Conversation

SBF
@SBF_FTX
1) Yield Farming, Sushi, and Collective Imagination: The Emperor Has no Clothes
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SBF
@SBF_FTX
Replying to
@SBF_FTX
3) As I write this, one SUSHI is worth about $9. Which is a lot, really: SUSHI is, in the weird mystical ERC20 sense, a unicorn. So congrats
@NomiChef
!
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SBF
@SBF_FTX
4) And I know that most of you see SUSHI and you say "LOL that's gonna crash real hard". And it might. As we talk, it does sorta seem like maybe we passed peak SUSHI hype; SUSHI is "down" to $8. But I don't think it's as obvious as it seems.
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SBF
@SBF_FTX
5) Let's take a step back. What is yield farming, really? Well, here is yield farming, in its purest form: Take a token Y. You put Y in a Uniswap pool with USDC. Then each day, one Y is dropped on the holders of the pool token, 1 Y to 1 Y. So each day supply doubles.
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SBF
@SBF_FTX
6) Well if all I did was mint a token, and then each day mint more of it and pass it out to the token holders--no one would care (probably!). Anyone can mint many ERC20 tokens. The key here is the pool. And not because of the liquidity (!!!).
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SBF
@SBF_FTX
7) See everyone thinks that the key to vegetables is that AMMs provide liquidity in the vegetable. And it helps. But it's not really the main thing. AMMs do something way more powerful for vegetables. AMMs give Y a "price". And if you're lazy, that price doesn't change.
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SBF
@SBF_FTX
8) See here's the cool wacky fucked up thing. If you just dropped Y on Y, it would enter the pools, change the ratios, and the price of Y would drop, preserving market cap. But instead you drop Y _outside_. So the pool's too dumb to realize there are more Y's out there.
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SBF
@SBF_FTX
9) So as you hyperinflate the supply of Y, if no one clicks anything ever, Y's price in the AMM stays the same -- and so the market cap hyperinflates. Now who cares you ask? People could always change that price! But for one moment--one glorious moment--Y is a unicorn.
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SBF
@SBF_FTX
10) It's a really cute slight of hand, and I don't think it was originally intentional. But framings matter. And if you put a hyperinflating coin in an AMM, each round of yield starts by increasing its market cap. Yield printer go brrrrrrrrr
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SBF
@SBF_FTX
11) And this all seems ridiculous! Except. Why is BTC the most valuable coin, and not BCH, or ETH, or DOT? Is it because of its unique design? Maybe. But really, BTC is worth $220B because it trades at $12k. And it trades at $12k because we all agree it does.
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SBF
@SBF_FTX
12) I mean, also, at this point BTC has built in advantages: apps that support it, and buy-in from some institutions, etc. But if we all woke up one day feeling like maybe BTC was worth $1k, and someone all exchanges cleared all orderbooks....
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SBF
@SBF_FTX
13) ....then bids would be around $900 and offers around $1100. And so BTC would be worth $1k. And maybe we all decided that BCH took its place, or XTZ, who knows. Coins are what we agree they are.
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SBF
@SBF_FTX
14) And in some sense, so are blockchains. I mean that's what a consensus is. Normally this is pretty straightforward. For BTC, you take the longest valid chain, and that's real. And if you mine another block you mine on that chain.
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SBF
@SBF_FTX
15) But what if, one day, all the miners woke up and said "eh you know what fuck the last 100 blocks, those were stupid". So all of their machines turn back 100 blocks, and start mining from there. Blockchains are what we think they are.
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SBF
@SBF_FTX
16) As are so many things in life. Some things have direct physical value. To some extent--to a very real extent--everything else is what we all make of it. Most value in the world is born from and sustained by our collective imagination.
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SBF
@SBF_FTX
17) And so we return to our yield farm, piles of Y dropped on top of each other. What is Y worth? Well, let's say it was trading at $1. Then comes the yield, and there are twice as many of it. What's it worth now? Well, you look at the AMM, and... looks like about $1.
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SBF
@SBF_FTX
18) And it's not just you, it's everyone. Everyone still sees $1. And maybe it "should" be $0.50 now. But it's not like $1 was any more blessed before than it is now. And just because a token was worth something doesn't constrain what it can be now.
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SBF
@SBF_FTX
19) Sure, hyperinflation, whatever. I looked at the pool and the pool told me $1. Even
@coingecko
agreed! So $1 it is, and the market cap of Y doubles. Yield go brrrrrrrr
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SBF
@SBF_FTX
20) The whole point of Y is that it's designed to tickle our collective imagination into thinking it's worth $1 post-split. And it does, and we do, and so it is. But now, also, we're all richer, out of thin air. Well we can't _sell_ those riches, not withing crashing them.
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SBF
@SBF_FTX
21) But we can hold them, and as long as we all have strong hands we stay rich. But the world has no more bread, or houses, than it did before. We got more of them, at the expense of everyone who agrees that Y is still worth $1 but doesn't have any.
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SBF
@SBF_FTX
22) And what Y shows is that some of our deep beliefs about what has value were never more than an implicit agreement never to doubt it too much. Because when you do, sometimes, everything is exposed.
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SBF
@SBF_FTX
23) So anyway, a few days ago a master chef cooked us all up a platter of pure yield. And in doing so, he taught us a few lessons about ourselves.
Image
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SBF
@SBF_FTX
24) First, he taught us that if we all believe a coin is worth a billion dollars, then maybe it is, at least for a day. But he taught us something else, too. See we divide the world up, into vegetables and blue chip projects.
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SBF
@SBF_FTX
25) Vegetables are empty, and projects are in it for the long term. But maybe sometimes those gatekeepers of our ecosystem were made out of our collective imagination. And when some yield shows up, and our belief flickers from one pool to another...
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