Sam Bankman-Fried on Arbitrage and Altruism | Conversations with Tyler

Hello everyone, and welcome back to Conversations with Tyler. Today I'm chatting with Sam Bankman-Fried. Sam is the CEO and founder of FTX, a major cryptocurrency exchange, and the founder and head of Alameda Research, a major cryptocurrency trading firm. Sam has, in a very short period of time, gone from just being a person who believed in effective altruism to being perhaps the world's leading practitioner of earning money to give it away. Sam, welcome.

Thanks for having me.

Let me do this a bit in reverse and start with the Sam Bankman-Fried production function, like how it is you do what you do. So you had a lot of success arbitraging Bitcoin prices across Japan, other locales. What's the fundamental skill that you have that made you better at that than other people? So a lot of people are smart, a lot of people work hard. Like, what's the extra thing? Factor X of Sam Bankman-Fried there?

Quantum mechanics.

How so?

Um, uh, no, and it's an interesting question, and I think the, the most interesting thing about it is that there isn't an obvious answer. There isn't like, you know, good at trading is the thing you could say, but then you break that down like, all right, well, what's it mean to be good at trading? And, um, it's not like I had a deep— it's not like you go to school for, for trading and get a trading degree. They don't really teach it in school. Tyler Cowen. It's really a wide collection of things, but I think what they center around is like, here is a messy thing. Like the world is very messy. You know, math might look clean, but anytime that you jump out into how things really work, there's always going to be factors that you can't consider. But there's a huge amount of power in being quantitative.— there's huge power in thinking about things not just from a qualitative angle, but putting numbers on things, building statistical models. But doing that in a world where you know you're forgetting an enormous number of factors, um, how do you do that? I think that is one of the core things here, is like getting quantitative and numerical when it's really hard to do so.

How do you think your early experience as a gamer feeds into what you've ended up doing professionally. So you played Magic: The Gathering. You still play, right? How is that game different and how does it relate to how you think about what you do in your business?

I think that there are some overlaps and I think that like, I mean, you know, I was at Jane Street before I jumped into crypto and, you know, a lot of the interviews there looked like game-type questions or framed as games. And I think a lot of the reason is that a nice property of games is you're just put in front of a messy situation And in the end, your directions are do the best you can, right? The directions are like, here's how it works. Now just start playing it. And like, you can do whatever thinking you want, whatever you think is helpful to get you to make the right moves. But in the end, what matters is making the best moves that you can, given whatever uncertainty that you have. And so you're constantly implicitly making probabilistic decisions, but in a world where you know you can't calculate everything out. And you need to make sure to include the important factors and not to spend all of your time worrying about factors that don't matter and sort of balancing those reasonably. And so I think that sort of is one piece of this. And then I think another thing that I would say that I think was like really important for, for, for trading is really, really grinding until you do a good job. And like thinking of it in terms of my goal in the end here is to do a good job. My goal isn't like, you know, check this box. My goal isn't like send this email to this person telling them to do this thing. Like my goal is I need to make the money from having done the trade, whatever that takes, and do everything that it takes to get there. And when you think about some of the trades, especially in crypto that we did, half of it was operational. And half of it was really annoying. Like, you'd have to jump through some really bizarre Byzantine hoops in order to get where you needed to go. And I— that meant that, like, you had to fight through bureaucracies. You could never sort of let them get the best of you. You had to keep being creative and pushing for more and more solutions until you could get there. And so I think that sort of, like, tenacity and an ability to, like, think of potential solutions to problems and try them out. Is like another really important piece of it.

So if you're 14 years old and you're arguing with your mother about the repugnant conclusion and trolley problems, and she, as you know, is a famous consequentialist, right? Yeah. How does that affect your attitude toward arbitrage? Isn't the trolley problem a kind of arbitrage?

Yeah, I think that there is something there. And I think that like more generally, even if it's not framed in terms of like thinking hard about numbers necessarily, there's something very quantitative about how you view the world. If you're thinking about things from a utilitarian perspective, from a consequentialist perspective, there's this really big notion of like, you know, in the end, I— you turn things into numbers and you decide which number is the biggest. And it might be really messy to get there, but that thought of like trying to take a messy system and do the best things you can when ultimately you care about some quantitative property, even if you can never be sure that you're calculating it right, you do the best you can.

And both of your parents are famous law professors at Stanford. I actually knew who they each were. I just hadn't known they were your parents. Uh, but in which respects have you brought a legal mind to your endeavors?

So it's become increasingly important over time. And if you talk to a random financial regulator, say a year ago or two years ago, and said, you know, what fraction of your time each day do you spend thinking about cryptocurrencies? Right. They probably say like, yeah, basically literally zero. Like, I've like, you know, not quite saying I've literally never thought about them, but this is like a total afterthought. If you ask a random financial regulator somewhere in the world today, What fraction of your time do you spend thinking about crypto? Ah, 50%, like an enormous fraction. You look at discourse, you know, if I tell you that the Senate is having a hearing on something related to finance today, what do you think the odds are that it's about blockchain? Yeah, you know, 50/50, right? Like, it's an enormous fraction of the discourse in the policy world and in the regulatory world in a way that it wasn't And what that means is that, you know, a huge fraction of the industry and of our business right now is understanding the nuances of the regulatory system, understanding the intentions of regulators, understanding which directions it might go in, understanding what would solve for the various things that people care about, and trying to find ways to get there in a really messy world again where there are like how many countries are 200 roughly countries in the world. That's a lot of countries. And each one of them is trying to figure out what they're going to do to regulate cryptocurrencies. And so it's not like, you know, you just like read that one law book on cryptocurrencies and you're done. Like there's 200 of them and half haven't been written yet. Like half the law book is effectively empty. And but that doesn't mean that there's no regulatory framework. It means that they're still kind of thinking about it. But, you know, you can't just like ignore it and assume everything's going to be okay. So it's just from a large number of perspectives, like incredibly messy right now and also just incredibly important for our business and the future of the industry to manage that process well.

