Created in April 2019 by Sam Bankman-Fried, FTX has imposed itself as a leading cryptocurrency exchange in a matter of month. In this interview for the Worldfolio, Mr. Bankman-Fried provides an insider’s look into the success of his company and discusses the incredible potential of cryptocurrencies.
Today, cryptocurrencies have blossomed into a diverse ecosystem of over 2,000 coins and tokens. A large part of the general public is aware of the benefits they hold over traditional money; they are decentralized, fast, secure, and made transparent thanks to blockchain technology. When cryptos first came out however, it inspired fear and incomprehension. To this day, critics still target the volatility of digital coins, often using the example of Bitcoin’s sudden price fluctuations. What is the long-term value of cryptocurrencies, both from an economic and social perspective?
To this day, cryptocurrencies remain a developing field. When first created, people associated cryptos with illicit trade, relating it to ‘the money used on platforms such as Silk Road.’ While public defiance towards cryptocurrencies is particularly present in the West, the same cannot be said about the Asian perception of it. You just have to observe where cryptos are most utilized to realize that divide between East and West. Often so, economic use cases are inversely proportional to the financial infrastructure around it. Since decades, America has been spending trillions of dollars building its financial infrastructure. Say what you want, but the US dollar remains one of the safest, most trusted assets in the world. This confidence clearly contrasts with the distrust some Asian populations have about their own currencies. Often so, individuals want to place their money out of their country but face difficulties doing so. Furthermore, if Asian countries adopted digital payments so swiftly it is because their banking infrastructure is limited. All these factors have contributed to Asia’ acceptance of cryptos.
From a social perspective, the potential of cryptocurrencies can be divided in two sides: “means of transfer” and “store of value.” The first is the most obvious digital payment system you can think of: envision going to McDonalds and paying for your Big Mac in Bitcoin.
To understand the value of a universal currency, such as Bitcoin, we must realize how inconvenient and ridiculous our current financial and economic processes truly are. For example, it is obvious that if we were to redesign the world from scratch we wouldn’t have as many currencies. Put yourself in the shoes of someone from Nigeria. Even though the NGN is one of the most liquid African currencies, it remains extremely difficult to exchange it for dollars. How many countries have changed their currency or adopted another country’s one? Keeping such a multitude of different currencies makes absolutely no sense.
Today’s daily transactions are another case study for the value of cryptos. While most people believe that swiping their credit card is an easy gesture, the underlying process for credit transactions is incredibly complicated, tedious and extensive.
But perhaps the best case study I can provide to convince you of the value of cryptos is with wire transfers. We all know wire transfers are a pain: they take hours to clear; cost a lot of money and need two days to arrive. Furthermore, most banks don't provide customers with an easy way to send them; and when they do, they charge a 3% fee! While 3% may not seem like a high number in absolute terms, consider how much 3% of the world’s GDP represents…
Now let’s compare. On the one hand, you have all these currencies that are hardly exchangeable and that are supported by ancient, burdensome processes. On the other hand, you have something new, multinational, easy to move and instantaneous. Cryptocurrencies have the potential to solve the bottlenecks of current payment methods.
Cryptos could also ameliorate our monetary systems. To create stability, the gold standard was used to back our currencies. When you think about it however, gold is kind of a ridiculous object. It’s this random metal that you have to physically mine and store. Honestly, gold is not the resource we would choose to back our assets if we were to start again. From that perspective, cryptos would represent yet another viable alternative. Instead of using the physical characteristics of rare metals, we could use the algorithmic properties of the blockchain to mimic the scarcity that makes the value of gold; and then instead of storing it physically, we could save it digitally.
At last, cryptocurrencies are both sturdy enough for large institutions and easy enough for individuals to use. If you want to store bitcoins or sell bitcoins, you could technically do it granted that you have basic coding skills. In comparison, try sending a wire transfer to yourself! You literally have to be a bank to do that.
In his 2008 white paper that first detailed bitcoin, the anonymous developer Satoshi Nakamoto claimed to “propose a system for electronic transactions without relying on trust.” Since then, there has been a heated debate around the impact blockchain technology can have on our definition of trust, and on the value of trust. While critics of cryptocurrencies have systematically attacked this claim, crypto-enthusiast have promoted it. Can blockchain really replace trust?
Blockchain can replace some sorts of trust, but not trust as a whole.
There is a specific way in which blockchain can replace certain forms of trust. If you want to know how many bitcoins are at this address for example, no trust is involved. All you need to do is check the address and the blockchain will reveal its value. Proving ownership of an asset without relying on the claims of external institutions is a powerful thing.
