so the story of like, you know, hey, we had a bunch of bad collateral. We took out, you know, some loans. The clatter goes on. It makes sense if, like, those losses were then socialized amongst the people who were part of, you know, the lending margin program on FTCS. But like, if you weren't, then your funds should have been separate. So clearly there's like some sort of commingling.

otherwise, like, this should not have been, you know, possible. Yeah. I think it's pretty clear that we don't really understand even the nature of Sam's story about how exactly, like, how exactly he's even claiming mechanically this whole thing would have worked. And, you know, I think it's very unlikely we're going to get any clear answers unless either one, somebody who's much deeper in the details actually interviews him. Or two, we basically see this thing.

dragged in front of a trial of some kind. I mean, arguably, bankruptcy trial will have to unearth half of these questions more deeply, right? That's why I actually I think it was announced. Why would it? Well, I mean, it still has to do recovery for it. It put all the entities in bankruptcy, including Alameda and like every random entity, except for a few, like a very small number, like Ledger X and stuff that didn't enter.

Right. But it's not clear to me that like this is the kind of thing that would happen in a bankruptcy court. I think it's much more likely that they're just going to find the assets. figure out the creditors and then figure out the bet that you know how to distribute what's left right a bankruptcy court is not there to like you know figure out who did something wrong right it's not forensics necessarily it's tracking down all the money getting it back getting it to the people who deserve yeah so i don't know that we're going to learn anything much from the bankruptcy court other than just like

what like what the money was spent on i think that will learn and there will probably be a lot of stuff of people going after sam personally going after some of these entities that were separated going after some of the real estate. So there'll be a lot of that I think will come out through the bankruptcy proceedings. But I doubt we're going to get, again, any answers about what really happened. It's just such a complicated question. And a bankruptcy judge isn't really even equipped to investigate that question. Yeah, although in this case, I feel like one of the reasons I'm a little more convinced some of these details come out is because where and how the assets are stored and custody right now is still extremely unclear based on some of the statements made by the

current like John Ray of like we don't actually know how to like get keys for certain things or like some some of the custody state is weird and so I think that will force you to do some forensics in the process if that makes sense yeah that that is that is possible that is possible another thing so after a lot of the FTX fall out there was also this finance recovery fund And there's a lot of weirdness around this recovery fund. So I don't know how many of you guys been paying attention to this. So CZ announced that, hey, Binance is going to step up and we're going to dedicate a bunch of money to backstop the industry.

It looks like there were some contributors. Jump contributed, Polygon, contributed, GSR contributed. But it looks like there's only 50 million that was total contributed by outsiders, as far as we can tell. And then, Binance claimed that they were dedicating $1 billion in, BUSD to this sort of bailout fund. Tom, you were going to some detail on the story. What are we seeing with this Binance Recovery Fund thing? Well, I think people just are a bit confused because, you know, it's basically the address

that Binance listed as like the recovery fund is like a single address that was moved from a Binance Hot Wallet. His address was moved from like Binance 7. So it's like, like, why is the entire, you know, recovery fund being stored in like a single wallet and why was it moved from like a finance wallet. It's just very confusing right now. And especially given that, CZ also sounds like he's trying to go out and raise more money for this. So yeah, there isn't really, very clear story around this. I think is it, who will be or okay is also trying to start their own recovery fund. So I guess now everyone has a recovery fund as well. Yeah. So we have these recovery funds now, but like what are they

bailing out? Things are exploding and they are just kind of sitting and watching. I don't understand what this is for. They're shibble at their society to take you seriously. Sam was right all along, you guys. It turns out he was telling the truth when nobody else would admit it. Well, I think Binances, and this is my hunch, Binances is going to bail out all the programs from like the Binance launch pad and their incubator and all these like, you know, low to mid-tier projects

that have run out of money or lost all their funds on FTX or whatever. anything that they've backed in the past, they can probably like bail out those teams with a couple million dollars to get them to keep building in the Binance system. I saw a bunch of posts like this that were like developer on Solana move to BSC or moved to BNB chain.

Sorry, BNB chain. And I like, I think there's like there's something about like Binance is using this as an opportunity to like grow the B&B chain ecosystem. I mean, not that this. It's an ecosystem fund. It's really an ecosystem fund. Yeah.

I mean, it was interesting. I mean, not that this is, the metric you should always look at because it's quite gamable. But it was interesting that Pancake swap flipped Uniswap TVL this end, not coincidental with the arrival of this fund.

So there's something weird about the, there's something going on in B&B chain land. I think this is meaningless. But TVL is not relevant. I know, I know, I know, I know. No, no, no. And this is comparing V2s. I'm just, I, I mean, I'm, I'm, well, just V2. Who cares about V2

because it's all moving to V3, where it's more. But all the really low liquidity random coins are in V2. Does PankakeSwap have a V3 equivalent? No, not yet. But the V3 license expires when like April. So I feel like we're going to, everyone's just going to deploy it. Like right now there's a thing where everyone who wants to deploy V3 has to go to uniswap governance, get governance to approve like deploying on your chain.

