Sam Bankman-Fried - Creating a Perfect Market - [Invest Like the Best, EP. 247]

My guest today is Sam Bankman-Fried, founder and CEO of leading cryptocurrency exchange, FTX. In a little over two years, FTX has registered 1.2 million users, grown to facilitate $10.9 billion of daily trading volume, and reached an $18 billion valuation. Prior to FTX, Sam worked at Jane Street Capital before founding a quant trading firm of his own, Alameda Research. At just 29, Sam has packed a lot into a short period of time, and as I’m sure you’ll hear, he has a special ability to harness uncertainty and think deeply across a range of topics. In our discussion, we cover the building blocks of a perfect market, the key areas of inefficiency in today’s exchanges, and Sam’s north stars of product design and effective altruism. We also talk about fairness in crypto markets, how FTX thinks about user acquisition, and derivatives as key enablers of properly functioning markets. Please enjoy my great conversation with Sam Bankman-Fried. For the full show notes, transcript, and links to the best content to learn more, check out the episode page here. ------ Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:03:57] - [First question] - What motivates him and what the true north of his vision is [00:07:12] - Evaluating the impact of well-functioning markets and philanthropic spending [00:11:55] - The key functions and building blocks of a perfect market [00:14:59] - Who pays $50 million to access fiat market order books [00:21:49] - What is valuable about having access to order book data [00:25:41] - Assessing and understanding the state of fairness in crypto markets today [00:31:51] - Can crypto only move as fast as the fiat system keeps up [00:32:43] - The advantages and disadvantages of stablecoins and USDT [00:34:46] - How much fiat inflow there is into crypto markets and exchanges today [00:37:36] - What it is about cryptocurrency exchanges that are so appealing to him [00:42:21] - Building in a dynamic world and deciding the sequence of problems to solve [00:45:12] - Whether or not the US is on the wrong side of crypto and countries competing for healthy regulatory environments in this emerging asset class [00:47:25] - Thoughts on centralization and what being decentralized unlocks [00:50:22] - Why derivatives are such a key function of properly functioning markets [00:52:38] - The competitive landscape between derivatives and exchanges [00:54:35] - Spending marketing dollars and paid acquisitions for FTX [00:57:30] - The growing trend of user-generated content becoming user-generated assets [01:02:24] - How many layer one blockchains we’ll need and the competition for dominance [01:05:18] - Thoughts on Bitcoin as the pioneer of the space and how relevant it still is [01:06:26] - Possibly reaching a state where everything happens on-chain [01:08:23] - What he means when he says he has more RAM than hard drive space [01:09:39] - Amassing wealth insanely fast and whether or not it affects him [01:10:26] - Important things to consider in this rapidly growing space [01:12:02] - A decision he made while respecting the power laws that govern us [01:13:10] - The kindest thing anyone has ever done for him

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

  I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai. This episode of Invest Like the Best is brought to you by Teegus. I started hearing about Teegus when several of my close professional investor friends sent me passages or ideas they'd found on the Teegus platform.

• 0:43Patrick O'Shaughnessy?

  Conducting effective primary research shouldn't take weeks, it should take hours. Searching for answers shouldn't be lengthy, cumbersome process. It should be easy and nearly immediate. Expert calls should not cost $1,000. Teegus solves these problems and makes primary research faster and better for professional investors. Teegus has built the most extensive primary information platform available for all investors. With Teegus, you can learn everything you'd want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Square, Snowflake or almost any company of interest. All you have to do is log in. Still want to do your own calls? Teegus has a solution. Experts that are just as good or better than what you'd find on other networks for

• 1:26Patrick O'Shaughnessy?

  just $300 per call, not the $1,000 or more that others charge. If you're curious about Teegus, call the top performing investment manager you can think of. They're probably already a Teegus customer and they'll point you in the right direction because customers, myself included, love Teegus. Visit teegus.co/patrick to learn more. This episode is brought to you by Hall Capital Partners. Hall Capital manages more than $40 billion in global multi-asset class portfolios on behalf of endowments, foundations and high net worth families with investments managed by distinguished investors, many of whom have been guests on this podcast. Hall Capital is always looking for exceptional investment talent at any stage and size,

• 2:07Patrick O'Shaughnessy?

  with particular focus on diverse teams, which they believe better drive decisions and outcomes. If you're raising capital or considering doing so, their team is seeking more great investors with which to partner across asset classes. Alternatively, if you're a passionate investor considering a career change, please reach out to Hall Capital to inquire about joining their teams in San Francisco and New York. To learn more, visit hallcapital.com or email [email protected]. That's [email protected].

• 2:39Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 3:06Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 3:31Patrick O'Shaughnessy?

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

• 4:15Patrick O'Shaughnessy?

  We also talk about the fairness in crypto markets, how FTX thinks about user acquisition, and derivatives as a key enablers of properly functioning markets. Please enjoy my great conversation with Sam Bankman-Fried.

• 4:29Patrick O'Shaughnessy?

  So Sam, I figured since this conversation is going to go all over the place, we have to begin with your why or true north. I sometimes scribble down some words that help me frame these conversations. And I wrote down markets, profit, progress, infrastructure and philanthropy. And maybe you can just tell me what's motivating to you. Do you think true north is a useful concept? And if so, what is yours?

• 4:50Speaker 02

  Totally. And I think I maybe have a couple of different true norths depending on what level you're talking at. One thing is basically, how much do things motivate me on like the day to day basis? I wake up, I go to work, I get an email after responding to it. And what are sort of the things rattling around my head most frequently in making decisions there? And for that, I think that it's product design, product function, markets, technology, sort of efficient markets. Just basically like, how do you build a good product and a powerful efficient exchange? And things like that. Things that resonate with me the most are things like, does the risk engine work? Is this a well-designed risk engine that gives people flexibility while making sure that the platform is safe?

• 5:36Speaker 02

  And maybe another thing is, does the general design of products in this space make sense? That's something that I think about actually quite a bit is where are there places where you sort of look at how a space is being built out? And just think, that's probably an accident of history. That's probably not the chosen path, so to speak. And I think one example of this is markets not being 24/7, like equities markets not being 24/7. And it's not the biggest deal in the world, but I think it's sort of a pretty clear example where to do it over again. They definitely would be 24/7. And the reason that they're not is sort of a historical holdover from a time when they were not electronic. And when there are physical hit specialists that were incredibly important to the functioning of the markets.

• 6:21Speaker 02

  And you had to give people time to sleep. Putting that aside for a second, you can then sort of like zoom out to, all right. But how about when I like reflect more generally on what I'm doing and think on sort of like a much higher level? About what prioritizing and on that side, you get more philanthropy side where it's not necessarily the most relevant thing day to day when I'm deciding how should this product be designed? It's often pretty irrelevant, but when instead you're thinking about what should I be doing with my life? High level, what should I be doing and prioritizing? In the end, my true north there is effective altruism and utilitarianism.

• 7:06Speaker 02

  And basically what that means from my perspective is how can I maximize my positive impact on the world? And originally came from a perspective of you're going to donate a thousand dollars. Where can you give it to save the most lives? But since the movement has transitioned into a much broader scope and thinking more generally, what are the causes and what are the interventions that do the most good? Given the resources that you have, from my perspective, thinking about what should I even be trying to do with my life? And sort of ended up where I am, earning to give, say, trying to make what I can so I can give as much as I can away. And then thinking about what the most effective ways to do that are.

• 7:45Patrick O'Shaughnessy?

  Why focus on the giving versus the building? And I wonder if you would agree that well functioning markets, which is obviously a problem that you're working on or chosen to work on, have done more good for humanity, let's say, than any sort of philanthropic organization, linearly taking in dollars and spending them on something versus organizing capital formation or market forces for good. Obviously, markets aren't perfect, but they seem to do a lot. Why think at all about philanthropy versus what I'll call reinvestment to build more infrastructure to do more good?

