Unchained - The Chopping Block: Why Lenders Didn't Liquidate Alameda When It Was Underwater - Ep. 421

Episode Date: November 16, 2022

Welcome to The Chopping Block! Crypto insiders Haseeb Qureshi, Tom Schmidt, and Tarun Chitra were joined by Laura Shin, CEO of the show, to chop it up about the collapse of FTX.  Show topics: Haseeb's explanation of the blowup of FTX whether FTX was a Ponzi scheme Sam Bankman-Fried's strategy to become a billionaire the weird sale of Serum, a project backed by SBF the lack of proper accounting practices in FTX and Alameda whether FTX did not have a proper and large enough security team  the likelihood that FTX’s volume numbers are fake  why Haseeb thinks this is one of the biggest catastrophes in venture history the role of media in building SBF's character and the revindication of journalism whether venture capital firms run propaganda for their portfolio companies whether VC culture enabled this collapse to happen the story of how Sam convinced Tom Brady to invest in FTX the debate about effective altruism and whether SBF's EA caused his mistakes whether FTX's failure will set the crypto industry back Hosts Haseeb Qureshi, managing partner at Dragonfly Capital Tom Schmidt, general partner at Dragonfly Capital Tarun Chitra, managing partner at Robot Ventures Guests Laura Shin, author, host of Unchained Episode Links Previous coverage of Unchained: The Chopping Block: FTX: The Biggest Collapse in the History of Crypto? The Chopping Block: SBF on a Crazy Week of Bitfinex, Wormhole and ENS Drama Erik Voorhees and Cobie on Why FTX Loaned Out Customers’ Assets Sam Bankman-Fried on How to Prevent the Next Terra and 3AC FTX Collapse: FTX filed for Chapter 11 bankruptcy protection NYT’s “How Sam Bankman-Fried’s Crypto Empire Collapsed” Sam Bankman-Fried built a "backdoor" to his FTX exchange to change financial records and move funds without alerting others. $600 million hack Unchained coverage: Could FTX’s Bankruptcy Trigger a Domino Effect? FTX May File for Bankruptcy After Binance Walks Off the Deal FTX Needs $8B to Meet Investor Withdrawals: Report Tron Founder Justin Sun Says He Is Working With FTX on a Solution US DOJ Joins SEC and CFTC Probe of FTX FTX-Issued Wrapped Solana Tokens Could Add to DeFi Contagion: wBTC Creator Sequoia Capital Writes Off $214M FTX Investment to Zero Binance Set to Buy FTX Amid Liquidity Crisis SBF’s Net Worth Plummets 94% In One Day: Report Binance Might Have Triggered a Liquidity Crisis as FTX’s Main Wallet Lost 290K ETH in Two Days Alameda’s Balance Sheet Sparks Controversy Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two Kwan. 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 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 got Tom, the Defy Maven and Master of Memes. Next up, we've got Tarun, Gigabrain and Grand Puba at Gauntlet. Joining us today, we have Laura, the CEO of the show.

And finally, myself, I'm the head hype man at Dragonfly. So we 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 somehow have not followed this story, we left off last week, I think Tuesday we recorded this emergency episode. On last Tuesday, we were sort of on this cliffhanger when CZ had an announcement. that he was going to acquire FTX, although he just submitted an LOI, meaning that it was a non-binding letter of intent to decide whether or not they,

after they do due diligence, whether they were going to acquire FDX. And on the last show, we were basically anticipating there was a high likelihood that CZ was going to walk away from the deal. So that was Tuesday. Wednesday, CZ announces that CZ is walking away. Binance cannot take over the liabilities. The balance sheet is too much of a mess. Sam then announces that he is going to still seek emergency financing.

to softly blame CZ, claiming that CZ was never going to buy anything. He announced that FTX U.S. is fine. The problem is on FTX International, but FTX U.S. is totally okay, and he says that the balance sheets are totally separated. On the same day, the SEC announces that for the first time they are going to be investigating FDX into misappropriation of customer funds. There was already an outstanding investigation into some of their earned products, but now it's starting to look like it's potentially a criminal probe. So that's Wednesday. Everybody is, kind of standing on pins and needles. The assumption at that point is that probably FTX is not going to be able to raise funding, but nobody knows that the complete details quite yet.

Thursday last week, withdrawals on FTCS are completely frozen, but it's announced that Bahamian citizens are allowed to withdraw from FTX. FDX claims that this was under the order of the Bahamian SEC. The Bahamian SEC, by the way, later, as of this weekend, denied that this was ever an instruction given to FTCX, but the only withdrawals that are now coming out of FTC's global are to Bahamian citizens. There ends up being an absolute circus where multiple things happen in the same day. One, Justin's son announces a credit facility that he's going to allow Tron and Tron ecosystem tokens to be withdrawable from FTCs, and then only Bahamian citizens and Tron tokens can be withdrawn and NFTs. And so what happens is that on Twitter, there are all

sorts of crazy black market transactions where people are faking Bahamian KYC or engaging into OTC deals with Bahamian users to basically use Bahamian KYC to withdraw out of FTX, which is obviously very illegal and all of this was happening out in the open on Twitter. Sam was reportedly still in the Bahamas when all this happened, but basically the whole team quit around this time. And so FDX just kind of becomes an absolute circus. Friday, finally, FTCX files for bankruptcy. And when FTX files for bankruptcy, it's not just FTX International, which is where the damage was originally done, but every single subsidiary of FTX, including FTX US, including Blockfolio and Ledger X, all file for bankruptcy simultaneously. Sam resigns as CEO, and he brings

in John Ray, who was the liquidator for Enron, to be the liquidator for the FTX bankruptcy. People thought at this point, okay, it's over. Finally, FTX has come to rest. the whole thing is going to be unwound, and we're going to learn what really happened. And then Friday night, a massacre, it turns out that FTX starts moving funds again. And people are like, wow, what is the liquidator doing at FTX at 10 p.m on a Friday night? Well, what ended up happening was that the cold wallets for FTX were hacked. And hundreds of millions of dollars of FTX assets, particularly in lots and lots of all coins, started getting sold through defy.

We should be careful about calling it a hack or not. It could have just been an insider and we don't actually fully know. We just know the funds moved. The funds moved somehow. We know that they were unauthorized. Yes. There's some type of unauthorized access. We don't know yet who this was or how they were connected to FTX.

And at the same time, soon after this started taking place, people noticed that the hacker or the attacker, quote unquote, started moving funds to two different addresses. And over time, it becomes clear that actually these two different addresses are somebody who has two people who have control over the same address fighting for control and siphoning assets away from control of the attacker. And so about 200, there was about 600 million worth of assets that were under contest and about 300 million of it was successfully siphoned away by the attacker. The other 300 million was either protected by the FDX team or frozen, a huge number of assets including the, I think the Pax G and the Tether, was frozen.

in anticipation of the attacker selling them for unfreecible assets. So absolute mayhem taking place on Friday night. Finally, the situation gets under control by Friday. By Saturday, the balance sheet of FTX is finally leaked. And we now know what the assets and liabilities of FTX look like. Basically, FTX had $1 billion in liquid assets to $9 billion in liabilities, meaning that if looking at the current state of the balance sheet, almost certainly there are going to be pennies on the dollar for anybody

who is looking at the FTX liquidation. So it's clear now that the scale of fraud at FTX was massive. It's clear that there was huge amounts of capital that was pulled out of FTX that should have been there for customer deposits. It's clear that it infected every element of the FTX empire. It even affected FTX US, which was originally perceived, and we thought on the show that it was going to be totally cordoned off. And that was the indication that Sam was giving as of Wednesday.

But the whole thing has now completely collapsed, and we're now learning more and more salacious details and drama of what was going on underneath the hood. So I'm going to stop there. We're going to go into a lot of detail about a lot of these things. But I just wanted to first start with giving everybody up to speed on what has happened between then and now. It took all of those facts before Matt Levine agreed it was fraud.

Because I feel like if you actually have been reading like the financial coverage and normal news, It's all been like, oh, like they had some problems. They had asset liability mismatch. Maybe they could have borrowed funds, whatever. And then today he was finally like, and he was like, yeah, I like Sam. He probably wasn't lying. And that was like Friday.

And then, you know, today he's finally like, oh, actually this balance sheet is dog shit. And it's mainly them saying tokens that they control. They marked up to their like peak value and took no liquidity constraints or anything like that into account. So I feel like at this point, it's pretty clear that not only was that true, but like the BlockFi and Voyager acquisitions were really just another way to keep kind of the Ponzi scheme going. Because like it really, the interesting thing from a like theoretical lens about this is you're taking three separate businesses or entities that have three functions that on their own could be sustainable. Like an exchange that earns trading fees, a market making operation that happens to have a very good fee tier. That's sort of the altruistic way of describing Almeda.

And the last thing is the ability to borrow against your own equity. But those three things, their utilities, when added together under one entity, looks like a Ponzi scheme. But if they were separate and adversarial, they're fine and sustainable. And that's like the interesting, to me, that's the funniest thing about this. It's like somehow we just turned into a very standard Ponzi scheme. It's just that you took the new depositors money and you used it. to underwrite yourself FTT loans, which you then had to use to prop up FTT,

which is basically buying up the, you know, paying the old depositors, and you need a new new flow of depositors, keep that going. Here's the thing, Taran, is I completely agree with you, and it does put all of the acquisitions that Sam was doing over the summer

into a very different light. And so just to sketch out, because I think a lot of the audience might not totally understand. So you might remember in the summer after the three arrows blow up, a bunch of lenders went underwater and needed to be bailed out.

and Sam kind of stepped in and announced that he was going to backstop a lot of the lenders. And at the time, a lot of people believed that Sam was just consolidating. He was being this JPMorgan capitalist. This is the theory. Okay, nobody really knows the exact details. But the theory is that Alameda was already underwater and was having their loans recalled by a lot of the other lenders. And the only way that they could, one, prevent themselves from de-leveraging, which would

have caused Alamators to completely blow out, or two, basically also obfuscate the extent of of their loan agreements with other parties was that basically they had to bail out the banks that were loaning them money. And if they didn't do that, that Alameda was just going to, FTT was just going to be vomited up everywhere, and Alameda itself would no longer be viable.

And so the idea is that actually they had to bail out, BlockFi and Voyager, because they were two of their own largest lenders. That's the idea. Now again, we don't know if that's exactly true. You know, when this happened on, when we were doing the show last week, my assumption was that this started recently.

My assumption was that the capital that was lent out from FTX customer deposits to Alameda was probably a momentary lapse that happened in the summer after 3AC blew up. It was basically Sam was on the brink. He had to go to Alamator's rescue. And if he didn't, that everything was going to fall apart. Elamator was going to go to bankruptcy.

All of the Sam Empire tokens were going to unwind in a really dramatic way. And he thought, look, if I can just If I can just tide over some liquidity now, I can save Alameda, pay back the loans, blah, blah, all this can be made whole as long as crypto doesn't turn against me, right? The market doesn't turn against me. That was my mental model of probably what happened. As more of this information is coming out about just how consistently this pattern of

misappropriation and fraud seems to have been at FTX, it now seems increasingly likely that actually this was happening from the beginning. Now, again, we don't know. This is speculation. there's so much fog of war right now about what the actual picture was at FTX. But the picture that we're getting so far seems to be that this was the intention from the beginning was to use FTX as a piggy bank for Alameda. And that's really scary that this.

So one of the big stories that came out from the Wall Street Journal this weekend was that apparently there was essentially this back door that was some kind of program that Sam had access to that allowed him to basically keep two sets of books for FTX, such that the auditors would get one set of books about where the assets were, but he could, you know, with a click of a button, move funds from FTCS customer deposits into Alameda in a way that was opaque to their auditors, and actually opaque to people internally at FTCS,

which is crazy and demonstrates a clarity around fraud that I was not expecting to get at the heart of the story. It's funny that right now is, blowing up with people being like Sam lied to Laura straight to jail in response for this type of stuff. Yeah, don't do that. That's hilarious. It's criminal. Oh, Tomi, go ahead.

