The Chopping Block: SBF Wants to Win in the Court of Public Opinion. Will He? - Ep. 428

Transcript

Not a dividend. It's a tale of two funds. Now, your losses are on someone else's balance sheet. Generally speaking, airdrops are kind of pointless anyways. Um, I mean, there's trading firms who are very involved. I like that ETH is the ultimate ponzi. DeFi protocols are the antidote to this problem. Hello everybody. Welcome to Chopping Block. Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. So, quick intros. First we got Tom, the DeFi maven and master of memes. Next up, we've got Robert, the crypto connoisseur and captain of Compound. Then we've got Tarun, the gigabrain and grand poobah at Gauntlet. And finally, we've got myself.

I'm Haseeb, the head hype man at Dragonfly. But all four of us are early stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Okay, so for those of you who are not tuning in live, we just went live after the end of the New York Times interview with SBF. Um, I think it's uh, actually, I guess the second interview that he's done, but but certainly the most high-profile, and it it seems like the most hard-hitting. I'm just going to give a very quick summary of some of the stuff he said, cuz a lot of it has kind of been repeats of, you know, things he's already been asserting publicly and in his tweets.

So, some of the some of the key quotes that I pulled out from the conversation he had with Aaron Sorkin. First, he said FTX US and FTX Japan are fully solvent, and he expects that they can pay back customers. He's surprised that they haven't already, and he's confused why they were pulled into the bankruptcy. He was asked at some length about the shibboleths and the game that Westerners play that he alluded to in the Vox article, and he sort of he he tried to paint it as though this is talking about marketing. Um, he's like, "Oh, you know, we do all these like dumb ESG marketing campaigns, blah blah blah, in order to get uh, regulatory stuff." Wait, wait, wait, wait, wait. Don't don't forget that he was like, "Well, I'm sorry that a private conversation that I thought was the truth was revealed."

He said that first before, so like True, true. He So, Aaron asked him about uh, criminal liability, if he expects that he will have criminal liability. And Sam gave a very interesting answer to that. He said, "Look, there's a time and place for me to think about that, but right now is not it. Right now, I need to be focused on customers and what I can do to help make the situation better." Now, Aaron also asked him, "When did he know that there was a problem at FTX?" And Sam answered he knew that there was a problem starting on November 6th. November 6th was the day that CZ tweeted that they were going to sell their FTT.

Uh it was November 7th, the day afterwards, that Sam actually tweeted that FTX is fine, all assets are fine, we don't trade with customer funds. And so this seems like potentially a an admission that Sam knew that things were not fine when he made that tweet. And that tweet, of course, was later deleted, which indicates probably what we already suspect, which is that he knew that that tweet was um was was not knowingly correct at that time. He he's he's he repeated again that he uh regretted that he allowed the bankruptcy process to come into place. And he felt that it was possible to potentially make all customers whole. And when he was asked why, he sort of alluded to doing something like Bitfinex, which presumably means issuing some kind

of debt token and using that to {quote} make customers whole and just continuing to operate. Um and then lastly, he said, which he also said in another interview, that he has 100k left to his less in his name. So he, you know, presumably it doesn't have a whole lot of money left and is just hanging out in the Bahamas. So those are those are what I kind of perceive to be the highlights. Reactions, we just we just got off the video. What did you guys think? Oh, yeah. I I I think he meant And- Andrew Ross Sorkin. Oh, I'm sorry. Andrew Ross Sorkin. My my first point is that he said a lot of things and didn't bring the receipts for any of them.

You know, he can claim or make any statement he wants. He's done that for a long time, but a lot of the things he said, you know, he didn't necessarily provide any evidence for. How much money does he have? Who knows? Most of those entities have been in his name. How much crypto does he have? If you want me to believe that he has no crypto, you know, I I will answer with extreme skepticism. My my take was, you know, he seemed to be framing his own defense, whether that's a defense in the court of public opinion or the court of the Department of Justice, by framing everything from the beginning to the end as "I'm innocent. I didn't know. Things got away from me. You know, this was just a funny mistake." He

Yeah, so it does seem like he's continuing to assert the defense that basically this was a margin position that went wrong. There was no clear decision or moment that he made to say, "Okay, we're going to take customer funds and give it to Alameda." You know, he's continuing to assert that this was just kind of run-of-the-mill margining that went wrong and that our risk systems didn't make this apparent to them. I I I think that's just partly the interviewer not understanding how a derivatives exchange works to realize how absurd it is to say that that's what happened. Uh I like I think if an investor can like thought you understood how clearing and settlement at derivatives exchanges is works normally and like why this makes no sense makes no sense to be like

"Someone sent you money in your bank account. I'm going to credit you margin in my exchange." Like makes no sense at all. There's no settlement guarantee. I I think like that that was probably the weakest question in some ways because it he didn't like kind of press on like how how could that even make sense that you did that at all. Yeah, it's it's somewhat hard, you know, right now for us to piece together everything that's happening cuz we're getting it, you know, in bits and pieces looking externally. And but I I do feel like, you know, once like some of the actual internal communications come out, ideally in like discovery, like there should be a paper trail like to sort of that this happened, right? I doubt they, you know, had everything done over phone calls or everything done in person. Surely at

some point someone put in writing what was what actually happened and then we'll have sort of a smoking gun. Right now it feels like, you know, we're trying to sort of figure out how the system work from the outside just by seeing sort of what what it's emitting. The fact that they had all these auto-deleting messages in all of their internal conversations I think is going to make it very difficult for any kind of criminal investigation to get a smoking gun. Now, I mean, given and also given the quality of the accounting, the accounting was so bad that clearly it's going to be very difficult to actually do any forensics here to understand who was involved when these decisions were made.

