The Decrypt Daily: Bitcoin & Cryptocurrency News Podcast - Oct 22: Is DEX Volume Bullshit w/ Sam Bankman-Fried

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00:00:00
From the Crypt Asia on this is it equipped daily. My name is Matthew Aaron today on the show.

00:00:07
Why do we look at volume of exchanges and we also want trust we wanted to trust that the exchange that we are using a lot of other people are using it as well a one way to do that is to look at the volume for what if the volume is not telling the whole picture or is just a straight of Li study centralized exchange has come out of nowhere from not having much valium to compete with centralized exchanges to rivaling even the biggest most well-known exchanges in the crypto space, but maybe there is a hidden secret. Maybe we are not looking at this week clearing of eyes and here to talk about that is Sam bikman freed founder and CEO of FTX exchange. And now the key holder of sushi swap, enjoy the conversation of if Dex volume is bullshit. I will see you after the show.

00:01:09
Hey Sam, welcome back to the show man. How you doing? Give you excellent. Excellent till the other day. You were at the LA blockchain conference. You said the decks volumes were bullshiting and I just want to know what your country are coming from with this and when I understand maybe a little bit more about how you think they're how dense is worth how you think that the space is going to evolve centralized exchanges Force Texas. You have you own both of them. So you are definitely the man to talk about all of this. Oh, yeah, you know Indians like there's a lot of definition of issues are but what makes volume real or fake and really been through this to be a bunch of times and you know, their judgment calls and has questions you what you mean by word. What does real mean of but Sears at least my take on it and I think sort of the sooner you can sense it take that the industry ended up with at least Last Time by surf by the time this whole process and Play-Doh and really the analogous sings dearest friends my name

00:02:09
Transaction mining was a think they're super popular on centralized exchanges. And basically what they did was they said how about this? We got this exchange token and you ask waste wizard. If one of the most prominent examples of this is this an f and we're going to basically puf TJ proportional to your trade volume proportional to volume. And what happened, of course was that reference of open up two accounts, or I can calculate the value of this ft and you know, I can calculate the cost of fees. And as long as you if they're giving away, I don't know whatever, you know, 10 million ft tokens for

00:03:09
Hey Denver, like well as long as heard of any of us at 5 basis points net fees for trading in yourself or like well as long as you know, five times the volume is less than the value of 10 million ft. It's a positive get dropped off this after it's worth more than a bunch of cells trading or wash trading that was going on on these exchanges because they were just paying more for that volume and they're charging for it charging lever 5 basis points in their paint 10 basis points worth of therapy and so cap on interest rate. If I call you you got the top five exchanges trading 2 billion dollars each day and it wasn't like finance will be okay.

00:04:09
Fgx coinbase or something like that, you know it would it was like a queen I am I forget a lot of the names of these Bonet. When do you know how to pronounce Weber Fashion Exchange that are very hot is a few months ago or so and it was all because they're just like paying people to trade on them in their exchange token and you approved for a good salt 6 months or so. This happened every day and very little meaningful volume happened on these exchanges by which I mean if you actually said like hey, I actually have some tether and I want to buy Bitcoins with it there not a good place to go eat. There. Is it all washed and then turned off the minute that I that the exchange has either stopped directions to crash so much that it was basically no value all the volume one away.

00:05:09
And none of them are important to the ecosystem still relevant and important want to stop paying people to take over all the volume one away. And so, you know, technically yes, there trades be printed there but like it the reason to ask how much volume in exchange has is to answer sort of questions. Like how important is it? How much liquidity does it have? How important is it for pricing? Where should too and be advised to trade how bright is future how much money is it making and none of those questions were answered by to buy this volume number volume number assertive like, you know completely cuz we're offering Tokens The Tokens had added value people are of figuring out they that they could trade on those dex's and make more money getting those tokens that were offered by the Texas then.

00:06:09
Wood animaker ticket fees on these these trays. So they're making a profit getting tokens that we're be rewarded them for training on these taxes. Am I correct? That was silly. I don't know why we cared about that. Clearly. This was fake volume. All those extremes are tarnished. There's like exactly one exchange that sort of went all in on this and emerge housing in that was bit Max because they serve like all this press and publicity from their transmitting and during that time. He like frantically tried hard to build a good exchange a product built up at user base and then they turned off the trans myself completely gone and what was left was actually good products and and you a good team attends and so people actually start using it for real on but all the other ones starts just died. She said nothing less perfectly examples.