Now, you didn't start as a manager at all, and you now manage what must be hundreds of people. What's the non-obvious thing you've learned along the way that is important to you?

A ton. And I was, I thought when I started that I was pretty good at managing. I think I would've given myself like an A- to an A, probably honestly speaking an A, like for being honest, that's how I would've graded myself before I started up Alameda. And in retrospect, I think like B- maybe was the appropriate grade for me. And in particular, I think I was like a pretty good manager when everything was going really well. Conditional on there being no real problems, I think I was pretty good at making things happen, talking to people about what they were doing, motivation, things like that. As soon as shit hit the fan, I had no idea what the fuck to do. I had no idea what do you do when two employees just vehemently disagree with each other about what to do and no amount of talking causes those disagreements to come together.

So what do you do?

Yeah, so what do you do? Um, I, well, I mean, query whether I'm the one you want to take advice from, but I, I, I think I know a decent amount about it by now. I've had a lot of experience, um, thinking about this and, you know, acknowledging that it's messy and that nothing is perfect here. Um, I, what I think about now is basically like, first of all, the most important thing And embarrassingly, a thing that I think a lot of people forget about and forget to do well, um, is first of all, try to get the right object-level answer. Like before you get into like management disputes and things like that, like understand what the truth is. And, and that is legitimately, I think like the biggest weakness of a lot of managers is that they jump straight into how to manage without first thinking, Well, what's the right answer in terms of the object-level problem we're trying to solve? What coding practices should we use? Should we run this advertisement? Whatever the question is. So first of all, find the right answer, do whatever research you need to do to find that answer. And then I think that I think is really important, at least how we function, is having a company culture that that is what matters. And making it clear that in the end, that's what we care about. That's what we're going to push on. And we're going to be pretty ruthless on that, caring about making the right ultimate decision. And no other arguments are going to win over that one when push comes to shove. And everyone has to be aligned on that fact. But then putting that aside for a second. So, okay, so you've done that. Now what do you do to actually resolve disputes, if there is a dispute, um, you know, one thing that I think I didn't realize at the beginning was that first of all, like, it's great if everyone's aligned and if everyone thinks the same things, but in the end there has to be some process by which everyone agrees you're going to come to a conclusion, that like there's some way to ultimately resolve these disputes. There's some person, odd number of people probably one person, honestly, who like ultimately makes that final call, and everyone knows it. So that if a civil war were to break out, everyone can just look at how it's going to end, and now there's no civil war. And there are downsides to that, but I think they're outweighed by the upsides from it. So I think that's one important piece of this, um, that— and I think that's something that I've changed my thoughts on a lot over time and, and become a lot more cognizant of.

What accounts for the Miami Heat being such a well-managed team so consistently?

Yeah, it's, uh, I mean, it's probably the coaching advice we're giving them. Uh, no, um, I, I, I, it's actually, honestly, that's an interesting question that I would be interested in, in talking with them about, is, um, and, but, but you do see this, and, and with some teams I do have a sense of what the answer is. I have a sense of, like, you see some sports teams, they outperform year after year after year. And I mean, whatever, the Patriots, probably the most notable example of that, right? And I think everyone knows it's Belichick and the staff that he's built and the culture that he's built centered around, A, outthinking some other coaches, but also a big thing there is doing the right thing, right? Like, what's he known for? Being kind of gruff, but like, in the end, like, he'll make the right play. He'll come up with like wacky new formations, they'll be good. And like, he doesn't care that much what's popular. He doesn't care that much about like how things quote unquote are done. Like he cares about like what's the play that will optimize our chances of winning and how do we do that? And you can see that in a lot of areas, right? Like look at the running backs that New England has employed over the years. It's sort of this random motley crew of people who everyone would have said like are sort of like, you know, randos and like unlikely to be that good or important., and then they like lead the league in rushing, and then those running backs go get some payday somewhere else, and they have some new running back no one's ever heard of, and again, they, they lead the league in yards per carry at least, or some tandem of them. And I think there's a lot of things going on there. So, so I think that like, just like, that, that's an important piece of this. And, and frankly, I think for sports teams in general, like, a lot of the fruit is low-hanging., and it's like consistently picking the low-hanging fruit, doing a good job, thinking carefully about, about what the right thing to do is, not getting too sidetracked by what the convention is for what to do somewhere. I think that gets you a lot of the way.

Now let me ask you a few questions about effective altruism, a movement where you've been a leader and major supporter. Thanks to people like you and also Open Philosphy, effective altruism seems to be moving away from being funding constrained to now being talent constrained or people or organization constrained. A, is that true? And B, if it's true, what does that mean for strategy?

Yeah, I think it's sort of true, but I think it's true a lot less than most people think it's true. That is the meme right now. Like, like, that is what most people will say is that, like, effective altruism is now not funding constrained because of myself, because of Dustin Moskovitz with Open Philanthropy and, and a few other things. That's been a pretty big update. Um, there certainly is a lot more funding than there was before, but I think saying it's not funding constraint, I think people go too far in that. And I think some, to some extent, that's a symptom of not thinking hard enough about great ways to spend money. I think that like, there needs to be more innovation in ways to spend money before there's going to be the capacity to spend the amount of money that, that effective altruism is going to have. But I also think that like, that innovation is happening and it will happen. And so I just think that, like, there is billions a year that I can see spent extremely effectively. That's one thing I'll say. But, you know, to the extent that it is funding constrained, and it certainly is more so now than it was before, I think a big piece of that is that I, you know, basically it's— I The biggest thing that's missing is, I think, a weird thing. Like, if it's not funding constrained, then it has to be something else constrained, right? Like, that sort of begs the question of, like, well, okay, then what is sort of the limiting factor on growth of the movement? And I think people will say, like, people. But, okay, you can talk to a lot of effective altruists who aren't sure what they should do with their life, which I think makes you wonder what people means exactly. Like, there are—

it's not that there aren't people anywhere, um, but those people are maybe not project drivers, right? Like, they would be an okay number 17 in an organization, but they're not going to make things happen. They're not the Sam Bankman-Fried arbitrageurs of the world. That is scarce. You must think it's scarce, right?

