Sam Bankman-Fried, the CEO of FTX, has explained exactly what “yield farming” is. But attentive listeners to the April 25 Odd Lots podcast will have noticed that what Bankman-Fried was actually describing was a textbook example of a Ponzi scheme.
The bizarre episode was triggered by a conversation with former Goldman Sachs investment banker Matt Levine. Levine simply asked Bankman-Fried how yield farming works, prompting the FTX CEO to provide a rambling description of “X Token” — the imaginary token that comes from a box that “literally does nothing.”
Despite doing literally nothing, Bankman-Fried stated that X Token will change the world. In Ponzi scammer parlance, this process is known as “selling the dream.” It’s the technique scammers use to gain their brands and turn them into true believers.
“You start out with a company that builds a box, and in practice that box is probably dressed up to look like a life-changing, you know, world-changing protocol that’s going to replace all the big banks in 38 days or whatever . Maybe you’re actually ignoring what it’s doing for now, or pretending it’s doing literally nothing. It’s just a box…” Bankman-Fried began.
“…And then this protocol issues a token, let’s call it whatever, ‘X-Token’. And X-Token promises that everything cool that happens because of this box can ultimately be used through the governance vote of the X-Token holders. You can vote on what to do with proceeds or other cool things that happen from this box. And of course we haven’t given a convincing reason yet as to why there would ever be any proceeds from this box, but I don’t know, you know, maybe there will be, so start with that.”
At this stage of the description, Bankman-Fried has created a do nothing box and tokens created from the do nothing box. Aside from changing the world with this concept, what happens next?
“So everyone who goes, takes some money, puts it in the box, every day will drop 1% of the X token proportionally among everyone who put money in the box. That’s what X-Token is doing for now, it’s being given away to the box folks.”
Bankman-Fried is now attempting to put a market cap on the do-nothing box.
“Well, X-Token has a certain market cap, right? It’s probably not zero. Let’s say it’s a $20 million market cap…”
“Wait, it was supposed to be zero to begin with,” Matt Levine interjects. “When you describe it in this completely cynical way, it sounds like it has to be zero, but go ahead.”
“Describe it like this, you might think, for example, that you could create a box and token like this in five minutes with an internet connection,” says Bankman-Fried.
“Like there’s some magic in the same, how do you pull that off? [$20 million] Market cap, but you know, whatever we’re going to take on from that for a second… if the total amount of money in the box is a hundred million dollars, then this year it’s going to bring in X $16 million tokens being issued for it. That’s a 16% yield. That’s very good. We’re gonna put a little more in, aren’t we? And maybe that will happen until $200 million is in the box. So, you know, experienced traders and/or people on Crypto Twitter or some other kind of similar parties go and put $200 million in the box together and they start getting these X tokens in return.”
But wait, there’s more. The more put into the box, the more money is paid out and the more the token price increases.
“And they’re like ’10X,’ that’s crazy. 1X is the norm.’ And then, you know, the price of the X token goes up a lot. And now it’s a token with a market cap of $130 million because, you know, optimistic usage of the box by people is coming off. And now, of course, suddenly the smart money is like, oh wow, this thing is now yielding 60% a year in X-tokens. Of course I’ll take my 60% yield, right? So they go and pour another $300 million in the box… and then it goes to infinity. And then everyone earns money.”
The money goes to infinity. To some people, this might sound like some sort of voodoo economics or buzz “to infinity and beyond” Lightyear economics, or even just a good old-fashioned Ponzi scheme. According to Bankman-Fried, however, it’s the magic money of yield farming and do-nothing boxes.
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