• 8:18Speaker 02

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

• 8:59Speaker 02

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

• 9:44Speaker 02

  But I think that some of them are. Maybe to give one example of this, one thing that I think became really clear over the last year, last few years, I guess, is that we as a society have no fucking clue what to do about pandemics. No matter what you think the right approach is, everyone agrees that we get optimistically a C plus, I think, as a society for a response. And that's not restricted to one country. And I think as COVID drags on, even the countries that are thought to have done quite well on this, that starts to decay away a little bit. You see a lot of countries that did an amazing job of avoiding COVID, of not having many deaths from it. Their economy stalled out though, because they didn't allow anyone else and they kind of shut down. And it's not clear what their path forward is now.

• 10:29Speaker 02

  Then you can ask a question of, well, what would it have taken for us to be in a much better place in response to COVID? I think there really are things we could have done that would have just been like super, super effective. What are sort of things there? I mean, first of all, it took us about a year after COVID hit before we were ready to start distributing vaccine. That's a really expensive year. That's basically what probably tens of trillions of dollars of economic damage and hundreds of thousands of lives lost. We didn't need to screw that up. Technologically, If we had been better prepared, we could have had vaccines cranking out two months, maybe after COVID hit, people could have started getting doses February 2020 instead

• 11:14Speaker 02

  of November. So I think that's sort of a combination of early detection of new pandemics, having the infrastructure ready to start making vaccine, and having a less insane process for getting them legal. I mean, the amount of lives lost from delaying on certifying the vaccines is just absolutely enormous and the amount of economic damage done. And this is a very tractable problem. This isn't sort of some pie in the sky. Yeah, if we could solve all society's ills, that would be great.

• 11:46Patrick O'Shaughnessy?

  It's kind of like you said with the risk model, like, is it getting better or not?

• 11:48Speaker 02

  Exactly. And now you look at the aftermath of this, and how much effort right now is society putting in to having a better response to the next pandemic than we had this one? Zero? I don't know. Basically can't find, talk about the next pandemic, which is pretty crazy, especially given that frankly, we got a little bit lucky that COVID-19 wasn't more deadly than it turned out to be. There are probably ways to use your time and your money and your resources to get us way better prepared for the next pandemic in a way which has a shot at saving tens of trillions of dollars and millions of lives. And that's absolutely enormous impact.

• 12:27Patrick O'Shaughnessy?

  And that's just one example. So I'd love to turn the conversation now to markets. You mentioned the one example of if we started this from scratch, it'd be 24/7, instant settlement, whatever. Walk me through what you think the key functions and building blocks are of a perfect market. So if we could design this without any frictions, no technological limitations, like, let's work backwards from the end. What does the perfect state of markets look like? What are the key functions and blocks?

• 12:52Speaker 02

  I think maybe I'm going to answer a very slightly different question, which is, what would it take to get within 5% of perfection or something like that? What would it take to get markets which are pretty close to the perfect one in ultimate value? And I think that that's like a useful framework to think of. And maybe just to start with one example question, what latency?

• 13:12Speaker 02

  Do we need, how low does the latency need to be in a market, in an exchange, plus all the infrastructure that the market data infrastructure that connects to it, in order to basically get most of the economic value out of it? And I think the answer is that the latency has to be low compared to the release rate of new economic information. You want to avoid is a case where like, two different economic events happen, and there hasn't been time to internalize them. And what speed is that at? I mean, it's at a really wide variety of speeds. But I think that realistically speaking, by the time you're at milliseconds, you've basically got there. You don't usually really have two pieces of significant, different economic information

• 13:54Speaker 02

  coming out less than a millisecond away from each other, but you actually do have two in the same day and two in the same hour. And so I think that gives you some sense of what latency do you need markets have? The answer is less than an hour, certainly. And obviously, it's hilariously long compared to the latency that NIS or NASDAQ will claim. But that's being a little bit deceptive. Right now, yeah, NIS's latency is a fraction of a millisecond, but in five hours, it's gonna be tens of hours. It's gonna be closed overnight. Right now, it's gonna make the federal holiday, so it might not, I don't know, our market can go-

• 14:29Patrick O'Shaughnessy?

  Yeah, we're not even trading right now, yeah.

• 14:30Speaker 02

  Right. Might for a seconds, plus or minus hours.

• 14:33Patrick O'Shaughnessy?

  Or days, on the weekend.

• 14:35Speaker 02

  Or days. It's sort of insane. I think this interesting context of, I don't think that it's the most important thing to really get the architecture to be as low latency as possible, but I think having it always open is like, actually pretty important. So I think that's one piece of it. Maybe going through some other things. Here's an easy win. You know what I think should be free and publicly available? The fucking order book. How insane is it that if you're not willing to shell out tens of millions of dollars a year right now, you're supposed to trade blind into an order book you're not allowed to see that the other players are? That's a pretty weird property of exchanges. Large market data pieces are pretty weird. You had to choose like, a single thing to not be monetized in exchanges, I think you'd say the order book.

• 15:19Speaker 02

  Literally displaying what the order book is right now- Is the whole purpose of exchanges in some sense, other than allowing for trading, is to support price discovery, not price discovery for those willing to pay 50 million a year.

• 15:32Patrick O'Shaughnessy?

  Just describe how that works right now, that 50 million, like who's paying that and how that works in traditional markets?

• 15:37Speaker 02

  It's a mess. I mean, who's paying it? Well, the people directly connecting to an exchange's market data are literally paying it. If you're a sophisticated HFT firm, then you're paying it. But if you're a retail, then probably some data feed firm is paying it, which is then passing that cost on to some broker, which is then passing that cost on to you or something like that. But you probably also, if you're a retail donor, if you get to see the order book, they'll only tell you the best bid and best offer. If you're lucky, maybe only the last traded price, maybe with five minutes delay or something, depending on how much they want to pay. Totally different in different cases, but if you really want all the data, you're paying the exchange tens of millions of dollars a year for this. And that's what all sophisticated trading firms have to do.

• 16:20Speaker 02

  You can't be like a sophisticated trading firm without doing this, at least for the major exchanges. And it is tens of millions and maybe more than that in some cases. And if you're retail, you just don't get most of the information and you pay some extra random fees and they just jack up your trading fees to compensate for this. And what's going on here, I think, is when you look at the monetization of a typical equities exchange today, it's a little weird. So in crypto, we are used to all the revenue coming from trading, from fees on transactions. That is not true on equities exchanges. And a lot of the reason for this is they are commoditizable in terms of the trading. If Nasdaq started instituting a five basis point beyond trades, everyone would just use NASDAQ.

• 17:04Speaker 02

  There's no reason really to use one instead of the other because all they are is a matching engine. That's their whole function. You just plug into a different matching engine. The only thing they have, which is really proprietary, is their data. So they end up monetizing that. And what's going on here is the same company doesn't own the mobile app and the matching engine. All the trading fees end up in the mobile app and the various brokerages and prime brokers and clearing and all the shit that happens in between the user and the exchange. The PPO firms and everything else, the exchanges get served with those fees and then they monetize their data, whichever one actually needs to pay for, even if they're not trading. It doesn't matter if you want to go use NASDAQ instead of NICE, you still need to know NASDAQ's data. You still need to know what's happening in markets to be able to actually efficiently

• 17:49Speaker 02

  price things. So odd business modeling is probably the wrong one for efficient markets. That's like one area where I think the United States at least could stand to improve quite a bit. Also, just the user experience is pretty bad. Let's say that you want to buy Apple on NASDAQ. Everyone, if they hadn't actually tried to do this before, would tell you the same thing about what you do. Well, go to NASDAQ.com and try and create an account. And that doesn't work. You can't even see the order book on NASDAQ.com. You can't do that. You gotta go find like E-Trade or something and go in this giant. So the amount of intermediation is insane in equities markets. And this leads to other weird things. One of the most popular things to do right now is to shit on people. A lot of politicians

• 18:32Speaker 02

  and regulators are kicking a skeptical eye towards payment for order flow. I'm going to not take a position on it myself here. I think it's pretty similar to other things that you can do for better or for worse. But let's talk about why PPOF exists in the first place. It exists because you're forcing people to go through six different companies from start to finish between like the mobile app, some clearing custody, some ATS, ultimately ending up on some equities exchange. There's some prime brokers sitting in the middle there. Between each of these steps, there has to be a PPOF firm luring things together. What sits between the retail customer and the mobile app? Someone showing prices. But then that's not the exchange. That still has to get regurgitated on to the exchange

• 19:12Speaker 02

  and maybe onto a few layers. So you start to have these PPOF firms intermediating because you have all these other intermediaries that need pricing connecting them together. And that makes it further messy and complicated. So I think creating clean, simple market infrastructures that are modular, but that don't require more parties than should be necessary is pretty valuable. And also you ask, why are none of these 24/7? Well, there's a lot of reasons. And one of them is you have to apply the SEC and then blah, blah, blah. But one of them is let's say some random equities exchange goes 24/7 tomorrow. Robinhood is not going to be ready to support that. Whatever clearing form people are using isn't going to be ready to support that. The stock loan businesses aren't going to be ready to support that.