I, I do, I do. And I do think that that is probably the One of the most scarce pieces is someone who can start something and drive it and lead it and take responsibility for it and be the person who's like, if this doesn't go great, that's on me. Like, I will do whatever it takes to make sure this thing goes great and I can get it there. And like, I, you know, I'm not allowed to blame anyone else for failing. If it fails, that means I failed to find a way to route around whatever problems it was having. I think that's a big piece of it. I think there's maybe another thing which is a little bit of a variant on that, but I think maybe an interesting variant, which is like, um, a constraint on everyone getting together and doing the thing. Like, what, what's it take for a new project to start up, right? A new altruistically minded project. It takes funding. Um, it takes founders, it takes employees. It takes ideas, um, and they all have to come together at the same place in the same time and meet up. Um, and I actually think that that is quite hard and quite difficult. Um, and that often that is actually what is blocking something. It's like the funding is there, the people are there, maybe the founders are even there somewhere. Like, I think sometimes they are, but what happens is like they kind of don't— I don't know, they kind of just like cross paths in the night, so to speak. And I—

so coordinators are scarce?

Coordinators are scarce. And but, but it's easy to be a coordinator and like have that feel kind of lame, like, oh boy, like, and I'm directly a coordinator, but like, I don't, I don't, I'm not really coordinating anything right now, like nothing. I don't know. I think that's a dangerous position to choose to hold in a lot of ways. And so I want to be like, you're cautious about saying that that is the blocker. I think that like, I, although I think it is a blocker, but I think that like, it's sort of coordinators, but it's sort of someone who just puts the flagpole down and says, this has happened. This is happening tomorrow in Redwood City, and the funding is there. I know it will be there. I guarantee it is there. And I found a person, and he will be there because I'm going to make him be there. And, and that's like, I know it's happening. I can prove it's happening. And when you do that, the interesting thing is everyone shows up. And, and so I think that there's a little bit of this like getting everyone to take that leap together that's necessary for a project to really start up.

So let's say you had a magical capital gain of $1 million and you had already decided to give it away. This happens to you all the time, but at the margin, the next million, where do you give it?

So I think that there are a lot of good places to give it, first of all. Like, you know, I think that there's no shortage of good answers. And, you know, you can look at, you know, any of the sort of standard ones that I think people will, will talk about. Let's talk about great answers. Like, what would be— what would be like something that I think would, would sort of like go above and beyond what people can usually think of to do with money? I think there are things there. So, and, but, but to some extent, I think that they need more than just money. I think money's an important piece of it, but, but it's not the only piece. They also need that drive to exist and to happen and to happen right and well. What I think I would do is I, I do one of two things, and I don't want to say these are the causes that necessarily matter the most long-term. I do think that they are the most important for the long-term of humanity, maybe right now, but others might develop really great ways to innovate soon. Right now, the things I'm most excited about, I think one of them is pandemic preparedness. This is probably the one I've been thinking about the most recently. I think the single clearest takeaway from COVID is that we don't have our shit together. As a world. Like, that's what's become clearest, is that we— there's no magical wizard behind the curtain who makes everything go okay. Um, it's actually a mess. And, uh, and everyone can agree that we screwed up the COVID response in every possible way. And but I think one of the more depressing things is it also kind of seems like we're not really ready for next time. I don't think—

not at all. We haven't improved anything as far as I can tell.

Right. Other than getting common knowledge that things suck, we haven't actually like made them not suck. You know, we've just sort of agreed that they suck. And so I— that's not great. And I— and we got a little lucky with COVID frankly. We got lucky because it could have been much worse. For all of its ills, COVID was not the like most lethal disease ever. And I— the next one might be more lethal. You know, the next one might be— I, I might be a lot nastier. And I, we— I don't think we'd be ready for that one either. I think we'd fall on our face just as much, but death tolls could be way higher. You could imagine something destabilizing for society. I'm still not sure we get our shit together on it. And I— we seem to have only one mode, and that mode is like freak out and do kind of some stuff in a disorganized way, like shut the economy down. We're good at that, and that we're really good at dragging on in particular, like as long as possible. Um, we can eventually make a vaccine. Actually, you can make vaccines quickly, but it still takes a year to get them out, which is fast by vaccine standards but slow by everyone-is-dying-right-now standards. Like Like if it was actually that type of scenario, a year is not necessarily okay. We are, I don't know, like we don't really have any—

So to boost pandemic preparedness, you have your million dollars. To whom do you write the check or to what?

To whom do I write the check? So I will say that I have been giving some funding to an org guarding against pandemics, I guess, conflict of interest note. My brother is heavily involved in it, so take that for what you will. But it's basically— it's doing a number of things, but the biggest of them is, is basically lobbying Washington for more spending on pandemic preparedness. This is something where there's actually a lot of interest in doing this, but, but getting across the finish line is quite difficult. But I think that like a dollar can turn into way more than that when done effectively there. And that's, that's, that's where I have been giving. The other thing that I think I would be really excited by, and this one I don't have an organization name for, but is funding efforts to build up vaccine capacity vaccine stockpiles, distribution networks, early detection systems, and other things that could be done rapidly, that could be done within a couple days of a new pandemic appearing and be distributed. And I think maybe over the next year I'll have more, I'll have some actual organization names on that one. None for now. But that, that's like one of the things that I would like heavily think about doing, and in fact am doing right now with that marginal dollar or marginal million dollars.