Um it seems that, you know, Sam is asserting very clearly that look, I didn't know. And if I had known I would have stopped it and yeah, he's saying that look, this is my responsibility because I'm the CEO and I messed up. But he's also asserting that he was not he was not knowledgeable. And ultimately that is almost always the key element of a criminal prosecution is the state of mind of the person who's committing the crime. If they didn't know that it was happening, then generally speaking you're going to get civil liability not criminal liability. Now, there are certain things I think that are pretty slam dunk like that he made misrepresentations to customers when he said that FTX was fine, that they broke the terms of service in a knowing way, and or that they mis- made misrepresentations to investors. It seems now that many investors are

raising their hands and saying, "Look, we were made assertions about the relationship between Alameda and FTX that were not true and that were demonstrably not true." Even even uh you know, with with respect to just the detail that we learned which is that Alameda had a special status in their liquidation engine. Um there was another interview that Sam did recently with Tiffany Fong which is actually the very first interview I guess he's done in that interview other than Kelsey Piper's, uh you know, leaked DMs. And in that interview he was asked directly about the back door that the Wall Street Journal reported on. And Sam's claim was that, "No, there's no back door. Like I can't even code. How would I make a back door?"

That seemed very confusing to me. Like wasn't he a quant at Jane Street? How I mean, he doesn't need to cast the code. He know, I I remember once I remember when I interviewed there when I left college, one of the jokes that one of my interviewers made was our founders only know two programming languages. VBA or Excel and OCaml and nothing in between. And so like I could kind of There's there's actually some reasons philosophically for them that I could most of the quants actually don't do a lot more like picking up the phone and pricing things rather than purely like tech-based trades. Yeah, I guess even if you're writing a lot of OCaml, that doesn't mean you know how to like write an accounting system. This doesn't obviate Gary from having done

this. Like let's He finds Sam can't code. Sure. Clearly the CTO can code. But if he just told one of his close allies within the company to do this in secret, like it doesn't change the fact that he ordered there to be a backdoor put in. Right. Look, the polycule has one person who could have done it. That's all that matters. Sure. At least one. I I mean so okay. So I I think we're It feels like the whole world is kind of on the same page at this point other than Bill Ackman. I don't know if you guys saw Bill Ackman live tweeted during the talk that he said call me crazy, but I think SBF is telling the truth. It seems like everybody except Bill basically thinks that okay, we kind of roughly

know what happened and I think we we see the the defense that that Sam was trying to make. Honestly, what impressed me the most in this conversation with Sam is the fact that like there is no upside for him in in doing these interviews and he's very clearly now at the point where he's like back to his old self. It actually was one of the things that the the New York Times had this like live live blogging of you know different snippets from the conversation and one of the things they said which I found very interesting is like New York Times wrote this themselves which is that they said like something like you know Sam is kind of back to his charismatic self and he's using his intelligence to try to, you know, kind of uh win over the audience uh and his and his

vulnerability. And it's very clear like Sam knows that this he's very good at this, right? It's kind of what made FTX so successful. And he's basically ignoring the obvious advice of any of his lawyers and he seemed like potentially seemingly, you know, the stuff that he said in this interview will almost certainly come out in a criminal trial if and when he has one. And so it does seem like I don't think there's an end-dimensional chess here. Like this is just clearly bad for him to be doing these kinds of interviews and directly answering questions that potentially implicate him on criminal liability.

Like I think he just genuinely believes what he's saying. Uh at least with respect to, you know, this is not the time for me to go in a hole and just disappear. You you know who agrees with you? Bill Ackman. Well, Bill Ackman might believe the details of the story. I don't know that I believe the details of the story, but in terms of Sam's just sense that like look, I just I I I can't just go and do what's in my blind self-interest because I feel like a strong sense of responsibility. Like it's hard to get like what is his motivation if like what what like what if you think it's all Machiavellian with respect to getting on the New York Times deal book interview, which is basically I mean what happened there was like a cross-examination.

This was the most unfriendly interview I have seen. I don't know. What do you what what do you guys think about that? I mean, I think leaking some of the specifics like, you know, sort of around the November 6th date seems like a big [ __ ] up, but it does seem like, hey, you know, so far uh you know, from all the leaks that have come out, assume Sam said nothing, it seems extremely criminal, right? It seems like, hey, there was there was, you know, malice behind these actions. And so all of his, you know, interviews so far have been trying to spin this like plausible deniability story, right? Oh, I I [ __ ] up, it was a mistake, accounting issue.

And I think that that hope is that you repeat that enough times and people begin to believe that that was actually Sam's state of mind, especially, you know, again, if we don't actually have those that written evidence. So, if that is sort of the message that's being spammed out, you have this voice of the group that's actually pushing that versus, you know, everything else that's being leaked out about the backdoor and you know, all these other sort of intentional acts that he took. I think it's also possible he just can't help it. That, you know, like the he's so used to the spotlight and he's so used to being a part of the conversation that maybe he just can't resist continuing to interject himself into that conversation.

