The rapid rise of FTX is due to a CEO who has a clear understanding of risks but dares to step on the accelerator.
Written by: The Generalist
Translation: 夕雨
FTX will become one of the most influential companies in the next decade. This cryptocurrency exchange has gained fame in more than two years, with a valuation of 18 billion U.S. dollars. This is achieved through crazy speed, cautious aggression, product innovation and a unique culture. In “FTX Trilogy”, we will unveil its helm, the company itself and its future. This article is the first part.
Sam Bankman-Fried (later: SBF) is a master of risk.
Like a few others, the CEO of FTX demonstrated an understanding of the degree of danger and was able to succumb to him. Only outstanding investors and founders in the world—such as Warren Buffett and Steve Jobs—can demonstrate this ability in a long-lasting manner. Although SBF has not proven his continuity in this area, his early performance shows that he is a rare genius.
This is just one of the reasons why SBF is capable of playing the role of founder of cryptocurrency exchanges and most influential investment companies. At the same time, SBF combined the judicial wisdom of a creative regulator and the intuition of an elite trader.
This series has contributed to one of the most impressive entrepreneurial experiences in modern memory. In the first three years of his leadership of FTX, SBF managed to balance risks while advancing at an extraordinary speed, just like walking a tightrope at high altitude in a Harley motorcycle.
Of course, the company has not crossed the chasm. Few other industries have the same regulatory risks as the encryption industry, let alone the speed of change. But in SBF, the company has an ideal leader: a CEO who has a clear understanding of risk but dares to step on the accelerator. His understanding of risk is almost commendable. This may be an added benefit. In his insomnia and characteristics, he is the appropriate incarnation of the crypto market he operates.
Today, in Part 1 of the FTX trilogy, we will outline his upbringing experience before delving into the thinking of SBF.
The growth of SBF
born
Sam Bankman-Fried (SBF) was born on March 6, 1992 in Santa Clara County, California. SBF is the son of Barbara Fried and Joseph Bankman, two law professors at Stanford University, and grew up in a high-quality environment. This had a significant impact on his later thinking, which we will continue to discuss.
In 2010, SBF was admitted to the Physics Department of Massachusetts Institute of Technology. As he said, he came here “a bit like a math nerd.” In his first few years, he considered developing in academia and wanted to become a professor of mathematics. After realizing that he had no interest in formal research, he broadened his horizons. Specifically, he looks for things that suit his skills and are worth his efforts:
One thing I do know is that I want to know how to make the most positive impact on the world. I have been studying utilitarianism for a long time, and recently I started to study effective altruism, which is basically a movement…you try to figure out how to influence the world, try to quantify things, try to find out what is the most effective way …
I tried many possible occupations, and these occupations are almost everywhere. [I] had some exchanges with people, basically, they said, “You can go to these charities or organizations that you think are good, or you can donate to them. Frankly speaking, considering your strengths and weaknesses, Maybe you donated things for them more than you can contribute directly to them.” So I thought about it, [also think] this sounds like a very reasonable argument.
SBF is convinced that accumulating a considerable salary and transferring it to charity is the best way for him to gain influence, so he interned at Jane Street Capital in the summer of his junior year. Several friends had internships there before, and they all said “not bad”.
Founded in 1999, Jane Street has grown into one of the largest and most respected quantitative trading companies in the world. It has maintained this reputation and scale: in 2020, the company traded $17 trillion in securities.
The pleasant summer job allowed SBF to get a full-time job after graduation in 2014. Facts have proved that this is very appropriate. SBF is fascinated by being surrounded by a group of “nerds” who are committed to proposing and executing keen trading ideas. He focuses on international ETFs, and this slightly exotic style heralds some of his later more compelling work in the Asian crypto market.
Although he described Jane Street as a great employer, after three and a half years, the young financier thought it was time to build his own. He remembered the reason at the time:
I am thinking that there are many things in my life that I want to try. I don’t know what will become the right thing in the end. But at least one of them may go well.
Alameda
No matter how optimistic he is, even SBF must be surprised at the scale and speed of his success. After leaving Jane Street in 2017, he spent time thinking about potential opportunities. Attracted by the cryptocurrency boom that swept the market at the end of the year, he turned his attention to the emerging ecosystem.
When he started to study the market, SBF’s trading intuition began to run at speed:
“Cryptocurrency” has many characteristics. It may be a very inefficient system and has a great demand for liquidity. This is basically: the sudden emergence of huge demand, very rapid growth, a large number of individuals, a large number of retail investors, and there is not much time to establish an organization. There is not much time to establish liquidity…
It feels like something that is likely to have a very large quantity and price difference.
