News: Sam Bankman-Fried on DeFi ponzinomics, Grayscale ETF comments, Binance and Russia, El Salvador

  • I’m doing a debate at Durham Union on Friday 29 April: “This House would ban cryptocurrencies.” There will apparently be video. Jemima Kelly from the Financial Times is also arguing this side. I promised to get together a list of our talking points for Friday, so I wrote this post instead. It’ll be all right on the night! [DUS]
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Rebellious jukebox

The cry of the cryptocurrency evangelist is: “you just don’t understand the technology!”

When you ask them a technical question, you discover that 100% of crypto bros who say you just don’t understand the technology, don’t understand any technology.

But there is a technology to understand here. Not software engineering — but financial engineering.

DeFi is constructed from ridiculous chains of leverage. Boxes are leveraged to other boxes, which are leveraged to other boxes, with linkages built from paperclips and sticky tape and bird poop.

Sam Bankman-Fried from the FTX crypto exchange went on Bloomberg’s Odd Lots podcast to do his best Gerald Ratner impression. He managed to flummox Matt Levine by explaining where the money comes from in DeFi yield farming. [Bloomberg]

It works a bit like this:

  • You put cryptos into a box.
  • You create a voting token for that box.
  • If people put cryptos into the box, they get voting tokens that let them decide what to do with the profits on that box, which may or may not ever exist.
  • More voting tokens are airdropped on the people with cryptos in the box.

Why are the voting tokens worth something? They just are, okay. So the airdropped voting tokens are your yield!

Bankman-Fried admits:

So you’ve got these boxes and it’s kind of dumb, but like what’s the end game, right? This box is worth zero obviously.

Levine’s flabbergasted response:

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

To be super-generous, what Bankman-Fried outlines is a bit more bubblenomics than ponzinomics:

  1. We cook up some magic beans.
  2. The market is so overheated and optimistic that someone will give these magic beans an alleged value.
  3. WE’RE RICH!

What’s in the bottom box that all the elaborate leverage mechanisms rest on? Hot air. What happens when the 2021 crypto bubble deflates? LOL.

Bankman-Fried later clarified his statements: [Twitter]

to be clear this is not how I describe yield farming — in context it was a toy model of what yield farming is if you remove all useful parts of the protocol

The trouble there is, the “toy model” he described is literally how a huge number of yield-producing DeFi DAOs work. The late lamented Beanstalk is an excellent recent example.

Container drivers

The SEC is considering Grayscale’s application to convert the GBTC Fund into an exchange-traded fund (ETF), so that retail investors can trade shares in Bitcoin in the US without ever touching a Bitcoin.

All previous Bitcoin ETFs have been rejected — because the Bitcoin market is manipulated trash — and Grayscale fears theirs will be rejected too. Grayscale has even threatened to sue the SEC if the ETF isn’t approved. [Bloomberg]

The SEC takes public comments on new applications — and there have been hundreds of comments supporting the Grayscale ETF! This is mostly because Grayscale put up a form letter for people to fill in. [SEC; Grayscale]

A lot of the pro-Grayscale letters were so overcome with enthusiasm that they didn’t even bother to replace the bit of the form letter text that said: “***[PLEASE WRITE YOUR THOUGHTS IN HERE, INCLUDING WHICH STATE YOU RESIDE IN — THANK YOU FOR YOUR SUPPORT]***”.

The SEC notes the form letters, which they’ve called “Letter Type A.” [SEC]

There have been some much better comments on the ETF, such as the one from David S. H. Rosenthal, he of the EE 380 talk “Can We Mitigate the Externalities of Cryptocurrencies?” He’s not a fan of the ETF proposal. [SEC]

GBTC is the Roach Motel of Bitcoin — the fund can only take in bitcoins. The bitcoins in GBTC can never be cashed out. (Converting to an ETF would fix that.) 3% of all bitcoins are trapped in Grayscale — it used to trade above the equivalent Bitcoin price, so whales would deposit BTC to get GBTC which they could sell six months later, thus cashing out in large amounts without affecting Bitcoin’s exchange price. But GBTC has been underwater since late 2020, and investors are getting tetchy. Grayscale could just sit on the stash and take 2% fees on it forever … [Amy Castor]

Everybody still hates Binance

Bitcoin protects you from governments! Unless you use Binance — then Binance shops you to the Russian FSB. A Reuters special investigation says that Binance leaked data on crypto donations to Russian opposition leader Alex Navalny to the FSB, because Binance wanted to get further into Russia. Binance denies everything, and claims the Reuters investigation is just clickbait. [Reuters; Binance]

In a hilarious comedy of errors, Binance paid Twitter for a custom hashtag that just happened to be a swastika. A Hindu swastika — but it was released on Hitler’s birthday: [BBC]

Well that was obviously really embarrassing. We’re not sure how that emoji got through several layers of review without anyone noticing, but we immediately flagged the issue, pulled it down, and the new emoji design is being rolled out as we speak.