He got hooked on Crypto Twitter. Yeah. I know how that feels. I know how that feels. When asked about the stimulants, he was just like Uh well, I didn't drink alcohol until after I was 21. It was like, what what kind of deflection is that? And then he like started being like, oh, I had needed help focusing, but clearly I wasn't focusing enough. My head exploded when I heard that part. I I thought that was a legitimate answer, which is like, look, I mean, the guy is like he was twitch his leg was twitching, he plays World of Warcraft on calls, clearly has a problem with focusing, right? So, I can understand that like this guy from everything we know about him probably does need some medication for his lack of focus. So, I thought that was a I honestly thought

that was a reasonable answer, but it's still funny. I I thought that was that was like that to me that was the best part, right? He didn't even like he could have just been like, no, next question, right? Yeah. Hilarious. And instead we like learned about the fact that he was like boring in high school. Weirdly, I got recommended a um like a a talk that he gave in like 2018 on on YouTube just like through the algorithm or whatever and it was it's it sort of reminds me of watching like old Trump videos of like this person was actually a very charismatic, you know, well-spoken person and then and it's so hard to sort of square that with sort of this like weird twitchy goblin that we now see on on screen. But like, you know, at the

time yeah, it was it's a very sort of different version of Sam. So like, I think you know, maybe it was just was you know, partly because of this. But yeah, it's strange to see him again on screen. Yeah, I thought um I I it seemed like maybe he'd set that up himself. I mean, I doubt he was getting a lot of help on it. Neither did the camera crew. That thing looked like a guilty deposition. That was like Just just that angle. Just that he was looking down and constantly, you know, doing this thing as he was answering questions and I was like uh it it it does not this does not seem like a good way to make yourself seem innocent.

So, yeah, especially in the court of public opinion. Like all these clips are going to be replayed over and over and over again. It does look like you're in a confession booth the way that was filmed. That is 100% that is 100% the vibe of of watching that that interview. Uh well, okay. I think we should we should kind of zoom out a bit and talk about some of the broader backdrop of what's been happening over the last week. So, when when we left things off in the last episode, we were talking about Genesis and some of the fears around the Genesis insolvency. And I believe last week we said that we thought Genesis was probably going to be okay. And now a lot more details have come to light and we've learned a

valuable lesson. I think we I think I alluded to very briefly last time. I was like, oh, you know, after FTX, I never I don't feel like I should be that confident about anything. Now we learned why. Is that it looks like there was a lot of funny business in the accounting at Genesis. Very very high level. The understanding that we now have from from different things that have been reported to the press is that DCG, the parent company of Genesis, made a loan to Genesis sorry, not a loan. What they did was they bought out Genesis's bad debt in Three Arrows. So, Genesis had I believe 2.1 billion dollars of exposure to Three Arrows. And DCG, the parent company of Genesis, bought that debt at par. Meaning that we are going to make you whole for that 2.1

billion. And so we're going to pay 2.1 billion for this debt, but we're not going to pay it in cash. We're going to pay it in a promissory note that pays out over 10 years. So basically they're going to get like some, you know, annuity effectively for next 10 years. Um but supposedly there's some term in that promissory note such that if Genesis goes into liquidation, then DCG would be forced to pay the full value of the promissory note. So the the the note would come due immediately if there's a liquidation of Genesis, which I assume at the time they weren't thinking was a serious possibility. Um and that was the reason why you can say we're solvent because yeah, okay, we don't have the cash, but we have the ability to call all the cash that would otherwise be necessary um if and when we we, you

know, kind of, you know, go we have to go to the mat on this because of a a liquidation. So that's now happening. Basically you're now in a situation where DCG has to do something with this promissory note. Uh now that Genesis is stuck, we realize, "Hey, when we were told that Genesis was solvent, we were including this promissory note. DCG does not have 2.1 billion dollars in cash to pay the value of this promissory note. And so either one, Genesis files and then pulls DCG into bankruptcy because DCG will be called on for this 2.1 billion dollar liability, which obviously they're you know, they're not going to pay 2.1 billion in cash. They don't have that. So either one, both entities go into some super complicated bankruptcy procedure, or the other possibility is that Genesis goes

under and then the the note is itself auctioned off at some value less than par, but somehow it's prevented from DCG going under because maybe the creditors would find that actually be a worse outcome. I don't exactly understand and I think this is a lot of what people are trying to figure out right now, but TLDR, it looks very very likely that Genesis either one is going to have to file for bankruptcy or two, they're going to have to go through a restructuring such that the creditors of Genesis are are to have to collectively agree that like hey, let's agree to get some you know, let's basically reduce our claims at Genesis in order to avoid a bankruptcy just because the bankruptcy would be so deleterious to the big creditors to to Genesis. So, this is a live situation. We don't really know

exactly what's happening, but it seems like markets are now pricing in that there's going to be some relatively calm resolution that doesn't involve a bankruptcy, but involves the creditors kind of renegotiating what's happening at at Genesis. Robert, I know you're closer to this than than we are. Any further insight or I don't know if that like you're not able to share? I mean, you know, I'm only closer because I think out of the four of us, I'm the only one who's a creditor to Genesis. So, it's the embarrassing being closer to the situation. I have more empathy with everyone who got wrecked with FTX. I'm wrecked with Genesis.

You know, I don't have any more information than that what's been discussed there. Ryan Selkis tweeted out a weird financial model earlier today saying like DCG is healthy everybody. Like take a look at this financial model. You know, full story coming tomorrow. That could be, you know, more optimistic than, you know, reality, but if you're looking for something interesting, go find that tweet. I think the thing that I'm looking for is, you know, whether or not they're pushed into bankruptcy involuntarily. I think at this point, you know, any number of, you know, creditors could push them into bankruptcy.

