Road to Billions
We are honored to gain insight into Sam Bankman-Fried, FTX and how SBF started from a Wall street trader to where he is today.
Q: Could you tell us a bit about your “effective altruism” philosophy and how it leads you to establish Alameda & FTX?
A: In fact Altruism is basically thinking about how you can maximize the amount of positive impact that you have on the world and what you should do with your life and career in order to help have that impact. And I end up going down the path of earning to give which is basically trying to make as much as I can in order to be able to donate as much as I can which let me to wallstreet and then later to start trading cryptocurrencies, because it seems like there exists a lot of trading opportunities there. That was late 2017 and that’s how I eventually got into crypto.
Q: out of curiosity what does the acronym FTX stand for? Fungible Token exchange? Full speed trading exchange?
A: Futures Exchange. F&T both from futures. It’s where it originally came from. It was the working name of the exchange. And we just never came up with something that we liked better. So we just stopped with that.
Q: When it comes to the first bucket of gold, would you like to share more stories about “kimchi arbitrage”?
A: The first thing that you need to admit is that crypto is really good trades to do. In particular there were arbitrages all over the place, cases where assets are traded a lot higher on one exchange than they were on another. The most famous of those is called the kimchi premium with a difference between the price on US exchanges and on foreign, non-US exchanges, particularly Korean exchanges, in late 2017 and early 2018. You got up to 50% premium in Korea at some point. That was a very difficult trade to do though because the Korean Won is a restricted currency. So you could not actually complete that trade easily. What we ended up doing instead is looking at Japan where Bitcoins on Japanese exchanges were trading at about 10% higher than there were on U.S exchanges. It was a lot less extreme than Korea. But unlike with Korea, you could actually do the trades in Japan because the Japanese Yen is free floating currency that you could actually get access to. So we started looking into this in late 2017, and built up the operational capacity to do it. In early 2018, I did spend a while doing a budget of arbitrage in crypto that was probably the biggest stuff of that.
Q: Wonderful. Instead of calling it Kimchi arbitrage， we should call it Sushi Arbitrage.
How did you unintentionally intervene and help out Sushiswap in 2020?
A: Sushiswap is a decentralized exchange and it was having a really exciting type of beginning so to speak, enormous amounts of attention were coming in. It quickly became the second biggest decentralized exchange by volume in the world. What ended up happening though pretty quickly a disagreement emerged between the founder of it and the users of the protocol. The founder went by the nickname of Chef Nomi. I don’t know who they really are. I don’t know anyone who does. Basically, there was a developer fund which got a fraction of all the tokens. It was intended to support the people to build the protocol. Nomi is the original developer and I felt it’s appropriate for them to take a big slice of the developer fund. And so they did, for themselves. The community was not happy about this. Felt like at most Nomi should only have taken some slice of it but more importantly that should have been in discussion. That there should be between Nomi and the community that there should be an open discussion, or a vote over what to do with that. Nomi didn’t want to give back the funds. It turned into a really gigantic argument. And there was not very much of a way forward. It was threatening to engulf the whole protocol… and sort of bringing it down. Nomi was basically the start-up of the fund, I have been an observer and had commented on it a bit. And on the way out, Nomi handed over control of some pieces of protocol to me. I was not expecting this. I was asleep at the time when it happened, I was pretty confused, and I ended up spending the next weeks working this out and people working with me ended up doing the heavy lifting. We spent weeks frantically researching everything about sushi swap and getting to the point where we understood the code that had been written, and we were able to help to deploy this key transitory element of it that was going to launch the final protocol. And then we held an election for the sort of the ultimate group that was going to manage the control of the protocol that was going forward and help it get onto the path of decentralization and pass it back to the community. It was a pretty weird thing that just came in that I had to intervene, very much changing the course of my plans for summer of 2020.
Q: As the founder of the leading derivative exchange, could you guide us how to “not do dumb things” for a successful crypto product?
1) People see the enormous success that a lot of projects have had in crypto. Many of them have done dumb things. I think people sometimes end up some sort of copying those dumb things. and the thing like ah, I guess that’s not the good thing to take away. What’s really going on there is that if you are really early into crypto, that is phenomenal, it's amazing for your business, you are first in the right place at the right timing. Maybe that was not an accident. Maybe it is a great business decision. But it is not necessarily the right business practice. One key piece of this which sounds sort of silly and obvious but it’s really important that is often under-appreciated is because we are in this new wild space that is growing so quickly and a lot people are doing really well in, that doesn’t mean that certainly does give you the right to ignore all of the normal factors that is going to make a company do well. We see this again and again. People decide to build blockchain gaming. Gamings on blockchain are integrations between video games and blockchain. They all forget to build good video gaming. So it felt like building crappy video gaming on blockchain, sometimes it becomes very popular. The truth is there is huge demand for blockchain integration with video games. But I think the right thing to do is to build a great video game, and that would be even better. That is certainly one example where we see a fair bit that things are pretty silly and make no sense from the outside, but a surprising amount happens in crypto, and maybe is not as shocking as you think given some of the context. Remember to always do a great job of whatever you are doing, your responsibility of doing that certainly has not gone away.
2) The second thing I would say is to understand the regulatory
environment. It’s a real task to operate perfectly from a regulatory perspective in 200 jurisdictions at once in that ‘s something you put an enormous amount of effort into trying to do as supposed. We couldn’t certainly wouldn’t say that one should be expected to be held to perfection on that or anything. But something I have seen a fair bit is people who don't even come close to living up to that and who instead do really egregiously “dumb things” from a regulatory perspective, who will run a business in a way that everyone knows is not sustainable that any observer with any legal background would look at and say that’s not a legal way to do that. Like there is no ambiguity…There have been a number of players who have done this and there have been some exchanges and other companies. I think this is one in these cases where it is a really messy area. One dismiss that fact because it is true and important. But just because it’s complicated and messy doesn’t mean that nothing matters on the regulatory side. . It’s obviously the opposite. A lot of things matter. The fact is that there are lots of grey areas. There are certain places without grey areas. There are certain places where it's absolutely clear what the answer is. Again I think it’s one of the things like there are great forward ways to go about understanding your regulatory context that at least get you through a reasonable place and you just can’t totally ignore that. Alway sanity check what you are doing, use common sense. Not everyone does that, and that’s something else I’d like to tell you.
3) The last thing is whatever your core product is. It’s really important that you deeply understand the core function that it’s serving. How traditional finance has done those things if they have done them before. They can understand whether it is correct to do it differently. And I think there are risk engines, one area that is historically done quite poorly by a number of people. In the industry times where each day, millions dollars of customer funds has been lost, (such as) derivatives trading with a risk engine that could not handle the position that was put on, and it is not good, a lot of funds to be losing in that way. That is one part when a lot of people (building the product) did not pass sanity checks there… at a point of bleeding millions of dollars a day… You really should be checking that out. People were actually not doing that properly sometimes.