SBF underlying thinking logic: the forward belief in the North Star and the end of the public chain

Note: I left a hole behind the FTX-related article, saying that I want to deeply analyze the underlying thinking logic of SBF. This hole has not been filled in for a long time, which has caused readers to continue to leave comments to remind me. Procrastination patients finally took this hole today. Filled in, I hope to inspire everyone.

FTX founder Sam Bankman-Fried (SBF) is the fastest man on the planet to accumulate wealth, not one of them.

What is his underlying thinking logic? Many articles or interview materials did not seem to answer my confusion. It was only recently that I heard an audio session of Patrick’s interview with SBF, which involved a series of underlying thinking behind SBF’s control of uncertainty. .

The content mainly includes:

  1. What is the North Star guiding SBF?
  2. How does SBF find the pain points in the construction of the trading market?
  3. In the future, where are the new opportunities in the trading market?
  4. How does SBF view policy supervision on a global scale?
  5. Why does FTX invest heavily in brand building?
  6. How does SBF view the current parallel pattern of new public chains?
  7. After accumulating a huge amount of wealth, how has the mentality of SBF changed?

Deep Tide has made deletions and refinements without affecting the original intention. The content is a bit too much, so bear with it.

North Star on the move

SBF seems to have become a new global icon in the crypto industry, full of halo, but we can’t help but want to explore the underlying driving force behind this halo, such as what is the North Star that guides him forward?

The answer given by SBF in the interview is relative. He believes that the North Star is not static, it depends on where he speaks.

The first situation is that when he wakes up, goes to work, receives an email, and must reply to it and make a decision, the most common thing in his mind is how to build a good product and a strong and effective exchange, etc.? The most critical one is whether the risk engine is effective? Because a well-designed risk engine can provide people with flexibility while ensuring platform security. And another important thing is whether the overall product design in this field makes sense?

The second situation is that he often reflects on his priorities.

For example, doing charity is not necessarily the most relevant thing in daily life? Even compared to product design, it doesn’t matter.

But when he thinks about what his life should do? And how should he prioritize? Polaris may have appeared, such as effective altruism and utilitarianism.

The root of the two lies in how to maximize his positive impact on the production world.

Secondly, the interviewer Patrick intuitively observed the tremendous energy and research that SBF has invested in building a good market. At the same time, he acknowledged that continuous market building is more beneficial to mankind than any kind of charity organization that linearly absorbs US dollars. What is puzzled is why SBF should devote its energy to philanthropy instead of devoting more financial infrastructure to benefit more people?

In this regard, SBF’s thinking seems to be more dimensional and in line with his definition of the inner North Star.

He has observed the situation in which countries have stifled the liquidity and effective market due to the excessively high stamp duty imposed on the stock market, thus making the economy hit, so he firmly believes that an efficient market will have a huge impact on the world.

Starting from the long-termism of world development, it is necessary to do charity.

Although there are many ineffective charities, if you carefully consider how to do the best with your life and funds, your vision will be completely different. SBF believes that some deep-thinking and powerful charitable organizations will have a lasting impact on the long-term development of the world in the future, and their impact will extend to tens of trillions of people in a decade and it is very likely to truly change the trajectory of history.

He took the new crown COVID epidemic as an example to express that human society has no clue when facing and solving the epidemic.

“What we want to see is how much effort society has made to better respond to the next pandemic, not our response to this pandemic? But there is basically no discussion about the next pandemic. This is very crazy. Frankly speaking, we are a bit lucky because COVID-19 is not that deadly. It will allow you some ways to use your time, money, and resources.”

In the interview, SBF expressed concerns about the common problems of mankind. He believes that people should prepare for the next pandemic because it is very important to save trillions of dollars and millions of lives.

Although in this pandemic, some good countries have done amazing work to avoid COVID and prevented more deaths, but SBF believes that they are in a closed state and the economy is stagnant, and no one knows how they are going. How will the road be? So it is very important to think about how to make the measures super effective and build a more complete risk model. Behind this example may be one of the reasons why he funded charitable organizations with strong thinking power.

The trading market needs to be perfected

With reference to the imperfections of the current trading market, SBF pointed out that the complex trading steps of the traditional trading market have led to problems such as inefficiency, poor information, and high transaction costs.

for example:

  • Order book dilemma

In today’s financial market, if you are not willing to spend tens of millions of dollars a year to pay for data services, you will passively trade into an order book that cannot see other players. So for the exchange, besides allowing trading, it supports price discovery.

  • Complex transaction process, flooded with many intermediaries

In cryptocurrency, people are accustomed to all income from transaction fees. Unlike stock exchanges, they monetize data and introduce numerous intermediaries.

Such a strange business model may be wrong for an efficient market, and the user experience is really bad.

Suppose you want to buy Apple on NASDAQ, you cannot open an account directly to buy it, you must enter the market through a broker. So the number of intermediaries in the stock market is crazy, which leads to a series of strange things.

For example, Order Flow Payment (PFOF) exists because transactions force people to pass through six different companies from start to finish, which makes transactions more chaotic and complicated.