You know, if their obligations are in default, they halted withdrawals. There's a lot of customers that, you know, had positions that matured and that could ask for their funds back. Or whether, you know, they're able to work things out without filing a bankruptcy petition. So, you know, I I think the odds are high. Let's say 80%, but the thing I want to ask about press you on Haseeb is you said the markets are indicating, you know, a gentle resolution. I'm actually curious what markets are you referring to.

I believe Okay, I could be I could be mistaken, but I believe after the news was reported that the Genesis creditors were seeking a non-bankruptcy resolution that markets rebounded. If I'm not mistaken, did that not happen? I mean, markets went up Not today. This is not today. This is a few days ago. That's the rate stuff. So Yeah, that that's like Jerome Powell Yeah, that's today. That's today. But this happened a few days ago, did not? Okay, whatever. I take everything that I just said with a grain of salt. I have no idea what markets think. Although Although I I I would be I would be curious if anyone is actually trading like DCG credit default swaps cuz like those could actually exist. That was what I was I was kind of curious if you knew that that existed or something.

Yeah, yeah, if anyone listening is trading DCG or Genesis credit default swaps or derivatives somehow, please tweet at us after the show. Let us know. That's super interesting. I mean I mean, certainly it's interesting for people who are creditors in case they want to hedge. Yeah. You know, I've heard of people buying and trading bankruptcy claims. I You know, obviously there's been a huge amount of activity at FTX and people trading bankruptcy claims. Back in the day, there was a huge amount of Mount Gox bankruptcy claims being traded.

I know it was like Fortress the hedge fund made a huge business buying Gox bankruptcy claims. I don't know if you can even trade the claims prior to bankruptcy. Maybe you can. Maybe there is already activity in Genesis claims. That'd be really interesting. If you have data You can make like a warrant, right? That's like only exercisable when the event happens and like if not, then it goes to it's just worthless. Yeah, there's there's there's a lot of folks who are buying out FTX claims as well. I think Genesis is a bit early for there to be a market for claims, but I guess possible. FTX claims are crazy though. Like I feel like Yeah, they're like 5 to 10 cents or something.

I think they've gone up. I think they've gone up. Yeah, they were initially closer to 5 cents. In the audio interview that uh Sam did, he said he expects creditors to get like 25% back, which is also where I imagine, you know, a lot of people are buying these claims to expect these to land. no, because when you're buying the claims, you're you're you're first of all, you're taking all the risk away, and also you get your money immediately, right? So, these claims are going for like maybe uh what I saw was like 12 cents, roughly. Um that was a few days ago. Right. I'm saying Sam is expecting when this is finally finished that you will get back 25 cents of a dollar, which is what I said. Right, right, right. Which which may take many, many years, and obviously there's a lot more risk, and

yeah. To double your money in like 5 years betting on an FTX recovery seems insane. Like if that's the risk you want, everything in crypto is a better risk. Shoutout to Laura, actually. I forget exactly who it was, but she had someone on recently who bought a lot of Mt. Gox claims, I believe on Unchained, who like walked uh walked you walked you through the entire process of like what it's like to buy a claim, what's like the process. So, like highly recommend listening to that. I I forget the guy's name, it's like Thomas something, but it was it was like very instructive.

Right. So, okay, so besides Genesis, which is still an ongoing story, um the other big thing was uh that BlockFi finally filed for bankruptcy. Now, this one, I think everybody sort of saw coming. I think there was no question when FTX went under that BlockFi was, you know, a goner. But, uh they it turned out if you were to really learn a few things from the BlockFi bankruptcy. So, for one, we learned that um among the biggest creditors, so FTX is one of their creditors. We also saw that um the SEC apparently had a um $30 million credit uh to their name as well. Also, the apparently the reason why BlockFi was taking so long to file, because everyone kind of knew that, okay, BlockFi is toast. I mean, given their

exposure to FTX, this is not going to end well. But apparently, they were selling all of their crypto, which was about uh $250 million worth of crypto they converted into dollars uh before filing. They also are the apparently, there's like now uh claims going around about Sam's Robinhood stake, which was pledged to BlockFi. I didn't totally uh fully understand how this relationship worked, but there's all these kind of, you know, kind of Spider-Man finger-pointing meme going on right now between uh BlockFi, Alameda, FTX. So, it's it's all it's all a bit of a shitshow. But BlockFi itself has a bunch of funds stuck on FTX. FTX is a creditor of BlockFi. Then there's this Robinhood thing. Um so, I'm uh all around, I'm I'm pretty confused about what exactly is going on here.

And I don't think we have a clear picture yet of the assets versus liabilities of BlockFi either. So, we don't have a good sense of what recovery would look like. Well, I think the thing was that like some of the funds borrowed from BlockFi were used to buy the Robinhood shares from Immersion Technologies, which is like this other entity. And then later, I believe that company's shares were used as like either part of the bankruptcy purchase and pledged effectively. And so, there's this very weird thing where like BlockFi's money went to buy Robinhood shares, which came back to BlockFi as collateral. But unlike DeFi, you know, you can't like loop You don't know what loops how many times it's been looped.

It does seem like there's a lot of loops in this whole thing between Alameda and FTX and BlockFi and all this. One of the things that came out also in the interview just now is that Andrew Ross Sorkin asked SBF like, "Okay, so why did you why did you spend all this money trying to buy BlockFi and Voyager?" And you know, we've previously speculated on the show that the answer was that he was trying to essentially save his own bank. Because if, you know, FT uh sorry, if uh Alameda uh allowed BlockFi and Voyager to go under, well, they were two of his largest lenders, and that would have like exploded the whole thing much earlier. That was That was a theory anyway.