However, there is a multitude of aspects where blockchain will not replace trust. Complex transactions, even in crypto, must rely on trust. While there are ways to trade one asset for another without relying on trust, they are complicated and messy. Even something as simple as swapping an ERC Token for another token presents reasons to use a centralized exchange instead of a decentralized one. Obviously, once a decentralized venue is accepted it brings back these old forms of trust.
Taking a step further, how can we monitor transactions that involve exchanging something on the blockchain for something not on the blockchain? Let’s imagine I’m buying a coffee with bitcoin. Thanks to blockchain technology, I can prove that I sent the bitcoin; but can I prove that I got the coffee? How will the coffee get on the blockchain? In such a transaction, trust is needed. As such, I would argue that while blockchain technology does alter certain forms of trust, it does not negate it.
What can be done to further democratize the use of cryptos?
This is a typical “chicken or the egg” problem. In order to pay a coffee with bitcoin, three things need to happen. First, I have to have a bitcoin. Second, Starbucks has to be interested in my bitcoin. Third, the technology to allow such a transaction must be operational. The question is, how do we get there? Honestly, we may never be able to pay our coffee with bitcoin.
If we were to create a roadmap however, the easiest step would be to build the technology in-between. While you can create the technology without having users, it is impossible to have users without the technology. Once the technology is in place, you could go to businesses and get them to approve your idea. Coinbase recently took a step in that direction as they announced that they entered into a partnership with visa
The most difficult part is to find a user-friendly way that doesn’t require everyone to be well-versed in blockchain. The first option would be to have credit cards that can spend bitcoins. Once that is done, you can sell the credit card to users. The second option would be to develop an app that can exchange bitcoin to dollars instantaneously. All the app would do is allow user to pay the bitcoin equivalent of a dollar price. Through this app, people would be able to receive and send bitcoins, and wouldn’t have to worry about exchanging currencies as the app would do it for them. Theoretically speaking, if you were able to enrol a large number of businesses on your app, then you could have direct bitcoin transactions where a price in bitcoin is paid in bitcoin.
In October 2017, you co-founded Alameda Research. Today, Alameda is the largest cryptocurrency liquidity provider in the secondary market. It manages over $100 million worth of digital assets, with daily turnover as high as $1.5 billion, and ranks as a top player on the BitMex Leaderboard. Can you run us through the history of Alameda Research?
Prior to creating Alameda, I traded ETFs for Jane Street Capital. I left Wall Street in 2017 to start Alameda Research. The genesis of Alameda was looking at crypto-markets and identifying inefficiencies. Back in those days, bitcoin was trading at a different price on Bitstamp and Coinbase. As such, our business originally focused on finding large arbitrages and building the appropriate infrastructure to sustain it. In early 2018, we scaled up our operation by finding arbitrages across various markets. Since then crypto trading has become more efficient and large arbitrages have dried up. To adapt to this change, our business focused on identifying inefficiencies and solving them through liquidity. We monitored platforms where there was too much liquidity, too much demand or not enough supply, and we provided a service before prices dislocate. This served as Alameda’s bread and butter.
Already established futures exchange platforms, such as BitMEX, have encountered a series of bottlenecks: 1) Inefficient risk management systems have caused traders to lose profit on their positions due to covering of socialized losses and clawbacks. 2) the process for collateral is burdensome. As each contract has its separated token and margin wallet, traders have complained about the difficulty to rebalance their position swiftly. In 2019, you launched FTX, a cryptocurrency derivatives exchange that offers a series of products and its own OTC portal. How does FTX plan to solve these bottlenecks?
We were able to solve these issues thanks to our financial and engineering expertise. The greatest strength of FTX is its human resources. Most of our employees were either traders or heavy users of these products. As such, we had a clear idea as to how we should design our product and portal.
With regards to collateral. The notion that to trade EOS futures you need EOS collateral is ridiculous. It is as senseless as needing Apple stocks to trade Apple futures; the whole point is that you want to trade the future, not the stock! Having dollars and stablecoins as collateral was really natural. In most of the trading world, the norm for collateral is to have cross-margin, and traders can use whatever they want as collateral. For example, traders can choose to have positions on a Google option while using Apple stocks as collateral. This makes it easier to take positions and encourages trade. While cryptocurrency spot exchanges already offered cross-margin for collateral, derivatives did not. Honestly, it just seems like it was a big misstep from other players not to have done this before. Fixing that bottleneck was not complicated.
From a risk-management perspective, one must carefully assess what the right parameters are. If you have enough collateral, you eliminate the possibility of bankruptcies and you can liquidate the account before it goes under. The point is to find a balance in liquidation, and our competitors have done a truly sloppy job at it. Every year they experience hundreds of thousands of losses from parameters that are poorly managed.