Therefore, it believes that it is very valuable to create a clean and simple modular market infrastructure. Of course, you may also ask why these are not 24/7. This is caused by many reasons. One of them is that you must apply to the US Securities and Exchange Commission and then wait for the application to pass.

  • Unreasonable transaction fees

In theory, transaction costs are normal as a revenue model, but its range must be reasonable and should not be greater than the actual amount of advantage the company sees.

It has a reasonable range of base points, which may be between 10 base points and two base points. Once it exceeds this range, it will stifle transactions and stifle liquidity. We have seen some countries impose taxes of 10, 15, and 20 basis points on each transaction, but the stock market may not even rise by 20 basis points throughout the trading day. So if you charge 20 basis points as a fee on both sides, users will not trade.

Therefore, it is very important for the effective market to set a reasonable fee. This fee is not only the matching engine fee, but the total fee paid when one party transfers the assets to the other party from the beginning to the end of each transaction.

Bottom thinking on perfecting the trading market

After pointing out the problems of the traditional trading market, SBF also expressed his low-level thinking in perfecting the trading market, including what is needed for a market that is very close to perfect in terms of final value? In the market, the exchange, and all the infrastructure of the market data connected to it, how low does the latency need to be to get most of the economic value from it?

Regarding how low the delay needs to be to obtain most of the economic value, the answer he gave is that the delay must be lower than the release speed of the new economic information , so as to avoid two different economic events, but the exchange does not have time to prioritize The internalization of this event.

What speed is that? Very diverse. SBF believes that when people are in milliseconds, there are usually no two significantly different economic information generated, because the distance between each other is less than one millisecond, but if they are in the same day or the same hour, it will not work, so the answer is definitely In less than an hour, this is very efficient compared to the NYSE and NASDAQ delays, but it is a bit deceptive.

Because the delay of the New York Stock Exchange is a fraction of a millisecond, but it may be closed overnight because of a federal holiday, which is crazy.

Therefore, he believes that it is not the most important thing to really make the architecture as low as possible, but to keep it open at all times.

Close to the state of a perfect crypto market

When it comes to the openness and efficiency of the capital market, Patrick believes that the current state of the crypto market may be the closest to the perfect market that SBF said, with an open order book and more fairness. SBF gave a brief introduction to the current state of the crypto market.

He said that the encryption market is still in a relatively disordered and chaotic state, but it has improved compared to three years ago, and there is huge room for development.

For example, when the market fluctuates greatly, there is a lot of arbitrage space, mainly cross-regional arbitrage. Although the encryption market is a non-statutory system, it still needs to rely on wire transfer infrastructure to penetrate everywhere. Therefore, to a certain extent, the encryption market can only When the legal currency system keeps up, it can run quickly to avoid problems such as insufficient liquidity and inefficient operation.

However, in the short term, the existence of stablecoins can at least partially improve this situation. If everyone in the crypto industry uses USDC instead of USD, users can move 24/7, eliminating the need for wire transfers. This is one of the reasons why stablecoins are so large in the crypto field, it is just a simpler and better legal way.

The SBF expects that a large amount of fiat currencies will flow into the cryptocurrency ecosystem in the next few years. Although it has not yet been implemented, it is very likely to be achieved. This can fill the capital base of cryptocurrencies and begin to invest these dollars in the ecosystem to make the ecosystem The ratio of capital to market capitalization in is close to 1.

How does encryption construction attract SBF?

The outside world believes that SBF’s involvement in the crypto market is not too early, but he has very pragmatic ideas. So people are curious how the encryption system stimulates him to devote his attention and time to this? Shenchao sorted out the following 4 points from his answer:

  • There is a huge demand in the crypto market, especially in all infrastructures for cryptocurrencies, which is obviously in short supply.

A few years back, cryptocurrency exchanges are crashing almost every day because they can’t handle the load, and the risk engine burns a million dollars in customer funds every day because they can’t make margin calls on time. It looks like a mess. But it’s just the appearance. The crypto market just doesn’t have time to mature and the infrastructure to keep up. The more so, the more business opportunities there will be. Facts have also proved that the crypto market has a great demand for new businesses. These must be people. Do it.

  • In the process of trying to conduct encrypted transactions, I realized the problems of the existing financial infrastructure (mentioned above).
  • Feel that the crypto market seems to be flooded with shit performances, but it is still easier to use than banks, and there are obvious ways to make this space more efficient.
  • The decentralization, cross-border, transparency, openness and other characteristics of encryption make SBF realize that there are plenty of opportunities to start new native digitalization and new social methods, which is very cool.

What should I do next?

SBF believes that development is dynamic, and many times must be super responsive to the global environment. If an encryption company does not seriously consider regulation and compliance, then it has made a mistake.

This was not so obvious a year ago, when many encryption companies did not have a real compliance department, but now it is very different, so what are the next steps? He will give some non-absolute assumptions, but he will dynamically determine the priority of things.

For example, statistical data is a priority. SBF said that the current trading volume of cryptocurrencies is almost as large as that of U.S. stocks, and the volume is large. The global cryptocurrency trading volume is about 200 billion U.S. dollars, and the derivatives trading volume is about 130 billion U.S. dollars. , The spot trading volume is about 55 billion U.S. dollars, and the ratio is about 2:1.