It turns out a few things have come to light. One, supposedly that it was reported or at least speculated that the purchase price for BlockFi was in FTT. It turns out not to be the case. BlockFi claimed that actually the purchase was in cash. And so they they they had I guess minimal FTT exposure or no FTT exposure. But then second, so in the interview, what Sam said is that like look, by the time that we actually made these purchases, they had already margin called us. Like we had very little loans coming from BlockFi or Voyager. And so the reason why we were buying them was purely to kind of stem contagion in crypto, which was at the time his stated goal. I don't know what you guys think of this story, and again, it's probably hard to put together the truth just because it

was so long ago, and it doesn't seem like they're keeping records on any of this stuff. Um but what's your what's your perception of that the the the the the recasting of the purchases he made over the summer? Well, the one that I read, and I don't know how much truth there is to this, and this is for like the sleuths out there, was that, you know, with things like BlockFi in particular, you know, by acquiring BlockFi, they moved a number of BlockFi customer assets to FTX after the fact. And it's possible that it was cash positive for the XT FTX broader organization.

And it also moved assets from the US entity into the offshore entity. So, you know, the example of how this worked is the US entity provided a loan to BlockFi with the US entity's dollars. The US entity is the one that's highly regulated, and everything is kosher, blah blah blah, right? Then, BlockFi moved its customer money to FTX International. And more money than FTX US put in. And the net impact of this was money positive for the commingled Alameda FTX organization to help buy them time.

That's my understanding, but I could be mistaken. There's one other thing that was funny in this interview, which I thought was hilarious, was like he was like, "Yeah, and all the and all the and all the jurisdictions where we were forced to follow the rules like the US and Japan, like people are solvent." I mean, he basically said that. Which which is basically saying like, "If we were forced to follow the rules, we followed the rules." Which implies, you know, if not forced to follow the rules, then we don't have to do anything. And I guess this idea of like moving all these US assets off-shore is in that vein of like trying to avoid any needing to kind of deal with the rules.

As as in not to shift gears too much, but one thing that I also feel like is somewhat damning or confusing about the FTX's like opting like being a lender on FTX is opt-in. Like you can have your funds on the platform, but not have them being lent out. And so, the story of like, you know, "Hey, we had a bunch of bad collateral. We took out you know, some loans. The collateral goes down." That would make sense if like those losses were then socialized amongst the people who were part of, you know, the lending margin program on FTX. But like if you weren't, then your funds should have been separate. So, clearly there's like some sort of commingling, otherwise like there this should not have been, you know, possible. Yeah.

I I think it's pretty clear that we don't really understand even the nature of Sam's story about how exactly like how exactly he's even claiming mechanically this whole thing would have worked. And you know, I I I think it's very unlikely we're going to get any clear answers unless either one, somebody who's much deeper in the details actually interviews him, or two, we basically see this thing dragged in front of a trial of some kind. I think I mean, arguably a The trial will have to unearth half of this these questions more deeply, right? That that's why I actually think know. It's not going to know. Why would it?

Well, I mean, it still has to do recovery for it it put all the entities in bankruptcy including Alameda and like every random entity except for a few like a very small number like LedgerX and stuff that didn't enter. Right, but it's not clear to me that like this is the kind of thing that would happen in a bankruptcy court. I think it's much more likely that they're just going to find the assets, figure out the creditors, and then figure out the best that you know, how to distribute what's left. Right, a bankruptcy court is not there to like you know, figure out who did something wrong. Right, it's not forensics necessarily. It's tracking down all the money, getting it back, getting it to the people who deserve Yeah, so I don't I don't know that we're going to learn anything much from the bankruptcy court other than just like

what uh what like what the money was spent on. I think that we'll learn and there will probably be a lot of stuff of people going after Sam personally, going after some of these entities that were separated, going after some of the real estate. So, there'll be a lot of that that I think will come out uh through the bankruptcy proceedings, but I doubt we're going to get it again any answers about what really happened. It's just such a complicated question and a bankruptcy judge isn't really even equipped to investigate that question. So, Yeah, although I in this case I feel like one of the reasons I'm a little more convinced some of these details come out is because where and how the assets are stored and custodied right now is still extremely unclear based on some of the statements made by the current CEO like John Ray of like we

don't actually know how to like get keys for certain things or like you know, some of the custody state is weird and so I think that will force you to do some forensics in in the process if that makes sense. Yeah, that that is that is possible. That is possible. The another thing so after a lot of the FTX fallout, there was also this Binance recovery fund and there's a lot of weirdness around this recovery fund. So, I don't know how many of you guys have been paying attention to this. So, CZ announced that hey, Binance is going to step up and we're going to you know, dedicate a bunch of a bunch of money to backstop the industry. It looks like there were some contributors. We like Jump contributed, Polygon contributed, GSR contributed. But it looks like there's only 50 million

that was total contributed by outsiders as far as we can tell. And then Binance claimed that they were dedicating 1 billion in BUSD to this sort of bailout fund. Tom, you you were going some detail on the story. What what are we seeing with this Binance recovery fund thing? Well, I think people just are a bit confused because, you know, it's basically uh the address that Binance listed as like the recovery fund is like a single address that was moved from a Binance hot wallet. This address is moved from like Binance 7. So, it's like like why is the entire, you know, recovery fund being stored in like a single wallet and like why was it moved from like a Binance wallet? It's It's

just very confusing right now and I especially given that CZ also sounds like he's trying to go out and raise more money for this. So, yeah, there isn't really like a really very clear story around this. I think is it Huobi or OKX also trying to start their own recovery fund? So, I guess now everyone has a recovery fund as well. Yeah, so we have these recovery funds now, but like what are they bailing out? Things are exploding and they are just kind of sitting and watching. I don't understand what this is for. Their shibboleth for society to take you seriously. Sam was right all along, you guys. It turns out he was more He was He was telling the truth when nobody else would admit it.