When SBF recognized the arbitrage opportunities between the US and Asian crypto markets, this interest became an obsession. Due to the difference in demand, the transaction price of Bitcoin and other currencies in South Korea is much higher. This so-called “kimchi premium” sometimes reaches 50%, which seems to be a once-in-a-lifetime opportunity. Theoretically, at least, investors can buy Bitcoin at a price of US$5,000 in a US exchange, and then immediately change hands at a price of US$7,500 in South Korea.
When others discovered this inefficiency and tried to take advantage of it, SBF quickly realized its limitations. Since the Korean won is a restricted currency, the size of the opportunity is limited. Of course you can make money, but repeated deployments of hundreds of millions of dollars are not feasible. He looks for something bigger.
Although not so compelling, SBF recognizes that the Japanese market has similar characteristics to the Korean market. The net purchase of Bitcoin is very high, leading to a 10-15% premium on domestic exchanges. Crucially, the yen is not a restricted currency, so it can be operated with real money. This does not mean it is easy-it requires a complex network of intermediaries, “looks like money laundering.”
Based on SBF Odd lot interview
Seeing the opportunity to earn “10% profit per working day” by buying bitcoins in the United States and selling them in Japan, SBF quickly took action. SBF, together with former Google engineer and MIT alumni Gary Wang, and Nishad Singh, who just graduated from the University of Berkeley in computer science and met high school, raised funds to found Alameda Research, a quantitative trading company. Essentially, this is the cryptocurrency version of Jane Street.
The benefits of Japanese arbitrage are the same as SBF imagined. With $200 million in funding, Alameda deploys and redeploys the funds to the Bitcoin market, earning 10% or $20 million every day.
But SBF is not satisfied with calculating his bonus and washing his hands. About a year after founding Alameda, he and his team began to consider a more important opportunity: the establishment of a cryptocurrency exchange.
SBF believes that the exchanges at the time were not professional enough. While running Alameda, he began to realize how much room for improvement in the underdeveloped crypto world. In fact, although Coinbase and other companies may be promoting at the time, there is still a long way to go for real institutional-level transactions, especially for those interested in more complex securities. For example, BitMEX offers derivatives trading, but like many other products, it is prone to interruptions and other performance issues. With their practical experience, SBF believes that the Alameda team can create an exchange for professional investors like them.
FTX
At the end of 2018, SBF, Wang and Singh started work on FTX, an exchange “created by traders and serving traders”.
However, there is a problem: the United States is a country that is not conducive to establishing an environment for crypto derivatives exchanges. U.S. domestic regulators are skeptical of emerging asset classes, especially for more speculative investments. For example, the U.S. Securities and Exchange Commission (SEC) (reasonably) suppressed the ICO boom in early 2018 and warned that it was paying close attention to exchanges during the year.
When the team developed an “attack plan,” SBF made a decision: FTX will be established in Antigua and Barbuda.
However, this does not seem to slow down development. In May 2019, FTX officially opened for trading. In the following two years, it has grown into a $18 billion company and is one of the most popular exchanges in the world.
Although this largely depends on the product itself and the company’s strategy, the role of SBF should not be underestimated. To understand what FTX is and what it might become, we must not only understand the biography of its founder, but also try to understand the factors that really resonate with him.
Understand this man
Simple analysis
There are a few things that are almost unreasonable about writing an introduction. Not only does it require the author to strictly observe the subject-to write down every exciting phrase with breathlessness, and to listen carefully to every previous interview-it also invites a kind of nosy, and this kind of nosy sometimes May intersect with deep understanding. How much can we learn from short conversations? At the first meeting, how much curiosity was reasonable? What insights can we gain from the deposition of life? Are old tweets, flexible CNBC sections, long podcasts, and surprise poems valuable?
The purpose only partially proved the rationality of the means.
SBF is a very approachable and friendly executive-after a few minutes of chatting on Twitter, we arranged a call. He is generous with time and information. Rather, it is an admission that previous reports have outlined his story and set the narrative. Every article discussing this person goes through the same three steps: He is young and very rich! He slept on the beanbag in the office! He cares about the world!
These are true or seem to be true. Predictably, we will also talk about them. But under (and beyond) these descriptions of SBF is the feeling of a vast hinterland. A person with a profound intellectual and emotional life is difficult to find even for those close to him.
