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SBF's underlying thinking logic: the forward North Star, faith and the end of the public chain

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A series of underlying thinking behind SBF's control of uncertainty

Original title: "SBF Bottom-level Thinking Logic: Forward Polaris, Faith and the End of the Public Chain"

Original source: Shenchao TechFlow

FTX founder Sam Bankman-Fried (SBF) is the man with the fastest wealth accumulation on the planet, bar none.

What is his underlying thinking logic? Numerous articles or interview materials do not seem to answer my confusion until I recently heard an audio interview with Patrick on SBF It suddenly became clear, which involves a series of underlying thinking behind SBF's control of uncertainty.

The content mainly includes:

（1 ) What is the North Star guiding SBF forward?

(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 global policy regulation?

(5) Why does FTX invest huge sums of money in brand building?

(6) How does SBF view the current parallel pattern of new public chains?

(7) After accumulating huge wealth, how has SBF's mentality changed?

The Forward Polaris

SBF has become the new global idol of the encryption industry, full of However, we can’t help but want to explore the underlying driving force behind this aura, 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.

Situation number one is when he wakes up, goes to work, gets an email and has to reply to it and make a decision What emerges is how to build a good product and a strong and effective exchange, etc.? The most critical of these is whether the risk engine is effective? Because a well-designed risk engine can give people flexibility while keeping the platform safe. And another important thing is does the general design of the product in this area make sense?

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

For example, doing charity is not necessarily the most relevant thing in daily life? Not even as important as product design.

But when he thinks about what he should do with his life? And how should he prioritize? North stars may emerge, such as effective altruism and utilitarianism.

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

Secondly, the interviewer Patrick intuitively observed that SBF puts a lot of energy and research into how to build a good market, and at the same time admits that continuous market building is more important than any other A charitable organization that absorbs dollars linearly is more beneficial to mankind. In this case, it is puzzling why SBF should devote energy to charity instead of fully investing in more financial infrastructure to benefit more people?

SBF's thinking on this seems to be higher dimensional and fits his definition of an inner North Star.

He has observed that the economies of various countries have been hit because of the excessive stamp duty imposed on the stock market, which has stifled liquidity and efficient markets, so he firmly believes that Consider the enormous impact that efficient markets can have on the world.

From the long-term perspective of world development, it is necessary to do charity.

While there are many ineffective charities, it takes a very different perspective if you start with a serious consideration of how to do the best with your life and money. SBF believes that some charitable organizations that think deeply and powerfully enough will have a lasting impact on the long-term development of the future world, and their influence will expand to tens of trillions of people ten years later, and it is very likely that they will really change the trajectory of history.

He took the COVID-19 epidemic as an example, expressing that human society has no clue when facing and solving the epidemic.

“What we need to look at is how much society is doing now to better deal with the next pandemic, not what we have done to this pandemic. Reaction? But it’s pretty crazy that there’s basically no discussion about the next pandemic right now, and frankly, we’re kind of lucky that COVID-19 isn’t that deadly, and it’ll allow you to have some ways to spend your time, your money and resources.”

In the interview, SBF expressed concern about common human problems, and he believes that people should prepare for the next pandemic, because saving tens of thousands Billions of dollars and millions of lives matter.

While there are some very good countries in this pandemic that have done an amazing job avoiding COVID and avoiding more deaths, the SBF believes they are in lockdown and their economies are stagnating , no one knows what will happen to their way forward? So it is very important to think about how to make the measures super effective and build a more complete risk model, and behind this example may be one of the reasons why he funds those charitable organizations with strong thinking power.

The trading market needs to be improved

Referring to the imperfection of the current trading market, SBF It is pointed out that the complex trading steps in the traditional trading market lead to problems such as inefficiency, poor information and high transaction costs.

For example:

1) Order book dilemma

In today's financial market, if you are not willing to spend tens of millions of dollars every year to pay data service fees, you will passively trade into an order book that cannot see other players. So for exchanges, in addition to allowing transactions, it is to support price discovery.

2) Complex transaction process, full of many intermediaries

In cryptocurrencies, people are used to all income from transaction fees, unlike stock exchanges, they monetize data and introduce numerous intermediaries.

Such a weird business model, probably wrong for an efficient market, and a really bad user experience.

Suppose you want to buy Apple on NASDAQ, you can’t directly open an account to buy it, you have to enter the market through a broker, so the number of intermediaries in the stock market is crazy Yes, this leads to a series of strange things.

Like payment for order flow (PFOF), it exists because the transaction forces people to go through six different companies from start to finish, which makes the transaction more confusing and complicated.

