If you have been around through any any part of the dotcom bubble and bust, or the LTCM crisis of the 90’s, or better yet the hyperinflation of the 1970s, you probably care a little bit too much about your money to stuff it in a cardboard box and hope it pays you for your time.
Here’s what was said:
Matt Levine: (21:17)
Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there’s a more sophisticated understanding than that.
Sam Bankman-Fried: (21:28)
Let me give you sort of like a really toy model of it, which I actually think has a surprising amount of legitimacy for what farming could mean. You know, where do you start? You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that’s gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It’s just a box. So what this protocol is, it’s called ‘Protocol X,’ it’s a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.
A Cardboard box?
Let’s dive into this just a little bit. What SBF is describing here is actually a ponzi scheme that would make Charles Ponzi himself proud. Essentially, as long as more and more people keep dumping their hard-earned money into a pit of despair it will keep going on and on perpertually.
Unless you are a holdover from The Princess Bride, nobody makes it out of the Pit of Despair. Once you expect a rate of return from your cardboard box, you are more and more dependent on new and fresh money to earn your payout. You can’t just manufacture yield long term out of thin air.
That is, unless you are Sam Bankman-Fried apparently. You just need to slap your brand FTX on top of anything you want (umpires, sports buildings, etc) and then you are an instant hit.