00:07:09
Fast forward to today and what's going on with most taxes and this isn't true of all decks is when he's proved most you know, what you see is basically like a variant. It's like economically very similar rephrase. Is there a men's instead what happens is basically various parties and sometimes it's a DEX itself in the case of you know, you need or sushi or a third-party is air-dropping saratogian for complicated reasons are paying people to provide the quiddity on the taxes and see what this means is. Basically if you take your assets and lock them up in one of you two swaps liquidity pools or sushi swaps or falter or any of these then you gets her paid each day and date that the tax token for doing it.

00:08:09
Subsidized and end in really the question you want answers was got rid of subsidies. How much would they be and it's hard to answer that but certainly would guess a lot less than with heavy subsidies. So a total value lockdown then how about the volume numbers? Why are there is bullshit is generally for like someone arbitrary reasons. These are not volume 10 reasons. Honestly are that that's what I all say. Should I go get her websites decide to rank People based on and talk and just decide that weighs 2 metric they're going to keep looking at. Okay. So now you have to be off all this inflated total value locked, but the thing is that on an automated market-maker walking value means providing with put it so the way you walked out and you take some nice or or whatever whatever and you you put them together into usdc West pool and that basically blocks you into providing liquidity on that pool if you take a billion dollars Avicii locked up there.

00:09:09
Your started saying hey World their 30s fees from take her some Acres. Feel free to trade against me. I'm forced to accept the trade in either direction. If you want to pay me thirty bucks for and to all of this earth like Capital builds up in these pools and and he's like sitting there waiting to be picked off as soon as markets move markets move of 50 Pips a bunch of people come in by buying from the people frying liquidity. They make money trading the people bring with me lose money on that trade, but that's subsidized kids are making more money on the air drops of the token shop sits directly subsidizing the total value and that in turn. Is there a subsidizing the volume and impermanent losses hurt if the politically correct phrase that people decide to use for doing a bad trade in defy likes her doesn't out. For some reason it permanent just means that like if prices then reverted you would make that money.

00:10:09
Since you want to be thinking about here, there's someone just noise and loss from the 5S and Rec but there's a high level waste like look at how much total value dropped on on the product each day from the ceratops. And then you look at the net fees that the car charging users. The equilibrium point the point of life zero real economic activity on should be we're basically people pay, you know, as many fees sort of as the airdrop size it until you get there just her positive. If you take your toppled unlike goat farm with it, maybe some quiet. Because you're lucky you have to build in Return of capital into this because it just the Nazis are on most of the same as right now, please let me know what it is 30 basis points like that that serve what to use for many Revenue calculations. This is not the right number the right now.

00:11:09
Where is zero its 3 providers the makers that it Alters your ships around these markets by thirty bucks, but there's there's no net loss between the two people training this each other in these am m to feet. And so you threw him that like, you know, if you quadruple the volume is still no one's paying any fees net and I like pretty pretty extreme numbers in terms of total value often volume given that there's no cost to exert zero fee trading and is heavily incentivized. Okay, so I have a couple questions that came out of this and first of all, thank you for explaining all of that. That's quite interesting questions are tartar to fold. The first one is these exchanges that come out with a good

00:12:09
Product because of this they made money off of this they made you know, they did make me current Acres, you know the volume is there by this but they've benefited and then he benefited by putting it back into the ecosystem. Is it fair to say that without this kind of unsavory business plan? We wouldn't have the innovations that we have or the extra movement in the crypto space that we have today. So therefore it's a it's a or the Lesser Evil 4 Wii the greater good it's a really good question. And I totally could have been an end and that Dynamic like there's nothing that means that sounds like means I can't have been the dynamic and in some cases it was I think that Max it was fit Max Rose to fame volume numbers that I got from the transmitting use that opportunity to build a cool product and I'm done sir pretty happy for how that turned out like not super happy that they did the trans mining but it was among the most offense.

