--:-- Dwarkesh Patel: Today on the Lunar Society podcast, I have the pleasure of interviewing Sam Bankman-Fried, CEO of FTX. Thanks for coming on the Lunar Society.
--:-- Sam Bankman-Fried: Thanks for having me.
--:-- Dwarkesh Patel: All right. First question. Does the consecutive success of FTX and Alameda suggest to you that the world has all kinds of low-hanging opportunities, or was that a property of the inefficiencies of crypto markets at one particular point in history?
--:-- Sam Bankman-Fried: I think it's probably more of the former. I think there were probably just a lot of inefficiencies.
--:-- Dwarkesh Patel: So I guess another part of this question is, if you had to restart earning to give again, what are the odds you'd become a billionaire, but you couldn't do it in crypto?
--:-- Sam Bankman-Fried: I think they're pretty decent. A lot of it depends on what I end up choosing and how aggressive I end up deciding to be. There are a lot of pretty safe and secure career paths for me that definitely would not have ended there. But I think that if I'd decided to really dedicate myself to starting up some businesses, there would have been a pretty decent chance of it.
--:-- Dwarkesh Patel: So that leads to the next question, which is that you've cited Will MacAskill's lunch with you while you were at MIT as being very important in deciding your career. He suggested you do earning to give by going to a quant firm like Jane Street. In retrospect, given the success you've had as a founder, was that maybe bad advice? And maybe you should have advised you to start a startup or a nonprofit.
--:-- Sam Bankman-Fried: I mean, I don't think it was literally the best possible advice. That was what, 2012 or something? Thinking about starting a crypto exchange would have maybe been better. But I think it was definitely helpful advice. And relative to not having gotten advice at all then, I think it probably helped quite a bit.
--:-- Dwarkesh Patel: Right. But then there's a broader question of, are people like you who could become founders advised to take lower variance, lower risk careers that in expected value are less valuable?
--:-- Sam Bankman-Fried: Yeah, I think that's probably true. I think probably people are advised too strongly to go down safe career paths. But I think it's worth noting that there's a big difference between what makes sense altruistically and personally for this. To the extent you're just thinking of personal criteria, that's going to argue heavily in favor of a safer career path because you have much more quickly declining marginal utility of money than the world does. So this is specifically for altruistically minded people.
--:-- The other thing is that when you think about what is advising people to choose a safer route, people will often try to look at the career advice that they got, the outward facing factors that you can see. But I think often the answer has something to do with them and their family or them and their friends, something much more personal. When we talk with people about what they're thinking about doing with their career, personal considerations and the advice of people close to them weighs really, really heavily on what decisions they end up making.
--:-- Dwarkesh Patel: I didn't realize that the personal considerations were as important in your case as the advice you got from...
--:-- Sam Bankman-Fried: Oh, I don't think in my case, but I think that in the case of many, many people that I talked to, they are.
--:-- Dwarkesh Patel: Speaking of declining marginal consumption, I'm wondering if you think the implication of this is that over the long term, all the richest people in the world will be utilitarian philanthropists because they don't have diminishing returns on consumption. They're just neutral.
--:-- Sam Bankman-Fried: I mean, I wouldn't say all will, but I think there probably is something in that direction where people who are looking at how they can help the world are going to end up being disproportionately represented amongst the most and maybe least successful.
--:-- Dwarkesh Patel: All right, let's talk about effective altruism. In your interview with Tyler Cowen, you were asked, what constrains the number of altruistically minded projects? And you answered, probably someone who can start something. Now, is this a property of the world in general, or is this a property of EAs? And if it's about EAs, then is there something about the movement that drives away people who could take leadership roles?
--:-- Sam Bankman-Fried: Oh, I think it's just the world in general. Even if you ignore altruistic projects and just look at profit minded ones, we have lots of ideas for businesses that we think would probably do pretty well if they were run quite well, that we'd be excited to fund. And the missing ingredient quite frequently for them is the right person or team to take the lead on it. In general, it's kind of brutal starting something. It's brutal being a founder. And it requires a somewhat specific but extensive list of skills. Those things end up making it generally fairly highly in demand.