The other issue is to understand when to liquidate a position if needs be. Instead of waiting until the last minute and putting out an offer with the hope that someone will trade against it, we slowly liquidate the position overtime. This balance underpins the risk engine of FTX and represents a major improvement in comparison to other platforms.
Our ability to improve came from two key factors: our background in financial product development and our passion to create the best product possible.
Why did you decide to create your own OTC portal and what are the advantages of having your OTC portal integrated within the FTX ecosystem?
The two features we considered were technology and liquidity. From a technology standpoint, we spotted points of amelioration on other portals. One of the advantages of our OTC portal is that deposit and withdrawals are built into it. Normally, you have to get in contact with the company to settle trades, but not on our portal.
The other piece was our desire for liquidity.
You created FTT. What are the benefits of FTT how do you drive the demand for FTT?
FTT Tokens allow you to get lower trading fees, which can decrease by as much as 60%. We also do a weekly buy and burn of a third of the revenue generated by the platform. On top of that, we have installed socialized gains. If there are bankruptcies and the insurance funds a net winning to those, then 10% of that goes to buy and burn of FTT.
How do you ensure that your platform is both powerful enough for professional traders and intuitive enough for first timers?
To this day, it remains the hardest problem we face. When we designed our platform, there were many times when we didn't know what the right decision was. The more knot in your platform the higher the entry barrier becomes for unexperienced people. However, making a platform that is to simple wouldn't be appealing to heavy users.
Overtime, the direction we have taken is to make our portal customizable. While the default settings are simplified, users have access to an array of add-ons and menus to customize the portal as they see fit.
FTX was the first in the industry to released “Leveraged Tokens.” These ERC20 Tokens, hosted on the Ethereum blockchain, allow traders to take position without having to trade on margin or future exchanges. What are the advantages of these “Leveraged Tokens”?
Our “Leveraged Tokens” are ERC20 Tokens that represents a leverage position from FTX futures. As their value is tied to a crypto position, users can instantly utilize them or redeem them at their fair value without dealing with collateral. Since they are also listed on other platforms, you don't need to have an FTX account to get access to FTX’s liquidity. As such, they are particularly interesting to retail traders who can now take on leveraged positions on spot exchanges without passing by margin and futures exchanges.
FTX partnered with Trust Token, the first regulated Stablecoin backed by US dollars. How important was this partnership for the development of FTX?
Partnerships have been crucial to the development of FTX. As a large amount of FTX’s collateral is in stablecoin, having a positive relationship with a stablecoin company was paramount for success.
Other notable partnerships include the one we have with Binance, Gopax and Bitmax. As we listed our FTTs on their platforms, it allowed us to expand the FTX ecosystem.
We recently partnered with Simplex to add credit card base deposit, as well as with BiLIRA to create a Turkish stable coin.
While in its early stages, the cryptocurrency future exchange market already has a variety of players. In the top Tier, we find BitMEX and Bitflyer. In the second and third Tier, companies include Huobi DM and Deribit for example. Where do you imagine FTX in the future?
When it was first founded, FTX was a Tier 3 player. Over the months that followed, we quickly grew and became an important company within Tier 2. Right now we are at the top of Tier 2. In the future, our goal is to be at the top of Tier 1. We currently trade over $1 billion a day in volume, a 40% increase from a couple month ago. For the next 6 month to a year, our objective is to continue with that growth and become one of the, if not the largest venue in crypto.
You recently launched the “US 2020 Election Market,” a series of futures contracts which allow investors to trade on the outcome of the American election. Practically speaking, how does this product work?
We made this product as straight forward as possible. Traders can choose from 6 contracts, each belonging to a candidate, which expire to 1$ if he or she wins the elections, and 0$ otherwise. To give you an example, the price of each TRUMP CONTRACT is equal to the probability that he wins re-election. So if you think there's a 50% chance of Trump winning, then TRUMP should trade at $0.50. He is currently trading at 0.63$, so if you think the odds are at 80%, buy now because it will pay out in expectations! If you think the odds are at 40%, it’s a good moment to sell.
Looking at the future, do you plan to expand the scope of prediction markets you offer? If yes, to what?
We did polls across our social media platforms and asked our users what they were most excited to trade. If we had to choose a single thing, it would be the NBA Finals. I don't know what we will do next, but that is a decent guess. There are many other subjects we are looking at. From E-sport to other political markets and geo-political events, we just want to provide a platform for people to express their opinion.