As I understand your views, you're a fairly pure Benthamite utilitarian. Is that correct?

That's correct.

Now, given that that's the case, as I see it, the replacement costs of human life are pretty low. So you could spend a modest amount of money and get people to have more kids. So why then should we ever spend a whole lot of money on life extension since we can just replace people pretty cheaply? We can grow yoodles more easily than save them, is another way to put it.

Yeah, I agree.

Then why isn't the priority, you know, birth subsidies, maybe in some roundabout, highly indirect manner?

So speaking for myself here, yes, I will say that I find that I'm not very compelled by life extension research for the exact reason you said. I think that it is really cool. Like, it's really cool, but I'm not sure it's the most pressing problem for the world because I— yeah, as you said, like, I— it's— we've been getting on okay without it. There are real human costs to it. It would be great to have, but I don't think is necessary for the flourishing of the world. So I, on the, on the, the sort of birth subsidy side, you know, there are a lot of things you can do to try and influence population rate up or down. And I actually want to look into that a little bit more and, and like develop a more refined opinion on it. I will say that like at some point feedback mechanisms might start kicking in. At some point you might have some births replacing others. And at some point you have to think hard about like the factors in both directions there. And what does it do to international coordination? What does it— like, I don't know the answer to this. I will say that whenever companies start to get bigger, they become a shit show. Now, probably that like that, that really shouldn't necessarily mean that that's true of like the world or countries.

But it is true of countries. The best governed countries tend to have fewer than 20 million people, right?

Yeah, I think that's right. And so I don't want to make a strong statement here. I guess all I'll say is like, that's something that points in the opposite direction. And on that, there's— I just haven't thought about this hard enough to feel confident in my thoughts on like fertility as it relates to, you know, current fertility as it relates to the sign of the world. The other thing is if, and this is an if, but if you think that the next few years are extremely crucial for the world, you know, the next 20 years, the next 30 years, that's like anything relating to birth is going to be delayed by 25 years in impact on the world. And so depending on what your timelines are for sort of Earth-changing technology, that'll sort of influence to some extent how much of a discount rate you apply on that. I don't think it's obvious what the right number is there.

Let's say we can raise animals so they have positive utility. I've seen Swiss cows. They look pretty happy. The final moment is not so great. Why shouldn't we just do that and eat meat? And it's good to eat meat because we support them, but we ban factory farming. Why doesn't a Benthamite believe in that? Or does he?

I'm totally fine with things.

You're a vegan, right?

I am vegan.

Eat Swiss cows. Isn't that a moral imperative?

Uh, so I, first answer is I have no problem with people eating Happy Meat. If it really is net happy, that is fine with me. Um, and I, I don't personally do it. The reason I don't personally do it is like, basically it's too confusing for me. Um, the cognitive load. So when I was first trying to go vegetarian and then vegan, It took me 6 months to make any progress. I just, like, it was really unpleasant, made no progress at all for 6 months. And basically each day I'd go to the cafeteria and be like, what good vegetarian thing do I want to eat? Like, think for 4 minutes and then get a steak and cheese sandwich. And so that didn't go so well. And then finally one day I was with my friend who had just gone vegetarian. A mutual friend said, oh, hey, you know, are you vegetarian now? To him, he said yes. I was eating tofu that night and she said, oh, you vegetarian too? And I said, yes. I had a burger for lunch that day. So yes, was not a very factually supported answer at the time, but I have not eaten meat since. And it was way easier for me once I went cold turkey than it was for me to try to wean myself off it because just the cognitive load of every time that I went to eat, having to decide what I could and couldn't eat and shouldn't, shouldn't eat. Was, was just overwhelming me as way easier to say, yeah, I don't eat meat. And it's a similar thing here. Like, I don't want to have to like sit down at the dinner table and like think for 30 minutes about what life a particular animal lived and whether it was like net positive or negative. It just, for me in particular, that's a big cost. I would prefer just not to eat meat than to have to go through that process. But I don't in principle have, have a problem with that. The other thing I will say is that, and this is specific to the environment today, this needn't be true. But, but today, almost all meat is inhumane meat. If you look by count, a very, very tiny fraction of it is actually happy. And again, that doesn't need to be true necessarily. You can imagine a world where most meat was, was happy meat. We just don't happen to live in it. And so that's sort of another reason that that I'm— that like right now it just wouldn't buy you that much. But that might change in 20 years. I think there's really interesting questions of like between like humanely raised meat, synthetic meat, and fake meat products, like what the race between those three will look like.

Should a Benthamite be risk neutral with regard to social welfare?

Yes, that I feel very strongly about.

Okay, but let's say there's a game, 51%, you sort of double the Earth out somewhere else, 49%, it all disappears. Would you play that game? And would you keep on playing that double or nothing?

So with one caveat. So let me give the caveat first, um, just be a party pooper, which is I'm assuming these are in non-interacting universes. Is that right? Because to the extent they're in the same universe, right, then maybe duplicating doesn't actually double the value because maybe they would have colonized the other one anyway eventually.

And you're holding all that constant, so you're actually getting two Earths, but you're risking a 49% chance of it all disappearing.

So, and again, I feel compelled to say, like, caveat here of, like, you know, how'd you really know that's what's happening, blah, blah, blah, whatever. Put that aside. Take the hypothetical, the pure hypothetical. Yeah, yeah.

