Sam Bankman-Fried, the CEO of FTX, has offered his explanation of exactly what “yield farming” is. But alert listeners to the Odd Lots podcast on Apr. 25 will have noticed that what Bankman-Fried actually described was a textbook example of a ponzi scheme.
The bizarre episode was precipitated in a conversation with former Goldman-Sachs investment banker Matt Levine. Levine simply asked Bankman-Fried how yield farming works, setting the FTX CEO off on a winding description of ‘X Token’ – the imaginary token which comes from a box that does “literally nothing.”
Despite doing literally nothing, Bankman-Fried explained that X Token is set to change the world. In ponzi-scammer parlance, this process is known as “selling the dream.” It is the technique scammers use to win over their marks and convert them into true believers.
“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…,” began Bankman-Fried.
“…And then this protocol issues a token, we’ll call it whatever, ‘X token.’ And X token promises that anything cool that happens because of this box is going to ultimately be usable by, you know, governance vote of holders of the X tokens. They can vote on what to do with any proceeds or other cool things that happen from this box. And of course, so far, we haven’t exactly given a compelling reason for why there ever would be any proceeds from this box, but I don’t know, you know, maybe there will be, so that’s sort of where you start.”
At this stage of the description, Bankman-Fried has created a do-nothing box and tokens created by the do-nothing box. Other than changing the world with this concept, what happens next?
“So anyone who goes, takes some money, puts it in the box, each day they’re gonna airdrop, you know, 1% of the X token pro-rata amongst everyone who’s put money in the box. That’s for now, what X token does, it gets given away to the box people.”
Bankman-Fried now seeks to place a market cap on the do-nothing box.
“Well, X token has some market cap, right? It’s probably not zero. Let’s say it’s, you know, a $20 million market cap…”
“Wait, from first principles, it should be zero,” interjects Matt Levine. “When you describe it in this totally cynical way, it sounds like it should be zero, but go on.”
“Describe it this way, you might think, for instance, that in like five minutes with an internet connection, you could create such a box and such a token,” states Bankman-Fried.
“Like some of the magic is in like, how do you get that [$20 million] market cap to start with, but, you know, whatever we’re gonna move on from that for a second… if the total amount of money in the box is a hundred million dollars, then it’s going to yield $16 million this year in X tokens being given out for it. That’s a 16% return. That’s pretty good. We’ll put a little bit more in, right? And maybe that happens until there are $200 million dollars in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or another sort of similar parties, go and put $200 million in the box collectively and they start getting these X tokens for it.”
But wait, there is more. The more that is put in the box, the more money it keeps paying out, and the more the token price rises.
“And they’re like ‘10X’ that’s insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it’s a $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden of course, the smart money’s like, oh, wow, this thing’s now yielding like 60% a year in X tokens. Of course, I’ll take my 60% yield, right? So they go and pour another $300 million in the box… and then it goes to infinity. And then everyone makes money.”
The money goes to infinity. To some people that might sound like some kind of voodoo economics, or Buzz “to infinity and beyond” Lightyear economics, or even just a good old-fashioned ponzi scheme. According to Bankman-Fried however, it’s the magic money of “yield farming” and do-nothing boxes.
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