It's funny because I remember during DFI summer, there was something I think Sam said to, someone else at FTX said to us on a call, basically saying, hey, all these early DFI teams, they fucked up. They did these, doing these public token sales. Because then you're explicitly selling this security. Why do you want to sell, you know, basically pseudo equity in your project early on? Actually, actually, actually, this story, no, so I, so I relayed the story to you. It was not actually Sam who told me this. It was actually Kyle from Three Arrows who told me this. So let me tell you this story. This was 2021. I know, I know. This is 2021 last year. I'd come to Singapore and it was actually, it was like my second time meeting the Three

Eros guys. And so I got lunch with Kyle, Kyle Davies in Singapore. And this was back when Sam was top of the world, Kyle was top of the world. These guys were just printing money. They were kind of the titans of the industry. And he was telling me, you know, so they had a close relationship with Sam. And Kyle was telling me, he's like, you know, I think I finally understood what Sam is doing. And I was like, what do you mean?

What do you mean you understand what Sam was doing? They were telling me, you know, what Sam realized is that the people from the last generation of crypto, the way that they monetized their position in the market was that they would get really well known. They would build all this press, get all this awareness. And then they would launch a token and they would sell that token to retail. And that was the game in 2017. And Sam realized that that game is stupid. Because if you play that game, one, you make money once. You just sell the token once and that's it.

And then you get all these regulatory troubles, right? The SEC comes after you. The people lose money. They get really mad. And you just have to deal with this thing forever. And what Sam realized is that what you should do instead is you should launch tokens and you should be a net buyer of those tokens. Because if you are a net buyer of those tokens, then now that token is going to become

really valuable because you're booing it in addition to everybody else. You're not perceived as a seller. You have no problems with regulators because regulars aren't mad that you're dumping this stuff on retail. And if you're Sam, you can use this as collateral. And you can borrow the real money of crypto, which is dollars. And especially if you have a market making firm that can monetize using those dollars, then that's where you make the real money. You don't make the real money doing an ICO, right? That's where you can make, okay, you can make a few hundred million doing an ICO. But if you want to make billions, you need dollars to go make those billions. And that was,

you know, according to Kyle, that was a strategy that Sam was employing from the very beginning. He did it with serum. He did it with FTT. He did it with all these Sam tokens. Sushi potentially as well. There's now speculation that Sam was actually Chef Nomi all along, who was the original creator of Sushi Swap. I remember after I had this conversation with Kyle,

I was like, huh, that's really interesting. Yeah, I guess that's true. But I associated that with Alameda. I thought, ah, that's what Alameda is doing. It's not what FTCS is doing. FTC is in exchange, right? Like, that's maybe Sam's personal strategy. But I didn't connect.

the dots that this is that FTX itself would be beholden to this strategy. And that's what I think what was crazy to everybody. But in 2021, like, so we never invest into FTCS. We never invested into serum. We never invested into any of the SAM ecosystem tokens. We found them to just to be so ridiculous. So the way that the serum fundraise happened. So I don't know if it was, Turin, you were there, you were there early in the serum sale. So when the serum sale happened, everyone heard that Sam was launching a Dex. And the way they conducted the sale was not like any VC round I've ever seen in my life. So literally they had an Excel spreadsheet and they had lots of, I think, a million dollars

of pop. And you had to put your name down in the Excel sheet. And it was basically like the price for every lot would get higher programmatically. And so if you put your name in the Excel sheet as, okay, I'm in for, you know, 400 million FDV. and then the next person has to do 420 FTV and the next person has to do 440 FTV and so the game was that you need to get in as fast as possible, put your name in,

as fast as possible, and get to a decision quickly. No time for due diligence, no time to even think it through. And Sam loved this mechanism. He did this kind of thing multiple times because he just believed that VCs are idiots. And, I mean, to accept maybe he was right, he just had a... The interesting thing, though, is for all the San points,

they actually were his noose at the end, if you actually start to think about it. Because the thing that happened to them is that they all had these like seven year emission schedules. Like they wouldn't fully have fully diluted until seven years. And they started with an extremely small amount of liquid tokens in the beginning. And then they had this like hyperinflationary schedule. So the people who bought into the serum sale within one year,

they could recoup their principal because the staking rewards were worth more than the principal. And so and the staking rewards were worth more than the principal. And so and the staking rewards were. liquid. Like that was the, that was the sort of like magic to getting all these people to buy it early was that, hey, you get your money back in a year. Now, the problem with that is seven-year emission schedule means that whatever valuation you're quoting, right, this like fully diluted valuation, which is like total number of future tokens versus the actual number that exists. It's kind of a sham. You can't really say that the token is worth that market cap.

at all, right? Because if someone had a loan that they have to liquidate, let's say, if you barred against it, they'd never be able to liquidate it. And somehow, all the centralized lenders are absolute dog shit at risk management. I mean, if you're centralized, it's much easier than what I have to do and what we do for defy. Like, you don't have to make proposals, get people to vote. You literally can just be like, LTV is this. I'm going to liquidate you. Fuck you. Right. You're a bad lender. And all of these people are dog shit. In fact, my DMs, after I wrote some tweets about this, have been filled with people who worked at Celsius and Voyager being like, yeah, we weren't allowed to liquidate our top customers because they had three customers who

were borrowing everything, which was like Alameda, three arrows, a few other firms. And they were like, yeah, the thing is we could never liquidate our customers because then we'd have no revenue. And we all needed to show these like huge amounts of income streams during the bull run. And so these centralized lenders had absolutely no incentive to, A, adjust the loan to value. B, figure out when to liquidate a loan that's underwater, which is exactly what we, the point. In fact, they went bankrupt because they didn't liquidate Almeida or three arrows, right? That's why Voyager needed to get bailed out. And the more crazy thing about this is that Sam convinced them to let him borrow as if the tokens were worth their fully diluted valuation.

And one thing I think that's very clear from the missteps of Caroline Ellison's, who is following the CEO, is that after the CoinDesk leaked the balance sheet, one of the most important things that you should read from that sort of text that was there was that their liabilities were all in locked FTT. So they had some liquid assets of liquid FTT, but they were net short at that price, $4 billion of that's locked FTT. that means someone probably Voyager or or blockfi or a combination of all of them lent money probably at a loan to value of like 50%, which is ridiculous because like this thing is never you could never liquidate this loan. Like that's how stupid these centralized lenders deserve to die because they were all fucking retarded.

I don't know how to describe how stupid some of the stories people who work there have DM me. Like it is it is actually they deserve to die. they are like the subprime lenders of 2008. And of course, the difference of the subprime lenders usually lent to people who are not explicitly adversarial with them. They were just kind of bad borrowers. Here, they're explicitly adversarial borrowers who gave you collateral that they control the valuation of and they control the size of.

And they sort of like, hey, look, here's this piece of paper that's worth $5 billion. So lend us a billion of your customer funds. And so that's how the block size and, Voyagers and stuff got to say, oh, look, we're making $100 million a year, recharging 10% on this billion dollar loan. And so, of course, FTCN can make the interest payments for that. So the thing that is kind of crazy is, and this is really where I think the noose of the seven-year thing hung Alameda and FTX is eventually, you know, while the price is going up, you don't have to actually borrow, you're borrowing against something such that your net liabilities are actually

decreasing because, like, your assets are going up. As things go down, as the price crashes, you have to start borrowing more because you have to go prop up the price of this thing. Because if it reaches certain levels, everything is liquidated all at once. You have this huge cascade. And so what are they doing? Their market-making strategy for FTT and serum was effectively the following. And you can see some evidence of this in the orderbook. Because there's really no bid.

Like no one is buying this organically. Everyone is just collecting their staking rewards and selling. and they basically had to borrow dollars against FTT and serum buy any FTT and serum that's being sold, which means they're now net long, they're even longer this asset. And over time, they like had the spiral.

And Caroline basically pulled the noose for them when she wrote that tweet about the $22 thing. Because she basically admitted that if they couldn't get it around, like if FTT fell before that amount, they were like completely doomed. And everyone knew, how much elite, at the very least, how much they're doomed for from that leaked coin desk sheet. And, you know, I'm not even sure CZ was necessarily, he thought,

oh, I'll just kill Alameda. He didn't, he probably didn't necessarily realize it was as entangled when he said he's going to sell stuff, TG. Yeah. I think their strategy was very, you know, actually, I was thinking a lot of what Nick Carter said in the last show about how, you know, every cycle there is, you know, the highest flying stars are almost always overfitted to the market cycle. And very clearly, Alameda, you know, they really came of age, although they started, you know, people talk about the, the early, you know, the Bitcoin, Japan, are blah, blah, that Elamata did, which like was kind of a, as we're learning now, was more of a shit show than they initially let on. The reality is that like where Alameda really came of age was in 2020 and

2021 in the midst of this kind of defy Solana mania, when the, the, primary thing that they needed was dollars. And if you have dollars, you can yield farm, you can leverage up, you can bet on your own tokens, you can know when things are going to get listed. There was just a story in the Wall Street Journal about an hour ago, which was talking about how, if you look at on-chain data, you can see very clearly that Alameda was buying up tokens before they were listed on FTX. I don't know that's brilliant sleuthing. I mean, everyone pretty much knew this, that Alameda was basically the venture arm of FTCS before FTCS ventures was spun up. This strategy worked like a

charm in 2020, in 2021. They made a crap load of money doing it, and they thought it would still work. And that's what FTT and FTX was all designed around, was they were adapted to this bull market environment. And when that bull market went away and the reliability of knowing which tokens were going to go up when, and that having capital meant that you could yield farm and dump tokens and be totally cavalier about this stuff, you know, it was so weird as an observer, because we weren't very close to FTCX or to Alameda. We never invested into anything they did. It was so weird to see how like the right arm of FTX was supposed to be this like great stalwart exchange and it was supposed to be this wonderful thing. And the left arm of Alameda was this like mercenary cutthroat, you know, basically like just farm and dump fund.

And people were, people loved Alameda. They wanted to take their money so badly. Like we would sometimes lose deals to Elamata. And we're like, why are you taking Alameda's money? Like they're, they're barely even a market maker firm. They're just like a, they're like a, you know, farm and dump firm. why would you want their capital? But they were winning deals because of their relationship with FTX.

And this idea that if you want to get listed in FTX and you want the SAM pump, you want to be integrated into the Sam Empire, you have to take their money. And that became the engine, the growth engine that I think got them greedy. I mean, it is actually, though, like, the real question to me is like how much, how large the loans were at Voyager, BlockFi, etc. because that's the key way to measure like how much leverage they really took that they didn't count or like clearly they obviously didn't hedge anything. I mean, the linear wealth thing already tells you that. The other thing that I think was a very childish mistake on their part is that capital management at like large scales in active capital management is very different than small scales. Like when they were like a 50 to 100 million, firm versus a billion plus in AUM, you have to actually start being a lot more diligent about

your net, how much leverage you really are holding versus like how much you think you're holding. And I think, I mean, as you can tell from their very shoddy bookkeeping, it's clear they were not doing a very good job of even keeping track of that. And you can get away with that. I think it's smaller sizes in the sense that like it'll be more apparent to you. But when you have a large book of a very large set of assets and like you're not really thinking about how correlated some of the assets are, they may, might, you might go from being like 1.5x levered to 10x levered because five of your assets are all moving in the same direction, which is against the side you're short. It's very much much easier at a larger scale to like completely misestimate your leverage ratio. Although nothing is more dog shit than saying, oh, actually we thought we had zero X leverage and we actually had 1.7 X. 1.7 divide by zero is still infinite, my friend.