• 19:57Speaker 02

  It's really hard to innovate if there's a lot of other companies that are intimately involved in every single transaction that you're doing. There's a weakest link component or something. Exactly. That's right. You could take a step forward in something. It doesn't do anything unless everyone can coordinate. So it's another area where things could be substantially more efficient than they are today. What are other things here? And I mentioned these before, but when you talk about the finances here, I think having trading fees is pretty reasonable as a revenue model. But they have to be reasonable trading fees. And what does that mean? It means that they shouldn't be bigger than the amount of actual edge that firms are seeing. It shouldn't be so big that real economic moves get lost in the trading fee.

• 20:40Speaker 02

  If you charge, just as an extreme thing, 10% trading fees to everyone who trades, then there could be economic news that moves markets 5% and no trades will happen and no order books will update because it's not worth anyone paying 10% fees. Just because markets went up by, you know, just this bear went up 5%. What does that mean? It means like, I don't know, what's sort of like the right unit of market moves that are economically relevant? In equities, I think a basis point is sort of the answer. I mean, I'm making that up. There's nothing sort of magical about that. But I think if markets have moved less than a basis point, it's kind of fair to say the world hasn't really changed. Right. And if you've moved many basis points, I think it's kind of fair to say like. Something's going on. Yeah, exactly. And so I think what that means is like, if you're running an equities exchange and you want to have trading fees, what's a reasonable fee? A basis point.

• 21:25Speaker 02

  I think that's a reasonable fee, somewhere between 10th of basis point, two basis points or something. As soon as you get much beyond that, you're killing trades, you're killing liquidity. And we see this, some countries have 10, 15, 20 basis point taxes on every trade. That is bigger than effective economic move. An equity might not even move 20 basis points in an entire session. And if you're charging 20 bits on both sides as a fee, they won't trade. And you really do see massive decreases in liquidity and volume. And it's a lot harder to raise money. It's a lot harder to get efficient pricing and market moves in venues where the taxes plus fees are more than a couple of bips. And so I think that's sort of like another thing which is important for efficient markets that the fees are reasonable. And when I say the fees, I don't just mean the matching engine fees. I

• 22:10Speaker 02

  mean every fee from start to finish in a trade, the total net fees that are paid when one party passes an asset on to the other shouldn't really exceed a few basis points.

• 22:22Patrick O'Shaughnessy?

  If we go back to the order book concept, maybe it'd be helpful, since it's already happening and you were on that side of the business prior to crypto, to explain why those HFT firms are buying that data and what having full order book data, the depth of the order book, the specifics of it allows for relative to a retail trader that has none of those things. Why is that valuable? What would it mean for it to be open based on what's happening when it's not open?

• 22:44Speaker 02

  This is pointing to a bunch of things which are all sort of somewhat related to each other, which is the value of market data. And there's sort of maybe two different things. The one is complete market data and the other is fast market data. One thing, when you look at actually being able to see the order book versus just the last traded price, the order book probably updates you basis point or two about your fare for something beyond just knowing the last price that it traded at. If it last traded at 123.58, you see that there's a gigantic bid at 123.58 and the best offer is 123.61. You probably don't think 123.58 is fair. You probably think it's like 123.60. One piece of this is just, yeah, there's probably about a basis point update on average from having full market data versus

• 23:29Speaker 02

  having like minimal market data. And again, I think that's not the biggest deal in the world, but it's economically relevant, a factor that matters. And obviously, if you're an HFT firm, it's enormous. That's more than the whole game. You have no choice but to pay all the data fees. You want to be a big, big, big HFT firm, but if you're not paying those data fees, you're always going to be like a basis point worse than everyone else, which means that you can never do trades that are barely good or do trades which are short time scale, stock only doing trades which you think are good by like very large amounts, which is fine for a long-term investor. I don't think this matters. If you're looking at somebody who's trying to buy Twenty million dollars of some equity and hold it for a year. It does mean that like only people shelling out tens of millions can be involved in precise

• 24:14Speaker 02

  or short-term price discovery. The other thing that you got to, that you sort of pointed out there, is looking at PPO firms, the whole thing is complicated and it all gets bundled into one fee and they don't say, oh yeah, well, we paid this many cents for this reason and we tack on another this many cents for that reason. But at its core, there's sort of two things going on there. The first is your traditional liquidity writing. First is like, yeah, sure, also you share it to Tesla on the offer right now. That's better than my fare, which is about midpoint. And that's part of what PPO firms are doing, is the effective price that they show post fees is often just a little bit more skewed to the side they'd want. They make whatever happen on that. The other thing, though, which you pointed at, is that they're sort of buying data and what's that mean?

• 25:00Speaker 02

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

• 25:45Speaker 02

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

• 26:14Patrick O'Shaughnessy?

  So we've got this really cool, big umbrella concept. Price discovery and clear prices are at the root of market capitalism. And it's one of the key markets, therefore, one of the key mechanisms that make capitalism interesting, at least historically. And then we've got this migration that maybe crypto markets represent towards closer to that perfect end state of always on, open order book, more egalitarian, et cetera. I want to talk now about fairness. So there's a fairness spectrum where you could argue that modern electronic markets and stock market, let's say, is fairly fair in the sense that there's Reg FD, there's all sorts of regulations around who gets to see what information when. And then obviously, in the crypto world, it's sort of Wild West still, meaning there's all sorts of the equivalent of insider information and front running

• 26:59Patrick O'Shaughnessy?

  and all this other stuff. Tell me about the state of fairness in crypto markets today. How do you assess it? How are you trying to work on it?

• 27:05Speaker 02

  So the first thing that I think is most important, frankly, and I think is underemphasized in these discussions. The most important thing is transparency about how much transparency there is. The most important thing is that everyone is on the same page about what the market structure looks like. The most destructive thing is if everyone believes that front running is illegal and then someone goes in and front runs. Because then everyone sort of made a lot of decisions conditional on one set of rules for the game and just get blown out by the detectors. So the most important thing is that everyone in the market knows what they're dealing with. And the other thing is actually having a level playing field to start with. When you look at crypto today, it is a total mess. It's a lot less of a mess than it was three years ago.

• 27:50Speaker 02

  So it was an even bigger mess then. Just to give some numbers here, in late 2017, early 2018, a lot of Japanese residents got very excited about crypto. Actually, a lot of countries, but Japan particularly so. And if a lot of Japanese residents got excited about Apple and they found a way to buy Apple stock, what would that mean? It would mean Apple stock was up, probably. It doesn't exactly cause market inefficiencies or dislocations or trades or anything like that. What does it mean when they got really excited about Bitcoin? Well, Bitcoin went up, but it particularly meant that it went up a lot in Japan. And that is a notion which is foreign. To

• 28:29Patrick O'Shaughnessy?

  Global markets.