If Binance want to solve this inexplicable mystery, they might look to their past track record. Here’s an earlier Nazi joke from Binance — a Star of David to advertise their “gas” promotion in 2017. [Twitter, archive]

Don’t take me down to Bitcoin City

I’m getting multiple reports that public employees in El Salvador … haven’t been paid this month. The military have been paid. Some police have been paid, though not all. The judicial branch hasn’t been paid. Government contractors’ pay has been consistently late since 2021.

The obvious thing would be to pay people in totally backed Chivo App “dollars,” but the backlash from public employees last year at the idea makes this a non-starter — for some reason, nobody trusts Chivo.

The State of Emergency has been extended another month. Everything’s going fine for Bukele, I’m sure.

NBER has published a paper on Bitcoin as legal tender in El Salvador. A February 2022 survey of 1,800 households shows: [NBER; paper, PDF; Bloomberg]

  • 20% of Chivo users kept using the wallet past cashing in the $30 signup bonus.
  • “The most important reason not to download the app, conditional on knowing about it, is that users prefer to use cash, which was followed by trust issues — respondents did not trust the system or Bitcoin itself.”
  • There’s no evidence of any significant use of Chivo to send remittances or pay taxes.
  • “Virtually no one” has installed Chivo on their phone in 2022.

The Fiscalia (Attorney General) of El Salvador has collected computer crime statistics for many years. Tracoda (Transparencia, Contraloría Social y Datos Abiertos) has sent a Freedom of Information request for the numbers from 1 March to 4 April. The Fiscalia’s office says this data … doesn’t exist. Carlos Palomo of Tracoda suspects that this month’s data looks incredibly bad because of many, many Chivo Wallet hacks. [La Prensa Gráfica, in Spanish]

Autor británico cuestiona el Bitcoin y el autoritarismo del gobierno de Bukele: En un artículo publicado en su blog, el autor David Gerard llama “dictador” al presidente Nayib Bukele y cuestiona acciones entorno al impulso del Bitcoin. That’s a news story on a blog post I wrote, that doesn’t link to the blog post in question. But I’m delighted to help fill space! [, in Spanish]

(Did I mention I’ve started doing Duolingo, in the hope of being able to read useful amounts of Spanish-language text in time for the planned book? I am firmly and repeatedly assured that Juan come manzanas. My accent sounds like an Australian pisstake of Spanish. I’m also told about any number of other courses that are better than Duolingo — but this one has the important advantage that I’m actually doing it. Though I’ll be looking at those courses too.)

Things happen

Operational security tip: when you’re running a scam, don’t call your victim from your own personal phone. A lawsuit alleges that the utterly ponzinomic OlympusDAO’s operators cheated the plaintiff out of millions of OHM tokens by disabling a particular smart contract. The suit publishes a claimed real name for OlympicDAO founder “Zeus” based on the plaintiff looking up the number that “Zeus” … phoned him from. [CoinDesk]

The redoubtable ZachXBT leaked a “marketing firm” price list for shilling crypto on Twitter. It’s not just Crypto Twitter accounts — the list includes athletes, actors and other verified influencers, for prices ranging from a few hundred dollars to $25,000. You’ll find these accounts routinely pumping NFTs, DeFi and minor altcoins.  [Twitter; Vice]

Reggie Fowler, US money mule for the Bitfinex crypto exchange and the Tether stablecoin up to 2018, has decided to forgo trial and plead guilty — not a plea deal, just a straight-up plea of guilty. Nobody knows why he’s doing this now. [Amy Castor; Amy Castor]