--:-- Dwarkesh Patel: What would it take to get more of those kinds of people to go into EA?
--:-- Sam Bankman-Fried: Part of it is probably just talking with them about, have you thought about what you can do for the world? Have you thought about how you can have impact on the world? Have you thought about how you can maximize your impact on the world? Just going down that path, I think a lot would be amenable. I think a lot would be excited about thinking critically and ambitiously about how they can help the world. So honestly, just engagement is one piece of this.
--:-- Another thing, even within people who are altruistically minded and looking at what it would take for them to be more excited to be founders or to be better at it, I think there are still things that you can do. Some of this is about empowering people and some of this is about normalizing the fact that when you start something, it might fail and that's okay. Most startups and especially very early stage startups, you shouldn't be trying to build them to maximize the chances of having at least a little bit of success. But what that means is that you have to be okay with the personal fallout of failing and that we have to build a community that is okay with that. I don't think we have that right now. I think very few communities do.
--:-- Dwarkesh Patel: Now, there are many good objections to utilitarianism. As you know, you said yourself that we don't have a good account of infinite ethics. Should we attribute substantial weight to the probability that utilitarianism is wrong? And how do you hedge for this moral uncertainty in your giving?
--:-- Sam Bankman-Fried: I don't think it has a super large impact on my giving, partially because in order to do so, you'd have to have a concrete proposal for what else you would do and what that would imply that would be different actions-wise. And I don't know that I've been compelled by many of those.
--:-- I do think, though, that there are a lot of things we don't understand right now. One thing you pointed to is infinite ethics. Another thing is, and I'm not sure this is quite moral uncertainty, this might be physical uncertainty more than anything else. But there are a lot of chains of reasoning people will go down that I think are somewhat contingent on our current understanding of the universe in a way which might not be right. And certainly, if you look at expected value outcomes, it might not be right.
--:-- Say what you will about the size of the universe and what that implies. But some of the same people who make arguments based on how big the universe is also think the simulation hypothesis has decent probability. But I think very few people chain through them like, okay, what would that imply? I don't think it's clear what any of this implies.
--:-- In the end, if I had to say how have these considerations changed my thoughts on what to do, the honest answer is that they have changed it a little bit. And I think the direction that they pointed me in is things with moderately more robust impact. What I mean by that is there's one way that you can calculate the expected value of an action, which is pretty specific and pretty much like, here's what's going to happen, here are the two outcomes, here are the probabilities of them. There's another thing you can do, though, which is to try and say, it's a little bit more hand wavy, but it's like, how much better is it going to make the world? How much does it matter if the world's kind of better in generic diffuse ways?
--:-- Typically, EA has been pretty skeptical of that second line of reasoning. And I think correctly, because usually when you see that deployed, it's nonsense. Usually when people are pretty hard to nail down on what the specific reason is they think something might be good, it's because they haven't thought that hard about it or don't want to think that hard about it. The much better analyzed and vetted pathways are the ones that you should be paying more attention to.
--:-- That being said, I do think that sometimes EA gets too narrow-minded and specific about plotting out courses of impact. This is one of the reasons why people end up fixating on one particular understanding of the universe, of ethics, of how things are going to progress. But all of these things have some amount of uncertainty in them. When you jostle that, some theories of impact and some models behave somewhat robustly under jostling and some of them completely fall apart. I've become a little bit more sympathetic to ones that are a little bit robust under thoughts about what the world ends up looking like.
--:-- Dwarkesh Patel: In the May 2022 Oregon congressional election, you gave $12 million to Carrick Flynn, whose campaign was ultimately unsuccessful. How have you updated your beliefs about the efficacy of political giving in the aftermath?
--:-- Sam Bankman-Fried: It was the first time that I'd given at that scale in a race. I did it because he was, of all the candidates in the cycle, the most outspoken on the need for more pandemic preparedness and prevention. He lost, obviously, such is life. I think there are some updates, lots of miniature updates on efficacy of various things. But also, I never thought that the odds were extremely high that he was going to win. It was always going to be an uncertain close race. There's a limit to how much you can update from a one-time occurrence. If you thought the odds were 50-50 and it turns out being close in one direction or another, there's a maximum of maybe a factor of two update that you have. I think there were a bunch of micro updates on specific factors of the race, but on a high level, I don't think it changed my perspective on policy that much.