00:13:06
You know, I think another way to see this is yeah, you know what they serve trans Mind by basically, but that was unfortunately the exception not the rule the rule, you know, what almost everyone does was once this is all said and done there is nothing left, you know, you will get at places like these places are not the places they build a great products or or or developed a really loyal user base and they would have been what you said, but in most cases it wasn't in most cases the volume.

00:14:06
You never posted the industry for it and you serve like come out the other side like boy that's kind of pointless. And and then you should have put into another thing you were just like tracing the flow of funds. There's a variety but most of them did have feasted have no internet but most I'm heading on to or not to take out a factor of like 10,000 and then treat that is like the volume buying the exchange and and then skipping a bunch of their future afternoon and again in a few cases like an interesting thing. I think I don't think I'm making a fortune off of making some money, but if you got money which is like what it took to subsidize the cost of building a new exchange answer like really weird all this might go this money went into

00:15:06
Forgetting all that work involved in starting a new exchange like a hundred extra X on which is sort of a deadweight loss because none of these exchanges took that start up cost and then Justified it by hiding something real to sense with this one that you're taking is a little cynical as if we look at the companies that are in emerging Industries, you know, everything there is Teamsters leadership those ideas and there's innovations that either make it into the space or. Don't make it to space in that space is wherever you talk about your tongue with the crypto space were talking about that the internet boom real estate anything that might have to have some sort of innovation to keep irrelevant. So what when you see these companies fall off in the are making basically money off their tokens are trading or what-have-you. You see people put money back into their system and other people just you know, just miss manager funds as well. Let me know we seen an all-right in ico's companies in the crypto space that just had bad leadership bad. Did it had great ideas, but just bad leadership bad as if you excuse him bad Innovation bed at bed for site all kinds of different things. So I would say that it's not just maybe

00:16:06
Unfortunate but just maybe just the way of business if I would or innovation in the in the in the markets, I guess when I'm looking at volumes and invested, especially I mean, I just looked at ft x volume 24 volumes you guys are at I think was $670 and twenty-four hours. I look at that. They're making this much today. I'm like, okay, that's how much there is a should be investing into their companies when I see this cuz I am the average mature. I'm not I don't have a deck store Essential Oil Exchange. I am not, you know deep in the industry like you like you are building and innovating and then deal with this every day. I look at these volume. I look at people like you and I will go this is confidence-building for me as a consumer as an as an investor to say I am going to put money in the crew because look at the baggage look at Innovation. Look at it Skyrocket know I did a podcast this the other day that one centralized exchange verse. The Dex the Dex is to is Dexter over to overtake the essential lights.

00:17:06
But now that I'm hearing about your bullshit now that I'm hearing that there are, you know, kind of different business plan involved with token the tokens of the exchanges or the volumes of what have you and such lies and in such exchanges I have now lost confidence in this industry. Is that a fair assessment is an average consumer did look at these volumes that might be manipulated might be falsified is looking at all these things to go is it is is crypto really the way forward as a really good question and answer Fun Pack it into two pieces. I know you said you don't have to beat the first part but you know, I see this the hopeful way which is this is just another token sale, you know that weird Leaf raised right? But it is her basically you're selling your token to your users and you also get some publicity in the process and reinvesting those funds in the product and I have no problem with that, you know, if that's heard of it is morally the right phrasing of what's going on. The devil's in the details here we have that so hopeful freezing up and I think that that did he send that that's her.

00:18:06
Is did the travois keto really at its heart what's going on a healthy as it turns out many of these cases. It's not in some it was but in many of hard to look at the progressions here and think that there was like real hoop that this is going to be innovating and pushing the industry forward other than by teaching people how to fake volume better in many of these there's our flight never Innovative products coming out the hope they're their best play was to take users from a slightly Superior product by incentivizing them and getting publicity and it's our coasts on that nnn. As soon as I start falling apart that you gave up and walked away. I'm at end bike as soon as he has some facial named. There's not a great product and I never kept working on it. So it turns like in practice the majority of the time that this was done and he can't there were exceptions to this obnoxious an exception but the majority of the time that this was done that the service fact that it was hard to follow exactly. What was going on was a Kiki song.