Yeah, I mean, one thing that was very clear. I mean, I'm sure that you spoke to ex-Alameda people over the last year. We interviewed a few people who came out of Alameda, and everybody who was there said that it was just, it was a circus. Like, there was so few controls. It was not well run. It was not well managed. I heard everything was like literally managed and managed.

There was like no like accounting systems for keeping track of all the wall of It was like you just wrote down to Google Sheet. Yeah. And at that time, you know, for young people, I mean, I don't blame them. Like they thought Alameda was so prestigious. It was so well known. Everybody thought Sam was like the, you know, he was the visionary of crypto. And so a lot of young traders wanted to work at Alameda.

And they churned really fast because Alameda didn't pay well. It was a horrible place to work. And so we'd constantly talk to a stream of people who left Alameda and wanted to get a better job. But, I mean, the one thing that you're. pointing to Turun, which is also part of the center of the story, is the corporate governance at FTX. And a lot of that has come out in the in the in the in the last week. So, you know, we, we never were that close to FTX. We're invested in some of their competitor exchanges like by bit. And so we never really kick the tires that closely on their fundraisers. It turns out,

uh, that FTX did not have a CFO. They didn't even have a board. Uh, they took in 1.7 billion dollars of venture funding. And they had almost no controls. and we're learning more and more that in the Bahamas, there was a house that basically Sam and his core lieutenants, as well as some of their friends, lived in. It was basically kind of like a polyamorous commune type place where just everybody who was part of the Sam ecosystem lived together. Apparently they, I mean, it's absolute craziness. So apparently there were a lot of relationships amongst each other that kind of were pretty fluid of people sleeping together who are part of the core team at FTX. They were quite secretive about it. They were also, part of the orientations when people would join FTX is that Sam would walk through different stimulants.

And he would encourage people to try out some of these different stimulants in their onboarding. I don't know if this is verified, but I saw this in one of the accounts of people at it. I mean, I will say the best primary source, because all of this is Harrisay, except for Caroline Ellison's blog, Tumblr. Yes, yes. Which is truly, truly one of it. I feel like reading that was like really understanding, like, the mindset of an incompetent supervillain. Like, they had all the traits of, like, sociopathy,

but, like, none of the, like, self-awareness to understand that, you have to, like, execute that in a certain way. But her Tumblr has a lot of, a lot of details about the Pollock Field. So I would highly recommend you go, I spent two hours doom scrolling. sort of the other picture that's emerging here is like there's this inner circle, there's this top circle at FTX, which is like these four officers, and there's everybody else. And so, you know, I knew people who rotated through FTX and I don't get the sense they

were in on this massive scheme. There was massive deception and massive just fraud, but it was not as if like the entire system was built this way. It was like a small group of people who were going out and were actually in. Yeah, although, yeah, the more of the, that I talked to people. I mean, Haseem kind of mentioned it. I mean, it appears that the operation was very shambolic and just, you know, I kind of made this point last week when we had the discussion with Nick, but, you know, the more I think about it, I think, yeah, I think like pretty much

last week, I think some of my early messages out to people were to try to understand what the security setup was at the exchange, because the idea that somebody could just move the funds without, like, it's setting off alarm bells in the exchange. I was just like, I know how a crypto exchange works in terms of security and like it should be some kind of multi-sig at minimum. There's, you know, obviously

there can be like rituals even around when you move funds from the cold storage, like how you do that. And so I was kind of like, like how did that even work like on a functional level? Like how did they actually move this money without, you know, somebody at least like quitting and just,

being like, I'm not, you know, going to participate in this. I'm leaving this company. Like, there was something very odd about that. But the more that I've learned, like, yeah, there were just certain kind of key elements that were missing. And then on top of that, what you mentioned about kind of applying this time pressure to a lot of the investors, I think that was definitely a big part of it. And frankly, you know, there were certain, I think, let's just say, I think they were kind of strategic about which investors they went after in order to kind of give themselves a certain sheen of like having passed a certain bar, maybe in due diligence, because they maybe pressured those groups a certain way and the actual like reputations

that those groups had. They didn't actually get to get to do what their normal process. Let's put it that way. The whole thing, you know, I just like last week when I was saying that, feel that SPF was sort of like, you know, like he was like Hermione and it was like, you suddenly found out he was Voldemort. Now I'm just like, wow, like I realize this was just baked in from the beginning. The more that I'm like learning about kind of how things operated over a time period and how they were set up. Because like I said, any normal crypto exchange is very well aware that like, you know, some 90% or whatever of all crypto exchanges have been hacked. And so typically most of them, they're just like the main thing we have to do is keep the coin secure.

And so, you know, you will see like kind of a priority around that. And so the fact that that was able to happen without tripping some alarm bells amongst certain employees, that's why I was just like, how did this even happen? And yeah, you know, my conclusion at least so far is like, yeah, they did not even have sort of kind of the basic setup in place. Well, FTX also very famously had very few employees. were very proud of that fact. I remember, I think there was one point in like, either 2020 or 2021, they had like 40 employees or something like that, which is obviously insane, like 10 times

fewer than, you know, Coinbase would have for sort of a comparable traction and size. And so I also can't help but speculate and maybe look back in retrospect and think like maybe that is also part of the design is having few people, it means having fewer eyeballs and making it easier to sort of bypass compliance. Last week, we were chatting with a bunch of the heads of exchanges in Asia. And when all this was going down, a lot of them were basically telling us that, like, they thought FTX was going to go down. And at that time, we didn't believe it. I mean, we just didn't, I mean, it's like, I don't know, it seemed like rumors were circulating. And it's like, okay, why are you guys buying into these rumors? It doesn't seem plausible.

Wait, wait, but just to understand, they thought that just because of events last week, or did they actually think that even before this whole thing about the balance sheet? When the math withdrawals were taking place, they thought that FTCS was going to go under. And we just didn't believe it. Like, to be honest. up until basically Monday, I didn't believe that anything was really wrong. I knew that Alameda was going to be in trouble, obviously. If all that FTT was going to get sold, Alameda was going to get screwed. But I did not believe for a second that there were secret loans taking place between FTX and Alameda of customer funds. That just seemed so implausible with everything that we'd seen about all these institutional investors, about Sam and the controls that must have been in place, given that they were talking about going public. If you're talking about going public, there's no way that that could be the case. little did we know exactly how bad the governance was at FTX, but we had no insight into that. And so they were telling us not only, one,

that they thought FTCS was going to blow, but two, what they were telling us is that, like, they thought that a lot of the FTCS numbers were faked. Now, I don't know if that's true or not. It's quite possible that it's quite possible that it's just that, like, wait, volume numbers or what kind of numbers? Because what they were telling us was that, like, look, we don't see FTCX in these markets, right?

When we're going out and battling for market share in these different markets globally. We never see FTCX, but they're always top three, top four for volume. Now, it's possible that that's because FTX had so much U.S. institutional volume that's where all the volume was coming from was basically these big institutional players.

And most of these other big exchanges are retail-oriented, right? So like, Binance, okay, buy bit. These guys, they focus on retail. They don't focus on institutions. FTX seem to be focusing on institutions that might be part of the story. But I would not be surprised for a second

of what we also find as we go through the rubble is that FTX was juicing their volume numbers. Now, again, it's going to be a while right now. It's all in the fog of war. We don't know what we don't know. And all these people are kind of coming out of the woodwork now saying, ah, I knew it all along. Sam was an evil guy.

He once stiffed me for blah, blah, blah. Anyway, a big part of what is striking about all of this is now, okay, we take a step back, right? Clearly, this is one of the biggest catastrophes, not just in crypto that we knew already on Tuesday. But now we know it's actually one of the biggest catastrophes inventor history, right? This is basically an Enron scale fraud

that was enabled by some of the biggest VC firms and just the culture of venture capital in this industry and in general. And it's got me reflecting a lot on why did this happen? Whose fault is it?

Beyond, obviously, Sam. Obviously, Sam is one of his principal fault it is. But in terms of who enabled him, what are the lessons that we take away as an industry. When I say as an industry, I don't just mean crypto, but I also mean the tech industry.

Because I think what happened here, I mean, obviously, it was a bunch of, yeah, crypto investors invested into FTX, but a bunch of just tech investors invested into FTCS as well. And pension funds too. Pension funds as well.

Yes. Yeah. That's right. Ontario did. Tomasek did, which is the sovereign wealth fund of Singapore. You've also got BlackRock. You've also got, you know,

you've got Sequoia, you've got light speed, you've got paradigm, you've got multi-coin, you've got all these places, who invested into the same company. None of them required a board seat. None of them required a CFO.

Clearly, none of them required audited financials from a reputable firm. Like there's some Mickey Mouse firm that did their audits. I heard that somebody had asked them, oh, what was it? It was Chumoth said on All In Podcast that he asked them for audited financials

from a big four accounting firm and asked them to, like, create a board with external board members. And Sam told them to fuck off. and then I heard that Sam apparently was on a call with Steve Schwartzman, the CEO of Blackstone. And Steve and Steve Schwartzman, like, you know, he didn't really, he was skeptical of the FTX story. And Sam told him on a call that he was an old man and he didn't get it because he's too old and hung up on him. And so this, this arrogance and this kind of, it sort of became this legend that fed on itself.

And that not only, I think it's not only VCs, but it's also the media. because the media really created Sam, right? Like, I remember Sam back when he was first getting to the space in 2019, 2020. He wasn't a big deal back then, right? He was starting to fund. Yeah, I feel like the first time I'd ever even realized he was in crypto, was I met him at your office. Yeah, that was before I joined Dragonfly, right?

That was when, that was before I came on board. It's a weird story because, so Alex and Bo, who were originally at Dragonfly before I joined, they sat down with Sam back when he was running Alameda. He was trying to raise debt because he didn't want to actually have external investors in the fund. He just wanted to sell debt at like a 15% note. It's been now circulated widely on Twitter. And so they were interested.

So he was then pitching the idea of FTX. And they were trying to invest into Alameda itself that he wouldn't take external money. And so he was like, hey, I want to start a fund or say, I want to start an exchange with Alameda. And so they tried to invest. They thought Sam seemed like an impressive guy. they brought him to Asia. They introduced him to a bunch of heads of exchanges. And they end up having a falling out between Bo, my now partner and Sam,

because Sam just kept flipping the script on them. He kept saying like, oh, okay, we're going to do this thing at this price. And the next day he would change it and he would kind of just go back and forth. And he was just so aggressive and so difficult to work with that they just decided, like, look, we just can't work with this guy. And so they ended up walking away from the deal. And Sam ended up, his seed round was done by other people, I guess, you know, race capital and some other folks who end up doing the FTX seed round.

And after that, actually for a while, Sam really didn't like Dragonfly. He refused to do deals with us for a while until eventually enough water had passed under the bridge. But at that time, Sam was just seen as like kind of a quirky market maker guy who got into the space. He wasn't, you know, nobody was scared of Sam. Nobody was amazed by Sam. He was just like a guy who traded and was going to start an exchange. But this legend started to congeal around him. And I really think the media,

very Elizabeth Holmes in retrospect, about how all the stuff that a normal person would look at and be like, wow, that's really weird. He's like kind of a weird guy. He's got his personality traits that make him difficult to work with. He's like on, he's playing legal legends while he's on a call with you.

He seems like kind of a dick. He's sort of disrespectful. All these things kind of became lionized and sort of became part of his character. And the media, you know, just ate it up and fed into it. And he became this celebrity. because of the fact like, you know,

okay, he has the, you know, he has the crazy hair. He doesn't, you know, he doesn't care when he's on a call with you. He wears the crappy t-shirts. He has the Toyota Corolla. He sleeps on a beanbag, right? This mythology developed around him.