I have tried my best to act as a “voyeur”. But I don’t have a clear explanation, there is no magic key that can unlock the soul of SBF. Just trying to understand him, no matter how flawed the task is. In particular, I want to investigate the four characteristics that I think influence his character:
- Chaotic but good moral alliance
- Fast processing speed
- Doubts about conventional wisdom
- The rare ability to switch perspectives
I will focus on evaluating the trade-offs of these features and their advantages.
Chaotic but good moral alliance
Given his interest in fantasy games such as League of Legends, I have reason to believe that at some point in his life, SBF played Dungeons and Dragons. For those who have not spent an afternoon, an evening, and an evening in a role-playing game, the basic gameplay of this game is to create your own character and then perform tasks with other members.
When designing a character, players need to choose race (such as humans or elves), profession (thief or wizard), and camp. This final decision requires participants to determine their moral and ethical values along two axes: legal to chaos, evil to good. The options are as follows:
WYNC
People like Captain America are typical examples of the role of a legitimate and kind alliance. He follows the rules and is motivated by charity. In contrast, a person like the clown is an example of chaos and evil. He just wanted to watch the world burn.
SBF may be the most chaotic and kind founder on the planet. Obviously, at least in some ways, he was driven by altruism. But the way he runs FTX shows that he is willing to act quickly within the boundaries.
Let us start with a good start and interpret his positioning on the two axes.
As mentioned earlier, SBF has shown a sincere interest in altruism that precedes his wealth. Before founding Alameda, he served as the director of the Center for Effective Altruism for several months. Today, FTX has pledged to donate 1% of its net expenses to charity, and so far, this amount has exceeded 10 million U.S. dollars.
The foundation of SBF’s moral philosophy can be traced back to his parents. Both scholars have shown a keen interest in ethics in their work, although it is particularly prominent in the works of Barbara Fried. In her most famous essay “What does it matter? In …”, she analyzes the limitation of one of the moral philosophical memes: the tram problem. Although completely unraveling Fried’s argument would represent too many detours, this work is consistent with our discussion of probability in moral decision-making. There is a symmetry here: just as her son has proven good at explaining the invisible world of financial risk, Barbara Fried has demonstrated expertise in solving moral ambiguities.
In our discussion, SBF pointed out that he was very interested in the work of Peter Singer and early utilitarian Jeremy Bentham. SBF’s decision to become a vegetarian echoes the utilitarian approach to morality:
This is a chicken that has been tortured for six to eight weeks, and then we can eat it for half an hour. This is meaningless.
The spirit of SBF is not merely abstract or out of touch with the world in which he operates. He has also shown a sense of responsibility for the crypto ecosystem, which best reflects his willingness to assume a temporary leadership position at SushiSwap. When the creator of the decentralized exchange “Chef Nomi” fled the project with the token, SBF entered a power vacuum and stabilized the ship. When I asked him this question, he called it a “thing that takes time.” He added:
The community is going through a difficult period of Nomi’s separation. I just helped put it in the right place. Let it stand on its own. I am very excited about what the team has done.
In the face of his kind behavior, it is easy for us to over-judge SBF’s motives. Many media have described his story as a quasi-saviour pursuit within the framework of capitalism. But this is detrimental to the reality of company construction. Although having a higher mission can help, if it is not driven by genuine interest, long hours of work and constant pressure are difficult to maintain. Although SBF has an admirable sense of ethics, we don’t need to burden his company with the kind of holy cloak that nonsense vendors like the founders of WeWork or Goop like. FTX is a business, run by businessmen.
The second part of SBF’s “Chaotic Goodness” alliance is of course the preference for chaos. This is reflected at the individual and organizational levels.
SBF seems to thrive in disorder. On the day I talked to him, he mentioned that I was his 16th meeting that day. He introduced me to their situation:
- media interview
- media interview
- Discussions related to potential venture capital
- Discuss with potential FTX Pay partners
- Contact an investment bank
- Internal meeting on licensing issues
- Internal meetings on regulatory issues
- Internal meeting on potential NFT products
- Talk to potential new venture capital partners
- Discuss regulatory issues in another jurisdiction with a lawyer
- Internal reporting on regulatory issues
- Discuss a company that is considering an acquisition
- Internal Legal and Compliance Meeting
- Discuss potential venture capital to support FTX Pay
- Discuss FTX endorsements with sports franchisees
- Interview with The Generalist
In summary, this includes four legal discussions, three interviews, two investment evaluations, a potential acquisition, and some other matters.