Currently, what is your favourite Election 2020 contract and why?
While I am not a political expert, I believe that markets are a little slow to react to long-term trends, and too over-react to weird, short-term events. If you look at the massive searches that Buttigieg, Bloomberg and Bernie abruptly got, it’d leave you wondering... I would bet against some of those sudden moves.
Just weeks prior to the South Carolina caucus, for example, Vice-President Joe Biden traded at $0.055 before jumping to $0.188 in a matter of days. Clearly, markets were underrating him. He was the favourite when the primaries started, lost some ground to Bernie and Bloomberg, but in a month we may notice he is still there and has managed to attract a large amount of delegates.
Bloomberg was looming in the background, and it was obvious he would run. As such, I believe he should have been a lot lower.
Bernie also should have been higher at the beginning. Some people just think that he didn't stand a chance because he is unusual, but remember that people said that about Trump four years ago, and look who is President today!
Honestly, it is not clear how it will play out and momentum may not be as important as in other primaries.
What are the advantages of TRUMP 2020 in comparison to traditional betting websites?
Firstly, our fees are truly reduced and represent roughly 10% of theirs.
Secondly, we have been able to create a multitude of channels to get funds in-and-out the platform. As with poker websites, one of the challenges we face is to get funds. Thanks to FTX’s diversified offering, we have been able to create many venues to increase the liquidity of our platform. Our desire for liquidity motivated us to facilitate payment forms and create our own OTC portal. Today, we accept payments in cryptocurrencies, such as stablecoins and Bitcoins, as well as traditional means of payment, such as wire transfers and credit card transactions.
Furthermore, we don't impose any limits on our users. While some betting websites restrict the amount of money one can bet, FTX lets you invest as much as you desire.
But perhaps our greatest advantage is that we do not cut you off if you are doing well. A lot of bookies consider that if you are making money, it means you are beating them. We think the inverse. If you are making money, good for you! Make more!
This goes back to the definition of FTX. When we first launched our company, our goals was to create a platform where you could trade what you wanted, for as much money as you wanted, with tons of channels to take your money in-and out and without being scared of getting kicked off.
Crypto-currency derivates is still a young market, with few products to be traded. In this new industry, FTX has proven to be a true innovator thanks to products such as ‘leveraged tokens’ and the ‘2020 US Election.’ How do you enforce that philosophy in your team?
I flip the question on its head and ask: how did our competitors never create it themselves? We looked at other exchanges, and wondered: What the hell are they doing? Why are they just standing still.
Withholding neither positive nor negative judgement, I believe that people get scared when they get hired by a big company. They think: ‘Oh boy, nothing is going to move here.’ Larger enterprises tend to have multiple layers of management and complicated long-term schemes, including IPOs. When they make money, they hire a series of new employees and can end up with hundreds of people just standing there without contributing much. So when they do decide to make something new, it may get assigned to someone who doesn’t know how to do it by someone who doesn’t know exactly what he is assigning.
We are taking the opposite approach and want to be as quick as possible. Our goal is to build the best product in the fastest time possible, and anything which gets in the way of that objective must be swiftly removed.
Since its foundation in 2018, FTX has donated over $7 million to charity. Why is it important for FTX to have a social cause?
If your goal with your money is to buy cars, then your 5th car really isn’t as valuable as your first one. If your goal is donating, the 5th malaria vaccine is as good as the first. Donating can be seen as a two-step plan. The first step is to figure out how you can create the most capital for donation, and the second step is to find the best channel to donate to.
When you think socially, the scope of problems to address is endless. This fuels us into taking a bolder path.
What is the biggest trade you’ve ever seen on your platform?
It depends how you define a trade and whether you are talking about a single order or a strategy. Our platform receives a multitude of trades over one million dollars, and we are accustomed to seeing giant orders of over $20 million. We have also seen positions accumulate overtime. Whether it is one person or many, I often say that “the world is starting to put on some positions.” A useful thing to do is to look at the open interest of the contracts, which is the total sum of all the long positions or equivocally of the short positions. Often, you can see it growing overtime in parallel with the evolution of premiums. Over the last few month, we have seen a ton of buy-side pressure from across the board; something all platforms have experienced. The world is increasingly trading cryptos. Futures are trading at big premiums, the price is high, and there are more buyers than sellers.
What objectives would you like to have achieved within 10 years?
From a corporate perspective, our three year road map is to become the number one crypto exchange in the world. Within 10 years, our aim is to transform into a global financial hub dealing with a multitude of financial products, both crypto and non-crypto. From a personal point of view, my goal is to do as much as I can to have a positive impact on the world.