And it enabled this whole thing. I think a lot of people pattern matched him to like Mark Zuckerberg or to Elon Musk and said, oh, he's got this unique, idiosyncratic brilliance or maybe even in crypto, like Vitalik or Hayden. They're also founders who kind of have that, idiosyncratic character, he fed into that romanticism about the countercultural founder,

the idiosyncratic founder, the slightly spectrumy founder. I mean, that Sequoia note that they deleted was truly one of the funny. You can find it. Do you want to reiterate that note? What's in there? Some of the stuff in that note is ridiculous. The first thing is they were lionizing him for playing League of Legends while pitching them. The second thing is they were just like, it sounded like their form of diligence was more like,

what can we do to get in rather than like, hey, asking any questions. And I think they definitely enjoyed the like brand name stuff, like really harping on that for both Sam and Gary, who's the CTO who, no one knows where he is, I guess. but the thing is it doesn't read like an investment thesis letter as much as it reads like a profile paid for you know like a I don't know I yeah Laura how would you describe it so this is why I just wanted to like separate out some of the things that Haseeb was talking about that profile I believe was written for some kind of Sequoia publication and a number of the VC firms have been launching their own publications because they, and even I think maybe some of the

tech companies are doing this, because they believe the media is evil and out to get them and blah, blah, blah, blah, you know, this whole thing like A16Z and even like you'll hear some of the Coinbase people kind of have this attitude. And so they have been launching their own publications, which, you know, I mean, I, of course, I interacted these people and they're lovely and whatever. I've never had anybody be like outrightly hostile toward me. But, you know, I'm just going to call it like it is. Like they're essentially propaganda outlets for, you know, their portfolio companies and whatever. And so that's-

It's called marketing. Propaganda is a very, that's a very much term. No, listen, listen, because that profile, it came out of, you know, one of these outlets, right? And yeah, okay, maybe the traditional media wrote, you know, glowing, profiles of Sam. However, like, when, so for a traditional journalist when you are doing that kind of thing, like, you know, as far as we understand, like, we're not VCs, but, you know, you will see like certain investors. And to you, that means like, oh, they passed whatever due diligence. So I understand, like, yes, they definitely should have dug deeper and they missed certain things.

However, clearly from how shocked everybody was this past week, I, you know, don't think. that there was anything like, let's put it this way. I definitely feel that whatever it was that Sam and his team did to kind of pull the wool over people's eyes. Like it was effective enough that when you have this sense that, okay, these, you know, like a pension fund and whatever investing, like that just says something to you about kind of the hoops that this has gone through, right? And now we're learning, okay, like maybe some of that didn't happen. But, you know, I do feel that actually in the end, you know, journalism gets vindicated here because none of this would have happened if coin desk. And I'm going to call out Ian Allison specifically, who is the reporter who leaked the Alameda financials, which, you know, that is what triggered this whole thing. And, you know, kudos to them. Like, I have been in multiple chats where people are saying like, Ian deserves a Pulitzer and all this stuff. And, you know, I do like, I'm sure people are well aware that, you know, when I approach my work, like, I'm trying to find out. you know, the facts and to verify things. And, and, you know, it takes work. It's like, it's not easy.

Like, just one other lesson, by the way, that, you know, I've taken, I'm granted, and I'm constantly learning this, but it was especially on display this past week is like, crypto Twitter just moves at a pace that is like so fast. Like, we're a journalist. You know, it's just like, yeah, there are just certain things that, and people are willing to run with like whatever they're hearing. And so sometimes when you want to be a little bit more careful, it's just like, okay, We'll wait a second. You know, I need to do a little bit more to make sure whatever. So anyway, all of this is to say that I definitely actually feel that one of the

takeaways would be that, hey, you guys, journalism is valuable. And we shouldn't shy away from, you know, when people have critical coverage. There's nothing wrong with that. And, you know, there is a danger when you have places like these tech firms or whatever that are like, we only want to put out positive stuff about it. Hold on. Hold on. Hold on.

No, no, no, no. And that's bad. So therefore we're going to control the message and we're going to have our own companies, media outlets and our own publications. Like, I think there's a danger in that. And that was on display with the Sequoia. No, no, no. Okay. So, first of all, nobody reads Sequoia to get their coverage of San Beckman Fried, right? They were reading the cover of Forbes. They were reading the cover of Fortune. That's not true. That's definitely not true. I can definitely tell you that there's a lot of people who are LPs in Sequoia, for instance, will probably read that and say, hey. Oh, sure. And then they'll try to enter the round. The Ontario pension fund entered that way.

They entered because they LP'd in a bunch of funds who had invested in B1, and they entered in C because they, so I would definitely push back on that not being read. It is definitely, it definitely influences people. It just doesn't influence people like you or me, but it certainly influences people. It does. I don't know what to do. I don't know what to do. I see this money treadmill, and I'm sitting on this capital to allocate.

Where do I go? Where do I go? where do I go? Oh, Sequoia said this. I'm going to go, right? There's some truth to that. Okay. Okay. Here's what I'll say. Okay. So first of all, it is not the responsibility of the media. And I don't want to be misconstrued as saying that the media should have figured out that Sam was a fraud, right? Of course not. Nobody knew that Sam was a fraud. Even the people who diligence him did not know that he was a fraud because he was hiding it. That's what makes fraud hard. Even the people who worked like, you know, at a high level in FTCS and Alameda. Exactly. And so that is not the responsibility of the media or even of,

the people who were DDing him if their DD was sufficient. If their DD was not sufficient, then it's on them. We don't know. We don't know what they were shown. If they were shown fraudulent documents or if there, like, if there were forgeries involved, we still don't have that information yet, okay? I'm not saying that the media is responsible for playing somebody up into the narrative that they were clearly feeding them, right?

Sam was leaning into this thing. He was on the cover of billboards. He was getting into TV commercials. Initially, it wasn't that way, right? Initially, it was just FTX. And Sam realized his image was so powerful. and it was working so well that he just leaned into it

and started doing everything media-wise, right? I also don't, I mean, I don't blame Sequoia for marketing their deals. Like, that's their job, they're VC. They're supposed to market their entrepreneurs. The problem is that now that we know that Sam is a fraud, that the media is now totally reversing the story, right?

With Elizabeth Holmes, it was different. Elizabeth Holmes, the VCs were actually against Elizabeth Holmes. The VCs didn't buy in to Theranos. It was all these, like, random investors who didn't really know what the hell they were doing, that were investing in a Theronos and believed the story, right? That is a place where I think the media was more liable because the media built up this narrative

that allowed all these much less sophisticated investors coming into the fray. In Sam's case, it was not the way at all. In Sam's case, it was very specific investors who got bamboo. One thing I just want to, you know, one point I just want to make is that we're saying the media, but it was also the media that exposed Elizabeth Holmes. You know, John Kerry wrote at the Washington Journal.

And even before then, Ken, Ken, in the New Yorkers. So, you know, like there's, I mean, just any reporter will tell you, like, when you approach a story, sometimes it's like, oh, hey, I got to write a thousand words and whatever. And, like, then you're only going to spend whatever, you know, a day or two or something. And then other times it's like, okay, I have 8,000 words. I'm going to spend like, you know, six weeks, two months or whatever. So, like, when we say the media, yeah, it's just, like, I'm not going to blame, like, somebody who literally spent two days writing about Theranos or, you know, Sam or whatever. And again, I'm not, I'm not claiming that, you know,

individual people and be irresponsible for writing things about Elizabeth Holmes. But the reality is that in the valley, people were broadly skeptical of Theranos for a long time as she was, you know, that company was continuing to get funded. That wasn't true for FDS. Right? There weren't people hanging around saying, hey, I think this thing is a fraud. You're absolutely right that, okay, the coin desk leased the balance sheet of Alameda. But again, that had nothing to do with fraud.

It was just that, okay, Alameda is over leveraged, right? That was what that told people. and then CZ announced that he was going to sell a bunch of FTT. And again, even CZ almost certainly did not think that Sam had lent out customer funds to Alameda. Otherwise, he probably would not have done that because he ended knocking down the entire industry and setting us back by so long, by revealing this massive fraud,

right? He probably did not want to do that. And so I think what really happened was that the thing just unraveled. And obviously this leak of Alameda's balance you has something to do with it, but it was just that the lie got too big. that's what causes thing to unravel. It was not any single person or any single insight from anyone that causes thing to unravel. It was just this kind of perfect storm that caused the whole thing to come crumbling down. If Sam had successfully raised $4 billion in that midnight on Monday, then maybe we wouldn't be talking about this.

Maybe we would still be walking around assuming that FTX was still perfectly fine. I think I would disagree with that for a couple of reasons. One is there was sort of like clear sort of accounting fraud like attributes to most of the revealed balance sheet. I think if we really mark to market liquidity adjusted almost all the assets, like they're down much more than what is stated. And the way that like I think it was being represented to people that were trying to fundraise from was that, oh, we own, you know, everything was marked to the FDV value. And I think there's a lot of... For Alameda. But even for FTCX, like, because think about the serum portion of the balance sheet.

I mean, that was, they were marking that to $2.1 billion. There was no way that was worth $2.1 billion. But the CoinDest article was not super deep, right? Because they also mentioned that, hey, we're discounting stuff that is illiquid. You know, they alluded to that fact. They didn't talk about what the liabilities consisted of. The liability is. I'm saying, like, let's look at the balance sheet that is that we've seen now.

Yeah, the balance sheet, I totally agree with you. If you go backwards in hindsight, that $4 billion he would have raised would have just gone to propping up that balance sheet to try to even get it back to the level. To be clear, I'm not saying that it wouldn't eventually have unwound, right? If you are $8 billion in the hole, it's going to fall through at some point, right? It may be later, but there's no way you're going to make back $4 billion of cash to pay back your customers eventually, right? It's just not.

I mean, they made $400 million last year in net profit, which was one of the most legendary years for crypto trading ever. So I completely agree with you. It would have eventually unwound, but we wouldn't have heard about it now. We would still be walking around thinking that FTX was fine. I don't think that would have been totally true because even if the bailout succeeded, there was already this notion that there was some trouble on the balance sheet, that you already had to have this thing happen. And eventually, that would basically force people to want much more tight accounting. And I think at that point, you would have found that it was effectively accounting fraud.

Very similar to Enron. Actually, all the people are comparing this to Lehman, I don't think that's an apt comparison. I think Enron had a lot of weird securities that they also marked in bizarre ways, and that their auditor was kind of stupid to understand. And like, Alameda FTX basically, and Alameda treated all these centralized lenders as the idiot auditor, which arguably was true. But I think there's a sense in which there was like clearly. a lot of accounting fraud and like the thing you're saying that Kyle told you in summer

is is effectively admitting to that right it's effectively admitting to like we're just doing accounting fraud on these on these tokens in a way because like there is not a gap measurement for them and you know governments are going to be extremely slow to seeing this but yeah it's very easy to get to a bad leverage cycle so my point is i even at the four billion if it got bailed out i think there would have been some sort of day of reckoning very soon, not very long. Because like that type of hole is incredibly unsustainable. I mean, you can just see it in the serum and FTT order books. Like it was just there was clearly just someone buying anything and taking every price.