As SBF told me, he likes this level of activity. “It was deliberate,” he said, “a lot of things are happening constantly.” Because of his talent and worrying work schedule, he manages this chaotic situation. Part of the SBF biography is that he only sleeps for two hours a night, curled up in a beanbag chair around the office. In the corner of our Zoom call, a blanket was scattered on one of the beds. As one of his investors told me, “He answers my text messages 24 hours a day.”
Regardless of the persistence of this lifestyle, SBF’s preference for chaos feels particularly suitable for the market he operates in. As he explained when he executed Japanese cryptocurrency arbitrage with Alameda, he is at his best when things are unstable. As the rest of the world seeks to restore balance and struggles in the process, SBF sees clearly. He has the ability to evaluate melee, choose a path in melee, and act quickly.
Just as SBF is content to live his own personal life on the edge, he has also shown a willingness to run his company in the same way. As he pointed out in our conversation, “Most of life is living on the edge.” Presumably, SBF believes in the coexistence of business opportunities.
From the day FTX was founded, he was willing to take controversial actions to achieve his goals. Of course, chaotic goodness comes with shortcomings.
SBF’s efforts are necessary, but it does not seem to be sustainable. Only people with genetic abnormalities can continue to operate without sleep deprivation. Is SBF one of them? Old friends and family know best. Given that the reports of this issue seem to come entirely from FTX, I don’t think he is one of the few insomniacs.
Although overly machismo investors often insist that founders overcome this pesky physical limitation to torture themselves, our biological needs often catch up with us. The pressure to build a business that has been passed down from generation to generation only exacerbates the likelihood of burnout.
Perhaps the greater risk is that SBF let FTX fly too close to the sun. What is worrying is that in his desire to succeed, SBF will guide the company to cross some real or perceived boundaries. For example, when I asked a cryptocurrency investor about the regulatory risks of FTX, they replied, “Will they face penalties at some point? Probably they will.” They continued to say that, according to their estimates, this would have an impact on the company’s development. The trajectory has almost no effect.
Although every executive can make mistakes, it is clear that SBF is aware of the risks of its business. This makes it difficult for us to imagine a truly catastrophic mistake. Although he may be chaotic, SBF will be planned.
Fast processing power
Part of the reason SBF is able to manage these continuous information inputs is that he seems to have elite processing capabilities. I feel that he is very happy to hold 16 meetings in a day, partly because his brain almost… needs this? Although the rest of us may be happy that there are several projects that can attract our attention, compared with us, SBF seems to be eager to have a dozen or more projects.
SBF talked about his ability in this area and also explained its trade-offs. In a tweet in February this year, he shared some of his ways of thinking:
According to this foolish understanding, there are two types of computer memory: RAM and hard disk.
RAM access speed is fast, expensive, and small in size.
Hard drives are slow, inexpensive, and have large capacity.
The computer I am using now has 64GB of RAM and 500GB of disk space.
In addition, the RAM will be emptied every time the computer is restarted; the hard drive is still present and the state can be saved.
Anyway, I find this a useful way to think about how I remember things.
And, in general, I think I have a lot of RAM and a relatively small hard drive. “
According to his estimation, this trade-off is not that SBF has a “relatively small hard drive.” In fact, this point becomes clear in subsequent posts. In explaining why he often plays League of Legends, SBF pointed out:
I play more games than you think, because I am a person who often weighs between sleep and work.
Why?
Well, there is an answer, it is obvious. The most common thing about League of Legends (LoL) is that everyone who plays it says that they wish they hadn’t played…
Maybe this is the answer. Maybe not, but…
When I am really tired, why do I instinctively open League of Legends sometimes?
Sometimes my body is very tired, so I just sleep.
But sometimes my fatigue is spiritual. My mind spins, and my RAM is full of things that are important to me.
Because I don’t have much disk space and don’t trust it too much. I live in my RAM.
Even if I want to empty it, I can’t do it.
For better or worse, thoughts that are valuable enough for my active memory will never leave it. .
For most people, short-term memory is reserved for things you will forget soon.
But my mind is full of things to remember, do and think about, and these thoughts will last for a while.
Sometimes forever.Because once they transitioned from RAM to hard drives, they basically disappeared. The world will only exist when I remember them.
So, no matter what, sometimes my mind is too full, or full of demanding and tiring things. I want to calm it down.
I will try to lie on the beanbag, but it will not help. My mind is still turning.
Obsessed with its circular thoughts.
I was lying awake and insomnia again…
So I will open League of Legends.
Moreover, I will enter the game without hesitation, choose a hero, and then start…
There is no room to think about anything else.
So my mind shifted to a new and very different cycle of ideas, entangled in the final game hit rate rather than responsibility.