00:19:06
Which allowed them to fruit, you know, basically I get away with certain overpriced token sale without on a part that no one had a whole lot of excitement in practice. It was in general not done it in a very helpful. Well, so it could have been us on the centralized decentralized is more complicated. I know it gets more if it fits her second piece of this which is and if he felt like two examples that I want to take care of a few examples are Lacuna Swap and Sushi swap or the things up like we're sort of like obviously stupid from the day. They are started like there's something he'll Farms just like no one ever thought it was going to be a few no evidence like yes, obviously, they just chose to the first food. They thought of that no one had taken yet supported some coded. Like, let's see how much we felt so good for right beside there was something in there. That wasn't the plan. That's definitely not the plan with younes watt Freight like he's doing

00:20:06
They also pioneered the product like clearly they Innovative, you know, and they're they're still building today. I need some clear what kisses her if not public yet. But at some point they they will release you the release pf3 and I don't like this this this is in fact, every sentence must be served a healthy version of this. Obviously a lot of things went wrong in that process ignore that bad intention was to have a similar thing where they're surf incentivisation at the beginning to get users and and responds but that it was going to be a real new product in philosophy and an impact. It has kept building in nioh. It now has features other a man's don't with with some pretty big ones coming along the way you in those cases and some more going to think that that you can look at it. Everyone is doing you'll farming now almost every major project is you know, I think it's like compound off a balancer cream used for

00:21:06
Sushi Swap and end in a bunch of other G5 projects aren't to see any version of cysts. Like they clearly word the whole time intending and and how follow through on on on building things. And so then you know, what's her interpretation of that and I think the answer is like not to Morley judge the space for it necessarily. I don't let you know. I don't serve whole deal will towards the device pays for having done this I think maybe the right decision for their products and I think that it's like not being extremely deceptive. I think that like good thing you do have to do though is to adjust your metrics and I think this is really the key second Point here. Is that whether or not you think it's healthy for the space and in some cases it is he also has his consequence making the numbers everyone's looking at me and something different than they were expecting and it means that if you look at total value loss or volume, you just can't compare in a meaningful way what you would find with the appliance will be okay except TX coinbase you any of these artists like major centralized exchanges.

00:22:06
Are not doing this because one is heavily incentivize and the other isn't and so users have to like discount all these numbers quite a bit fine. You know, that is what it is, you know, you could say it's not their fault for that. Although clearly part of the point was to to inflate there's numbers in some cases but not in others, but I think the big thing I say is he putting moralization aside and the Judgment of the product decide we're trying to decide how much adoption they really have at least long-term. You have to put a pretty fat asterisk next to all of these numbers is about who blocked numbers all the volume numbers on anything that claims to be Revenue things like that cuz are all heavily subsidized and really the question you want to be asking is all right. How about when the subsidies are done then what's up? What what's the long-term sustainable level of this? Let's not be subsidized and any surf like unclear like it's really hard to know because all of these platforms have grown so immensely over the last few months and a lot of that is kissing subsidies, but some of it you said some of its real growth

00:23:06
Hard to pick and pull apart. What's what and to get a sense of his know one thing you can do is look at what happens for these projects if they do turn off incentives now, no one really has just a little hard to do this, but you look what happens when they turn in sentence way down, right? So I get sushi swap turned incentives down by a factor of 10 tvl went from like a billion to Neo 320 went from like 400 million to one hundred million loser to the long run numbers and they turned on by which also pushes it in the direction of numbers that you can interpret straightforwardly and she can look at all of these protocols when and substitution goes down. See where they serve like what level they end up with to get a sense of maybe with a real numbers are but it's so hard song with none of them have gotten worse incentives completely.

00:24:06
I'm so it's it it is really hard to pull post-party numbers. But I do think unfortunately that wanted to take away is here is all these numbers saying like defy volume is now up to 15% of C-5 volume like that gets pretty the asterisk. You know, that's a really good point and I want to go back to my question from back there. Are you answered a lot of the question but not the Taiga specific of the other question that I want everyone to ask and listen to the last question to ask end end the Asterix. You just said I want to come to the volume again. The average person to person isn't in the business for sale doesn't know about incentives or subsidies. I'm not looking at that. I'm looking at the volume. So I'm looking at the so-called Innovations the so-called population of crypto assets or accuracy or blockchain to invest room, not me or just in general to say is the average person.