And obviously, you know, I'd say uniswap governance is very anti-BNB chain. So I don't see that ever happening. But that's why Uniswap governance. about governance will extend the license for another year. Okay, they choose to do that? Yes. The actual terms of the business source license are governance can grant

additions and licensees to it or it can change the date of XB. Okay, so just so I understand, because I'm not super close to this. So if somebody goes and deploys UniV3 on B&B chain, what happens? Like, who sues who? How does this work? I mean, I don't know if we're actually going to find this out, but I assume Uniswap the protocol votes to hire a law firm to sue some projects. I have no idea. I have no idea.

I think it's actually supposed to be litigated in Claros court. If I'm familiar with the Uniswap license, you guys can correct me on that. Wait, do you remember, what was that trial that happened of like that guy, Yaz? Like, there was this, like, fake trial trying to, like, censor him. It was like kind of a kangaroo court in Claros. I forget if it was Claros somewhere. No, Aragon. Aragon is where we saw like some crazy...

Yeah, yeah, Aragon was nuts. Aragon was like a kangaroo court. It was like somehow we found the way to build all the technology to reinvent Soviet Russia in the 1920. Wonderful. Wonderful. Okay, well, speaking of chaos and defy, so we did have also last week a very interesting attack that took place against Avey. And this kind of caused reverberations across all the lending protocols in defy. So Turun and Robert, I assume you guys are closest to this, but I'll give it the very, very high level.

So we talked before about the mango markets attacker, Avi Eisenberg. Abraham Eisenberg is his full name. So he was the one who manipulated mango markets and to have a very profitable trading strategy, quote unquote. He announced earlier this idea that he could basically do an attack against Ave by borrowing assets that were essentially, that were less liquid than Avey was kind of giving them credit for, and essentially manipulating markets after doing large loans. So I think essentially the way the attack weren't, actually, Turin, it's probably better if you walk through it. Describe for us what exactly happened with the attack, what happened with Curve and all the kind of play-by-play, why Avey ended up incurring

bad debt at the end of this episode? Well, I mean, the bad debt that the protocol had is the thing that you should be worried about at the end, not the ones he made. But he was sort of doing a little bit of the opposite of what happened in Mango, where instead of trying to push the price up of some piece of collateral to borrow everything, he actually put some USC's collateral, then shorted curve, try to push the price down, and then basically by pushing it down, he basically could borrow all of the supply of curve, and then if it mean reverted, then you can do a mango style thing. Now, he didn't really analyze where curve liquidity was.

There was kind of not, there are not many places to get curve. For instance, convex finance is a place where people end up locking up curve for multiple years. And there's quite a bit of liquidity in there. And so it was easy for people to take the other side of his trade and basically grief him for shorting this. in the way he did. The protocol realized bad debt because basically there wasn't enough curve to do the liquidations.

And so it was just expensive in some way, a sense. But the total amount of bad debt was like under $2 million. So it was relatively small. Yeah. So I think at the end of the day, like the sheer destruction and overall liquidity since the FTX incident has made these mango sale things more likely, which is why I think people,

are being much more cautious now. But the main point is in the V3s of both compound NAVE, there are borrowing supply caps, which you can use to kind of limit the max size of these types of... So if I can summarize in a sentence, there were some stale parameters for borrowing and lending long-tailed, or mostly borrowing long-tail assets. And these parameters assumed market conditions

that looked more like, you know, January than that looked like today. and all the stuff ironically that we've been talking about with credit destruction. For Mango, it's actually quite different. The mango is different, yes. In Mango, it was sort of the long-tail parameters. Here it was sort of, there's this weird thing where, like, the collateral use was actually, like, good collateral, and the liquidation threshold was somewhat high. And it's actually very hard to convince people to lower liquidation thresholds in these communities

on the major assets, meaning ETH, WBT, USDC, tether. So, so Ivey put up the USC and then shorted curve. So it's a little bit more nuanced, uh, if you actually go in details. But yes, it's one of these things where like liquid deconitions deteriorated going through

governance took, you know, by the time got the proposal would make it through, it took, it was late. And so, you know, yeah, we submitted a proposal and froze stuff. But I guess the point is I think yeah, it was sort of unprecedented, but

there was it wasn't like a huge loss also maker had some bad debt as well last week from jemini urn so if you remember maker put part of the safety module into jemini urn to earn to earn some yield and it incurred some losses from that and has written them on and paid back how much do you put into jemini earn and isn't jemini earn genesis yeah so they wrote it off completely and just paying it and die back to the, it was about $2 million. It was almost the same. It was about, oh, wow. Yeah.

