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SBF
@SBF_FTX
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@SBF_FTX
2) NOT INVESTMENT ADVICE For the sake of this thread, I'm going to ignore uses like "you can buy tokens and maybe they'll go up". Instead I'll focus on three: a) payments b) market structure c) social media
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SBF
@SBF_FTX
3) Let's start with payments, both domestic and international.
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@SBF_FTX
4) Here are some bad things. a) Let's say you go to a store and buy some stuff--you know, bread and bananas and boogie boards. You go to check out; your goal is to transfer $123.81 to the cashier standing three feet from you.
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SBF
@SBF_FTX
5) Years ago, this was a bit of a hassle; you had to go fish out bills and coins and make change and stuff. But now we have the internet! And so instead all you do is swipe your credit card... ...and pay ~1% of every purchase you make as a fee.
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@SBF_FTX
6) b) You want to send money back home to a relative in Brazil. You... walk to a physical Western Union store, I guess? Or maybe use some app, figure out how to load money on to it, and then send it... ...to your relative who doesn't have a bank, let alone USD?
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@SBF_FTX
7) In general remittances are *hard*. People regularly lose 10%+ on their transfers (!!!); it can take a week; and you run the risk of funds not getting there in the first place.
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@SBF_FTX
8) c) A US business wants to send 100m to a European business. So you initiate a wire transfer. A day later, your bank sends it out. Over the next week, 3 other banks touch that wire transfer, and sometimes it gets stuck in the middle, waiting for you to rescue it somehow.
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@SBF_FTX
9) Oh, and you pay 1% in FX fees, plus $50 in wire transfer fees. d) You are living paycheck to paycheck, and get an overdraft fee. You are surprised, and investigate why. It turns out your paycheck takes 4 days to deposit, your cash won't hit until the next business day.
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SBF
@SBF_FTX
10) Meanwhile your credit card just batched together a few weeks of expenses and deducted them from your account, and your landlord finally cashed a check from a few weeks ago. So all your deposits are pending and all your withdrawals just hit.
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SBF
@SBF_FTX
11) The moral of the story is: payments are hard. There are many reasons for this, but they all circle around the same core problem: What, exactly, does it mean to send someone money? What does it mean for that money to "settle"?
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SBF
@SBF_FTX
12) ACH and credit card transfers can take a day to a month to take effect. And then for the next month, they can, maybe, be recalled. (Even if there's no reason!) There's no way to send USD to a non-US bank unless they are whitelabeling one; there are tons of intermediaries.
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SBF
@SBF_FTX
13) So, how does blockchain help this? Well, for every one of these scenarios, you could replace them with: a) Bob creates a wallet b) Alice creates a wallet c) Bob sends the assets to Alice's address
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@SBF_FTX
16) Blockchains allow anyone to create a wallet and use it to send and receive tokens--including USD pegged stablecoins. Those payments take seconds to process, cost fractions of a penny, and are finalized in less than a minute. No long wait, no account balance uncertainty.
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@SBF_FTX
17) Ok, so how about market structure? On January 28th 2021, most major retail brokers shut down. Users were unable to buy; sometimes they were unable to sell, too. And on some platforms users got liquidated. The weird thing is that there was basically no leverage!
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@SBF_FTX
18) This was, of course, the day that Gamestop, AMC, and other memestocks skyrocketed. Why were users shut off? It wasn't because of leverage: users tried to deposit $50 to buy $25 of stock, and were denied. And it wasn't because stocks were "out of stock" or anything.
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SBF
@SBF_FTX
19) Instead, the system broke down because of settlement risk. See, when the typical retail trader tries to buy a share of AAPL, they don't send an order to a stock exchange. Instead, they send an order to a stock _broker_, like Robinhood or Schwab. (Or, now, FTX US!)
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@SBF_FTX
20) The dollars they send in are routed to the broker's bank account. Their order is in turn routed to a PFOF firm, like Citadel or Virtu. That firm, in turn, might buy the stock on an ATS from another trading firm, which would finally bid on NASDAQ, or NYSE.
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@SBF_FTX
21) And then, two days later (!!!), comes settlement time. The share of AAPL is settled through the DTCC via something like: NASDAQ --> PFOF#2's clearing firm --> ATS --> PFOF#1's clearing firm --> broker's clearing firm, with the DTCC in between every transfer.
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SBF
@SBF_FTX
22) Meanwhile, the dollars used to purchase the stock flow through banks. So in order for your friend to buy one share of AAPL, 11 different entities have to settle with each other over the next few days in 10 payments. And in theory, _any one of those settlements could fail_.
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@SBF_FTX
23) And on January 28th 2021, there was a lot of retail trading volume. Which meant tens (hundreds?) of billions of dollars of pending settlements between tens of counterparties which would take days. As GME rose in price, so did the potential loss if settlement failed.
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SBF
@SBF_FTX
24) And eventually that risk got too big for the brokers, which had to partially shut down. How does crypto help this? Well, first of all, with a full stack product, settlement is way simpler. Here's what it takes to buy and settle on ftx.com/trade/BTC/USD:
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@SBF_FTX
25) On FTX, everyone can send orders straight to the exchange; in equities, only the wealthiest traders can. Which means you can bypass all of the settlement risk from intermediaries. But there's another reason that blockchain helps.
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@SBF_FTX
26) Say you tokenize stocks. Instead of waiting 2 days to settle, you can just swap AAPL-token <> USD-token on a blockchain. Which, remember, takes about 10 seconds and costs about $0.0002 in fees. No remaining settlement uncertainty or risk.
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28) So how about social media? Right now, if you tweet something, and your friend pulls out Facebook, they can’t see your tweet. Social media networks are isolated, not interoperable.
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@SBF_FTX
29) This means that everyone has to manage 10 different apps, and our networks and conversations are fractured. In addition, all of your network, and friends, and data, are tied to a specific platform.
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@SBF_FTX
30) The largest networks have pseudo-monopolies, with gigantic network effects that prevent new competitors. And how does censorship work? Well, basically, the leaders of the top few social networks have to make unilateral decisions.
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SBF
@SBF_FTX
31) Let’s say that, instead, we put messages on a blockchain. So if you used Blockchain-Twitter (BT): --You type the message in BT’s interface --BT posts the message on a public blockchain --Your friend pulls out Blockchain-Facebook (BF) --BF reads your message and displays it
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