So it sees great value in creating a clean, simple modular marketplace infrastructure. Of course you might ask why none of this is 24/7, there are many reasons, one of which is that you have to apply to the SEC and then wait for the application to go through.

3) Unreasonable transaction fees

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

It has a reasonable pip range, probably between 10 pips and two pips. Once it exceeds this range, it will kill transactions and kill liquidity. We see some countries taxing 10, 15, 20 basis points per trade, but the stock market may not even be up 20 basis points throughout the trading day. So if you charge 20 bps as a fee on both sides, users won't trade.

So it is very important to set a reasonable fee for an efficient market. This fee is not just a matching engine fee, but every transaction from the beginning to the end Fees, the total fee paid when one party transfers assets to another.

In perfecting the underlying thinking in the trading market

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

About how low the delay needs to be to get most of the economic value, his answer is that the delay must be lower than the release speed of new economic information, so that Avoid a situation where two different economic events occur, but the exchange does not have time to internalize the first.

What speed is that? Very diverse. SBF thinks that when people are in milliseconds, usually there will not be two significantly different economic information, because the distance between each other is less than a millisecond, but not if they are in the same day or the same hour, so the answer must be At less than an hour, this compares efficiently to the latencies of the NYSE and NASDAQ, but it's a bit deceiving.

Because the NYSE latency is a fraction of a millisecond, but it could be closed overnight on a federal holiday, that's crazy.

So he thinks that it is not the most important thing to make the architecture as low latency as possible, but it is more important to keep it open.

Status close to a complete encryption market

Speaking of the openness and efficiency of the capital market, Patrick believes that the current state of the encryption 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 encryption 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 room for arbitrage, mainly cross-regional arbitrage. Although the encryption market is a non-legal system, it still needs to penetrate into various places Relying on wire transfer infrastructure, so to a certain extent, the encrypted market can only operate rapidly when the fiat currency system keeps up, avoiding problems such as insufficient liquidity and inefficient operation.

In the short term, though, the existence of stablecoins could at least partially improve the situation, and if everyone in the crypto industry used USDC instead of USD, users could 24/7 mobile, eliminating reliance on wire transfers. This is one of the reasons why stablecoins are so big in the crypto space, it's just an easier and better legal way.

While SBF expects a large influx of fiat currency into the cryptocurrency ecosystem in the next few years, although it has not really materialized yet, it is very likely to happen, which can fill the crypto The capital base of the currency and start pumping those dollars into the ecosystem, bringing the capital-to-market cap ratio in the ecosystem close to 1.

How does encryption construction attract SBF?

The outside world thinks that it is not too early for SBF to intervene in the encryption market. But he has very pragmatic ideas. So people wonder how the encryption system stimulates his attention and time to it? Shen Chao sorted out the following 4 points from his answers:

1) The encryption market demand is huge, especially in all infrastructures for cryptocurrencies. Inadequate supply.

Thinking back a few years, crypto exchanges were crashing almost every day because they couldn't handle the load, risk engines were burning a million dollars of customer funds a day, Since they couldn't make a margin call on time, that looked like a mess. But the worst is just the appearance. The encryption market just doesn’t have time to mature itself and keep the infrastructure up to speed. The more this is the case, the more business opportunities there will be. Facts have also proved that the encryption market has a great demand for new businesses. These must be someone do it.

2) In the process of trying to conduct encrypted transactions, I realized the problems existing in the existing financial infrastructure (mentioned above).

3) Feel like the crypto market is seemingly full of shit shows, but still easier to use than banks, and there are obvious ways to make this space more efficient.

4) The decentralization, cross-border, transparency, openness and other characteristics of encryption make SBF realize that there are a lot of opportunities to start a new native digitalization and new The way to socialize, etc., is pretty cool.

What should I do next?

SBF believes that development is dynamic and many times must be hyper-responsive to the global environment. If you are a crypto company, and you don't take regulation and compliance seriously, you are making a mistake.

This wasn't as obvious a year ago when many crypto companies didn't really have a compliance department, it's very different now, so the next steps are What? He will give some non-absolute assumptions, but he will dynamically determine the priority of things.

For example, statistics are something that is being prioritized, SBF said that the current trading volume of cryptocurrencies is almost as much as that of US stocks, and the volume is very large. The trading volume is about 200 billion US dollars, the derivatives trading volume is about 130 billion US dollars, and the spot trading volume is about 55 billion US dollars, the ratio is about 2:1.

