Levin:

Can you give me an intuitive understanding of farming? I mean, like for me, farming is like you’re selling structured puts and earning bonuses, but maybe there’s a more sophisticated understanding than that.

Sam Bankman Fried:

Let me give you a kind of really toy model of this, which I think has surprising legitimacy for what farming could mean. You know where to start? You start with a company that builds a box and in practice that box they probably dress it up to look like a life-changing, you know, world-changing protocol that’s going to replace all the big banks in 38 days or so imported. Maybe just ignore what he’s doing for now, or pretend he’s literally doing nothing. It’s just a box. So what is this protocol, 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. Okay, you put it in the box and you get, you know, an IOU for putting it in the box, and then you can redeem that IOU for the token.

So far what we have described is the dumbest ETF or ADR in the world or something like that. It doesn’t do anything but lets you put things in there if you want. And then this protocol issues a token, we’ll call it anything, “token X”. And the X token promises that whatever cool happens because of this box will ultimately be usable by, you know, the governance vote of the X token holders. They can vote on what to do with any product or other cool things that happen from that box. And of course so far we haven’t exactly given a compelling reason why there would ever have been any benefits from this box, but I don’t know, you know, maybe there will be , so that’s sort of where you start.

And then you say, okay, well, you have this box and you have X token and the box protocol states, or maybe on-chain governance voting, or, you know, something like that, that what they’re going to do is they’re going to take half of all the X tokens that have been reminted. Maybe two-thirds will, two-thirds will offer X tokens, and they’ll give them away for free to whoever uses the box. So whoever goes there, takes money, puts it in the box, every day they’re going to drop, you know, 1% of token X prorated to everyone who put money in the box. That’s what token X does for now, it’s given to the people in the box. And now what happens? Well, token X has a certain market capitalization, right? It probably doesn’t suck. Let’s say it’s, you know, a $20 million deal…

Levin:

Wait, wait, wait, from first principles it should be zero, but okay.

SBF:

Uh, of course. OK. Very reasonable comments.

Levin:

I mean, that’s not entirely true, but, like, when you describe it in that totally cynical way, it sounds like it should be zero, but keep going.

SBF:

Describe it this way, you might think, for example, that in five minutes with an internet connection you could create such a box and such a token, and it should reflect like, you know, it should be worth about $180 or something market cap for like that, you know, that effort you put into it. In the world we’re in, if you do that, everyone’s going to be like, ‘Ooh, box token. Maybe that’s cool. If you buy a boxed token, you know, it will show up on Twitter and its market cap will be $20 million. And of course one thing you could do is make the float really low and whatever, you know, maybe there hasn’t been 20 million dollars poured into it yet . Maybe it’s kind of like, is it, you know, a fully diluted valuation or something, but I recognize that it’s not entirely clear that this thing should have a market cap , but empirically I claim it would have a market capitalization.

Levin:

I am okay.

Weisenthal:

There should be no market capitalization in theory, but in practice they always do. OK.

SBF:

That’s right. So, and obviously, we’re already hiding some of the magical impact, right? Like part of the magic is like, how do you get that market cap to begin with, but, you know, whatever, we’ll move on for a second. So you know, X tokens [are] given every day, all these fancy companies are like, huh, that’s interesting. Like if the total amount of money in the box was one hundred million dollars, then that would net $16 million this year in X tokens given out for it. That’s a 16% return. It’s rather good. We’re going to add a little more, right? And maybe it will happen until there’s $200 million in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or other similar types of parties, are going to put $200 million in the box collectively and they start getting these X tokens for it.

And now all of a sudden everyone is like, wow, people decide to put $200 million in the box. It’s a pretty cool box, isn’t it? How precious this is a box as evidenced by all the money people apparently decided to put in the box. And who are we to say they’re wrong about that? Like, you know, it’s, I mean, boxes can be awesome. Listen, I like the boxes as much as the others. And so what happens now? All of a sudden, people are kind of recalibrated like, well, $20 million, is that it? Like this market cap for this box? And it’s been about 48 hours and it’s already $200 million, including from such sophisticated actors. They’re like, come on, that’s too low. And they look at these ratios, TVL, total value locked in the box, you know, as a ratio to the market capitalization of the token in the box.

And they’re like ’10X’ that’s crazy. 1X is the norm.’ And then, you know, the price of token X skyrockets. And now it’s a $130 million market cap token because of, you know, the optimistic use of the box. And now all of a sudden, of course, smart money is like, oh, wow, this thing now makes about 60% a year in X tokens. Of course, I’ll take my 60% return, isn’t it not? So they’ll pour another $300 million into the box and you get a shrink and then it goes on and on. And then everyone makes money.

Levin:

I consider myself quite a cynical person. And it was so much more cynical than how I would have described farming. You’re just like, well, I’m in the Ponzi business and that’s pretty good.

Weisenthal:

At no time did any of this require some kind of similar economic case, it’s like other people putting money in the box. And so I go there too, and then it’s more precious. So they’re going to invest more money, and at no point in the cycle did that seem to describe some sort of similar economic goal?

SBF:

So on the one hand, I think that’s a pretty reasonable answer, but let me play around with it a bit. Because it is a framework of this. And I think there’s kind of a depressing amount of validity…

Levin:

Can you comment on the durability of this? Because, you know, on the one hand, you’re like, well, a trillion dollars of institutional money is going to go into Bitcoin. And on the other hand, you’re like basically there are a lot of Ponzis that have been very successful.