And then you keep on playing the game. So what's the chance we're left with anything? Don't I just St. Petersburg paradox you into nonexistence?

Well, not necessarily. Maybe St. Petersburg paradox into an enormously valuable existence. Existence. That's the other option.

Are there implications of Benthamite utilitarianism where you yourself feel like that can't be right, you're not willing to accept them? What are those limits, if any?

So I'm not going to quite give you a limit because I, I would, uh, my answer is somewhere between I don't believe them and if I did, I would want to have a long hard look at myself. But I, but I will give you something a little weaker than that, which is like an area where I think things get really wacky and weird and hard to think about. And it's like not clear what the right framework is, which is infinity. All this math works really nicely as long as all the numbers are finite. As soon as you say like, what are the odds that there's a way to be infinitely happy? What if infinite utility is an option, is a possibility? Well, you can kind of figure out what that would do to expected values. And now all of a sudden, like, what are you comparing hierarchies of infinity? Like, linearity kind of breaks down a little bit here. Like, adding two things together doesn't work so well. A lot of really nasty things happen when you go to infinite numbers from an expected value point of view. And, um, I don't— there are some people who have thought about this. To my knowledge, no one has thought about this and come away feeling, um, feeling good about where they ended. Uh, people generally think about this and come away feeling, uh, more confused.

Derek Parfit once told me the same thing. He said no one has a good account of infinities, and he was suspicious of them.

No one does. And I think it's— I think my instinct here is it matters, is that this isn't like a no one has a good account of it, whatever, ignore it, this is all bullshit type thing. It's like, yeah, no one has a good account of it. And like, that's kind of too bad. And it'd be better if people did. And I think it is a relevant Unknown.

I have some crypto questions for you. Is there, in fact, any way to coherently regulate stablecoins? So I see what the proposals say. It's all about capital requirements, deposit insurance, treat it as like a bank account, sort of like a new kind of money market fund. Can that possibly work? Doesn't it end up having to be applied to all of crypto, all payments companies, PayPal, whatever else? Like, what's really there that they can do?

That's a really interesting question. So first of all, I will, I will say I think there is something that does work compared to the current environment, but I'll get to your point in a second, which is a good one, which is I think that like if you just said, look, all stablecoins have to be fully backed by the dollar and have to have audits to confirm that they are in a bank account, that would get, I think, a pretty safe product that was well understood, well regulated, and frankly would be from a product perspective just as good as current stablecoins. That's what all the stablecoins are doing today. It's just, it's a mess because there is no clear regulatory framework for them to fit into and to have oversight of that. So part of my answer there is basically, yeah, I think that like that framework would solve the current problems that people have in a pretty clean way. But you you have a good point there, which is like, well, how about PayPal? How about like, there are all these things that we don't call stablecoins right now that we call something else.

Um, and PayPal promises me a dollar and they give it to me. I'm happy, right?

Exactly. And, and in fact, a lot of these, they kind of look a lot like stablecoins when you drill into it. Like, like when you really dig into it, what is the difference between PayPal and USDC, I guess there are some differences, but I kind of think there are more similarities than there are differences, to be honest. Um, I— what does that imply for PayPal? You could just say whatever it applies, stablecoins, not PayPal. That's how it is. I think it'd be a big improvement over the current world where, you know, where it's the same thing but without regulatory oversight and with a lot of random drama because of this. But I do think that, that it gets to this question of like, well, wait, but banks are allowed to rehypothecate dollars. Banks are allowed to do all manner of wacky things with their deposits. Like, are stablecoin companies allowed to? And if not, is it obvious they shouldn't be allowed to? And like, how should that, how should that be governed and regulated? And I think like, sort of maybe the answer is like, whatever, the banks will do that on their behalf, the banks where they hold their assets, and then pay them interest. For the right to do that. Although, of course, right now, like, banks aren't actually paying interest really. Maybe that'll change.

Not to me. But also, how stable does a stablecoin have to be to be regulated as such? So if there's any regulatory definition, won't a lot of people just camp their crypto assets to be just slightly more volatile than wherever the line is drawn? Or you just end up regulating all of crypto. How does that work?

Yeah, so And is your thought— well, I mean, this could go in a few ways. Is your thought that, like, people will attempt to get into just barely into the regulatory system or just barely out of it?

Maybe both, but a lot of people will go out of it. So I'll issue something, I'll call it a not stablecoin, but de facto it'll be very stable. Right. But also, oh, this isn't— it's just sort of an accident. Oh, who knows what the market's going to do today? And it's just stable for decades.

Yeah.

How do you regulate that?

Oh, it's a really good question. Of course, like, what it gets to is this question of like, well, what if a stablecoin didn't promise to be a stablecoin? Like, is it bad that it's backed by the dollar? Like, that somehow make it worse from a regulatory perspective? Like, why is it being held to a higher standard?

Exactly.

I do think there's a little bit of an answer here, although I also think that like, this is, this is getting at another point, which is like, you could reasonably say like, look, You know, are consumers doing what they're doing with their eyes wide open? If there's sufficient disclosures and transparency, shouldn't people be allowed to use stablecoins with some risk in them? And I think that'd be a reasonable thing to think. But if you put that aside for a second, you say no, absolutely not. I— here's one difference between that and a stablecoin, which I think is relevant, is that a stablecoin is not just stable in one direction. It's stable in both directions. In particular, if you're an investor and you buy a stablecoin, you have downside risk but not upside, right? Like if somehow the stablecoin company makes money, you're probably not going to get any of that. But if it loses money somehow, you're probably on the hook for that. So there is something a little asymmetric going on here for the consumer. And so I think it wouldn't be crazy from that perspective to think about, you know, that there should be some protection here and that like consumers, you know, maybe there should be regulation if consumers are only given one side of exposure. But I don't think that's obviously true. Like, I think you're making a decent point.