While U.S. spot trading volume is about $10 billion, derivatives trading volume is about $1.5 billion. So the ratio is not 2:1, but 0.1:1. A little extrapolation reveals that there is about $25 billion in missing trading volume, and there is a lot of demand for derivatives trading from the US.

But because mainstream cryptocurrency exchanges have not obtained the CFTC license, they do not have the regulatory ability 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 next work with the CFTC and discuss ways to develop the platform over time to fill this gap in the market.

Embrace regulation

This is a problem that practitioners in the global Crypto industry have to face , SBF's attitude towards regulation can be summed up in one sentence: actively embrace regulation, follow the route of compliance and transparency.

In SBF’s view, the regulatory policies of countries around the world, including the United States, are lagging behind the encryption market. This is a brand new asset class that was rarely Some people are concerned that after five years, it has grown into a trillion-dollar market, and 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, believing that the United States will establish a more complete framework in the next few years, which will make the United States a stronger regular place for encryption business.

However, it is difficult to supervise decentralized protocols or products. As far as specific regulatory policies are concerned, it is reasonable to try to find strategic parts of the ecosystem , which incorporates most of the regulation, for example, centralized exchanges and any institution that operates a fiat-to-crypto conversion business.

Regulation does not need to be perfect, the right thing to do is to take a step in the right direction and start creating a framework to protect consumers without stifling the industry prevent financial crimes.

Derivatives and Innovation

In the field of derivatives, perhaps no one is better than SBF have a say.

There are many derivatives exchanges, and SBF believes that the core competitive advantage of FTX lies in cross margin.

In FTX, almost any asset can be used as margin, such as Euro, US dollar, Ethereum, Bitcoin, USDT, Microsoft Equity Token...you can make any deposit immediately Derivatives trading of assets.

What does it look like on some other platforms?

First of all, sell the assets in hand, get USDT, then buy spot Ethereum, and then transfer Ethereum to the Ethereum futures margin wallet and use it as Collateral, and finally to trade Ethereum futures.

In SBF's view, this defeats the whole point of futures. Trading spot before trading futures is stupid, it increases the risk of being liquidated, there is no flexibility, and the whole system is in chaos.

FTX’s brand building

In SBF’s opinion, according to traditional methods, such as in Google Advertising with Facebook, setting up a big buy button linking to the website, is not what FTX really wants to do.

“Most user acquisition happens through social media. How do we get most of our users? They see a thread on twitter and say It's really exciting to be FTX, so I should test it out."

What FTX really thinks about in marketing is how to get as many people as possible Has anyone heard of us? Second, let people know who we are, what we do, and want to reach out to FTX.

Currently, FTX has sponsored many sports events. In SBF’s view, these endorsements are not only for people to see the three letters of FTX somewhere, Rather, to create a stronger connection and to convey some message:

"We are a legit exchange, we have legit products, reputable Agencies have done their due diligence on FTX. Like, basketball players, if you heard they were associated with a certain product, would you say, oh, that's interesting?"

Public chain and Bitcoin

Speaking of the current parallel pattern of multiple public chains, SBF believes that this is only temporary.

“I don’t see any reason to need two (public chains). Not saying there won’t be, but why would there be two? Why not one ? There are many public chains now, and there should be competition among them. The competition drives them to keep improving and pushes the world to find out which public chain they want to use. "

What is the end game of the blockchain? What really matters is reaching 1 billion users and transacting trillions of dollars. This is bound to be accompanied by the fact that the public chain needs to meet millions of transactions per second.

And the application needs to be natively composable, and funds can be seamlessly transferred between different applications, instead of relying on sharding, Layer2, and side chains.

Therefore, in the view of SBF, a single, original, composable public chain with millions of TPS has great value.

For Bitcoin, SBF does not think it is a general-purpose blockchain, and TPS determines that it is not enough to become a general medium for transactions, so it is Solana is very different.

Wealth and Faith

SBF is the fastest growing wealth young man on the planet ,none of them.

Speaking of the rapid increase in wealth, SBF thinks wealth has affected him less than most people, and it hasn't changed his mind about most things, but Wealth changes the way other people interact with him, especially people he doesn't know well.

Finally, Patrick asked a SBF a non-business question, "What is the kindest thing someone has done for you?"

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SBF replied, "Support me, you know what I've been doing, you believe it might work when most people don't believe me."

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

“Maybe what actually resonates with me more is that I think a lot of people in the effective altruism community, they’re totally unaffected by me or anything , are very dedicated and selfless to what they do with their lives and achieve something truly spectacular in a way that involves making personal sacrifices and seeking altruistic benefits. In a sense, these people I think are more capable Resonates with me."