--:-- Dwarkesh Patel: But does it make you think there are diminishing or possibly negative marginal returns from one donor giving to a candidate because of the negative PR it creates?
--:-- Sam Bankman-Fried: At some point, yeah, I think that's probably true.
--:-- Dwarkesh Patel: Continuing on the theme of politics, when is it more effective to give the marginal million dollars to a political campaign or institution to make some change at the government level, putting in early detection? Or when is it more effective to just fund it yourself?
--:-- Sam Bankman-Fried: It's a good question. Part of this is that it's not necessarily mutually exclusive. But one thing here is looking at what is the scale of the things that need to happen? How much is international cooperation important for it? When you look at pandemic prevention, we're talking tens of billions of dollars of scale necessary to start putting this infrastructure in place. So it's a pretty big scale thing, which is hard to fund to that level individually. And it's also something where we're going to need to have cooperation between different countries on their surveillance for new pathogens and on vaccine distribution. If some countries have great distribution of vaccines and others don't, that's not good. It's both not fair and not equitable to the countries that end up getting hit hardest, but also in a global pandemic, it's going to spread. So you need to have global coverage. I think that's another reason that government likely has to be involved, at least to some extent, in the efforts.
--:-- Dwarkesh Patel: Let's talk about Future Fund. As you know, there are already many existing effective altruist organizations that do donations. What is the reason you thought there was more value in creating a new one? What's your edge?
--:-- Sam Bankman-Fried: Part of it is I just think that there's value in having multiple organizations. Every organization is going to have its blind spots. You can help cover those up if you have a few. If OpenPhil didn't exist, maybe we would have created an organization that looks more like OpenPhil. But they are covering a lot of what they're looking at. We're looking at overlapping but not identical things. So I think having that diversity can be valuable.
--:-- Pointing to the ways in which we intentionally designed it to be a little bit different from existing donors, one thing that I've been really happy about has been the regranting program that we've had. We have a number of people who are experts in various areas who we've basically donated pots to that they can regrant. What are the reasons that we think this is valuable? One thing is just giving more stakeholders a chance to voice their opinions in a way where we can't possibly listen to everyone in the world directly and integrate all those opinions to come up with the perfect set of answers. Distributing it and letting them act semi-autonomously can help with that.
--:-- The other thing is that it really helps with large numbers of smaller grants. When you think about what an organization giving away $100 million in a year is thinking about, if we divided that up into $25,000 grants, how many grants would that mean? That would be 4,000 grants, which is a lot of grants to analyze. If we want to give real thought to each one of those, we can't do that. But on the flip side, sometimes the smaller grants are the most impactful per dollar. There are a lot of cases where someone really impressive has a really exciting idea for a new foundation, for a new organization that could do a lot of good for the world and needs $25,000 to get it started. To rent out a small office, to be able to cover salaries for two employees for the first six months. Those are the kind of cases where sometimes a pretty small grant can make a huge change in the development of what might ultimately become a really impactful organization. But they're the kind of things that are really hard for our team to evaluate all of, given the number of them.
--:-- The regrantor program gives us a way to do that. If instead we have 10, 50, 100, maybe eventually regranters who are going out and finding a lot of those opportunities close to them, they can then identify those and direct those grants. It gives us a much wider reach and also biases it less towards people who we happen to know, which is good. We don't want to just overfund everyone we happen to know and underfund everyone that we didn't happen to. So I think that's been one initiative which I've been pretty excited about, and I think we're going to keep doing.
--:-- Another thing is that we've really tried to have a lot of emphasis on making the process smooth and clean. There are pros and cons to this, but I do think that it drops the activation energy necessary for someone to decide to apply for a grant and fill out all the forms. So we've really tried to bring more people in the fold in terms of potential recipients.