The US spot trading volume is about 10 billion U.S. dollars, and the derivatives trading volume is about 1.5 billion U.S. dollars. So this ratio is not 2:1, but 0.1:1. A little extrapolation will find that there is a lack of trading volume of about 25 billion US dollars, and there is a great demand for derivatives transactions from the United States.

However, because mainstream cryptocurrency exchanges have not obtained the CFTC license, they have no regulatory capabilities to provide futures in the United States. FTX recently acquired Ledger X. This is a crypto derivatives platform licensed by the CFTC.

SBF and the team will then cooperate with the CFTC and discuss ways to develop the platform over time to fill the gap in this market.

Embrace regulation

This is a problem that practitioners in the global crypto industry have to face. SBF’s attitude towards supervision can be summarized in one sentence: actively embrace supervision and take the route of compliance and transparency.

In the view of SBF, the regulatory policies of various countries in the world, including the United States, are lagging behind the crypto market. This is a brand new asset class that few people paid attention to five years ago. Five years later, it has brutally grown into a trillion-dollar market. The United States usually does not try to introduce a new financial regulatory framework every three to five years.

But he is very optimistic about the future and believes that the United States will establish a more complete framework in the next few years, which will make the United States a more powerful regular place for encryption businesses.

However, it is more difficult to monitor decentralized agreements or products. As far as specific regulatory policies are concerned, it is reasonable to try to find the strategic part of the ecosystem and include most of the regulation, such as centralized exchanges and any operation An organization that converts fiat to cryptocurrency.

Supervision does not need to pursue perfection. The correct approach is to take a step in the right direction and begin to establish a framework to protect consumers and prevent financial crimes without stifling the industry.

Derivatives and innovation

In the field of derivatives, perhaps no one has more say than SBF.

There are many derivatives exchanges. SBF believes that FTX’s core competitive advantage lies in cross margin.

In the FTX, almost any asset can become a security deposit, euro, dollar, Ethernet Square , Bitcoin , USDT, Microsoft shares immediately pass certificate …… can be any asset of derivatives trading.

What does it look like on some other platforms?

The first is to sell the assets in your hands to obtain USDT, then buy spot Ethereum, and then transfer the Ethereum to the Ethereum futures guarantee purse and use it as collateral, and finally you can trade the Ethereum futures.

In the view of SBF, this goes against the full meaning of futures. It is foolish to trade spot before trading futures. It increases the risk of being liquidated. Without any flexibility, the entire system is in chaos.

FTX’s brand building

In SBF’s view, following traditional methods, such as advertising on Google and Facebook and setting up a big buy button to link to the website, is not what FTX really wants to do.

“Most user acquisition is done through social media. How do we get most users? They saw a post on Twitter and said that FTX is really exciting, so I should test it out.”

What FTX really considers in marketing is how to make as many people as possible have heard of us? Second, let people know who we are, what we do, and want to take the initiative to learn about FTX.

At present, FTX has named many sports events. In SBF’s view, these endorsements are not only to let people see the three letters of FTX in a certain place, but to establish a stronger connection and convey some information:

“We are a legal exchange. We have legal products. Those reputable institutions have done due diligence on FTX. For example, basketball players, if you hear that they are connected to a certain product, would you say, Oh, this is fun?”

Public chain and Bitcoin

When it comes to the current parallel pattern of multiple public chains, SBF believes that this is only temporary.

“I don’t see any reason for the need for two (public chains). It’s not that there won’t be two (public chains). But why do you need two? Why not one? There are many public chains now. There should be competition between them, and competition promotes them. Keep improving and push the world to find the public chain they want to use.”

So what is the end game of blockchain? What is really important is covering 1 billion users and trillions of dollars in transactions. This is inevitably accompanied by the need for public chains to meet millions of transactions per second.

And applications need to be natively composable, and funds can be transferred seamlessly between different applications, rather than relying on sharding, Layer2, and sidechains.

Therefore, in the view of SBF, a single, native, composable, million TPS public chain has great value.

For Bitcoin, SBF does not consider it to be a general-purpose blockchain. TPS determines that it is not enough to be a universal medium for transactions, so it is very different from Ethereum and Solana.

Wealth and faith

SBF is the young man with the fastest accumulation of wealth on this planet, none of them.

Speaking of the rapid growth of wealth, SBF believes that wealth has less influence on him than most people, and has not changed his views on most things, but wealth will change the way other people interact with him, especially if he doesn’t know much about it. People.

Finally, Patrick asked SBF a question about an unrelated business, “What is the kindest thing someone else has done for you?”

SBF replied, “Support me, you know what I have been doing. When most people don’t believe me, you believe it may be feasible.”

Then he gave an answer more in line with his values.

“Perhaps what actually resonates more with me is that I think that many people in the effective altruistic community are totally uninfluenced by me or anything, and they are very dedicated and selfless in what they do in their lives, and they are very committed to what they do in their lives. This involves making personal sacrifices and seeking altruistic benefits to achieve truly spectacular things. In a sense, these people I think resonate more with me.”

Posted by:CoinYuppie,Reprinted with attribution to:
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