Well, I think Binance's, and this is my hunch, Binance's is going to bail out all the programs from like the Binance launch Binance launchpad and their incubator and all these like, you know, low-to-mid-tier projects that have run out of money or lost all their funds on FTX or whatever. Anything that they've like backed in the past, you know, they can probably like bail out those teams a couple million dollars to get them to keep building in the finance ecosystem. a bunch of posts like this that were like, "Developer on Solana moved to BSC or moved to BNB chain." Sorry, BNB chain. And I I like I think there's like there's something about like Binance is using this as an opportunity to like grow the BNB chain ecosystem. I mean, not that this ecosystem fund. It's an ecosystem

ecosystem fund. Yeah, I I mean, it it was interesting. I mean, not that this is the metric you should always look at cuz it's quite gameable, but it was interesting that Pancake Swap flipped Uniswap TVL this weekend. Uh not coincidental with the the arrival of this fund. So, there's something weird about the There's something going on in BNB chain land that I think this is meaningless. TVL is not relevant. Yeah, I know, I know, I know, I know, I know. No, no, no. I And this is comparing V2s. I'm I just I I Oh, well, just V2s. Who cares about V2 cuz it's all moving to V3 where it's more efficient and cheaper.

all the really low liquidity random coins are in V2. Does Does Pancake Swap have a V3 equivalent? No, not yet. But, the V3 license expires when like April, so I feel like we're going to There's everyone's just going to deploy. Like right now, there's a thing where everyone who wants to deploy V3 has to go to Uniswap governance that governance to approve like deploying on your chain. And obviously, you you know, I'd say Uniswap governance is very anti-BNB chain, so I don't see that ever happening. But, That's why Uniswap governance will extend the license for another year.

Okay, can they choose to do that? Yeah. There's a The actual terms of that business source license are governance can grant additions and licensees to it or it can change the date of expiration. Okay, so just so I understand, uh cuz I'm not super close to this. So, if uh somebody goes and deploys a Uni V3 on BNB chain, what happens? Like, who sues who? How does this work? I mean, I don't know if we're actually going to find this out, but I assume Uniswap the protocol votes to hire a law firm to sue some projects.

Okay. I've no idea. I've no idea how I think this is actually supposed to be litigated in Claros court. I'm familiar with the Uniswap license. You guys can correct me on that. Claros theory Wait, do you remember what was that trial that happened of like that guy Yaz? Like there was this like fake trial trying to like censor him and it was like kind of a kangaroo court in Claros. I I forget if it was Claros or somewhere Ed knows Aragon. Aragon is where we saw like some crazy uh Yeah, yeah. Aragon was nuts. Aragon was nuts. Aragon was like a kangaroo court. It was like somehow we found a way to build all this technology to reinvent Soviet Russia in the 1920s. Wonderful. Wonderful. Okay, well, speaking of um speaking of chaos in DeFi, so we did

have also last week a very interesting attack that took place against Aave. And this is this kind of caused reverberations across all the lending protocols in DeFi. So, Tarun and Robert, I I assume you guys are are closest to this, but I'll give the very very high level. So, we talked before about the Mango Markets attacker, Avi Eisenberg. Uh Abraham Eisenberg is the full name. Um so, he was the one who manipulated Mango Markets and took a very profitable trading strategy, quote unquote. He announced earlier this idea that he could basically do an attack against Aave by borrowing assets that were essentially that that were uh less liquid than Aave was kind of giving them credit for uh and essentially manipulating markets after doing large loans. So, I think essentially the way

the attack worked actually Tarun, you're it's probably better if you walk through it. Describe for us what exactly happened with the attack, what happened with Curve, and the you know, the all the the kind of play-by-play, why Aave ended up incurring bad debt at the end of this episode. Well, I mean, the bad debt that the protocol had is the the thing that you're you're should be more worried about at the end, not not the the ones he made. But, he was sort of doing the a little bit of the opposite of what happened in Mango, where instead of trying to push the price up of some piece of collateral to borrow everything, he actually put some USDC as collateral, then shorted Curve, tried to push the price down, and then

basically by pushing it down, he basically could borrow all of the supply of Curve, and then if it mean reverted, then he then you have then you can do a Mango style thing. Now, he didn't really analyze where Curve liquidity was. There was kind of not There are not many places to get Curve. For instance, Convex Finance is a place where people end up locking up Curve for multiple years, and there's quite a bit of liquidity in there. And so, it was easy for people to take the other side of his trade and basically grief him for shorting this in the way he did.