--:-- Dwarkesh Patel: If you make it easy for people to fill out your application, and if generally you're finding things that maybe other organizations wouldn't, how do you deal with the possibility of adverse selection in your philanthropic deal flow?
--:-- Sam Bankman-Fried: It's a really good question. Of course, that's a worry that Bob down the street might see a great bookcase that he wants and be like, "Oh man, I wonder if I can get funding for this bookcase. It's going to house a lot of knowledge. Knowledge is good, right?" Obviously we're not that one. I think we detect pretty quickly.
--:-- The basic answer is that we still have oversight on all of these. We do really deep dives into both all the large ones but also into samplings of all the small ones. We do some oversight of all of them, but we will do really deep dives into randomly sampled subsets of them, which allows us to get a pretty good statistical sense of whether we are facing significant adverse selection in them. So far we haven't seen obvious signs of it, but we're going to keep doing these analyses and see if anything worrying comes out of those. That's a way to be able to have more trusted analyses for more scaled up numbers of grants.
--:-- Dwarkesh Patel: A long time ago you wrote a blog post about how EA causes are multiplicative instead of additive. Do you still find that that's the case with most of the causes you care about, or are there cases where some of the causes you care about are negatively multiplicative? An example might be economic growth and the speed at which it has its own.
--:-- Sam Bankman-Fried: Yeah, I think it's getting more complicated. Specifically around AI, you have a lot of really complex factors that point sometimes in the same direction, sometimes in opposite directions. Especially if what you think matters is something like the relative progress of AI safety research versus AI capabilities research, a lot of things are going to have the same impact on both of those and thus confusing impact on safety as a whole. So I do think it's more complicated now and it's not cleanly things just multiplying with each other. I do think there are lots of cases where you see multiplicative behavior, but I also think there are cases where you just don't have that.
--:-- The conclusion of this is if you do have multiplicative cases, you probably want to be funding each piece of it. But if you don't, then you probably want to be trying to identify the most impactful pieces and specifically moving those along. I think our behavior should be different in those two scenarios.
--:-- Dwarkesh Patel: If you think of your philanthropy from a portfolio perspective, is correlation good or is it bad?
--:-- Sam Bankman-Fried: Expected value is expected value, right? Here's one way to think about this. Let's pretend that there is one person in Bangladesh and another one in Mexico. And we have two interventions, both 50-50, on saving each of their lives in particular, some new drug that we could help release to combat some neglected disease. And then there's this question of, are they correlated? Are these two drugs correlated in their efficacy? My basic argument is it doesn't matter. Because if you think about it from each of their perspectives, the person in Mexico isn't saying, "I only want to be saved in the cases where the person in Bangladesh is or isn't saved." That's not relevant. They're like, "I would like to live." And the person in Bangladesh similarly says, "I would like to live." You want to help both of them as much as you can. It's not super relevant whether there's alignment or anti-alignment between the cases where you get lucky and the ones where you don't.
--:-- Dwarkesh Patel: What's the most likely reason that Future Fund fails to live up to your expectations?
--:-- Sam Bankman-Fried: I think we just kind of get a little lame. We give to a lot of decent things, but all the cooler or more innovative things that we do just don't seem to work very well. And we end up giving to the same places that everyone else is giving, wherever that ends up being. We don't turn out to be effective at starting new things, we don't turn out to be effective at thinking of new causes or executing on them. Hopefully we'll avoid that, but it's always a risk.
--:-- Dwarkesh Patel: So should I think of your charitable giving as a yearly contribution of a billion dollars or less or more? Or should I think of it as a $30 billion hedge against the possibility that there's going to be some existential crisis that requires a large pool of liquid wealth?
--:-- Sam Bankman-Fried: That's a really good question. I'm not sure. We're going to start giving something we've already have. We've given away about 100 million so far this year. We're going to start doing that partially because we think there are really important things to fund, partially because we want to make sure to start scaling up those systems in that process so that we're ready. And so that we notice opportunities as they come, we have systems ready in place to give to them. But I think it's something we're really actively discussing internally, how concentrated versus diffuse we want that giving to be, and how much we want to be storing up for one very large opportunity versus how much it's going to be a mixture of many.