The old thought cycle—the exhausting cycle—was forced to disappear from my active consciousness and let it spin on its own. kill time.
It will come back. In a few minutes, super minions will take over my thoughts, my mind will discard the idea of ”League of Legends” and welcome the return of old thoughts.
But I have won 30 minutes of peace for myself and gave myself time to do the things that usually happen during sleep:
Give my mind some time to rest and breathe.
It’s time to process my ideas, consolidate them, and get along with them in peace. Then it started working again.
When read in another context away from the dopamine bait of social media, this post by SBF is a beautiful text. Barbara Fried is a versatile poet and professor who will find music in her son’s arrangement. But it is clear that although SBF has supernatural capabilities in terms of processing speed, it can cause exhaustion. Again, the priority here is for investors and leadership to ensure that sufficient resources are allocated to relieve the pressure on the FTX founder.
Doubts about conventional wisdom
One of my favorite quotes comes from Machiavelli’s “Prince”:
An unwise prince cannot get wise advice…good advice depends on how smart the prince seeking advice is.
SBF is a model of this approach. You will feel that every point of view is constructed from scratch, rather than borrowed from previous teachers.
For example, at a certain point in our conversation, he mentioned how he was persuaded by this mantra, “It’s better to be safe than sorry after the accident.”
Is that right?
As the SBF asked, “Do your ideas and suggestions bring value to the world?”
This is a small anecdote, but it reflects the way SBF thinks and solves problems. He showed a healthy skepticism towards traditional wisdom and proceeded from the first principle. This is a feature highlighted by Kyle Samani from Multicoin Capital, an investor in FTX. Samani has repeatedly reiterated that SBF is exceptional in this regard, showing an obsession with “first order correctness.” Regarding this issue, Samani remembers a conversation that SBF considered building Serum on Solana instead of Ethereum.
During a short 30-minute conversation with Samani and Solana founder Anatoly Yakovenko (with this fast processing capability in mind), SBF carefully considered the requirements of the new system and analyzed factors such as optimal throughput and acceptable latency. In the end, he made his own decision: Serum will use Solana.
Almost all great entrepreneurs show some preference for thinking from first principles—innovation usually requires focusing on a set of problems that is considered static and remixing different elements. If this approach usually has a trade-off, it is usually speed-it takes time to rebuild the problem from scratch. Obviously, this does not seem to be a problem for SBF.
The ability to switch perspectives
Perhaps the highlight of my conversation with SBF was that he disappeared into a rabbit hole about perspective. We have been talking about thinkers he likes, and this question is not entirely comfortable:
Not just one person. I tried to piece together bits and pieces from different people. In many cases, people will gain very important insights that I missed. Then they will have a lot of very stupid ideas.
With a pleasant frustration, he said that people usually make suggestions when they are unable to provide them. They may think that they have mastered the situation and its various intricacies, but in fact they lack a useful background. He pointed out that this is one of the obstacles to running a united team: sometimes employees will be stubborn on issues that they think have been overlooked, but have actually been considered.
SBF finds this annoying, and it tells us something about him. Whenever he listens to someone’s opinion, SBF seems to be moving between their opinions and those of dozens of others.
Again, Samani called this ability a special talent. Like anyone he has never seen before, SBF can jump between details and then jump to a macro perspective. He understands the details of every possible transaction on the FTX platform, and at the same time is able to play against competitors. He also seems to be able to play freely between the functional perspectives of team members.
As with the previous characteristics, this talent may cause other people to make slow decisions, but not in SBF. Perhaps a more reasonable risk is that SBF expects other members of his team to see a similar panorama, but if not, he will be frustrated. It is difficult for anyone else in the organization to have his insight, especially between different entities. Will this cause turbulence? It seems unlikely that there will be an issue that will have an impact.
After studying Sam Bankman-Fried, it’s hard not to be impressed. In my interviews with investors, crypto experts, and himself, I was shocked that this is a special executive and an unusual person. A source said very seriously, “SBF is the most capable person I have ever met. This should be explained as widely as possible.”
At the same time open and mysterious, practical and intellectual, ethical principles and flexible in operation, SBF displays a set of rare personality traits and is almost an ideal candidate for his field of work. Like others, he seems to be able to navigate the chaos, to calculate and calibrate the ever-changing pattern of risk.
In FTX, he has found his cathedral. The fastest growing exchange in the crypto industry is very creative and very bold. This is not to say that it has not caused controversy. In the second part, we will explore the company’s victories and its weaknesses. But now, what we can be sure of is that it has a suitable ruler.
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