Um the protocol realized bad debt because basically there wasn't enough Curve to do the liquidations, and so it was just expensive in some way sense. But, the total amount of bad debt was like under $2 million, so it was relatively small. Yeah, so I I I think at the end of the day, like the the sheer destruction and overall liquidity since the FTX incident has made these Mango style things more likely, which is why I think people are being much more cautious now. But, the the main point is in the V3s of both Compound and Aave, there are borrow and supply caps, which you can use to kind of limit the max size of these types of So, if I can if I can summarize in a

sentence, there were some stale parameters for borrowing and lending long tail mostly borrowing long tail assets, and these parameters assumed market conditions that looked more like, you know, January than they looked like today. And all the stuff ironically that we've been talking about with credit destruction. For Mango it's actually quite different versus Mango is different, yes. In Mango it was sort of the long tail parameters. Here it was sort of there's this weird thing where like the the collateral used was actually like good collateral and the liquidation threshold was somewhat high and and it's actually very hard to convince people to lower liquidation thresholds in these communities on the major assets meaning ETH, WBTC,

USDC tether. So so Ave put up USDC and then shorted curve. So it it it's a little bit more nuanced if you actually go and look at the details. But yes, it's one of these things where like liquidity conditions deteriorated going through governance took you know by the time by the time got the proposal would make it through it took it would have been too late and so you know you know we submitted a proposal and first stuff but I I guess the point is I think yeah it was sort of unprecedented but there was it wasn't like a huge loss.

Also Maker had some bad debt as well last week from Gemini Earn. So if you remember Maker put part of the safety module into Gemini Earn to earn some yield and it incurred some losses from that and has written them off and paid back How much did you put into Gemini Earn and isn't Gemini Earn Genesis? Yeah. So they wrote off they wrote it off completely and just paying it in DAI back to the It was about 2 million dollars. It was almost the same as about Oh wow. They were just starting this program. It was like dripping into Genesis Earn.

That's great that they were Yeah, that's great that they I mean it's not luck, right? Like they did the slow roll out. That's great. Good for them. Well it's not just a slow I mean there there is some luck in that the timing of when this happened Right. Of course. But my point is both protocols had these kind events they were relatively small communities were responded pretty quickly. So I would I would just like say that you know and you can see how the debt is and people are all fighting about it versus like I don't know how how did Genesis get like billions of dollars of debt and like not like not liquidate anyone it's a kind of my good question because the humans didn't want to liquidate

their best customers. I mean I think for I mean yes that is definitely true. I think for Genesis and for for for Gemini Earn specifically my understanding is like that's actually a large bulk of sort of the debt it's like almost a billion dollars is coming from Gemini Earn and I think there's inherently this weird issue which I don't know why was this these programs were set up this way where you sent inherent like duration mismatches right where you sell these sort of yield services to retail customers with the idea that you can always deposit you can always withdraw like a bank but then on the backside you're making you know fixed term loans to to market makers and so even if the loans are fine like

you're setting yourself up for a bank run because inherently like there's just no way to sort of you know and and these aren't very liquid assets not it's not like you can go to the Fed and like borrow against them or sell them easily it's like these are sort of weird bespoke lending agreements and so it's almost as if like you know you raise a few million dollars and you like you know told all the Gemini Earn depositors to go go on vacation for 6 months you know when these loans are supposed to expire and they get their loans back like that is almost like an easier solution rather than like trying to get everyone immediate liquidity for a product that just isn't designed to have immediate liquidity.

Yeah I mean that's true but I mean what you're describing is banking and like that's what Genesis is Genesis is a bank. Right I guess my question is like why did Gemini not sort of bake that into the SLAs the the idea that like in you know certain market conditions it's not guaranteed you're going to be able to withdraw one to one or with some limitations on that or or something I guess better on I mean you're right that I guess this is just banking, but it's weird to me that that was them not more presented more more clearly up front. Yeah, I mean look Gemini is one of the biggest creditors and I think that's who Genesis is negotiating with right now because if Gemini pushes them into bankruptcy then it's all going to be a gigantic mess and I think it's pretty clear that's not good for Gemini or for

Gemini customers. But yeah, I I I think the answer unfortunately is that that's what banking is. And banking is basically the business of duration mismatch and trying to manage that duration mismatch so that it doesn't explode in your face. And that's why eventually we invented central banks is because managing those duration mismatches in times of of real of real trial generally requires a bigger stronger bank to come and save you. And you know, if you recall that's what we thought CZ was doing when we thought it was still a duration mismatch thing. Now we know it's not a duration duration mismatch thing, but that was presumably what the story was about how Binance was going to save FTX. That was basically a pseudo central bank

stepping in to help a weaker bank. Yeah, I mean in all of these cases, you know, you have entities in the case of FTX it was essentially running out and making venture investments, you know, and buying up all these things with FTX customer money. In Genesis' case it's having like you know, longer term assets, longer term loans against really short-term Gemini Earn customer money that wants to withdraw every time bad things happen. In all these cases it's, you know, investing for the long term with liabilities that can be demanded on a moment's notice. Yeah, it's true. And I think look I I agree with you Robert that, you know, DeFi

shows us a much better way to resolve these problems. It's it's much better to have everything out in the open, have smart people thinking about this and not just a management team that's pushed into a corner and has to make up stuff to defend itself. We've seen the same behavior basically from FTX as from Genesis, which is that they just say whatever they need to to keep deposits on platform. And if the deposits leave, then all of a sudden everybody is uh you know, just goes quiet. So as a result of this attack, which to be clear we're actually not sure whether uh Avi made money from this attack because you know, presumably he was shorting it on a centralized exchange so we don't we don't know how the positions ended out.