--:-- Dwarkesh Patel: When you look at a proposal and you think this project could be promising, but this is not the right person to lead it, what is the trait that's most often missing?
--:-- Sam Bankman-Fried: Super interesting. I'm going to ignore the obvious answers, which are like, the guy just not very good. Let's look at cases where someone is pretty impressive but I still think is not the right fit for this.
--:-- I think one of them is how much are they going to want to deal with really messy shit? This is a huge thing. To give some examples, when I was working at Jane Street, it's a really great place. I had a great time there. One thing which I didn't even realize was valuable there until I saw what things could look like outside was if I decided that it was a good trade to buy one share of Apple stock on NASDAQ, there's a button to do that. If you, as a random citizen, want to buy one share of Apple stock directly on an exchange, it'll cost you tens of millions of dollars in a year to get set up to be able to do that. You got to get like a physical colo in Secaucus, New Jersey. You have to have market data agreements with these companies. You have to think about the SIP and about the NBBO and whether you're even allowed to lift on NASDAQ right then. You have to build technological infrastructure to do it. But all of that comes after you get a bank account. Getting a bank account that's going to work in finance is really hard. I've probably spent hundreds, if not thousands of hours of my life trying to open bank accounts.
--:-- One of the things at Early Alameda that was really crucial to our ability to make money was having someone very senior spend hours per day in a physical bank branch, manually instructing wire transfers. If we didn't do that, we wouldn't have been able to do the trade. When you start a company, there's enormous amounts of shit that looks like that. Things that are dumb or annoying or broken or unfair or not how the world should work. But it's how the world does work. The only way to be successful is to do it, is to fight through that. If you're going to be like, "Ah, whatever, I'm the CEO, I don't do that stuff," then no one's going to do that at your company. It's not going to get done. You won't have a bank account and you won't be able to operate.
--:-- So one of the biggest traits that I think is incredibly important for a founder and for an early team at a company, but is not necessarily important for everything that you might want to do in life, is being willing to do a ton of grunt work if that's what's important for the company right then. Viewing it not as low prestige or too easy for you or something like that, but as, "This is the important thing. This is the valuable thing to do. So it's what I'm going to do." That's one of the core traits.
--:-- The other one is, are they excited about this idea? Will they actually put their heart and soul into it? Or are they going to be a little bit drifting and bored and not really into it and half-ass it? I think those are two things that I really look for.
--:-- Dwarkesh Patel: How would you use your insights about pitcher fatigue to allocate talent in your companies?
--:-- Sam Bankman-Fried: Pitcher fatigue. I haven't thought about this in a while, but my thesis back then, which I still think is probably true, is that when it comes to pitchers in baseball, there's a lot of evidence that they get worse over the course of the game the more innings they pitch. They get worse and worse and worse. Partially it's just hard on the arm. But it's worth noting that the evidence seems to support the claim that it depends on the pitchers, but that in general you're better off breaking up their outings. It's not just a function of how many innings they pitched that season but also extremely recently. So if you could choose between someone throwing six innings every six days or throwing three innings every three days, probably you should choose the latter. That's going to get the better pitching on average and just as many innings out of them.
--:-- Baseball has actually since then moved very far in that direction. The average number of pitches thrown by starting pitchers is down a lot over the last five to ten years.
--:-- How do I use that in my company? There's a metaphor here, but actually I think I've gone the opposite direction if anything. Here's what my sense has been in terms of computer work instead of physical work. You don't have the same effect whereby your arm is getting sore and eventually your muscle snaps and you need surgery if you pitch too hard for too long. That doesn't directly translate. There's a little bit of an equivalent of people getting tired and exhausted. But on the other hand, context is a huge piece of being effective. Having all the context in your mind of what's going on, of what you're working on, what the company's doing, makes it way easier to operate effectively.