And I wonder if like perhaps Almeda in the run up last year, their market making strategies got less and less sophisticated because they didn't really have. have to be because everything was going up. So even though they're buying, even though they're quoting, they're quoting the sell direction and everything's going up, the sell direction wasn't that much. They're making more in fees and technically. And like FTX was, because it was sort of like,

if you look at them as a single unit was like making more money by taking their loss. That subsidy suddenly becomes extremely bad when you have to cover everyone trying to get out of Luna simultaneously. And you haven't changed your market making strategy. And you're sort of obligated to the parent company. Now, does that make all the losses make sense? I don't know. Like, if you add up the total

UST volume on FTX and assume that, say, you know, 10% to 25% was filled by Alameda on the other side as a loss, you still don't get to the numbers we see, which is why I think they had to have some leverage crisis with the centralized lenders. There's something very, very fishy about the centralized lenders and understanding what collateral they still hold is really going to be crucial to this. Yeah. We're going to learn all that stuff, I think, very slow. over the next year or two as many years i mean if you go by nron's timeline it took forever that's true that's true and you can see from the corporate structure of ft x which was like this gigantic spider web of entities across many different countries that this is going to take a very long time

to unwind trading firms are often structured like that i think the biggest um possible malfeasance on the part of the venture investors was the venture investors didn't ask for the following they or maybe they did and Scott told to fuck off, as you were saying earlier, which is, you normally when you invest in sort of a group of companies like that, you, from a governance standpoint, you ask for a holding company, you know, like Berkshire Hathaway, holding company of many sub-companies like that. You ask for a holding company and you invest in the holding company with some rights associate teacher these entities. And from what I can tell, I don't actually know if any venture investor actually knew the entire

set of entities that existed. Part one. Part two, I think like the idea of investing in any one of them and like making its valuation really large suddenly means the other ones can sort of like borrow against the valuation of that in sort of some weird ways, implicitly or explicitly or explicitly via transfers that are made and loans between entities. And I suspect that actually kept things propped up quite a bit longer than you might realize versus like if it had a holding company and like everything had to follow at once. And that to me was always the weirdest part about that, about that fundraising round.

It was like, people were like, would be like, yeah, we invest in FTX. And then they forced us to invest in FTX US. And I was like, wait, so there's no holding company you invested in? You invested in these things separately? And they're like, yeah, there are probably some other entities, but like they don't matter. And like, people were very blasé about the, the org, this, the spider web chart in a way that like, I was like, okay, I don't know what you invested in because it doesn't sound like you know what you invested in. Yeah. So I guess that's the other question. So first thing

I want to say is that I don't believe in the concept of collective guilt. And so I don't believe there's such a thing as the media is responsible or that the VCs are responsible. But it's pretty clear that some individual VCs in this process enabled this and that other VCs like ourselves, who maybe didn't speak out about things that we didn't agree with may also bear some of the responsibility for what happened. It's kind of what Sam became. in the industry. This is something I've been thinking a lot about over the weekend. We didn't invest in Sam. Obviously, we had Sam on the show. We were friendly-ish with him. We were on, we chat about things occasionally and occasionally we find ourselves in rounds together because he would invest into a lot of stuff.

I never suspected Sam of anything like this. And I found him to be an impressive person. Like, when I chatted with him, he seemed very smart. He seemed very shrewd. He seemed very capable. I didn't agree with the way that he ran FTX. I didn't agree with the relationship between FTCX and Alameda, you know, we work in an industry where there's all sorts of shit that's going on that you're not going to agree with. And if you nope your way out of everything that you find untoward or that you're uncomfortable with, you're just not going to be able to do anything in this industry besides just hold Bitcoin. So I don't know. I'm curious what you guys think about, let's ignore individual VCs because, I mean, we could do that all day and it's kind of a stupid thing to do because they're doing that enough themselves.

What do you think about VCs on the whole? and the extent to which VCs or VC culture enabled this to happen. I think it's just a byproduct of the market to an extent, right? Like this is so, if you think about like FTX's rise, it was 2020 and 2021, when everything tech was just getting money thrown at it at crazy valuations. And that's naturally what's going to happen in that kind of environment when you have, you know, too much capital chasing too few opportunities. And so naturally one way you can discriminate on capital is,

through diligence and through branding. And the capital that doesn't ask questions, as we saw with the small thing, is going to get more access than the not. That's sort of a huge case baked into the price. I think the thing that, I mean, it's maybe obvious to say about FTCX is so sad is not only was this enterprise value destroyed, which, you know, that is the risk that you bear investing in venture, investing in making any sort of investment, but it's the customer deposits and the user deposits that also evaporated, right?

Like, what was it? The electric car company that just got charged with fraud. Nicola? Nicola. Nicola. Nicola, yeah. Nicola, okay, a lot of people lost their money, but they knew kind of explicitly what they were doing, right?

They're speculating on this electric car company stock or, you know, hey, you bought bird scooters and bird scooters is now, what, like $20 million or something like that. Okay, but you kind of know what you're doing. Here, it's basically the commingling of these different types of, you know, investors or customers and the loss there that it thinks is just like, staggering it and sets it aside from, I think, a lot of these other venture failures in the past two years. Yeah. So I think, I guess this gets back to my point in the beginning of the show. There are three entities here, three sort of operations that on their own individually,

assuming that there's like rational actors trading on them or arbitraising things are totally valid businesses. One, you know, one being the exchange making fees, one being a market maker, and one being a lender lending against equity or tokens. The problem is if you combine them in the right way, such that there's no one arbing the spreads between them, you get this like Ponzi scheme. And it's like very, it's not, this is why the idea of like investing in like pieces of this big thing,

actually it can be deleterious because you actually basically fund this like Ponzi like the incentives to make, make this like Ponzi like thing. I mean, it really was a Ponzi scheme at the end of the day. So it's like very hard to say, see any other way of describing the idea of taking new customer funds and lending it to yourself to then prop up this token that is implicitly paying off the new customer fund. And the value transfer to early FTT and serum holders, I think the idea that that was not transparent to the depositors is probably the biggest frustration, especially relative to something

like defy, where like that, you can see when that happens. Like there's no way to hide that. And like all of this proof of reserve stuff is right at the moment, kind of a charade, because it's actually quite hard to guarantee the liability side of this, especially if there's leverage involved, because you actually don't know all the counterparts, unless all the counterparts are defy protocols, which then reduce this to like, okay, the defy protocols are the only ones that guarantee you public revelation of liabilities and assets, right? Like everything else is relying on some notion of tagged addresses. And, you know, there's a little, still a little, trust me, bro, aspect to that.

Even all these things that try to do liability matching, you know, there are all these, like, awesome ZK protocols for doing it, but none of them can deal with, like, a derivatives exchange. They all assume that they're giving you proofs of assets and liabilities on the spot instrument. None of them can handle the derivative instrument. And so I think that that's something that defy is, like, the only thing that's ever existed to guarantee that. Yeah, well, until everything is in DFI, which is not going to happen anytime soon, we still need to trust people. We need to trust operators. We need to trust the people who are building these companies to be who they say they are. And Sam was not that. And I guess, like, to me, it comes back to the question is like, should we have known? Should people in the industry have known? Should the VCs have known? Again, we don't actually know enough yet. We're still kind of in the fog of war. All this stuff is coming out now. Everybody who's ever had a gripe with Sam is now going on Twitter and telling their story. And it now kind of seems like the story is that you should have known. And I think this is probably not exactly right.

I think, as far as I know, Sam was not a, he was not somebody who people were going around saying, I think he's a scammer, I think he's stealing money. I think he's embezzling funds from FDX customer deposits. People had different gripes with him, that he was cavalier, that he was mercenary, that he was a dick. But I don't know anybody who seriously claimed that he was stealing money. I mean, there's this thing that's happening now that I think, you know, one of the big Twitter accounts is covering this was talking about that anybody who now has a relationship with Sam or had a relationship with Sam, it's kind of like being in a picture with like just Lane Maxwell, you know,

was like at the time, like, they were just a normal person who like kind of made the rounds. And like everybody's interviewed him at some point. We've had him on the show. You know, you've had him on Unchained multiple times. He's been on every single podcast. He's been on odd lots. He's met with Bill Clinton and with Tony Blair and blah, blah, blah. Like everybody has been around this guy. The question is like, do you? Do you think... I mean, pour one out for Tom Brady. I feel like, didn't he actually invest money?

Like, I thought this was like... Yeah, he did. Yeah. It was like 50 million. It was crazy. I mean, he's had a rough year. Tom Brady's year, I feel like there's just been a lot of... But no, I seriously want to ask that question.

Like, what do you guys think? Because I feel like this is so much of what Twitter is doing now. Is they're obsessing over every single thing that anyone has ever said about Sam? I mean, imagine, imagine if... if the fact that like all the Enron execs were like really good friends with George Bush existed and you had Twitter around that time, you'd have social media would have done the same thing. I think this is basically like what does Enron plus social media look like? Which is a new emergent effect. Yeah. I actually want to address the earlier question before we talk about or before I, you know, add something on this.

But going back to the VC issue, like I kind of tweeted. about this yesterday. But another thing that I keep thinking about is Fred Ersum is a co-founder of Coinbase and Paradigm invested in FTX. And so there's just something there where I'm like, so I don't know. You guys tell me when you're a VC, what kind of relationship do you have with your portfolio company? Because I'm a little bit like either Fred knew nothing about what was going on at FTX in terms of the setup and the security and all these other things I mentioned. Or he did and couldn't, you know, influence Sam. Like, it just does not compute to me that those two people could have had a relationship

around building this company and that FTCX would just be so, so, so, so, so different from how Coinbase operates. Like, there's just something I find so strange about that. Well, the first thing is that, so remember, Fred, so, okay, I don't know. So I'm going to just speculate, basically. So first let me caveat with that. So the first thing is that, you know, Fred was building a domestic exchange in the U.S. which was U.S. regulated. Sam is building an overseas exchange in the Bahamas that was servicing

international clients, which just means the standards are very different for the level of compliance and, you know, the things you have to do. Second is that, remember, this, FTCS grew during COVID. And so people, you couldn't just, you know, go fly to the Bahamas. He was in Hong Kong originally, right? With FTC started in Hong Kong, moved to the Bahamas, I think last year, I think like mid to late last year. And so you couldn't go to these places without doing a long quarantine. So VCs were not doing onsites. Nobody was. going into the Bahama, the Polycule, and checking to see if they were, like, having proper controls from, you know, how the private keys were stored. They were just getting on Zoom calls and asking them.

And they would take whatever they said as answers because, like, what else are you going to do? You're not going to go fly there and, like, you know, go join the polycule and figure out what's really happening. So the reality is that, like, VC always operates on trust. The first time people went was the Salt Conference, which is like, that is also like a crazy thing. we look back at that. Yes. It's been a bizarre year. The marriage of Scaramucci and Sam at that time seemed very counterintuitive to me, but now actually it seems like it almost is like a perfectly written sonnet.

I mean, Sam was just so shrewd in buying access. So, you know, he bought access in terms of, you know, the U.S. in donating, being the second biggest donor to Joe Biden's campaign, being a massive donor to a bunch of, you know, Democratic candidates across the U.S., the Miami Heat Stadium, F1 sponsorships, like all this stuff that just, like, brought him attention and notoriety that didn't necessarily result in, you know, customers, right? It's not clear that any of this stuff had a positive ROI. And they clearly, you can see from the balance sheet, they weren't making it back in

trading fees. So they didn't have the profits to show for it. But they were spending hundreds of millions of dollars. onto frivolous nonsense that just increase their name, increase their ability to ultimately borrow money and leverage themselves. And that's what it buys you. One of the craziest, like, heresy rumor stories I heard, and like I have no way of validating this,

but I think it'll be funny to share on this podcast, is how do you think, you know, someone like Sam actually convinced Tom Brady or Matt Tom Brady to, you know, invest, join, whatever? Well, he has an agent. And this is the part I can't verify, owned a tequila brand, tequila company. And supposedly, the agent was like, yo, if you buy my tequila company, I will introduce you to Tom Brady and help make this thing happen.