We do know the open interest and it was not very high on any of the was going to say there was only like 70 mil in like open interest on Curve perps. So like I think he just like evaporated 40 mil unless he had maybe some you know, long exposure but I I don't know if there's like a gigabrain move for the for the Curve short. So we we think he most likely lost money. Also, do you do you think someone like that wouldn't be bragging about it if they even broke even? That's fair. I think I think specifically he was like building up this short because he was trying to rich so Michael, the Curve founder has like I think a few hundred mil in Curve as collateral and so trying to hit his liquidation threshold which was like 25 cents in the hope that that

would cause that to sort of you know, massive dump and unfortunately got got discovered and and squeezed. Right. Yeah, and then Curve released their their white paper for their stable coin in the middle of the which was Emergency pocket white paper. A great a great move to have in your utility belt when you need it. I will say my my one criticism, I mean I the the there's maybe some benefits and merits to what's in that paper which that's very underspecified. But I will say the one one my one criticism is I don't think any DeFi mechanism needs to use the word adiabatic cuz it has nothing to do with crypto and that paper has it six times.

Say it to Rune. Yeah, so okay. So the consequence of this is that obviously there was some bad debt on Ave. Ave is going to pay that back. And so I think Ave is going to be fine. It's a relatively small of debt for Aave as well as for Maker. And then Aave paused lending markets for 17 of their tokens. Uh Compound then went and did the same thing, which is I think a different set of like 10 tokens. Borrow caps. No, no, borrow caps. The problem is Aave V2 doesn't have Ah. uh caps. You can't You can't There's no like debt ceiling limit. Aave V3 does. Not V2. Got it. Okay. So, until Aave V3 arrives, for now Aave's paused the lending markets for these uh for these tokens.

Um Compound instituted these borrow caps and and I think Aave will do the same once they migrate to V3. I I think this is a good place to end on cuz I know uh Tarun, you've got to stop here. But, it really speaks to the difference again, which we've talked about again and again over the last 3 weeks, between DeFi and CeFi. In any time where you have a lot of market instability and you have, you know, credit kind of collapsing and a lot of fear in the markets, bad things happen. But, you can just see how stark the difference is between what happened in DeFi and what happened in in centralized players. Right? Genesis likely going to bankruptcy. BlockFi imploded. Every single lender in the space has basically died. And then of course FTX has gone under in absolute disgrace.

When Aave and Compound were facing the same pressure, what did they do except everybody shows up, puts together their collective brain power, sees exactly what's happening with the exposures, and pulls things down. Uh and on the whole, despite the fact there was a coordinated attack. That's not even what was happening at FTX. At FTX they did it to themselves. But, in this case, this was a This was an attacker trying to bring down the platform. And the thing performed beautifully. It It took on only, you know, a million and a half of bad debt, which was like less than 1% of the debt in the protocol. I think like less than half a percent of the debt in the protocol. Yeah, I To put it to put it in the context, the the bad debt to revenue ratio is still less than uh when I was

like looking at the the said numbers relative to that. Uh I think it ends up being like 3 or 4% and the average bad debt to average ratio for secured lending below credit grade in the US is like 15%. So, it's still quite a bit lower in terms of things like that. So, Yeah. Before we end, I actually want to ask a question to each of you, which is what is your prediction for the Telegram DEX? Telegram announced today that they were going to like they're going to have NFTs in the DEX and it were this feels 2018 right again. Yeah, this is all the way back to the origin of Isn't this what they were told they weren't allowed to do?

Yeah, that's why I'm like I'm like whoa. weren't allowed to do yeah, I see right. It was a securities issuance violation. And um so, they said, "Okay, we're not doing Telegram Open Network." And then some random people supposedly grabbed the source code and decided they were going to spin it up. And then Telegram or you know, at least Durov looked at this and was like, "Oh, this is so cool. This is actually working. We are going to start supporting this blockchain within Telegram despite the fact that they had to give the money back to investors that they originally raised, which was massive amount of amount of money. So, okay, my prediction for the Honestly, I haven't been following it super closely. I saw the announcement today.

It seems like TON Token has a huge market cap. I think it's valued like 2 billion circulating 5 billion FDV, but very low liquidity. There's very little of this thing trading on any venue and I think it's like the biggest exchange it's on is OKX. And it trades like a couple million a day on OKX. So, I I I don't know. I have a I have a hard time squaring this, but I'm I'm not personally a believer in like the messenger They're building a DEX. They're building a DEX in the messenger, which to me basically is all those Telegram OTC groups that people are trying to sell you coins in. Telegram is trying to compete with them.

Bad timing, but yeah, fair enough. I A friend of mine sent me a TON Token recently cuz I didn't really sort of believe this like wallet story, but then I learned that because I have a US phone number, I'm actually not allowed to have a Telegram wallet. So, you know, if you hated you know, region-gated exchanges and region-gated DEXes and region-gated relayers, you're going to love the region-gated blockchain. Um or region-gated messenger, I guess. Yeah. Region-locked messenger, yeah. Robert, what's your prediction? I can't speculate on this. All right.

Tarun, what do you think? Uh you know, I like I said, I think their their their their goal is to like kill the OTC chats that are in Telegram. Fair enough. Well, we'll have to see what happens. Um I think this is probably So, just as a quick uh caveat uh before we before we wrap up the show. Normally, the show is done every 2 weeks. Um we've been doing this weekly basically since uh FTX exploded just because the velocity of news has been so crazy. Um it seems like now things are finally stabilizing. Obviously, there's there's still aftershocks and contagion that we've yet to see from FTX, but I think the velocity of news is slowing down.

So, we're probably going to be going back to doing the show every 2 weeks. But, thank everybody for tuning in. It's been amazing to see how excited you guys are to uh hear from us and and get our our views on what's going on in the space. Hoping that things calm down a bit. Thank everybody, and uh you'll hear from us again soon. Hey.