• 28:30Speaker 02

  Right. I mean, there's Regan Mess in the US, which prohibits arbitrage between different equities exchanges. In general, there's a non market for everything. Everyone uses basically that market. And there's lots of capital keeping things at least mostly in line with that. In crypto, not even a little bit. There's no natural forces that make it need to be the case. That a Bitcoin is worth the same amount on every venue. And in fact, in late 2017, early 2018, if you're trying to buy Bitcoin in Japan, you would end up paying about 10% more. Than if you're buying it in the United States, it was an absolutely massive arbitrage. You just never see numbers like that. You could spend your life trading equities. 10% arbitrage is just like not a concept. And it's trading a billion dollars a day.

• 29:13Patrick O'Shaughnessy?

  Not small, not liquidity problem.

• 29:15Speaker 02

  What's happening there? Well, there's no formal regulatory relationship between a Japanese exchange and a US exchange. But in addition to that, there is like, whatever, 100, 200 million dollars of net flow per day coming probably from Japan. How much money was there providing to that? Well, late 2017, less than 100 million dollars a day. None of the large liquidity writers were in the space. It was actually very difficult to provide liquidity to that arbitrage. You had to get banking setup that was crypto friendly in Japan and the United States. You had to get accounts every week to capitalize, use a massive production. The amount of total liquidity that people had gotten effectively set up there was less than the total demand. The market just diverged and stayed diverged for months.

• 29:58Speaker 02

  That's sort of like an extreme example. We don't see things that extreme anymore. But that's the example of the thing that could happen in crypto. You could have Coinbase trading a percent higher than Gemini for Bitcoin for weeks straight. If somehow there's so much flow on one of them and not the other, and not enough liquidity Friday, trying to keep those in line. And that will happen when crypto markets get stressed. So when there's a big move, you will start to see some arbitrages appear again for a bit. What this means is that basically the active traders are getting bad prices. What this means is that if you want to sell your Bitcoin during a crash, you might end up losing an extra percent or two on it. Because you're selling it where everyone else is selling it and you're selling it below

• 30:41Speaker 02

  what a Bitcoin actually worth at the moment because there isn't enough buy side liquidity providing to it. Things are more in line than they used to be. If you take a major cryptocurrency right now, it's probably within two basis points on most major exchanges. It's not a huge loss that you're facing, but there are a lot of idiosyncratic times where that number gets bigger. And what sort of is driving that? One, no regMS, no anti arbitrage principles. Number two, not enough total liquidity in this space. Just the market makers aren't big enough compared to the flow. And number three, a lot of assets that are a little bit funky. An example of this is Tether. A lot of people have disagreed on whether Tether is a dollar or whether it's kind of like a dollar, but not really. Reasonable people have decided it's worth a dollar. Reasonable people have decided it's worth

• 31:26Speaker 02

  99 cents. Reasonable people sometimes say it's worth a dollar and a penny. Now all of a sudden you have percent of 1% spread or arbitrage potentially popping up if different people are pricing a tether differently. And so you see things like that that can lead to discrepancies here. You can see just exchange problems, like an exchange that's having tech problems, accepting deposits of a cryptocurrency, that might trade way too high on that exchange because no one can get it there to sell. And one of the things that exacerbates this is in many places, including crucially the United States, there's effectively no leverage or margin or financing to anyone in crypto. And what that means is that if you physically run out of dollars, if you're a market maker and you run out

• 32:08Speaker 02

  of dollars on Bitstamp and there's a big seller, you know, like, yeah, it'll be a day, a day before I can buy another Bitcoin here. I have to wait for a wire transfer to land. If you're allowed to use margin, you can imagine basically margin buying there against selling somewhere else and then closing that spread down when wire transfer is clear the next day. With no margin, you can't do that. And so like unless you want to have $10 million sitting there in your Bitstamp account doing nothing, most of the time, when you get someone who's trying to sell $10 million of Bitcoin, you can't provide to them. You can only provide how much you have there. And so that's sort of like is another contributing factor to the capital cost of providing liquidity in crypto, especially across venues. And because of that, the inefficiencies that you can see

• 32:53Speaker 02

  across markets that can last for anywhere from a second to a weekday.

• 32:58Patrick O'Shaughnessy?

  It makes me kind of think back in that example of the problem of relying on all this different chain of firms, these intermediaries to make anything progress better. Does that mean that the same is basically said here, but with fiat systems or ramps as the same problem again, like crypto can only go as fast as the fiat system keeps up or something?

• 33:15Speaker 02

  To some extent, yes. It is legitimately the case that sometimes the hardest thing about buying a cryptocurrency is sending a wire transfer. Even though it's supposed to be a non-fiat system, the places where that seeps in still end up being the hardest. And the biggest blockers, when I was first getting set up in crypto, that was the biggest blocker. I spent like two weeks, I had some dollars in my bank account, and it's like, I'd like a Bitcoin, please. Took me two weeks. Why it took me two weeks? Sending that wire transfer is legit hard. The banks don't want to deal with it. Wire transfers don't work very well. That's a huge pain. What else is causing pains here? Well, maybe I should say it's our way around this, really, because there is. There is a way to potentially at least partially ameliorate this, which is stablecoin. This is a beautiful thing about stablecoins, 24/7 they're on the blockchain.

• 34:00Speaker 02

  So if everyone in the crypto industry used USDC instead of USD, that you can move 24/7, that you can move instantly, and that removes the reliance on wire transfers. And that's one of the reasons why stablecoins are so big in crypto. It's just legitimately an easier and better way.

• 34:16Patrick O'Shaughnessy?

  Where does that fall down, though? So we don't have to go into like the tether dispute, it's just too complicated for our conversation today. But if tether is a dollar, let's just say it's a digital dollar that moves like you want it to, itself has the same problem, like it needs some sort of backing or collateral which moves at the old speed. So how does that work?

• 34:33Speaker 02

  The way it works, the advantage that you get from it is that sometimes you don't need to go into a bank account. Let's say you're trying to just send your dollars from Coinbase to Bitstamp. You, in theory, could just send USDC from Coinbase to Bitstamp. If there's no stablecoin, you have to wire it out from Coinbase to your bank account and then in from your bank account to Bitstamp. So it's the wiring and wiring out, where you're not actually trying to cash out, but it's the only way to move it around. So the advantage of stablecoins is when you're not trying to exit the crypto ecosystem, you're just trying to move within it. And so you don't need to do the creation and redemption of the stablecoin gets sent there. But yeah, if you're trying to pay a bill.

• 35:08Patrick O'Shaughnessy?

  You had a problem.

• 35:09Speaker 02

  Yeah. It doesn't help. Sure, you could buy a stablecoin instead of a dollar, but then you just have to go redeem that stablecoin. And now you're back at the same old place of needing a wire transfer.

• 35:18Patrick O'Shaughnessy?

  Do you have a sense for how much fiat inflow relative to market value there's been in the crypto ecosystem? And how do you see that trending over time? Like, is there a point at which there's an escape velocity here?

• 35:30Speaker 02

  I've thought about this. I don't know the answer, but let's get some bounds on this. And the thing lurking here, right now crypto market cap is about like 2.5 trillion or something like that. That does not mean that people wired 2.5 trillion dollars into crypto to buy. Because as you buy crypto, price goes up and everyone's crypto appreciates, not just the crypto you just purchased. But let's get some bounds on it. So there's something like 100 billion dollars of stablecoins outstanding. That I think is like a lower bound on the amount of fiat inflows that led to that 2.5 trillion dollars of market cap. In addition to that, I'm guessing there's another 100 billion of fiat currency sitting on exchanges. That's a few hundred billion. And then there's some other places that aren't going to be as easily tracked as that. What's my guess? Eh, I don't know, 400 or 500 billion dollars or so of actual legitimate fiat inflows that have gone into this space.