And they bought this tequila company for $50 million to do that. And again, I have no way of verifying this, but I've heard this from four separate people. Wow. And I heard it way before this happened. Like, I heard it like in January and February. but like I think there's a lot of that when you're talking about pay to play

it's like you're to buy the agent's external company for them to like introduce you a ton of bottle well get ready depositors you're going to be we're going to see what that tequila company is worth so we can try to make you whole

oh my god if my agent ever did anything like that there's always there's always there's always money in the tequila bottle is the new there's always money in the banana stand oh my god oh my god okay well

Well, one of the things that people, so back in, I think one of our previous shows, we were talking about how Sam was buying up all these distressed lenders. And I came out in defendant to him and I said, hey, you know, I can't know what I said. Something like, hey, SBF is like buying stuff or he's backstopping the industry. And, you know, you should give respect where respects to do for doing that because, you know, nobody else is doing it. And people started jumping on me yesterday saying like, you know, look, you're saying Sam is. so great, like, look at you, you're in bed with this guy. I was like, okay. So I just deleted the tweet because I'm like, okay, I feel stupid now for having tweeted that

to begin with. But I feel like this, this, I feel like Sam is just going to become like a ghost now where everybody is kind of going through and scrubbing everything they've ever said about him. It's almost like a, it's almost like a ritual. I feel like that everybody is being forced to do is disassociate themselves with him as far as they can. I don't want to delete the episode where we interviewed Sam because I think it's a, it's an important moment in time, although he was a terrible episode because he was in a hotel and his internet was really bad.

Speaking of deleting episodes, Lex Friedman deleted his Wilma Caskell episode. And I was, okay, so let's talk about this. Let's talk about this. So one of the key things, of course,

that the media loved marketing about Sam was that he was an effective altruist. So for those of you who don't know, effective altruism is a movement of basically, I think actually Turin and I would probably disagree on the definition of effective altruism. But it's a movement that is characterized by people like Will McCaskill, Colin Karnovsky, who's the founder of Givewell, Peter Singer, and then most famously and most recently, Sam Bankin-Fried,

who was probably one of the most famous names. We should also allow for the fact that Singer is a very famous philosopher for the last 50 years, and he has done many other things. He just happens to be mildly associated. I would say the option. To be clear, he runs the life you can save, which is one of the largest EA charities, which I was on a panel for the last two years with Sam and Caroline with Peter Singer on a panel that they ran. And I moderated it last year.

So I moderated it. So like, no, no, no. Peter Singer is an effective altruist. He is very much an effective. Okay. By the way, I'm not an effective altruist. And now that I've learned a little bit more about it, I'm like, uh, this, this is not. for me. But anyway. So we should talk about this. So now, so in the, in the eyes of the media,

at this point, Sam became the most famous effective altruist. And of course, the mythology around him was that he was this kind of saint-like figure. He was going to donate 99% of his wealth. He had absolutely, you know, he was basically living in this crappy t-shirt, sleeping on beanbags, blah, blah, you know, we just got driving a Toyota Carolla. You know, TikTok loved this story about this selfless billionaire guy. And then it was in, he was, I think he was a board member of the Center for Effective altruism for like three, four years. The big donor to give, well, a lot of EA charities. And he started what was called the FTX Future Fund, that they were one of the largest

donors. I think they committed over a billion dollars to donate to effective altruists, aligned charities, let's say. And then Alameda research itself, I think they pledged like 50% of their earnings annually. They were going to donate to charity. And so it was from the very beginning what animated Sam and what kind of brought him on his mission to get into crypto, actually to, to, even become a traitor. So the reason why he went to Jane Street and became a trader after

originally studying math at MIT was that he was convinced that he wanted to earn to give. So earning to give is this concept in effective altruism, which is basically this idea that you pursue a high earning career so that you can redirect those funds into high impact charities. And the idea is that you can potentially have more impact with your giving than you can with many kinds of direct work. And this was an idea that was very popular back in 2013, 2014, in the Effective Ultrism Movement. And this was explicitly what Sam was doing. And now, of course, the most famous name associated with Effective Alterism has been

very publicly disgraced, is now going to go down as one of the legendary fraudsters of our generation. And basically, EA, the Effective Alterism as a movement is now being indicted. And so you've got a lot of people writing op-eds, a lot of people dissociating themselves with the movement, a lot of people looking like they have egg on their faces. And I should also say, so I'm somebody, I self-identify as a lot of people. effective altruist. I've been a part of the movement since 2013. I actually knew Sam. I first met Sam in 2015, before he got into crypto, before I got into crypto, at an EA

conference in San Francisco, back when he was still at Jane Street, because Sam was a big EA guy and everybody, everybody in sort of the EA world knew his name. I didn't know him very well. I met him once in a hallway and we chatted for a little bit, and that was it. But I, I myself, am somebody who have been earning to give. I've been doing it for basically seven years since I got into the tech industry. I don't donate 99% of my wealth. I donate 33%. But so this is something that's very near and dear to me. Tarun, you've been very public in basically your indictment of effective altruism as a movement and you basically think that this stuff is all bullshit. I want you to kind of voice your concerns and I want to try to address them and also kind of

respond as best I can. I think I do have a long track record of writing anti-EA stuff for a long time. but I feel like I should have been more militant after seeing this last few weeks. But I think the main conceit I find with most EA stuff is, and sort of in general consequentialism as a philosophical movement, is you always have to start with the axiom that the ends justify the means to argue that you're optimizing utility

in some ways. And you're not even able to construct an explicit utility function. You just are saying like, hey, I'm going to like try to optimize this type of thing of like how I'm, how I'm allocating my wealth or how I'm donating or how I'm doing whatever. And I think first of all, there's no consensitinal utility function. Second, the idea that you say ends justify as a means means that, okay, well, then like you might as well just like kill a ton of humans to lower costs, right? Like there's actually this like level of inhumanity and in the entire philosophy of this thing

that it would rather pay money now. So there's at least the long term, it's, part of EA. So long-termism is a dollar spent to improve the welfare of people a thousand years in the future is worth more than a dollar spent to improve the welfare of someone now. And people who have that mindset would rather sacrifice tons of people right now, the welfare of those people, their livelihoods, their ability to live in a meaningful manner, because of this idea that, oh, I'm going to help infinitely many people in the future, there's going to be more people in the future, so the net utility improvement for each person in the future. future is higher. And the conceit in that is that you, A, haven't found the discount rate,

like, because you have to discount some amount of success. You assume there exists no discount rate. That's this linear utility type of mindset. The second thing is that when you use this ends just as a means thing, you inevitably have this thing where it's like, you run into the trolley problem style thing. It's like, oh, do I just like, am I willing to kill one person to save five? And, you know, oftentimes, you know, the utility optimizer just says yes, right? But there is this notion and like EA people you can see in McCaskill's like really shitty apology on Twitter, which is like five, too little too late in my mind. That basically, you know, we've written, we've written four blog posts in our history that

that give you some way of saying that actually we have one way of getting around the ends just by the means when it comes to robbing, you know, kind of like unethical behavior. And most of that comes from the following conceded assumption, which is, assume that all humans who are exiting this utility optimization thing are running an untrustworthy hardware. So they make mistakes. Then you can't actually make a utility judgment that affects them based on, you know, like normal utility optimization. They always make this base of like, oh, if the AI did it, they can do this, but the human does it, you should have some correction. And to me, that's just saying you chose the wrong fucking utility function. And that means you're just like, oh, I guess like after we already fucked up something,

I guess we're going to like bolt on this correction. And the idea that there's this idea that you don't face any consequences for this post hoc ex post kind of correction to your behavior, I feel like that's not how most societies operate. And that's not how human interaction is meant to exist if you're actually trying to have some notion of equality or humanity. And it's very funny for a fucking philosophy that starts with all pain is equal as its initial kind of dogma. You know, that's the Peter Singer dogma, somehow leads to this like, oh, we're just going to like not be that equal and then like bolt on all this. And I find that stuff to be the most deleterious part about it. And it's like, I don't mind robbing grannies now because I'm going to like help the children in future.

And that that mindset is pervasive amongst a lot of people, especially in what I would call the Oxford Jane Street, Dustin Moskowitz. part of EA. Okay, so let me, let me, let me, let me, let me, let me, let me, let me try to respond to some of that. So the first thing I'll say is that, um, so I, I've been in EA or a sort of self-identified EA since like 20, 13, 2014. And, um, back then the movement was very small. Like, it was this kind of weird set of ideas that I'd read on blogs on the internet and I agreed with them. I thought they made sense. Um, and I, I thought it was a, it felt to me like the right way to orient my life and my relationship with work. And with my responsibility,

as a human being to give back and not kind of take for granted this idea that as one of the most privileged people on earth and being privileged not just in the sense of like, okay, well, you know, I have, I don't know, the way that people usually think of privilege is like, oh, I'm male or whatever, but more that like I'm American. I can work here. I speak fluent English. I'm pretty intelligent. That puts me in like the 1% of the world that has all these capabilities that allow

me. And I have access to, like, some of the most incredible wealth engines in world history, which is Silicon Valley, or just the general tech industry, which most people, even if they're smart enough, they don't get to have access to the jobs and the wealth that are created by it. And the core idea of, you know, that Peter Singer really originally awakened me to is this unfairness of it. And that it's your job. It is your moral responsibility, even if society doesn't tell you that it's your responsibility. It is your responsibility to do something to correct that unfairness. and now EA is a pretty loose concept

and it's increasingly become more you can call it a movement and you can call it a philosophy. I would say I subscribe more to the philosophy than the movement. I'm not a part of the movement in the sense that I don't go last time I went to that conference

was 2015, which was seven years ago. I stopped going to it because I'm like, okay, these are kind of weird and I'm not getting a whole lot out of this because I'm just working. I'm just doing stuff. I'm not going around and thinking about EA all the time. It's just a life philosophy

more than a culture. Now, the culture of EA, I haven't been very publicly outspoken about it, but I've always found it surprisingly incompetent. So I've never funded anyone from EA. I kind of wanted to, like in my mind, I was kind of like, okay, I feel like maybe it's a good thing to fund somebody using EA. But every EA I've ever come across has just always struck me as either like extremely Machiavellian or very incompetent in ways that are very difficult to explain to them how they're so incompetent. And it's just striking there have been so few success cases of people who are EA's who managed to like really be. very successful. Sam was kind of the one example that seemed like a real outside success in EA. And now, that being said, like this whole idea that EAs are married to this like kind of ruthless cold

utilitarian calculus, I think is just not true. That may be true if you're reading the EA forum and people are arguing about these philosophical debates. But it's kind of like, you know, there's no EA, there are no EAs in a foxhole, right? In reality, you go out, you take care of your family, you like are nice people in the street, you kind of do normal things. And then, you know, there's no, When you are considering how you give and how you have kind of, you know, sort of career level impact or life level impact, then I think to me, the philosophy of EA, I don't think it commits you to utilitarianism or consequentialism. To me, what EA commits you to is this idea that people should be rigorous about the way in which they do good and that most people are not rigorous enough. And that ironically, we are very rigorous about business. We're very rigorous about technology.

we're very rigorous about statistics and about macro and about all these other things. But somehow the thing that's most important that we do with our lives, which is improving the well-being of others, people are incredibly unrigorous. And they appeal entirely to their emotions and how good something sounds. And they don't even attempt to give the same level of mathematical seriousness and inquiry to those questions. Now, that doesn't, again, I don't think it commits you to saying, okay, we have to spend all our money on existential risk.

I don't do that. And I don't think it commits you to saying, okay, we have to send all our money to bed nets. I would say the fact that Anthropic has $500 million from FTX is like an indictment of this thing, right? It's like, I robbed the grannies to like do AI safety. That's literally what they fucking did. They robbed the grannies, the pension fund people,

the people whose LP capital was in this fucking place. And they gave it to this thing that was like, oh, like, we're going to save people from AI that tries to kill you 10,000 years in the future. Like, to me, that's the morally reprehensible. There are, that's just like, just like fucking stupid. And that is like the dumbest fucking thing I've ever seen. And I, that's why I'm, in general, find this like morally bankrupt theory just leads

to creating psychopaths. Like it leads to, it's incentivizing people to not care. Wait, Laura, actually, yeah, sorry. Laura, go ahead. Yeah, I actually, um, so like my, so, yes, I, I barely knew anything about affection of altruism. But what I learned from covering Sam is that, you know, he, maybe he took it further than you. Howse, like, somehow when you were articulating it, it seemed like basically reasonable. But I do wonder if he took it to a sort of an extreme, right?