--:-- If you could have two half-time employees or one full-time employee, you're way better off with one full-time employee because they're going to have way more context than either of the part-time employees would have and thus be able to work way more efficiently. In general, our experience has actually been that concentrated work is pretty valuable. If you keep breaking up your work, and it depends on the person and the context, but in general, if you do that, you're never going to be able to do as great of work as if you really dove into something.
--:-- Dwarkesh Patel: You've talked about how you may experience relatively little when you're deciding who to hire. But in a recent Twitter thread, you mentioned that being able to provide mentorship to all the people who come on is one of the bottlenecks to you doing a scale. Is there a trade-off here where if you don't hire people for experience and you give them more mentorship, and thus can't scale as fast?
--:-- Sam Bankman-Fried: It's a good question, but to a surprising extent, we found that the experience of the people that we hire has not that much correlation with how much mentorship they need. Much more important is how they think, how good they are at understanding new and different situations, and how good they are and how hard they try to integrate into their understanding of coding, their understanding of how FTX works. I think that we have by and large found that other things are much better predictors of how much oversight, management, and mentorship someone is going to need than their experience at similar looking roles.
--:-- Dwarkesh Patel: And how do you assess that short of hiring them for a month and then seeing how they did?
--:-- Sam Bankman-Fried: It's tough. I don't think we're perfect at it. But things that we look at: do they understand quickly what the goal of a product is? And how does that inform how they build it?
--:-- Sam Bankman-Fried: When you're looking at developers, I think we really strongly want people who can understand what FTX is, how it works, and thus what the right way to architect things would be for that, rather than treating it like an abstract engineering problem divorced from whatever the ultimate product is. Being able to do that is something you can try and ask people: "Here's a high-level customer experience or customer goal. How would you architect a system to create that?" So that's one thing we look for: just an eagerness to learn and to adapt. It's not trivial to test for that, but you can do some amount of it. You can try and give people novel scenarios and see how much they break versus how much they bend. I think that can be super valuable as well.
--:-- We also specifically search for developers who are willing to deal with messy scenarios rather than wanting a pristine world to work in. Our company is customer-facing. It has to face some third-party tooling. We've been a quickly growing company. All of those things mean that we have to interface with things that are messy in the way the world is.
--:-- Dwarkesh Patel: Before you launched FTX, you gave detailed instructions to the existing exchanges about how to improve their system, how to remove clawbacks and so on. Looking back, they left billions of dollars of value on the table. Why do you think that was? Why didn't they just fix what you told them to fix?
--:-- Sam Bankman-Fried: Yeah, it's a really interesting question. My sense is that it's part of a larger phenomenon. One piece of this is just that they didn't have a lot of market structure experts. They just did not have the talent in-house to be able to think really well and deeply about risk engines. And also there are cultural barriers between myself and some of them, which I think probably meant that they were less inclined than they otherwise would have been to take it very seriously.
--:-- But ignoring those factors, I think there's something much bigger at play. Many of these exchanges had hired a lot of people. They'd gotten very large. You might think that meant they got more able to do things because they had more horsepower. But in practice, most of the times that we see a company grow really fast, really quickly, and get really big in terms of number of people, it becomes an absolute mess internally. There's huge diffusion of responsibility issues. No one's really taking charge. You can't figure out who's supposed to do what. And in the end, nothing gets done. You actually start hitting negative marginal utility of employees pretty quickly, where the more people you have, the less total you get done.
--:-- I think that happened to a number of them to the point where, yeah, I sent them these proposals. Where did they go internally? Who knows? The vice president of exchange risk operations, but not the real one, the sort of fake one operating under some department with an unclear goal and mission, who had no idea what to do with it. Eventually they just passed it off to a random friend of theirs who was a developer for the mobile app, and they were like, "You're a computer person, is this right?" And that's how it died. I'm not saying it literally happened like that, but something sounds kind of like that probably happened. It's not like they had people who took responsibility. They didn't see this and say, "Wow, this is scary. I should make sure that the best person in the company gets this." They didn't pass it to the CTO or the person who thinks about their modeling and say, "Hey, is this thing scary?" And then that person looked at it and said, "Wow, this might be a problem." I don't think that's what happened.