Now, if we look at DeFi, there are some forms of obvious explicit leverage, like people borrow money to participate in the system. Put those aside. I've learned over my life, if you look at any system, any institution, Typically, there are forms of hidden implicit leverage in those institutions. Might be good, might be bad, but it's there. And in a sense, you don't understand the institution until you understand where is the implicit leverage in this game. So in DeFi, where is the implicit leverage? Is it rehypothecation or where is it? What is it?

Ignoring the explicit leverage of like Borrow lending protocol. Yeah.

Which is easy to see.

Which is easy to see. Yeah. So I— what happened in 2008? Like, why? What, what, what caused the collapse? And a lot of things did, whatever. That's sort of a dumb question. But, but what was one of the things that led to this? Um, is I— that no one knew how much leverage there was really in the system, right? Like, as you said, there's always implicit leverage. And in this case, there's all of these spoke OTC swaps between banks that basically didn't get reported anywhere. And in fact, those got rehypothecated again and again and again. And, and there's no one was keeping track of the total notion of these. Like, it's impossible to— they weren't public. Um, uh, one thing you could do is look for a similar thing in crypto. You can look for OTC transactions, um, you look for OTC swaps, you could have on, um, you could look at OTC borrow lending. Um, those are in crypto. Are they in DeFi? It's sort of ambiguous. Um, they, they touch all areas of the crypto ecosystem. Um, but that's an area where, uh, yeah, I think there's some like dubiously accounted for leverage. Um, uh, so, so I think that's one answer to that question. Um, where else is there leverage, uh, that, that sort of is implicit? Um, rehypothecation sometimes, although in DeFi, because it's all sort of on-chain, it has to be pretty explicit if it's going to be rehypothecating.

But it's hard to see, right? Like if you traced everything, you could find it, but no one's actually watching it. Or are they?

Well, they're sort of half-heartedly watching it, maybe is how I'd put it, which is it's not great. Maybe full-heartedly watching it. I could imagine one arguing for people full-heartedly watching it, and that would be a reasonable thing. For them to be arguing for. But I, I— but in particular, if someone releases a protocol, like there's a question of like, well, is that protocol rehypothecating? And you just look at the code and see if it can rehypothecate, right? And so like in general, people actually often do know whether each protocol individually can rehypothecate, which is a separate question from whether they as a group can or whether they are or something. But in fact, most of these aren't— most DeFi protocols are not doing things beyond what they literally say they're doing. And, and so the amount of leverage they introduced into the system mostly is what they say they are. But here's some hidden things. So first of all, you take one leveraged thing, you put it in another leveraged thing. So DAI, DAI is an algorithmic stablecoin. Like other algorithmic stablecoins, it is not perfectly stable. It's not perfectly stable because it's not backed by the US dollar. It's backed by crypto assets that could have price movements. And I— it's in theory overcollateralized. DAI can then be used as collateral on some borrow lending protocols in crypto. And so that's one form of free hypothecation in DeFi markets that you can trace through. It is in theory public, but it's not super easy necessarily to trace through.

Now, for mathematical finance, as you know, we at least pretend we can rationally price equities and bonds. So people started with CAPM. It's much more complicated than that now, but based on similar kinds of ideas, ultimately arbitrage, right? So if you think of crypto assets, do we even have a pretense that we have a rational theory of how they're priced.

With a few of them, not with most. And in particular, like, let's talk about Dogecoin for a second, right? Which I think is sort of the purest of a type of coin, of the meme coin. I think the whole thing with Dogecoin is that it does away with that pretense, is that there is no sense in which any reasonable person could look at Dogecoin and be like, uh, yeah, you know, like discounted cash flow. Um, and I think that there's something bizarre and wacky and dangerous but also powerful about that, um, about getting rid of the pretense. Um, and I— and, and so I think that that's one example of a place where I— where, yeah, there is no pretense anymore that there is any real sense of, of like, how do you price this thing other than supply and demand? So like memes versus, I don't know, anti-memes. It's like I— and I think that like more generally though, that's happened to a lot of assets. It's just less explicit in a lot of them, right? Like, what is Elon Musk's greatest product ever? Or what's his most successful product ever? I don't think it's an electric car. I don't think it's a rocket ship. I think like one product of his has outperformed all of his other products in demand, and that's TSLA, the ticker, right? That is his masterpiece. And I— how is that priced? I don't even know what that— I, I don't know. It's, it's worth, it's worth Tesla. You can't, you know, it's a product people want, Tesla stock.

But the prevalence of memes, Dogecoin, your point about Musk, which, which I would all accept, does that then make you go back and revisit how everything else is priced? The stuff that was supposed to be more rational in the first place, is that actually now quite general and you've seen it through crypto or not?

Absolutely. Um, it's like absolutely forces you to go back and say, well, okay, like that's how cryptocurrencies are priced. Is it, is it really just crypto that's priced that way? Like, or, or maybe are there other asset classes that may claim to have some pricing or, or purport to, or people may often assume does but which in practice, um, is, uh, is not exactly that. And I think the answer to that is a pretty straightforward yes. It's a pretty straightforward, uh, answer that, uh, you know, I mean, you look at like Tesla, right? You look at a lot of stocks right now, anything about like what's— what determines their market cap, the discounted cash flow. Yeah, sort of that, that plays a role in it. Yeah, it's like 30% of the answer. I, you know, and it's when we look at the meme stocks and the meme coins that we feel like we, we can sort of see the answer for ourselves for the first time. But it was always there in the other stocks as well. And social media has been amplifying this all over the place.