Like, I've never heard you say, you know, I just want to make as much money as possible to give as much of it away to other people, right? But like, Sam, you know, maybe not using those words, I don't remember. But, like, I somehow got that impression from him. And so when I interviewed him recently, I mean, the way I phrased this was just around the political donations, but it's something that I was wondering, and you could express it in a slightly different way, which I'll get to in a moment. But I asked him, when you are making your political donations, is your motivation, your EA philosophy, or is it to foster the crypto industry in the U.S., like to help the crypto industry? And he basically said it was like for EA purposes. And so, you know,

when you have this person who is working in this field, but their values are not necessarily aligned with that industry. Like his guiding lights were not like around decentralization or whatever. It was really around the EA thing. It's like his attitude to this was more like, I'm going to use the crypto industry for this other goal. And I could see how, you know, when you're thinking more in that way, it could lead you to do really crazy things like take your customer.

and he's blown that to Alameda, basically. I mean, I don't know what was in his head, but it's just something that occurred to me. Because I feel like a true crypto person, you know, after living through, you know, all these exchange hacks or whatever, they would like, they would protect that stuff. They wouldn't, you know, just be cavalier with it.

You know? I don't think that's even much of a theory. I mean, they had the big ads with Sam on the front saying, I'm in crypto to do the most good for the most people, which makes no fucking sense. Like that has nothing to do. The shit sounds of like, like, fucking cope from this like, oh, the Corolla guy, like, lives in the $75 million penhouse.

And, like, like, that fucking shit, like, oh, if you're really that effective at donating shit, don't live in the $75 million dollar colloquial house. Like, you know, there's, like, a lot of stuff that they spent money on that just completely violates the dogma of all this shit they're saying. Like, why do you buy the ad? That money from the ad could have bought mosquito nets, motherfucker. Like, that's, like, that's what I'm saying. Like, you're not even listening to all the shit you're saying.

You're just high on your own supply. Like, the more I thought about it. it when I was, granted, like, I've never researched this. I was literally only trying to understand it for this interview with him. But I just was like, oh, weirdly. And it goes back to what Tarun was saying about the one, killing the one person versus the five. I was like, oh, like, if you follow that philosophy, you are going to end up in like making very weird choices that take you out of a very conventional morality. And I, like, there was just something where I was like, oh, like, if you're thinking that way, it's like, it's, it's hard to explain. But it's like, it's like, it's

like when somebody gets so hyper rational and they're like only thinking like in this mathematical way, it just kind of takes them out of the human sphere. And that is kind of, I feel like maybe what happened here. There's actually a pretty good thread that someone dug up about with Sam basically talking about the Kelly Cartyrian, which is this formula that helps you think about how to size your bets based on the expected value of like a bet. And basically people are now digging it up and sort of, it's sort of interesting glimpse into how he thinks. And the general sort of, you know, tell here is that he talks about his utility function being sort of log money, which is, you know, generally supposed to be like the max, you know, you're supposed to be getting out of your utility function in the Kelly criteria,

but also then, therefore, let's you justify basically, you know, wagering large amounts of money once you have large amounts of money for something that is not going to necessarily pay off. It's like there's some chance that you're going to make a trillion dollars because it's basically the same amount of utility that you have right now. And I think that is maybe kind of what you see in like the outcome from FTCS is like, you know, wagering larger and larger amounts because you're assuming there's some, you know, massive payoff that's not going to be materially different than what you have right now. Here's where I take issue with this. Okay. So, so one, I agree with you that there's something clearly, there's something clearly messed up in the kind of the worship of

asceticism around Sam, right? I think there was something very unhealthy about it. And it was there from the very beginning at Alameda. Because it was fake. Like a lot of it was not real. I mean, to be clear. It was not, it was not fake, right? Like, if you look at what they were doing from the Alameda days and what he was doing while he was at Jane Street, he was doing this in EA from the very beginning. I mean, from the last year. The last year, the last year was when... Be clear. In the last year, he was worth $30 billion. I, so I don't like this game. If you're really an aesthetic with linear utility, you should, you should be scaling your asceticism by not changing, not like making ads of yourself in every San Francisco.

Like, there's a lot of stuff that's crazy. A lot of it was enabled in my mind by McCaskill. The Twitter stuff, you know, when, like, Elon Musk's tweets came out and, like, McCaskill was in there trying to, to get, McCaskill's just trying to be in the capital formation game, not the actual redistribution game in the same way that Sam is. And they both, you know, reputation laundered each other. And in general, I think, like, we're kind of trying to be like, oh, well, you know, what was true three years ago must still be applied as an invariant. But what we saw in the last year was

malfeasance and malevolence. I agree. I agree. Let me let me finish. Let me finish. Okay. So I have still not totally internalized. Like what did EA get wrong here? And I totally agree with you that clearly some of the folks who were at the center of the EA movement, particularly Will McCaskill, tied their fate to Sam. And they found him incredibly convenient at a time when they're apparently So I was reading about this some today, last night in the EA forums, that there were a lot of people internally at EA who had a lot of criticisms of Sam. And felt that he was a Machiavellian person, that he had a reputation for being very unfair and very manipulative to people. But they ignored it, supposedly. This is what now people are saying.

But again, I don't totally trust this, just because this is the kind of thing that always happens when somebody gets kind of publicly shamed and bad things happen is that everybody comes out and says, I knew it all along and I always had this, you know, whatever. So these claims get amplified in times like this. it'll be a while until we get a better accounting of who actually said what, when, and who thought what when. So I don't know. I still need to process for myself if I want to distance myself from effective altruism as a cultural, as a culture, as a cultural movement, as opposed to as a philosophy, right? What any particular person does obviously does not indict a philosophy. A philosophy is a philosophy. You have to argue on the philosophy, not some particular person who practices it. But effective altruism is not just a philosophy. It's also a movement. It's a social movement. And it's also an organization of people. And that organization of people may have made some pretty massive mistakes. I haven't paid a whole lot of attention to it because I'm, you know, I'm in crypto all day.

And so this is all I do. The other thing that I want to say, though, is that I really do want to take issue with this idea that it was effective altruism that caused Sam to, you know, embezzle funds or whatever the hell he did. Okay. We know why people embezzle money. They do it every way. It doesn't matter whether effective altruists or not. People do it because they're scared or they're greedy. That's the answer.

It has nothing to do with effective altruism. There's nothing to do with going to MIT. nothing to do with being a traitor. This is the oldest story in human history. We don't need to appeal to any complex philosophy or social organizations to understand why people do the shit they do when they're cornered. The answer is that Sam felt the need to bail himself out

because he was scared. And that is what we need to impugn. That is what we need to repudiate. I think trying to mentalize and say, he did it because he was going to save the grandie, blah, blah, blah, blah. If Anthropic was not on their balance sheet, I would agree with you.

Anthopic investment is the ultimate thing that proves that. Like Anthopic is literally like EA porn company, right? True, I would agree with you if he made that investment to Anthropic with customer funds, but we don't know when any of this happened. We have no idea of the timeline. Yeah, well, also, you know, almost $2 billion is missing apparently. So who knows where the donation came from? But one thing I will say is like, you know, when you talk about that moment where it's either

going to be greed or fear that motivates you, I mean, like, he could. have very well just said, okay, Alameda failed. We're going to announce this. You know, I have this other profitable business. I don't need this other business. And so I actually feel that EA did play a role in the sense that he's like, oh, well, if I make this bet and I can like, you know, earn the greatest amount for whatever, you know, like, it's not because I feel like just like a normal entrepreneur would have kind of looked at it in a cold way and just been like, okay, this one, you know, we're just going to have to close it up. It just, it's, you know, in the red.

And then, but the other one, this can be a healthy business. There are tons of exchanges that do very well. But because his goal is to just make as much money as possible to give it away, I feel like that is what made him, you know, like, like I said before, it's like going back to that notion that EA is what drove his principles rather than, like, a crypto person because I feel like a crypto person. Laura, Laura, this is the most fraudulent industry I have ever seen in my life. Are you really claiming that a normal crypto person here would not

Like literally exchanges are the bastion of fraud of everywhere, every possible business. A more pure crypto entrepreneur maybe then is the phrasing. You know, he does like let's put like, but you would admit though, if he had just done that, he could have definitely had a very successful business with FTX, right? Of course. Of course. Yeah, Alameda would go on there. He would lose a lot of face.

He would lose a lot of money. But FTCX would still fundamentally be fine, right? Again, we don't know what happened or when it happened. But here's what I will also say. okay the reason why this happened like the real like you sort of you know do the five whys right like okay why did this happen why was that allowed to happen um the answer should be that there should have been a fucking board and a fucking cFO that would not have allowed any of this to happen even if sam wanted to do it right at a normal company the CEO does not have the choice there is no

okay in a moment of crisis you look deep inside and decide okay how many utils do i want to save out of you know the far future or whatever that's not even a question that enters into most CEOs's mind because they know they can't. And that's part of the problem here with FTX. And that's why I'm pointing to the VCs and the governance here is because the fact that this was possible is the problem, right? You should not allow a human in a moment of fear to be able to make a decision about billions of dollars of customers' money.

That's the problem. All I'm saying is that since those structures weren't in place, and we all admit that the rational choice would be to say, okay, we're going to close up Alameda, but FTX, we're going to keep going with that. that's working, he didn't make that choice. And it's weird. Like, why? Why did he not do that? And the only way I can think about it is, like I said, about this kind of other philosophy of his that he said was his guiding philosophy where he was like, if I make this bet. And I can't remember in the Sequoia article,

he has something about where he talks about like risk in this way. And you could see like following, you know, that what he says in there like, oh yeah, like you might try to make this big bet to try to make all this money. Like, I don't know, that that was my read on it. Because otherwise, it doesn't make sense. I mean, it's possible, right? But like, the other thing is that he's a traitor. And as a traitor, especially as a very highly leveraged traitor, clearly throughout most of his career, this was what he's, this is what he did.

Apparently in the early days when Alameda blew up, that's what happened is they took on a bunch of leverage and it blew up. And so like, it's not as though the idea of, okay, you take on some leverage and you bail yourself out was a foreign concept to him. He's a traitor. But the concept of where you get the. leverage is the point of actually caring about your business, right? Your utility function should be to fucking keep your exchange alive, not just think of it as another form of a lender, right?

And the problem is he viewed these lenders as such idiots so much that he thought his own company was a stupid lender. And, and, you know, like, that's, that's the morally reprehensible. Look, I mean, one way or another, clearly what Sam did was morally absolutely reprehensible. But I think the goal of the industry is not to, like, psychologically and, figure out, okay, what particular idiosyncrasy of his moral beliefs led him to do this? Right. But we, but we, I have a question. When you say clearly it was morally reprehensible, like according to a common morality, but I'm asking, under the EA, when you're making that rational equation of like, oh, if I, you know, the risk is, is this amount, but the number of

people I could benefit is this amount, blah, blah, blah, that, whatever. Okay, so how many people do you think he benefited now as opposed to if he had just left FTCS alive and still been a multi-billioner? Right. So the risk. didn't pay off, but I'm saying when he made the calculus, maybe he thought it was going to pay off. That's the only, like, because this whole thing is so crazy in my head, that's like the only way I can imagine he justified it. So here's what troubles me about all this, is I feel like there's this exoticism about, you know, because Sam was a utilitarian, that every single thing that he did was like, you know,

him laying out this utilitarian calculus in his mind. I know plenty of people who are utilitarians. They don't do that. They're normal people. but they believe that that is the right moral framework when they're making kind of clear-hearted decisions about how to donate money or about how to make big kind of societal level decisions, okay?

Barring from robbing Peter to pay Paul is the same as making a donation decision from the perspective of just the dollars accounting and cents. No, I don't think there's anybody I know who's utilitarian who would agree with that. When you're making $4 billion of loans against dog shit collateral that you minted, I think that it's a very similar.