They were just starting this program. It was like dripping into Genesis. That's great that they were. Yeah, that's great that they, I mean, it's not luck, right? Like they did the slow roll out. That's great. Good for them.

Well, it's not just a slow. I mean, there is some luck in that the timing of when this happened. Right. Could have been totally. Of course, of course. So like, I, I, I still still. But my point is both protocols had these, of events. They were relatively small.

Communities responded pretty quickly. So I would just like say that, you know, and you can see how the debt is and people are all fighting about it versus like, I don't know, how did Genesis get like billions of dollars of debt and like not liquidate anyone?

It's kind of my... Good question. Because the humans didn't want to liquidate their best customers. I mean, I think for... I mean, yes, that is definitely true. I think for Genesis and for Gemini Earn specifically, my understanding is like that's actually a large bulk of sort of the debt. It's like almost a billion dollars.

It's coming from Gemini Earn. And I think there's inherently this weird issue, which I don't know why was this, these programs were set up this way where you just have inherent like duration mismatches, right, where you sell these sort of yield services to retail customers with the idea that you can always deposit, you can almost withdraw like a bank. But then on the backside, you're making, you know, fixed term loans to market makers. And so even if the loans are, are fine, like, you're setting yourself up for a bank run. Because inherently, like, there's

no way to sort of, you know, and these aren't very liquid assets. It's not, it's not you can go to the Fed and, like, borrow against them or sell them easily. It's like, these are sort of weird bespoke lending agreements. And so it's almost as if, like, you know, you raise a few million dollars and you, like, you know, told all the Jim and I earn depositors to go, like, go on vacation for six months, you know, when these loans are supposed to expire and to get their loans back, that is almost like an easier solution rather than like trying to get everyone immediate liquidity for a product that just isn't designed to have immediate liquidity. Yeah, I mean, that's true.

But I mean, what you're describing is banking. And like that's what Genesis is. Genesis is a bank. Right. I guess my question is like, why did Gemini not sort of bake that into the SLAs? The idea that like in, you know, certain market conditions is not guaranteed you're going to be able to withdraw one to one or some limitations on that or something I guess better. I mean, you're right that I guess this is just banking.

But it's weird to me that they're not more presented more clearly up front. Yeah, I mean, Gemini is one of the biggest creditors. And I think that's who Genesis is negotiating with right now. Because if Gemini pushes them into bankruptcy, then it's all going to be a gigantic mess. And I think it's pretty clear that's not good for Gemini or for Gemini customers. But yeah, I think the answer, unfortunately, is that that's what banking is. And banking is basically the business of duration mismatch and trying to manage that duration mismatch so that it doesn't explode in your face.

and that's why eventually we invented central banks is because managing those duration mismatches in times of real trial generally requires a bigger, stronger bank to come and save you. And if you recall, that's what we thought CZ was doing when we thought it was still a duration mismatch thing. Now we know it's not a duration mismatch thing, but that was presumably what the story was

about how finance was going to save FTCS. That was basically a pseudo-central bank stepping in to help a weaker bank. Yeah, I mean, in all of these cases, you know, you have entities. In the case of FTX, it was essentially running out and making venture investments, you know, and buying up all these things with FTX customer money. In Genesis's case, it's having like, you know, longer term assets, longer term loans against really short-term Gemini earn customer money that wants to withdraw every time bad

things happen. In all these cases, it's investing for the long term with liabilities that can be demanded on a moment's notice. Yeah, it's true. And I think, look, I agree with you, Robert, that, you know, Defi shows us a much better way to resolve these problems. It's much better to have everything out in the open, have smart people thinking about this and not just a management team that's pushed into a corner and has to make up stuff to defend itself. We've seen the same behavior basically from FTX as from Genesis, which is that they just say whatever they need to keep deposits on platform. And if the deposits leave, then all of a sudden, everybody just goes quiet. So as a result of this attack, which, to be clear, we're actually not sure whether

Avi made money from this attack because presumably he was shorting it on a centralized exchange and so we don't know how the positions ended out. We do know the open interest and it was not very high on any of the... Yeah, I was going to say, there was only like 70 mil and like, open interest on Curve Purp. So, like, I think he just, like, evaporated 40 mil, unless he had maybe some, you know, long exposure. But I don't know if there's, like, a gigabrain move for the, for the curve short. I see.

So we think most likely he lost money. Yeah. Do you think someone like that wouldn't be bragging about it if they even broke even? That's fair. I think, I think specifically he was, like, building up this short because he was trying to reach. So Michael, the Curve founder has, like, I think a few hundred mil in curve as collateral. And so trying to hit his liquidation threshold, which was like 25 cents,

and they hope that that would cause that sort of massive dump. And unfortunately, got discovered and squeezed. Right. Yeah. And then Kerv released their white paper for their stable coin in the middle of this thing, which was another interesting. Emergency pocket white paper. Yeah, exactly.