• 36:16Speaker 02

  So something like 25% of the market cap, 20% of the market cap, I don't know, something like that. Which doesn't seem like an insane ratio to me. I don't really know what to think the fair one is, but I don't know, seems plausible. What's going to change that ratio? Well, right now, everyone knows that most financial institutions are planning to buy Bitcoin at some point. Somehow, maybe on their own behalf, maybe on their investors' behalf, their clients. If you talk to basically any big bank pension fund, doesn't matter what, they'll all say the same thing, which is, yes, we have a mandate, not just the green light, but a mandate to get involved in the crypto ecosystem. They will also almost all say, but we're not ready yet.

• 36:58Speaker 02

  We have a mandate to do it, but compliance is going to take somewhere between six and 24 months.

• 37:03Patrick O'Shaughnessy?

  Compliance, custody, all this stuff, yeah.

• 37:05Speaker 02

  Basically substantial expected fiat inflows into the crypto ecosystem over the next few years, which haven't really materialized yet, but probably will. That is something that could really fill out the capital base of crypto and start to get those dollars into the ecosystem. Make the capital in the ecosystem to market cap ratio get closer to one.

• 37:28Patrick O'Shaughnessy?

  Is that necessarily mean that prices go up if more fiat comes into the system?

• 37:33Speaker 02

  Probably, but not necessarily.

• 37:35Patrick O'Shaughnessy?

  Why would it not?

• 37:36Speaker 02

  If it's over prepositioned. So I don't think this is really happening, but to some extent, you could imagine maybe the world has expected $200 billion of inflows from institutional players over the next three years. And in fact, there's going to be $50 billion of inflows and the world has already bought $100 billion in anticipation of that, playing to flip out to the inflows. But in fact, there's only 50 of them. So the flip, people are going to be selling 100, trying to flip out to inflows of only 50, net selling prices go down. I wouldn't guess that would be what happened. I would guess that people are under a preposition for it, but you could imagine.

• 38:09Patrick O'Shaughnessy?

  So you came late to this ecosystem, and I don't mean the word mercenary in a negative way at all, but in a world that was previously filled with so many pure missionaries like zealots for crypto as the solution, everything, which I wouldn't characterize you as that. Because you had this late, relatively speaking, late and sort of pragmatic you on this entire space, what has you so excited? Like, why have you devoted your time and attention, which we talked about at the beginning, you know, you're allocating meaningfully for some larger goal? What is it about this ecosystem that has attracted you and so many other talented people? And do you anticipate staying in it a long time?

• 38:43Speaker 02

  There are a bunch of things leading to that. First of all, just huge, huge demand in this space and not enough supply. And I mean that on many levels. I've met that historically in terms of buying versus selling cryptocurrency. It's still today the case that one thing you can look at, for instance, is on FTX, which is a crypto exchange I started, we have a spot borrow lending book where there's market forces determining the interest rates of the various assets. And right now, if you want to borrow a Bitcoin, which you can use to short sell, you're paying a little bit less than a percent a year in interest. And there's $700 million of open interest there. If you want to borrow a dollar, which you could use to get long crypto, you're paying 10% a year and there is $2 billion

• 39:28Speaker 02

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

• 40:09Speaker 02

  Volume in the crypto industry and it just hadn't had time to mature. Enough for the infrastructure to catch up with that. So one part of this is just like business opportunity. It seems like there's a lot of man for a new business here. And someone's got to do it. And it didn't seem like the existing players were going to get their act together. Another piece of this is you pointed this out. When I first tried to do a crypto trade, the hardest part of the crypto trade was the wire transfer. And I think that's super instructive for me. I think what it sort of made me think was like, wow. The existing financial infrastructure we have has some issues. Sucks. Somehow, despite the fact that this space seems like a total shit show, it still is actually easier to use than a bank.

• 40:50Speaker 02

  And there's like obvious ways to make this space a lot more efficient. And so it just sort of felt like, yeah, boy, payments must be real bad. And when you sort of start to dig into it, it's like, yeah, they are. We often don't notice it, but we're bleeding 3% of our GDP each year to payments. Every time you go to a supermarket and buy a banana, you're paying 3% to a credit card company to cover up the fact payments don't really work. You're trying to wire money to Nigeria, you're losing tens of percents. And I think that there's a substantial opportunity to start fresh. The natively digital and natively online approach. The nice thing about decentralized ledgers is that it allows international cooperation. It allows cooperation between companies on sending value between each other. There's a lot of economic opportunity in crypto rails.

• 41:35Speaker 02

  And when you look at the potential of something like DeFi, here's one cool thing you can do with DeFi. You could put social networks on chain. What does that mean? It means you build a protocol on chain for sending encrypted messages. Maybe they're DMs, maybe they're public, depending on whatever setting you choose. Every social network could draw from that same protocol, that same set of messages. What that means is that if you tweet, someone else can like it on Facebook. Because they're both accessing that same underlying set of messages and that same underlying protocol. That's extremely valuable. It solves this network issue where no one wants to use a social media company and tell all their friends are using it. So it makes them interoperable with each other.

• 42:19Speaker 02

  And it also allows cool approaches to censorship. Have a permissionless underlying protocol layer. And then anyone can build their own user interface on top of that. And you make their own decisions about whether to censor it. And if you're sort of upset with the censorship level on some platform, you can start your own and you already have access to all the messages that are floating through there. So I think that's sort of like, it's another example of pretty cool application of blockchain tech, which I think could actually be better than the existing products, but would take a lot of work to build out.

• 42:53Patrick O'Shaughnessy?

  Obviously you're sequencing. You don't strike me as an accidental guy. And so the sequencing is very interesting, starting with Alameda, which is a trading firm explicitly trying to earn profits in an inefficient market, which has gone very well. Then it's FTX and Serum. And like you said, infrastructure in this space. Talk to me about sequencing. My suspicion is you're not done and we'll keep sequencing in other directions. How do you think about that challenge of what to do, when and when to do next?

• 43:19Speaker 02

  A lot of this has to be dynamic because a lot of this has to be super responsive to the global environment. Right now, if you're a crypto company and you're not thinking extremely hard about regulation and compliance, you're making a mistake. I don't think it was as obvious a year ago. I mean, a year ago, a lot of crypto companies didn't really have compliance departments. I think we thought it was a little bit predictable that that would run into problems and that some people being a little bit out there. There is some responsiveness here, but putting that aside, what are the next steps? I'll give a few, and I don't want to say these are definitely the next steps. I think what I would say is these are steps that we are very strongly considering and or working towards, but we'll decide dynamically what the right thing to prioritize is.

• 44:04Speaker 02

  So one of them, and I mean, this is something where I think we've basically laid our hearts on the table. Let's just get some statistics from today. By the way, crypto trades a lot. I think some people underestimate this. Crypto trades almost as much as US equities do. Still a lot of volume. So in the last day, there's been about $200 billion of volume globally in crypto. If you want to divide that up internationally, it's about $130 billion of derivatives volume and something like $55 billion of spot volume. So a little more than two to one. And now let's look at the United States.

• 44:43Speaker 02

  So in the U.S., there's something like $10 billion of spot volume, $1.5 billion of derivatives volume. So the ratio rather than being like two, two and a half to one, it's 0.1 to one. And if you sort of extrapolate out, there is something like $25 billion of missing volume right now, which should be derivatives volume coming from the United States. That's big. If you had that and nothing else, that would make you the second biggest exchange globally. And why is that? It's because no major crypto exchanges are CFTC licensed. None of them have the regulatory ability to offer futures in the United States. We recently acquired LedgerX.

• 45:27Speaker 02

  It's a CFTC licensed crypto derivatives platform. It's pretty straightforward what we want to do with that. And we're really excited to work with the CFTC on that and to talk about ways to develop that platform over time. But that's just a massive, massive missing market.

• 45:45Patrick O'Shaughnessy?

  Before we go on, just a broader question on countries competing with regulatory environment for economic activity. Like if you think about the U.S.'s history, you could argue that its success was its system settings, the rule of law and the Declaration of Independence. Everything that was the agreed upon rules, to use your point earlier, was what made this such an amazing place to do business and remains an amazing place to do business. How do you think about that in this new kind of Web three world where it seems like perhaps the U.S. is on the wrong side of what made it so great historically? Is that true? Do you think that will change? How do you think about countries competing with regulatory environments for this new industry?