00:25:06
Is looking at that as a way to Jade is this a growing space is innovation coming out this is this the future but when you have all of these different incentives and subsidies in baked in financial schemes that trick the average investor or even the sophisticated investor, is it reasonable to say that the owners of these exchanges? I'm not saying this at directly as you but the owners of these exchanges are making Bunches of money off of our naivety. That's a really good question and I'll give you two answers that cuz I think the answer is

00:25:41
Only sort of end and it really gets down to exactly what your uterus the first type of user is. I want to exchange between you know, the coins and tether your Easter in tether. Let me choose a venue to do this and they're not thinking about decentralization. Let's put that aside from your office of Sam wants you to text her then that's it. SF request a trade here. Where should I go? What metric should I use as an approximation of like really where the volume and liquidity and and and stuff like that are good execution dirty a trick by these numbers are going to the wrong place and they're going to lose an extra twenty-five Epson all their traits because of this that is definitely grinding down a bit from this. I'm now the truth is our haven't been that many of that user the actual user growth of these platforms and number of users is

00:26:41
It's very concentrated interflight crypto Insiders on but but yeah, like she sent that like random user trip is trying to choose their platform is NACA doing good. Now, there's a flip side to this. Will there's a few flips. I see this as a way worse, although more of their own fault, which is someone who just like buys random shit and indiscriminate Lee and then end up with a lot of things that go to 0 brightness like a cool by hotdog today. Couldn't hit like this. Yours or not. But now we get you to a third type of user and a third type of user is the farmer & The Farmer has done quite well from some of the Seas trading against the first two users, but not most of it most of it is actually in some senses legit and and just the way to Ballpark. This is like in general defy protic.

00:27:41
Balls have dropped a substantial fraction of their total Supply on Farmers. That's substantial fraction of their total Supply. What's the valuation of that? Let's kick it. Let's pretend that you trust Aldi market prices right now. Maybe you don't but you can surf later multiply or divide by whatever you think is right factories. What is some of the market cap of of the tokens that have been drop is yield on users? I think you get like mid-single-digit billions of dollars over the last few months on the turn of a big number, you know, I like millions of dollars per day has been dropped total from yield farming on users and it for free for free in return for I mean, freeze it how you want right using the product inflating the volume, whatever Sue in some sense you want treats his back and say like he's just all a zero-sum game depends on what you think the song should be but as well.

00:28:41
Started either cuz know there's this enormously positive some trade for users, which is splitting up the dividends of this giant crop all the yield that all these projects were dropping and that, you know, the device voluntarily gave up a quarter of of of of all their projects to help the project but I crave billions of dollars of Galaxy mousse users and I'll give you this up by playing their various roles in the ecosystem. And so it has a very positive number for users. Of course, if you include the projects in that then you're back to a negative number be a whole lot. He was always at the projects going quote lost because they no longer have those tokens for the act of Charity depends on quite well today and in some cases not know but in some victims, so well it leaks into even the surf like most retail user is making money out of this accidentally because the farmers just like action

00:29:41
Transactions cuz they're so much more hopeful take on it. Is that look all this attention that it's getting completely makes sense given those billions of dollars. That was not a fall you put of actual net win to the people participating the system over the last few months again, of course, it's not coming out of nowhere is coming out of the projects not liking that one for the space and that's a lot of ways of raising this but that that's out of the way freezing it in which it service is Boost good for users. And in that way. It's been substantially net positive for users know that there's been a billion dollars lost to East miners. So you can write that off to clear the Valley Project undertaken Cicero Thunder husband surfnet winds to people who are free CEO of us TX, and new owner of sushi swap. Thank you for having this conversation with me.

00:30:41
And I do have learned a lot and I have a new I would say you gave me a new skepticism yet still hang onto hope in the crypto space thinks his conversation like to get as much sense capital of some of these things. I think there's a lot of potential soap. Thanks for having me on.

00:31:00
Thank you for listening to this episode of the decrypt daily on tomorrow. Show. What I think is the most important use cases for blockchain technology that is voting on The blockchain what could fundamentally be different in society if all are voting was Secure counted in verifiable that's coming up tomorrow after the Crypt daily. Happy houghtaling.
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