A great move to have in your utility belt when you need it. I will say my one criticism. I mean, there's maybe some benefits and merits to put some up, which is very under-specified. but I will say my one criticism is I don't think any defy mechanism needs to use the word adiabatic because it has nothing to do at crypto and that paper has it six times. Sing it, Tarun. Yeah.

So, okay, so the consequence of this is that obviously there was some bad debt on Ave. Avey's going to pay that back. So I think Ava's going to be fine. It's a relatively small amount of debt for Ava as well as for Maker. And then Avee paused lending markets for 17 of their tokens. A compound then went and did the same thing, which is, I think, different set of like 10 total? BRO caps.

No, no, borrow caps. The problem is AVEV2 doesn't have caps. You can't, there's no like debt ceiling with it. Ove V3 does. Got it. Okay. So until Avey V3 arrives for now, Ava

has paused the lending markets for these tokens. Compound instituted these borrow caps and I think Avey will do the same once they migrate to V3. I think there's a good place to end on because I know Turin you've got to stop here. But it really speaks to the

difference again, which we've talked about again and again over the last three weeks between defy and CFI. In any time where you have a lot of market instability and you have, you know, credit kind of collapsing and a lot of fear in the markets, bad things happen. But you can just see how stark the differences between what happened in defy and what happened in centralized players, right? Genesis likely going to bankruptcy. BlockFi imploded. Every single lender in the space has basically died. And then, of course, FTX has gone under an absolute disgrace. And Ave and Compound were facing the same pressure. What did they do except everybody shows up, puts together their collective brainpower,

sees exactly what's happening with the exposures and pulls things down. And on the whole, despite the fact, there was a coordinated attack. That's not even what was happening at FTCX. And FDX they did it to themselves. But in this case, this was an attacker trying to bring down the platform. And the thing performed beautifully. It took on only a million and half of bad debt, which was like less than 1% of the debt in the protocol. I think like less than half a percent of the debt in the protocol.

To put it in the context, the bad debt to revenue ratio is still less than when I was like looking at the Fed numbers relative to that. I think it ends up being like three or four percent and the average bad debt to let over ratio for secured lending below credit grade in the U.S. is like 15 percent. So it's still quite a bit lower in terms of things like that. Yeah.

Before we end, I actually want to ask a question. to each of you, which is, what is your prediction for the Telegram decks? Telegram announced today that they were going to, like, they're going to have NFTs and the decks. And this is real 2018, right again. Yeah, this is all the way back to the origin. Isn't this what they were told they weren't allowed to do? Yeah, that's why I'm like, I'm like, whoa. Well, they weren't allowed to do the ICAO, right?

It was a securities issuance violation. And so they said, okay, we're not doing telegram open network. And then some random people supposedly grabbed the source code. decided they were going to spin it up. And then Telegram, or at least Durov looked at this. It was like, oh, this is so cool. It's actually working. We are going to start supporting this blockchain within Telegram,

despite the fact that they had to give the money back to investors that they originally raised, which was a massive amount of money. So, okay, my prediction for the, honestly, I haven't been following it super closely. I saw the announcement today. It seems like ton token has a huge market cap. I think it's valued like $2 billion circulating and $5 billion. FTV, but very low liquidity. There's very little of this thing trading on any venue. And I think it's like the biggest exchange it's on is OKX. It trades like a couple million a day on OKX.

So I don't know. I have a hard time squaring this, but I'm not personally a believer in like the messenger. You're building a Dex in the messenger, which to me basically is all those telegram OTC groups that people are trying to sell you coins in, telegram was trying to compete with them. Bad timing, but yeah, fair enough. a friend of mine sent me a ton token recently because I didn't really sort of believe this like wallet story. But then I learned that because I have a U.S. phone number, I'm actually not allowed to have a telegram wallet. So, you know, if you hated, you know, region-gated exchanges and regentated dexes and regent-gated relays, you're going to love the region-gated blockchain.

Or region-gated messenger, I guess. Yeah. Region-locked messenger, yeah. Robert, what's your prediction? I can't speculate on this. All right. Terrid, what do you think? Like I said, I think their goal is to, like, kill the OTC chats that are in telegram. Fair enough.

Well, we'll have to see what happens. I think this is probably, so just as a quick caveat before we wrap up the show, normally the show is done every two weeks. We've been doing this weekly, basically, since FTX exploded, just because the velocity of news has been so crazy. It seems like now things are finally stabilizing. obviously there's still after effects and contagion that we've yet to see from FTCX, but I think the velocity of news is slow down.

So we're probably going to be going back to doing the show every two weeks. But thank you, everybody, for tuning in. It's been amazing to see how excited you guys are to hear from us and get our views on what's going on in the space. Hoping that things calm down a bit. Thank you, everybody. And you'll hear from us again soon.