So is this a new account of how your background as a gamer with memes has made you the appropriate person for pricing and arbitrage in crypto?

I, I, yeah, yeah, there's probably some truth to that.

Now there's a mental game people play when they're trying to price Bitcoin. I'm sure you've heard it, done it, like, well, gold is worth some amount and Bitcoin could become a quarter of gold, and then to support that amount of the market, the price of Bitcoin has to be X. Is that a useful game or you think it's BS?

I, I actually do think it's quite useful. I think it's like straightforwardly useful and that like, um, it's not the only thing that matters, certainly, but I think it's a piece of it. And that, like, you know, it is a piece of how I think about Bitcoin. Like, I do think about, like, well, you know, like, right now Bitcoin is trading at what, like 10% of gold or something like that, depending on whether you're counting gold in the ground right now or whatever. And I, you know, it's— I I think that like if you told me that Bitcoin was currently trading at 1% of gold, I would just be like, fuck it, I'm going to buy. Like, like, I don't know, like, I don't— I kind of don't need to know anything else. Like, there's like, what are the odds Bitcoin becomes the new gold? Is it 1%? No, it's more than 1%. I don't know what the percentage is. 1 isn't the right number. And so I— so there's that. And that's one piece of this. And, you know, if you told me that it was worth 10 gold right now, 10 times what gold was, what would I think? I think I'd be like, I don't know, maybe. Like, I can't disprove that. It's no longer just filling the role gold filled. That's certainly true. So I think that that's sort of how we think about it. And maybe another thing to think about is like, you know, Bitcoin's about as important as what world's currency. Right? Like, when you think about sort of like impact on the world, I think this sounded like kind of like a wacky investigation 2 years ago. And I worry that some people still think it's a wacky investigation because they haven't bothered to like recompute whether it's bizarre. But actually, it just totally makes sense. Like, I don't know, Swiss franc or Bitcoin, which, which do you think has more impact on the world right now? I just don't think it's crazy to say Bitcoin.

No, it's obvious that it's Bitcoin. It's crazy to say the Swiss franc.

Exactly. Even though 3 years ago, you would have probably said the opposite, right? Or 5 years ago, I don't know, at some point you would have. And so I think that that's another metric I use is how does this rank on the world currency list? And I think where on the scale from Polish zloty to euro is it? And again, I don't want to claim that this gives you the right answer, but I think it gives you some 3 order of magnitude wide band. Of like what the right answer might live in and what it might not live in. And it's a nice sanity check on like a trillion dollars for Bitcoin. Yeah, it's not a crazy number. Again, I don't know if it's too high or too low, but like it certainly is— it's plausible to me that's the right answer.

Why do you think Ethereum is overrated?

Yeah, so, um, I— so this is a, uh, I— a flagging for anyone who doesn't know, I have strong opinions on this. My opinions are not the same as everyone else's. Take that for what you will. I basically, if you look at like what would it take to have a global scale blockchain that was replacing substantial fractions of the world's infrastructure, if that's where you start, I— you can just sort of look at like, well, okay, What scale would that have to be at? Pick your favorite big thing. I don't know, big internet thing. You could say Twitter or Facebook. You could say New York Stock Exchange or NASDAQ, say Visa, say Google, Amazon, whatever you say. How many things per second does it have to compute? And, you know, the answer varies some, but like you're generally going to hear answers that sound sort of like a million. You sound really like 100,000 and 10 million, depending on which thing we're thinking about. And it sort of makes sense, right? If you have a billion users, for instance, which is the kind of thing you might expect of like a gigantically successful internet thing.

Sure.

Then, you know, a billion users, if there's what, 100,000 seconds in a day, If each user does 10 clicks per day on average, then I think that gets you 1 million transactions per second, ballpark. It's like, whatever, it's sort of the math kind of works out as a sanity check there. So, okay, so, you know, big thing I think means like millions of transactions per second ideally. And maybe you can get away with a little bit less, but like It's got to be a lot, certainly. I— and then you say, well, okay, I— what, what's that mean for a blockchain? Well, it means that if you want a blockchain to really get to a truly global scale, you kind of want that blockchain to be processing like millions of transactions a second like that. That'd be great if you could do that. And And what does that require then? Well, it straightforwardly requires technology that can parse that. And we kind of like don't have that on very many blockchains right now. If you look at most blockchains today, they cannot support millions of transactions per second. And, you know, Ethereum cannot support millions of transactions per second today. It can support 10. 10 is the number of transactions per second it can support. 10 is like off by like 6 orders of magnitude from where it needs to get. Like, it's not close. Now, it's going to get upgraded to ETH2 sometime over the next few years, let's say, at which point it's going to get to something like thousands of transactions per second per shard. So the first point I want to make is thousands is still not nearly enough. Like, thousands would mean that it could not host a single active order book on FTX for the entire blockchain, let alone like Facebook. So, so, so thousands isn't going to get you there, but it's going to shard. And what sharding means basically is there's going to be like a bunch of them running in parallel and periodically syncing up with each other. And so that if you had 100 of those, 1,000 of those, I guess you're at millions of transactions a second collectively. But they don't talk to each other super well. And so you've got like single-digit thousands per shard, millions overall. Does that work? Is that enough? Maybe. I would be pretty nervous about that. And the reason is that I, you know, basically it's— I— you can't take a single order book and shard it. You can't have like 2 people trying to lift the same offer from different shards and 30 minutes later figure out what happened. And in fact, like if you tweet and someone's like, oh, I can't see your tweet, I'm on Twitter shard number 78, you're on Twitter shard number 331, of course I can't see your tweet. It's not a great user experience. I think like certainly companies and maybe even industries you kind of want on a single shard. And so I kind of think you want millions of TPS per shard. If you are going to shard it. And that basically gets me to where I am, which is like, I think that when you're looking at the type of things that could scale to support gigantic billion-person applications online, I think you're looking at a very limited number of blockchains that are focusing very heavily on their scaling.