• 46:22Speaker 02

  I'm optimistic it will change. And I think the biggest thing is crypto came about very quickly. And how new it is. This isn't like it's a new type of CME future with a different index. This is a totally new settlement layer. It's a totally new asset class. It's a totally new role. It's a really profoundly different product. Five years ago, had very little attention. And so in five years, a very, very different asset class has been born and become as large as the largest existing asset classes in volume. That's pretty wild. That's faster than regulatory systems move in most countries. And so you look at what's happening in the United States. The US does not generally try and roll out completely new financial regulatory frameworks every three to five years.

• 47:07Speaker 02

  This is like breakneck pace on that standard. And I think that that's a lot of what's been caught here is right now, there are real interesting questions about what the framework will be for a lot of assets, what regulatory department has jurisdiction over them. What licenses will ultimately end up being necessary for some action? And that's not to say that there is confusion over everything. There is clarity around some things in the US regulatory space, but there are other things where there isn't. And it's a big topic of discussion. If you talk to someone on Capitol Hill right now and ask about what their views are on finance, like a third of what they'll tell you about is crypto. This is like top of mind for regulators. I'm optimistic that there's going to be sort of fuller frameworks built out over the next

• 47:52Speaker 02

  few years in the US that will make it a much more robust place to do crypto business.

• 47:58Patrick O'Shaughnessy?

  How do you think about the centralized nature of most regulation historically? That it's far easier to regulate, say, bank charters and a limited number of them than a decentralized ledger? And the decentralized ledger provides so many of the interesting properties. Like there's this weird tension here between what you can regulate, whether it's the exchanges or the wallets or, you know, whatever it might be, what the right point is. That seemed to naturally have to then centralize versus the benefits of a decentralized ledger. Like, how do you square this circle in terms of innovation?

• 48:29Speaker 02

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

• 49:11Speaker 02

  Here's something which I think would be like a substantial step forward from where we are on the regulatory side without endangering the product would be a registration regime based around reporting and transparency where you have to say exactly what assets you're holding. And there have to be periodic audits confirming that. And you have to have policies around redemptions and honoring those. And maybe some blacklist for addresses known to be associated with financial crimes. Maybe the assets have to be held in a US bank account. Some sort of regime like that, which I think would address a lot of the consumer protection and financial crimes worries that exist with some regulators with stablecoins while still allowing the space to thrive. And I think that I almost explicitly what we want to say, I don't know what the perfect thing is.

• 49:56Speaker 02

  I sort of think that's a really hard question and it depends on how the space develops over time. And rather than shooting for the perfect here, I think the right thing to do is take steps in the right direction. Start to build out frameworks that protect consumers, that prevent financial crimes without killing the industry. Start with that, take steps forward. And then, yeah, in three years, maybe there's going to be a second round of things. With a regime like that with stablecoins, that addresses most of the large points and concerns while allowing USD stablecoins to thrive, which I think is really valuable from an economic efficiency perspective for the cryptocurrency system. Also frankly, for like dollar dominance, there are going to be stablecoins in the world.

• 50:40Speaker 02

  And if you ban USD stablecoins, then it's going to be Euro stablecoins or it'll be CNY stablecoins. It's not a question of whether there will be stablecoins. It's a question of which country they come from and which currency they're backed by.

• 50:55Patrick O'Shaughnessy?

  I was going to go back to why derivatives are such a key function, just in general. Maybe this is an overly simplistic question, but the ratio internationally makes me think, look, this is just like a key central function that we need in properly functioning markets. And you've done a lot, obviously you've spent your career kind of in this space. What is it about derivatives for the uninitiated that are so important for markets?

• 51:18Speaker 02

  One thing to note, which I think you're sort of alluding to there is that this isn't a crypto specific thing. In almost every asset class, more volume trades in derivatives and spot. Why is that? If you don't need delivery, they're more economically efficient. The big thing about, let's just compare a futures contract to a spot contract. In order for Alice to buy a Bitcoin from Bob, Alice needs dollars sitting there on the exchange and Bob needs a physical Bitcoin sitting there on the exchange for that transaction to happen. Now, that's very important if Alice's goal is to go send that Bitcoin to her friend, or if Bob's goal is to go take those dollars and pay his bills with it. But most volume doesn't actually require physical delivery. Most of the volume that you look at, it's people trading in and out.

• 52:02Speaker 02

  It's people putting on a position that they want, people hedging something. The average trade doesn't require, it's not actually important to either person to get physically delivered the thing. It's the financial exposure that they're looking for. And frankly, you can trade out of that later if you need to. If you buy a Bitcoin feature, but later decide you need the Bitcoin, you can later go sell that Bitcoin feature against buying a spot Bitcoin to get into that. But if you don't require delivery, which is what happens with futures, that's just your financial transaction, you don't require nearly as many specific types of assets sitting on the right people's accounts in the right place at the right time in order to do a transaction. People instead trade freely as long as they have enough total collateral

• 52:47Speaker 02

  that they're not going to blow out and then figure out settlement on their own schedules. It just makes markets more efficient. It makes them easier to use. It lowers transaction costs. It lowers capital requirements. And people could trade with spot if they had to. They usually don't want to. Usually they prefer not to because it just, yeah, you end up paying twice as high fees and you're often unable to do the trade you want to.

• 53:11Patrick O'Shaughnessy?

  You're in this space, obviously, so I'm curious what you think the competitive frontiers are between derivatives exchanges. So if five derivatives exchanges are competing for your business, what are the battlegrounds between them to win over the user's business?

• 53:24Speaker 02

  Dank memes on Twitter.

• 53:26Patrick O'Shaughnessy?

  Funny but true.

• 53:28Speaker 02

  Right. If you ignore the things that most influence people's decision making and said, look, it's the underlying products, which is not the direction this world has been going in, but sure, sort of an antiquated thing, but probably still quite important. Here's one thing, cross margining. So let's say that you want to buy Ethereum or a futures. What do you need to have in your account and where in order to do that? On FTX, the answer is anything. You can have anything in your account and you just have one account. There's no where is not a meaningful thing. You deposit euros, dollars, Ethereum, Bitcoin, tether, USDC, Microsoft, SPY. Any of those work as collateral. Compute is collateral value, parrot cut it to the extent it's larger liquid, and make sure that your position

• 54:11Speaker 02

  doesn't exceed its bounds, and you trade whichever futures you want in whatever combination you want. On some other platforms, what does it look like? Well, the only way to do this is to sell whatever you have, tether, use tether to buy spot Ethereum, move your Ethereum into Ethereum futures margin wallet, and use that as collateral to trade Ethereum futures. So first of all, they require you to trade spots, trade futures, which defeats the whole fucking point of futures. Second of all, you then want to go buy a Bitcoin feature, top block, you move your Ethereum out, sell it for tether, use a tether to buy Bitcoin, move Bitcoin to your Bitcoin futures margin wallet. You're literally managing hundreds, thousands of wallets on a single platform, moving assets, doing stupid spot trades out the right collateral in the right place at the right time. It's this massive

• 54:54Speaker 02

  mini game that doesn't need to exist. It increases risk and get liquidated on any one of them. You have no flexibility on it. The whole system is a mess. And so that's, I think, like, one of the biggest differences is how cross collateralized the margin system is.

• 55:07Patrick O'Shaughnessy?

  Back to dank memes on Twitter, one of the things that's interesting, and I'm just curious because again, it seems like you make decisions in a very rational way. You spend a lot of money on marketing. I see FTX all over the place and in the obvious places where your users might be. How do you think about that? Like paid acquisition in this world, it's like such a traditional concept. Marketing dollars, it seems like very non crypto in some ways. Like, how do you process a decision like this and prosecute it?