Ukraine bans cryptocurrency purchases in hryvnia, to stop “unproductive capital outflows.” If you want to buy cryptos in foreign currency, you’re limited to 100,000 UAH equivalent — about $3,450. Sending actual money across borders up to 100,000 UAH is fine too. Remember, Ukraine is the use case for crypto! [National Bank of Ukraine]

Ethereum is decentralised! You can tell by how an Infura outage on Friday 22 April took out a pile of services: “We are aware of an outage of some of our ETH1, Palm, Optimism, Polygon, Filecoin and Arbitrum API endpoints.” It also took out the Metamask Ethereum wallet. [The Block]

How Bitcoin mining devastated this New York town — what Plattsburgh, New York went through in 2018 when the crypto miners swooped in for the cheap St. Lawrence River hydroelectric power: high electricity prices and ton of noise. [MIT Technology Review]

Russian Bitcoin mining company Bitriver has been sanctioned by the US Office of Foreign Assets Control. Bitriver has multiple links to sanctioned Russian billionaire Oleg Deripaska, who owns old aluminium smelting plants, and sells electricity from those to Bitriver. [Treasury; OFAC; The Block]

Daily Beast: How Crypto Is Failing Spectacularly to Greenwash Itself. Crypto greenwashing has mostly been attempts to do complicated DeFi-style financial engineering with carbon credits — rather than doing a damn thing about proof-of-work mining. [Daily Beast]

The US thinks a North Korean hacker group stole the ETH from Axie Infinity’s Ronin blockchain. Various Ethereum addresses have been sanctioned. North Korea has done this enough that the CISA, FBI and Treasury sent out a warning about the “Lazarus” group, who have been at this since at least 2020. [The Verge; The Block; CISA]

Russia is pushing its CBDC “digital ruble” forward, and promoting its Mir credit card network. Does anyone know of any technical details on this CBDC and what it will in fact be? [Reuters]

Toronto Star: The Saturday Debate: Should we fear the crypto bubble bursting? With a quote from me. [Toronto Star]







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4 Comments on “News: Sam Bankman-Fried on DeFi ponzinomics, Grayscale ETF comments, Binance and Russia, El Salvador”

  1. The financial engineering reminds me of the old wallet-drop swindle. And come to think of it, the new version involves wallet airdrops.

    Good old sucker filter. Select the fools who never learn, and give them yet another chance to not learn.

  2. I’m somewhat inclined to give Binance the benefit of the doubt with the swastika symbol: Binance is originally from China; presumably much of their staff is East Asian; and in East Asia the swastika is still more commonly associated with its use as a map symbol for Hindu and Buddhist temples.

    Lending credence to this association, the Binance swastika has dots in each quadrant, and is aligned orthogonally, which is characteristic of the Hindu or Buddhist swastika. (By contrast, the Nazi swastika lacks dots and is usually rotated 45º.) The Binance swastika also has dots at the ends of the strokes, which somewhat evoke the outward-flaring strokes of the Hindu or Buddhist swastika (while also more obviously evoking a circuit board). This version of the swastika is part of the Unicode Tibetan block as U+0FD7 ࿗ RIGHT-FACING SVASTI SIGN WITH DOTS.

    Anyway, this culturally insensitive use of the swastika is the first and only instance of dubious judgment where I would actually give Binance the benefit of the doubt. In pretty much every other instance I would not.

  3. Sam Bankman-Fried’s description of how “yield farming” works seems somewhat unique among cryptocurrency ponzi schemes in that it pays out in a different currency than the principal, and consequently the initial investors don’t actually lose any of their initial investment (aside from demurrage, i.e. fees, which one assumes is where the real profit lies).

    This is to say that “yield farming” is somewhat unique among ponzi schemes, period, in that it doesn’t technically rob Peter to pay Paul. In the context of Charles Ponzi, this would be like if instead of paying out cash to his investors he had given them vouchers for the (hypothetical) international reply coupons while allowing the investors to withdraw their principal… minus a small transaction fee, of course.

    Another way of putting this is that “yield farming” manages to be almost not actually a scam, in that the person organizing the yield farm is making an “honest” buck by selling shovels… completely useless shovels, but shovels nonetheless. Or, instead of shovels, the person organizing the yield farm is making their “honest” buck by charging their marks a fair market rate for the cost of literally physically printing Monopoly money. If in a gold rush, the real money is in selling shovels, in a Monopoly-money rush, the real money is in selling paper and ink.

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