--:-- Dwarkesh Patel: There are two ways of thinking about the impact of crypto on financial innovation. One is the crypto maximalist view that crypto subsumes TradFi. The other is that what you're basically doing is stress testing some ideas from a volatile, fairly unregulated market that you're actually going to bring to TradFi, but this is not going to lead to some sort of decentralized utopia. So which of these models is more correct? Or is there a third model that you think is the case?
--:-- Sam Bankman-Fried: First of all, who knows? It's going to be path dependent. But if I had to guess, I would say a lot of properties of what is happening in crypto today will probably make their way into TradFi to some extent. I think blockchain settlement has a lot of value and can clean up a lot of areas of traditional market structure. I think composable applications are super valuable and are going to get more important over time.
--:-- There are some areas where it's not clear what's going to happen. When you think about how decentralized ecosystems and regulation intersect, it's a little bit TBD exactly where that ends up. So I don't want to state with extreme confidence exactly what will or won't happen. But some pieces seem pretty likely to me. Stablecoins becoming an important settlement mechanism is pretty likely. Blockchains in general becoming a settlement mechanism and collateral clearing mechanism seems decently likely to me. More and more assets getting tokenized seems decently likely to me. And there being programs written on blockchains that people can add to and that can compose with each other seems pretty likely to me. A lot of other areas could go either way.
--:-- Dwarkesh Patel: Let's talk about your proposal to the CFTC to replace Futures Commission Merchants with algorithmic real-time risk management. There's a worry that without human discretion, you have algorithms that will cause liquidation cascades when they were not necessary. Is there some role for human discretion in these kinds of situations?
--:-- Sam Bankman-Fried: There is. The way I think about it is that the way traditional futures market structure works is you have a clearinghouse with a decent amount of manual discretion in it, connected to FCMs. Some of those FCMs use human discretion and some use automated risk management algorithms with their clients. Generally, the smaller the client, the more automated it is.
--:-- We are inverting that to some extent. At the center, you have an automated clearinghouse, potentially connected to FCMs which could potentially use discretionary systems when managing their clients. The key difference is that one way or another, initial margin has to end up at the clearinghouse, a programmatic amount of it, and the clearinghouse acts in a clear way. The goal of this is to prevent contagion between different intermediaries. Whatever credit decisions one intermediary makes with respect to their customers doesn't pose risk to other intermediaries because someone has to post the collateral to the clearinghouse in the end, whether it's the FCM, their customer, or someone else. It gives clear rules of the road and lack of systemic risk spreading throughout the system. It contains risk to the parties that choose to take that risk on — the FCMs that choose to make credit decisions.
--:-- I think there is a potential role for manual judgment. Manual judgment can be really valuable and add a lot of economic value. It can also be very risky when done poorly. In the current system, each FCM is exposed to all of the manual bespoke decisions that each other FCM is making. That's a really scary place to be in. We've seen it blow up with the Elmi Nickel contracts. We've seen it blow up in other cases with a few very large traders who had positions at a number of different banks and ended up blowing out. I think this provides a level of clarity, oversight, and transparency to the system so that people know what risk they are or are not taking on.
--:-- Dwarkesh Patel: Are you replacing that risk with another risk? If there's one exchange that has the most liquidity in futures, and if there's one exchange where you're posting all your collateral across all your positions, then the risk is that that single algorithm that the exchange is using is going to determine when and if liquidation cascades happen.
--:-- Sam Bankman-Fried: It's already the case that if you put all of your collateral with a prime broker, then potentially whatever that prime broker decides — whether it's an algorithm or a human or something in between — is going to decide what happens with all of your collateral. If you're not comfortable with that, you could choose to spread it out between different venues. You could choose to use one venue for some products, another venue for other products if you don't want to cross-collateralize or cross-margin your positions. You get capital efficiency generally for cross-margining them, for putting them in the same place. But the downside is that the risk of one can affect the other. There's a balance there. I don't think it's a binary thing.
--:-- Dwarkesh Patel: Given the benefits of cross-margining and the fact that less capital has to be locked up as collateral, is the long-run equilibrium that the single exchange will win? And if that's the case, then in the long run, there won't be that much competition in derivatives?