• 55:30Speaker 02

  There's a really interesting question of whether we should be buying Facebook ads or Google ads. Right now, we're not really, and I don't know if it's right not to be. But let's put that aside for a second because that's usually what user acquisition means. Frankly speaking, most of this money is usually spent on like Square that says buy X here. A big buy button, you click on it, takes you to the website. And that's not what we're doing. Why is it not? On the one hand, most user acquisition happens through social media. How did we get most of our users? They saw a post on Twitter and they're like, oh, wow. This person who's a picture of a frog, I generally think has good instincts on crypto products. And they said that FTX is really dope, so I should go test it out.

• 56:15Speaker 02

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

• 56:52Patrick O'Shaughnessy?

  Brand matters now.

• 56:54Speaker 02

  Right, you're not trying out 10 products. You're not clear you're trying out two products. Hey, it might just be one. So name recognition certainly matters and we are way behind on that. Versus, for instance, Coinbase, we have about four times their daily trading volume. And about 3% of their user base. So the factor of 100 difference in volume per user, like they have done spectacularly at the long tail retail consumer. And we have done much better at the more sophisticated, more highly engaged users who trade larger volume each. But the other thing that matters, I sort of split out marketing into name recognition and brand. One thing that I think about with our marketing is how do we get as many people as possible to have heard of us?

• 57:39Speaker 02

  And another is how do we get people to know who we are, who we really are, to get some sense of that? And that's hard. That is the thing that we're really thinking about with our marketing. And a lot of the endorsements that we're doing are aimed at not just getting people to literally see the letters FTX somewhere, but to create a more powerful association and to convey that we're here for the long term. We're a legitimate exchange or a legitimate product that people who have a lot of reputation to lose and don't want to lose it, have done a lot of research and due diligence on us. But more generally, we're looking to pack a lot more punch with a lot of the marketing that we're doing rather than spreading it out as much. What does that mean in practice?

• 58:23Speaker 02

  It means thinking about what are the few things in the world that really matter? And that really matter from a branding perspective or from an endorsement perspective? There just aren't that many. Look at basketball players. How many basketball players, if you heard that they had some association with a product? Would that be like, oh, that's kind of interesting. It's really a short list of things. And if you look at which endorsements matter for a sports team, there actually just aren't that many that matter that much. When you think about what properties of a sports team endorsement you have heard of and resonated with you and you can remember.

• 59:03Patrick O'Shaughnessy?

  The idea is then that you want to be extremely choosy on quality and impact, and that that's an interesting optimization challenge just in and of itself. I'm really enamored with the concept of the first part of the web being user-generated content defined, and the next as being user-generated asset defined. Spin up NFTs, companies can issue tokens. And I'm curious how you think about this big trend, like what opportunity it represents, how it will change the world. We could talk about the FTT token and its utility if you want. What is your thought on this, like, user-generated asset era that we may be entering and leaving an old era?

• 59:37Speaker 02

  Super interesting. It goes hand in hand with disintermediation, where a lot of these assets are things which, in theory, are sort of user-generated and sort of always have been, but like only in theory. As an example, how about a book? Are books user-generated content? I mean, yes, sort of. They're like author-generated content. But historically, what gate keeps them? It's not demand and it's not supply. It's like publishing houses and bookstores. And then like all these things which take ultimately user-generated content, get it into the hands of consumers, but with a lot of weird distortion and a lot of weird bottlenecking and gatekeeping.

• 1:00:21Speaker 02

  And now, what are we starting to see? More and more people self-publishing new books and saying like, wait, I can upload a PDF to my blog. And now I've published a book, I guess. So much for getting an agent to find a publisher. And I think we're not quite there yet for mass market, but I think we probably will be. You can't reflect on like, what is the role of a publishing house? I think that we are seeing that shift in a lot of areas. I think that sometimes it's all at once and sometimes it's bit by bit. But it used to be the case that when people were trying to decide what companies to buy, they would all outsource it to the same seven asset managers, mutual funds, pension funds. And that's what moved markets.

• 1:01:03Speaker 02

  It still happens to some extent, but a lot of people take it into their own hands and they go on social media, they make decisions about what companies to buy. And they buy them. And it's a very different dynamic. And you get some things that look like more efficient markets and some things that look like less efficient markets. On the one hand, you get AMC and GameStop and Hertz. On the other hand, I think you get some companies where there is probably much faster price discovery because of this. I think Tesla is probably an example of that, where that happened way faster than if the old institutions were gatekeeping it. And that's probably not the type of content you're thinking of, but I think it's the same phenomenon of people taking their lives into their own hands and the web enabling that. And so now you can talk about, okay, well, how about real content content?

• 1:01:48Speaker 02

  Well, NFTs, that's user-generated content, direct to consumer. With sort of lightweight platforms facilitating that transaction in a competitive market where you choose a different platform if you wanted. How about tokens with different token economic models? In most countries in the world right now, it's a flourishing industry, not really in the United States because of questions around whether some of these are securities. You can look at user-built applications, which, okay, that's what a startup is. But again, the amount of hassle and intermediation usually put into that is like massive.

• 1:02:22Patrick O'Shaughnessy?

  Very hard, high friction to start a company.

• 1:02:24Speaker 02

  High friction. You need to know the right VC firms to have a shot at getting the funding necessary. Now you see people from their basement starting an app online. And that's another variant on the same thing. And I think ultimately it's going to be good. I think ultimately it disintermediates, it creates more efficient markets. It removes friction. It allows things to move much faster. It's also a bit of a rocky road. It means that there isn't natural curation point. And the world has to in a somewhat ad hoc way, figure out how to do that.

• 1:02:56Patrick O'Shaughnessy?

  If we think about like some of the layer one blockchain salon or whatever, Ethereum, probably the best two examples as developer toolkits more than anything else that address the problem you just laid out. You just get to get going right away tomorrow, tonight, rather than go through the arduous process of starting a company. What does that mean in terms of how many of these layer one blockchains there need to be? Like today, there's a couple dominant ones. What do you think?

• 1:03:21Speaker 02

  I don't see a reason there need to be two. That's not saying there won't be. But why do there need to be two? Why not one? It's not immediately obvious. I think what I'd say is, right now, there should be many because there should be competition. As platforms, there should be competition driving them all to keep getting better and driving the world to figure out which they want to use. I don't know for sure what the answer is going to be there. But I do think that the world is starting to understand better than they did before. I think you're starting to see a lot more sophisticated thinking than even six months ago about layer ones, where I think there's just some really obvious important questions you have to be asking. What's the end game here?

• 1:04:05Speaker 02

  What's the end game that matters the most? What's a really important end game? The really important end game is a billion users using some blockchain, right? It's trillions of dollars using some blockchain. And what goes along with tens of trillions of dollars and billions of users? And you just look at a lot of examples. The answer is millions of transactions per second. That's sort of how it is. And I think that just like you can't scale if you're not going to get to millions. I think you just sort of need to get to that level. And if you don't, you're almost probably never going to be a big part of the picture in terms of actually facilitating the bulk of the economic activity or non-economic activity happening on blockchains. So I think that's like incredibly important piece of this.

• 1:04:48Speaker 02

  And really, the question is, how would you build infrastructure that can support that? And at least somewhat composable. So you don't want to take a single order book and shard it. That doesn't work. Two people try and lift the same offer at the same time, it's a mess. In fact, a single exchange shard is pretty bad. So I think you need 100,000 TPS per shard eventually. And really, within an industry, you don't want to break composability. You want to be able to seamlessly move capital between one application and another one that are both financial trading applications. I think you're starting to look at something like a million TPS per natively composable, single shard, single-thread unit.

• 1:05:29Speaker 02

  And maybe you have to shard it after that or use layer twos or sidechains or whatever you want to call them. But I think you want to maximize how much you can get into one composable blockchain first. And I think you want to shoot for like a million or so. My honest sense here is that like it's a lot of values in getting a single natively composable million TPS blockchain.

• 1:05:51Patrick O'Shaughnessy?

