Sam Bankman-Fried Described Yield Farming and Left Matt Levine Stunned

Sam Bankman-Fried Described Yield Farming and Left Matt Levine Stunned
bloomberg.com

The problem with farming was that, in many, but not all, cases, the equity in question had no value. It isn't true that they were all ponzi schemes, though. Many of the tokens did generate and continue to generate quite significant revenue for their holders, e.g. Compound. You can argue that the entire space is a ponzi, but within that space, Compound (among several others) is a legitimate service provider to the casino, and earns real income for doing so.

Farming is really no different from startups paying early employees in options. Its just that the companies were a lot dumber, and it was a lot easier to participate.

So why do people put billions in crypto but not in random bits of paper such as Pokemon cards?

Liquidity.

This is the magic of the IPO: bits of paper that give you dividend rights to a business suddenly become worth multiples more when it becomes easy to trade them. I'll take a punt on your crappy taxi app if I can jump out of that bet for a small fee. The motivation? Other people will think the same.

Crypto has reinvented the financial system, particularly the part where you can split risks and trade them. There's a whole industry of liquidity providers who basically transport risk across venues and risk classes: prices for the same thing need to be approximately the same across venues, returns for riskier things need to be higher than returns for less risky things. Things that are a bag of risk need to cost something similar to the sum of things in the bag.

This is the exact same as in the traditional financial market: ETFs are bags of stocks, high yield bonds are for riskier issuers, and you can buy the same stock on many exchanges at more or less the same price.

A lot of these trades are really just relative value arbs: something is worth x here, so I can offer it at x + 1 there. When some guy gives it to me at x, I sell it to the other guy at x + 1. If some guy gives me a bag for X + Y, I sell the X to one guy for X + 1 and I sell the Y for Y + 1.

But the liquidity is what allows people to stick loads of money in. They see that you can have a punt on something and get your money back for low slippage, so they give it a go. Whether that's in one scheme or another doesn't matter, but this "put money in a box" analogy is quite apt. Maybe your mechanism is a DAO, maybe it's an AMM, maybe it's some option vault. As long as there's a financial sense in which it can be glued to the rest of the ecosystem, someone will have a go at it.

Most projects that have earmarked tokens for their employees suffer as well. As the token goes through the speculative pump and dump, employees with locked in tokens can watch their networth go from millions to nothing - without being able to do anything about it. Employees constantly jump ship because after the dump, they realize that their locked in tokens are worth very little - and when the vesting ends, they market dump it all to get whatever profit they can. As the price craters, the project finds it harder and harder to attract new talent.

I've seen this happen with so many projects that I now appreciate why we don't have exchanges for new businesses. Can you imagine what the startup world would be like if every startup was listed on a stock exchange immediately after it was founded? You'd have speculators pumping up the stock price based on rumor and/or fact ("YC invested! Sequoia is in!"). Employee vested ESOPs would go from millions to nothing and hiring future employees would be extremely hard since their ESOPs would be worth nothing.