It's a very similar. Yeah, okay. So it seems like Turin, you're committed to this idea that utilitarianism commits you to basically committing crimes if they have positive externalities. Yes. Okay.

I don't think there's any utilitarian. One of the main reasons I say this is all of the logic that I have seen from both McCaskill, Yudkowski, and the EA forums, involve this post-hawk belief that, oh, actually, we can bolt on the ends

don't always justify the means by mutating when we'd say, like, oh, if it involves humans, maybe we treat it different than involving AI. And it's like, no shit, shock. That's the point of having agreed upon rules and morals and rights in the society. So there's the concept of rule utilitarians,

which gets around sort of naive utilitarianism. I think naive utilitarianism, your right to ruin, does commit you to this idea that if you do something wrong, or deontologically immoral, meaning you're breaking some moral law, but there's no obvious, like you're not found out for doing it,

or you just, you know, the positive actualities outweigh the losses. Yes, naive utilitarianism does commit you to that. Almost nobody who is a utilitarian is a naive utilitarian because it results in these weird trolley problems and all these kind of, you know, these horrific consequences. So very few people believe that.

But the other thing is, I don't think EA commits you to being any kind of utilitarian. I wouldn't say that I'm a utilitarian. I think I have some kind of weird mishmash of virtue ethics. Sometimes I'm utilitarian, I think, on large scales. And on small scales, I think I'm just like a normal-ass person. And I follow the rules.

And that I think is what most EAs actually look like, which is why I don't, again, you know, EA as a philosophy and EA as a movement are two very different things. And it's very clear EA as a movement has a lot of rehabilitating to do. And it may be unsalvageable. I don't know. I haven't spent enough time in that. community as of late, and I don't really hang out with people who are other EAs because I just do it. I don't make it like my identity or my social circle. But the core ideas behind EA, I don't think,

I don't believe they commit you to anything like what Sam did. I think what Sam did is that whether he was an EA or not, he was a fucked up guy and he had a very loose sense of morals. And I don't think it would have mattered if he'd never found EA when he was a young guy. I think he probably still would have done some fucked up thing in his life because he clearly just had a loose relationship with the truth. And if you are that kind of person, it doesn't matter what philosophy you believe. It's about character.

It's not about philosophy. I don't think there is any philosophy that's going to make you decide to go fuck over all of your customers and lie to everybody you know and run a gigantic fraud. That is a really messed up philosophy to get any human being to do that.

And I don't think there is any such thing out there. Yeah, but we don't have to keep arguing this, but I think it goes back to the kind of like bet idea, like when you have that choice, like when you look at the, the outcomes, you kind of calculate a percentage chance of this or that. That's the only way that I can imagine that this happened. But I remember the point that I wanted to make me, which is that, you know, and I tweeted something like this, but I do think one of the big takeaways is that

traders should not run exchanges. The two mindsets are just not compatible. You know, like, yeah, just now that we've learned all of this, I'm like, whoa, you know, and it's what I said. I don't want to keep repeating myself, but, you know, just like security should be the first and foremost thing. And I heard, I saw somebody tweet something about, and I could verify this, because I'm going to have Jesse on the show later, but Jesse Powell of Cracken might have told somebody that one of the red flags that he saw with Sam was that, or with FTX was that they had a very small security team apparently, which that's a red flag for an exchange, which makes a lot of sense. So Brian Armstrong, you know, for all the criticism he's got, he has a completely,

different personality from Sam. I don't think he's a trader. He's definitely more like a builder and coder. And, you know, just other people with that kind of mindset around security and whatnot. Like, those are the people who should be running centralized exchanges. Yeah, I think we talked about this a little bit last show, but like the jesse's and Bryans of the world who started these companies well before anyone thought this industry would turn into anything and really believed in the ethos, believe in the promise of the technology.

I don't think they would have done something like this because obviously it's just so harmful to the industry overall. Whereas you have opportunities to come in, see this as a great way to make money. I think that does sort of cloud your judgment. Maybe not explicitly. Maybe there's not a literal thought around, you know, the ends justifying the means. I think certainly like, you know, it speaks to your overall incentives. Well, so I want to wrap this show with just a reflection of like, okay, we're here now. this is one of the most catastrophic failures of the last five years in crypto is the downfall of FTX.

And it seems like the more we learn, the worse it becomes. It's clear this is going to set the industry back. So the question that I want to leave with is just, what do you think happens from here? What does the next six months? What does the next year look like as we recover from this? You know, I actually want to acquittal with your statement. I don't know if I would say that it will definitely set the industry back, at least. on a long enough time scale because I actually think it's so good for the industry just like based on all the principles that, you know, I hear from crypto people about what they're trying to build and how they want to use this technology to change society. I actually think it's so good to get those kinds of people and, you know, those kinds of practices or whatever you want to call them out and have people recognize like this is not how we do things sooner rather than later. And so, you know, I understand that maybe.

be not regulators and lawmakers will understand that right in the beginning. But I imagine that the community members will kind of double down on more decentralized things, on self-custody, on just like all the sort of really core principles. And so in that regard, I actually feel like this could kind of hasten the more pure version of crypto than kind of the way the industry was going the last two years. Yeah, I mean, I want to be optimistic here. And I agree maybe in the long run, Yeah, maybe this is a step forward, but I feel like we always say this after every exchange hack and people have been trying to push not your coins, not your keys, not your coins forever, and humans just kind of keep doing the same thing they've always been doing.

So I would like to believe that you're right, but I'm also somewhat maybe a little bit pessimistic, but I think it's just going to be very chilly for a while. Like this asset class just looks so toxic to a lot of people who aren't already working in it. And I think people who pushed these investments at their more traditional crossover funds or VC funds look extremely silly now. And I think on a long enough time frame, things will heal the technologies, new technologies will be built and hopefully things will look better. But in the short term, it's just hard to see how people get excited about underwriting

investments in crypto if they're not already in it. And even if they are in it, rethinking the strategy. Drew, what would you say? I mean what I said on Twitter the other day, the first place that liquidated that Alameda paid back we were defyp protocols. And defy protocols due to active participants

who care about not being fucking stupid like centralized lenders who deserve to die. You know, we spent a lot of time actually trying to understand what risks these things protocols are taking and how much leverage

they're actually giving people. And the fact that an actor had to go pay back the smart contract first instead of relying on you know, sweetheart deals with their own experience. change is the ultimate sign that crypto's technology is the right technology in the future.

And between ZK and really succinctness-related projects in Snarkland and Defi, I still am, I actually think the death of this type of stuff is actually very good for increasing the level of development in those technologies, because people see them as necessary, not just sufficient for or nice to have them. So to me, that's the that I'll take away. Yeah, I'll definitely plus one to that to ruin. It's clear there's going to be a big regulatory backlash as a result of FTX because there were so many of the rich and famous who were caught up in this thing.

This was not just some run-of-the-mill kind of overseas, random exchange that ended up stealing people's money. This was something much bigger. and it makes a lot of people look stupid and it makes a lot of people think, okay, if I couldn't trust FTCS, who can I trust? That violation of trust is going to be very hard to overcome. I think we will eventually overcome it,

but it's going to take time. It's going to take a lot of work on behalf of not just centralized players, but everybody in the industry, of showing that we are up to the task of creating products and creating an industry that people feel comfortable with. And, you know, the reality is that, you know,

we talk obviously about Defi a lot in the show, and we're big believers in Defi. But for most people, Defi is still too complex. It's still too difficult. It's still beyond the pale of what they can realistically use and stay secure interacting with. And so there's a lot of work to do. And so what I see is that the next year is likely going to be quiet. We're still going to be funding great entrepreneurs who are working on new ideas and building new things. And I think capital will be there for folks who have genuinely.

ideas about how to move the space forward. But I think consumers are going to be pretty gun-shy for a while. Eventually, we'll get past this hump because crypto, you know, crypto is resilient. It's been through many, many terrible crises before, and it'll get through this one just as it's gotten through all of them before. I think institutions are going to take a step back. I think they are going to be a little bit traumatized by what they saw with FTCS because they assumed that the work had been done that had not actually been done. They assumed that they they could trust that this institution was run like a real grown-up operation when, in fact, it was, it is not just that the money got lost, but the way in which it was lost.

And the level of fraud and deception, particularly coming from the very top, coming from Sam himself, is just so unconscionably bad that I do, I do think we're going to take one on the chin as an industry for this. But, you know, at the end of the day, Tarun, I would absolutely underscore that is that the thing about technology, is that technology only ever gets better. It never gets worse. People keep finding new ways to optimize these things and make them faster, make them smoother, make them more usable.

And two, three years from now, this technology is only going to improve regardless of whether or not people remember FTX or they don't. There will come a time. There will be a cycle after this, that there will be people who I've only ever read about FTS, which is kind of difficult to imagine now. But there were people like, man, you know,

I heard about that. What was that like at that time? It must have been so crazy. How did you guys not know that this big exchange and this guy who was such a big deal? They say he slept on a beanbag. Like, what does this meme I keep reading about? There will come a time when all this will be like this ridiculous story that only oldies like us are going to remember. And yeah, I look forward to that.

But in the meantime, I think what I would say is that it's back to work. So it's back to building. It's back to focusing on the important things that we need to do, which is to make this technology better. So that it actually can be ready. so that people don't have to use. They don't have to trust individual people or individual companies the way that people were forced to trust Sam.

The whole point of this technology is that we don't have to trust people anymore. We don't have to trust institutions anymore. And it's not ready yet. If we were ready, we wouldn't have gotten here. And so I think the ball falls back to the builders to be able to open the door to the next stage of this industry.

Yeah, one thing that I just want to add when you were saying that people in the future won't even know this whole debacle, It just reminds me of how I can't remember it was at some point probably the summer or something. I saw people, you know, they must be new and like they didn't really know what the Dow was. You know, and like that was that was like just this big. It's like Mount Cox, the Dow and now FTX are Tara Luna probably is all also in there. I think if you surveyed members of Constitution Dow, I would guess less than 50% of them.

Right. It's funny. I'm teaching a course at Berkeley on Westfield. web through entrepreneurship, which is very timely because the courses run through a lot of crazy stuff. You have an ethics session? Do you have an ethics? No, we'll add one next time.

Yeah, we'll add one next time. It's a good call. It's just so, it's refreshing in many ways to be interacting with students who don't know any of this stuff. They don't know what the Tao is. They barely know what, you know, what happened before 2020, basically, is just like ancient history to them. So it's in many ways refreshing because it just reminds you.

that there will be another generation after them too. That's not going to know anything that happened since 2023. And they're going to be building the stuff that goes into the next cycle, most likely. So anyway, yeah, this stuff continues on. It doesn't stop for anyone. So that, I think we've hit just about two hours is I think the longest show we've ever done. Yeah, I want to check if there's any additional words in the letters in the Wheel of Fortune. And he talked to New York Times and like has some very unselfaware quotes in it that make it seem like he's like, oh, well, I made a mistake, whatever.

Whoa, whoa. Can you share those before we wrap? Yeah. Yeah, the last line, the last few paragraphs of this New York Times article are like, I feel like pretty. Can you just read it loud? People can say all the mean things they want about me online, he said. in the end what's going to matter to me is what I've done and what I can do and you know like I feel like there was no like I'm sorry or like here's what happened I'm really like I made an ethical lapse it's like no that's fine whatever wow did he confirm that it's a hack or no he didn't no absolutely not no he's he's posting them he's he's he's improvising he's figuring out as it goes wow Wow. Okay, wow. That's crazy.

Yeah, again, I feel like the lack of like moral self-awareness is something I associate with extreme utilitarians. And this is clearly a demonstration. All right. Well, Tarun, maybe maybe you're more right than I originally assumed. All right. Well, with that, I think we're going to sign off. Thanks, everybody.