--:-- Sam Bankman-Fried: I don't think so. You could already see that happening, but I don't think we're going to have a single exchange winning. Among other things, I think there are going to be different decisions made by different exchanges, which will be better or worse for particular situations. One thing people have brought up is: what about physical commodities, like corn or soy? What would our risk model say about that? The answer is it's not super helpful for those commodities right now because it doesn't know how to understand a warehouse. You might want to use a different exchange that had a more bespoke risk model that tried to have a human understand what physical positions someone had on. I think that would totally make sense. That can cause a split between different exchanges.
--:-- In addition, we've been talking about the clearinghouse here, but many exchanges can connect to the same clearinghouse. We're already a clearinghouse connected to a number of different DCMs, and I'm excited for that to continue to grow out. In general, there are going to be a lot of people who have different preferences over different details of the system and choose different products based on that. I think that's how it should work — people should be allowed to choose the option that makes the most sense for them.
--:-- Dwarkesh Patel: What are the biggest differences in culture between Jane Street and FTX?
--:-- Sam Bankman-Fried: I think FTX has much more of a culture of morphing and taking on a lot of random new things. Jane Street is still — I don't want to say it's an ossified place or anything. It is somewhat nimble, but it is more of a culture of "we're going to be very good at this particular thing on a time scale of a decade." There are some cases where that's true with FTX because some things are clearly part of our core business for a decade. But there are other things that we knew nothing about a year ago and all of a sudden we have to get good at. So I think there's been more adaptation. It's also a much more public-facing and customer-facing business than Jane Street is, which means that there are lots of things like PR that are much more central to what we're doing.
--:-- Dwarkesh Patel: In crypto, you're combining the exchange and the broker. They seem to have different incentives. The exchange wants to increase volume. The broker wants to better manage risk, maybe with less leverage. Do you feel that in the long run, these two can stay in the same entity given the conflict of interest or potential conflict of interest?
--:-- Sam Bankman-Fried: I think so. I think there is some extent to which they differ, but there are more senses in which they actually want the same thing. Harmonizing them can be really valuable. One goal is to provide a great customer experience. When you have two different entities with two completely different businesses, but every order has to go from one to the other, you're going to end up getting the least common denominator of the two as a customer. You're going to get only things that are supported as poorly as whichever of the two entities supports what you're doing most poorly. That makes it harder. By synchronizing them, it gives us much more ability to provide a great experience.
--:-- Dwarkesh Patel: How has living in the Bahamas impacted your opinion about the possibility of successful charter cities?
--:-- Sam Bankman-Fried: It's a good question. I think it's updated positively a little bit. I think we've built out a lot of things here and that's been hopefully impactful. It's made me feel like it is more doable than I previously would have thought. But it's also a lot of work. It's a large-scale project if you want to actually — and we have not built out a full city. We've built out some specific pieces of infrastructure that we needed. We've gotten a ton of support from the country and they've been very welcoming. There are a lot of great things here. This is way less of a project than just taking a giant empty plot of land and creating a city in it. That's way harder.
--:-- Dwarkesh Patel: How has having a RAM-skewed mind influenced the culture of FTX and its growth?
--:-- Sam Bankman-Fried: It's a good question. On the upside, we've been pretty good at adapting and pretty good at understanding what the important things are at any time. We've been good at training ourselves quickly to be good at those things, even if they look very different than what we were doing before. That's allowed us to focus a lot on product, to focus a lot on regulation and licensing, to focus a lot on customer experience, on branding, and a bunch of other things. Hopefully it means that we're able to take whatever situations come up and provide reasonable feedback about them and reasonable thoughts on what to do, rather than thinking more rigidly in terms of how previous situations were.
--:-- On the flip side, I think it means that I have to have a lot of people around me who will try and remember what the long-term important things are that might get lost day to day as we focus on things that pop up. It's important for me to take time periodically to step back and clear my mind a little bit and just think: "All right, let's try and just remember what the big picture is here. What are the most important things for us to be focusing on?"