  You vote with your wallet or with your code and you built on top of Solana. Probably no surprise to people listening that that's the one with the most transactions per second and scalability in that way. What does that mean you think about Bitcoin? So much of this ecosystem is still Bitcoin, obviously, like that is not the place. Bitcoin is not the developer tool that anyone would want it to be. It doesn't support any of what you just said. So how do you think about the original asset in this space that got the whole thing going?

• 1:06:16Speaker 02

  I don't think of it as a general purpose blockchain. As you said, it's got what? Five, 10 TPS. That is not enough to be general purpose medium for exchange. What it does let you do, though, is move Bitcoins around. And that's sort of my sense. The point of the Bitcoin blockchain is to move Bitcoins around. It's not to facilitate general financial. And so then I think that question speaks down to how cool is Bitcoin as an asset? And I think that it's like, has potentially a large role in the world. And I don't want to say that it doesn't. But I do think it's just sort of like worth acknowledging explicitly that it's a different thing than what I think Ethereum and Solana are trying to do.

• 1:06:59Patrick O'Shaughnessy?

  How do you think about the future of everything on a blockchain? Like, do you think that we'll reach a state where every meaningful financial asset trades 24/7? You can see it by an open order book, all the things that we spent the first chunk of our conversation talking about. Because that the future that we're heading towards? And if not, like what gets in the way? What stops it?

• 1:07:18Speaker 02

  Not everything. So blockchains are not the most economically efficient thing in the world. The most economically efficient thing is a single server, a centralized server. And how much more efficient? Well, you probably have like 10,000 servers if you're a decentralized blockchain, all computing the same thing. A minimum latency of like 100 milliseconds. So that's how long it takes light to travel around the world, which you need to do if you want to have a geographically decentralized blockchain. The question is like, which things are not strongly constrained by latency or compute cost? Robin Hood, not at all constrained by those. Totally fine to be on a blockchain. Two HFT firms trading with each other, absolutely constrained by those.

• 1:07:59Speaker 02

  HFT firms are probably always going to be mostly trading against each other on centralized servers. If you think about NetSays, communicating about which movie you'd like to watch, what the recommendations are, selecting it, figuring out where to download it from, all of that can happen on a blockchain. Actually moving the video file, way too massive, not going to be economically efficient to do on-chain, but you might have something like a torrenting type of protocol, where you have effectively an on-chain protocol to communicate, and then some off-chain protocol to actually send files to each other, or IPFAS or whatever. That's sort of my sense, is that the most compute constrained things will happen off-chain,

• 1:08:42Speaker 02

  but that there's a world, and I don't want to say this will happen, but it might happen, where most things that are not compute constrained and not latency constrained, end up at least partially on-chain. And that blockchain's also formed sort of the connection layers between all of these things.

• 1:08:55Patrick O'Shaughnessy?

  I've seen you write before about you personally having more RAM than hard drive space. Describe what you mean by that, and whether or not you think more of the sort of key builders or entrepreneurs in the future will be defined in that same way.

• 1:09:09Speaker 02

  So what I mean by it is basically like, I suck at trivia, I'm not good at it. And so we look like raw number of total facts that I can recall, I don't think I'm particularly good. I think where I'm a lot stronger is like number of concepts I can hold in my head at once, make a decision that references many things at once, in sort of like a nuanced way. I think that's why I'm much stronger at like much more relatively large amount of actively accessible memory and knowledge, relatively less sort of long-term storage of facts to be able to dredge up when needed. I sort of think it's pretty useful for being in a position where you have to be on top of a lot of things, and you have to make

• 1:09:53Speaker 02

  sure not to lose important threads, which I think fits entrepreneur role pretty well, or the trader role for that matter. I think if you look like a research role, it's less clear that that's the relevant archetype. It's more like focusing on one problem and diving deep into it.

• 1:10:12Patrick O'Shaughnessy?

  So RAM is flexibility and that's rewarded in the world of entrepreneurship. Strange question is, you've amassed wealth faster than arguably anyone in history, except maybe Zuckerberg. Has that felt weird? Does it affect you in unexpected ways? Do you care much? People I know you might get hit by it the least, but hard not to imagine getting hit by it somewhat. What has that been like psychologically to be on this ride?

• 1:10:36Speaker 02

  I think it hits me less than it would most people. I don't want to say it doesn't hit me at all, but I think it doesn't change how I feel about most things that much. It certainly changes how other people interact with me sometimes, especially people I don't know very well. And so that's taken some adjusting to, but I don't think it's like a huge change in my day to day life.

• 1:10:58Patrick O'Shaughnessy?

  What have we not talked about that's consequential about the future in your opinion? We've covered a lot of ground. There's 40 of my questions that we didn't get to and we're almost out of time. So maybe we'll do it again, but what major muscle movements have we missed that you think are really important for people interested in this trend to consider or think about?

• 1:11:17Speaker 02

  One of the general themes that I've become more and more convinced by over time is that all the upside is in, all the expected value is in the upside tails, not in the median outcomes usually. And you should take that seriously and it implies weird things, which I think are true. Like that often the right path is one that very well might fail. You really should be thinking the whole time about what is the upside? What's it look like? Where is it? What can you do that will keep that in mind? Even if you're not using it to make everyday decisions, but like from a high level of strategy perspective. And I think that that's sort of like, as the world speeds up and gets wackier, that becomes more and more powerful and more and more important.

• 1:12:02Speaker 02

  And I think it becomes like more and more important to take that seriously. And to acknowledge that sometimes things that sound crazy and unlikely, might be unlikely, but maybe not so unlikely that they're not super valuable in expectation. I think a lot of the crypto industry has played out that way. I think that like a lot of how I now, who did not always think about what I do plays out that way. I think it's a pretty fundamental shift in how you think about what you're going to do. I think it is super important.

• 1:12:35Patrick O'Shaughnessy?

  Is there a single decision that comes to mind when you think about this idea of kind of power laws ruling everything around us that most exemplifies this idea? Some decision you made because you were respecting this concept?

• 1:12:47Speaker 02

  When I started FTX, I was the most optimistic, I think, of people on the team. And I thought there was a 20% chance of success. And other people were lower. Sort of like did some math and it's like, oh, wow. It seems like very high upside, plausible, it could work, very high expected value. I think that math turned out to be way too conservative. I think as it turns out, I was still massively not appreciating the upside enough. But it was still way, way, way kind of more extreme than I think what it was easy to get to. And just in general, I think that's one of the clearest cases of like, go for it. It seems high upside. Most people thought it wouldn't work.

• 1:13:28Speaker 02

  And it turned out that the straightforward analysis, expected value analysis was the correct one.

• 1:13:36Patrick O'Shaughnessy?

  So in the digital era, be bold, be different seems to be the right strategy.

• 1:13:40Speaker 02

  Yeah, and be smart and do well, obviously.

• 1:13:42Patrick O'Shaughnessy?

  This has been such an interesting conversation. I literally do have like 40 questions I wasn't able to ask just because of time constraints, but so appreciate your time. I ask the same closing question of everybody. What is the kindest thing that anyone's ever done for you?

• 1:13:55Speaker 02

  There are maybe a few things there, but I think, and it's sort of the boring answer, like supporting me in what I've been doing. I think sort of believing that this might work when most people didn't and encouraging it. Maybe the thing that actually resonates a little bit more with me, I think it's been like a lot of the people in the effective altruism community who have totally independent of me or anything, been incredibly dedicated and selfless with what they're doing with their life and achieve really spectacular things in a way that sort of involved making personal sacrifices and seeking the altruistic upside, if not the personal one.

• 1:14:40Speaker 02

  And that, that, those are the ones I think resonate more with me in some sense.

• 1:14:44Patrick O'Shaughnessy?

  Sam's been so much fun. I cannot wait to do round two with you. I'm sure in a year we'll have enough to talk about or something. This has been a blast. Thanks so much for your time.

• 1:14:53Speaker 02

  Thank you.

• 1:14:55Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

• 1:15:24Patrick O'Shaughnessy?

  You