Now, I think the best French fries in the world are in southern Argentina, in Patagonia. Where do you think they are?

Oh, I gotta say, I like a lot of French fries. So do I. I'm probably gonna like them. Growing up, McDonald's was my answer. Like, that was my favorite place when I was growing up. It no longer is, but it was once. I think that New York has a lot of very good French fries. I think that I, I, in Europe sometimes, very good French fries. I think you could potentially find them everywhere. But I think that it is sort of like the places you would stereotypically associate with them are the places I've had the best ones. I've never been to Argentina, though. And so I'm probably just missing the best. And I would go with your place over mine.

You know, I think the Andes have the best potatoes, but maybe not the best French fries because the food isn't always that European. So southern Argentina, you have basically Andean potatoes., but European cooking techniques. In Europe, I would say France and Belgium are the best. Yeah, try Patagonia.

Quite good. I will try Patagonia because, I mean, a big problem— well, okay, I think a lot of people make, others are, you know, feel free to disagree— is not drenching them in salt and oil. Like, they'll sometimes go kind of light on the salt and oil. I think, like, the whole point of the French fry, like, and so I agree with that. Like, sometimes in Asia, I think they're, like, really good potato products They're not— I know they're kind of only sort of like good french fries. I think it's hard to find this sort of like thing that I'm exactly looking for done well there. But Belgium is— is, uh, Belgian fries are quite good.

Yeah. What's your favorite food in the Bahamas?

I— Beyond Burgers. I, I'm eating about a Beyond Burger a day right now.

And what is that?

So that is one of the two very popular veggie burgers that has come out over the last 5 years or so. It's Beyond and Impossible Burgers are the other ones. And, you know, in the last few years, there's been a real step change in fake meat from like pretty mediocre to like pretty decent. And Beyond and Impossible have been kind of leading the way in that. They're now like a huge fraction of all veggie burgers sold globally are Beyond Burgers and Impossible Burgers. They're just better than most other ones. Like they've done a lot of research on how to make them taste pretty meaty. Um, and I'm not going to say they taste like as good as the best beef burger I'd ever had, but like they taste a lot better than most veggie burgers.

Now if you try to imagine a scenario where the Bahamas starts having economic growth of 10% a year, maybe not every year but pretty frequently, what does that scenario look like?

Yeah, um, it's— and by the way, I think there's a real chance of that. I'm like somewhat bullish on the Bahamas. Um, and, um, and so things I'm going to say, I, I think, like, I don't mean these as disagreements with the policy of the Palmist. I think that they are doing reasonable things from some perspectives, um, from law perspectives. Um, I think that it's embracing what they're great at. And, you know, what is it? Well, it's been a really great place for us to be, um, from a lot of angles. Um, and I think there are a lot of other businesses it's a great place for. And I hope that we can have a lot of really positive impact on the economy and the people here more generally. We're investing a lot in the island, in the schools and the health infrastructure here. I think that like the biggest things that I would say other than those, and really health infrastructure is a big one, I think really like massively upgrading it on all fronts would go a long way towards, uh, towards improving quality of life for everyone here, um, and making it an international hub while also helping, uh, helping the population a ton. Um, that's, that's maybe the single biggest thing I'd say. And then the other thing is, um, is, yeah, like, for example, if, if the Bahamas closes their borders for COVID, um, in general, I think border closing for COVID, I'm not a huge fan of But especially, I think it just like would kill a lot of what makes it special here. And they're not doing that, to be clear. And I'm pretty excited about that fact.

If you think about underlying factors there, deep cultural roots or norms or whatever, what's the positive thing about the Bahamas that most outsiders wouldn't know about or not see?

So like, here's one interesting thing. It has a strong democracy. Um, I, uh, one, one joke that, that more than one person told me when I first got here was, uh, you know, Sam, of our two countries, one of them just had an extremely peaceful transfer of power promptly following an election. Um, and, uh, it wasn't my country. Um, and, uh, but, but like, um, I— that's not true of, of, uh, a lot of other places I think people would would often put in a similar category. Um, but I think it's the combination of like a nimble, um, small state that has, um, a lot going for it, a lot to offer, and also is like robustly democratic, um, is, uh, is I think fairly powerful. The people here are just really nice. That's, that, that's kind of cool. Um, like it just like is such a stark difference from a lot of other of other places that I've been. And really conveniently located, like it really is, it's a 30-minute flight from Miami. And the infrastructure here is pretty decent and it is getting better pretty quickly.

And last question, I'm sure you faced this already, but let's say you have an extra million dollars or $10 million to give away to improve life in the Bahamas. Bahamas only, not you change the whole world and the Bahamas benefits, just improve the Bahamas. What do you do with it?

Yeah, um, I think that, uh, I think health is where I would focus probably. Um, and there's— I think it depends on exactly the amount. Some things have scaling different directions here. I think the bigger the amount is, the more that you'd want to set up like try and build out really great, build up the hospital system, for instance, here. And I think that that sort of is a bigger project. But I think working out the healthcare infrastructure, or obviously, especially on the lower end, like, I mean, direct cash transfers are always like within an order of magnitude of the best thing you can do. Like, those are pretty effective. I'm just giving to Bahamians. But I think that, you know, we've spent some money buying COVID relief supplies for the island. I— and we're sort of monitoring what those stockpiles look like. And if that becomes a limiting factor, we'll sort of put more into it, although I think it's looking OK from a stockpile perspective right now.

Sam Bankman-Fried, thank you very much. My pleasure.

Of course. Thanks for having me.