Crypto’s 2001 Moment: How Bad Will This Get? | Avichal Garg & Haseeb Qureshi

Transcript

this episode is brought to you by Circle the issuer of usdc which hopefully as you all know is the preferred stable coin of digital Natives and crypto natives with over 1.5 million holders globally you'll hear more about usdc later in the show uh all right all right everyone uh welcome back to another episode of Empire I'm gonna time stamp this episode just because things are so fluid and moving so quickly so we're recording this Friday November 11th it's 11 20. uh Eastern Stephen vichel woke up early on the west coast for this one so appreciate it guys we've got a virtual Garg and haseeb from dragonfly uh eventually runs electric um guys I I I so many places that we could go with this episode in this

conversation I think I want to start with um your guys's take on like ft just FTX and Alameda and basically like how much of this did you guys know as like large crypto investors how much of this how much of this did you know in terms of like alameda's incredibly ruthless like FTX this exchange obviously you had no idea they were co-mingling funds no nobody knew that but like how how much of it was like knowledge already that Alameda was just like this ruthless trading firm maybe haseeb can I start with you there yeah yeah I think this has been known for a long time among people in the crypto industry um there are some pretty Infamous stories I mean you know it was well known it was part of the same mythology

that he he got to start as a Trader you know there's a whole story about the Japanese Yen uh Arbitrage you know everybody everybody loves this story about how he's such a genius and how he's such a great Trader um and Alameda was the element is what came before FDX and when FTX was originally raising their seed round the story was that okay this trading firm this very successful trading firm is going to start an exchange and that was seen as being kinda suspect because generally speaking like a trading firm and an exchange um they should not have a relationship right because there's always a worry you know traditional exchanges don't have a market making arm or don't have a trading firm associated with them because there's a worry that the trading firm might be

um might be advantaged in some way they might be able to trade on God mode they might have an unfair advantage on the exchange um and in the very early days of Alameda a lot of counterparties did not want to trade on after GX because they always worried that does element have some Advantage is there something Shady going on now when FDX really grew like in 2021 a lot of people were like okay no it's fine at this point right they have institutional money they're growing really big at this point it doesn't really make sense that FTX would be doing anything that is untoward with respect to you know how they're running their order books and so people were mostly okay with it but the the presence of Alameda behind FTX was always a bit weird right because although FTX was so was considered to be a very

institutional brand it was really get you know gaining a lot of popularity and and Retail awareness um Alameda was known as being one of the most Cutthroat trading firms in crypto right uh it's kind of an Open Secret that a lot of the big exchanges have Market making arms right the Kraken at a famous marketing arm of course uh binance is a big Market making team you've never heard of any of them they don't have names they don't they're not public they don't talk about what they do um because they're only really there to try to make the exchange more liquid um Alameda was legendary for being absolutely ruthless and mercenary right and it was very strange of course the relationship even between fgx and Alameda because back last year before FTX Ventures came into existence Alameda was doing Venture deals for FTX but not

explicitly and and you know there was this famous story with refinance where Alameda you know invested into some I don't remember what they were some defy protocol um and they were shorting their token and dumping it and doing all this you know Market manipulation stuff uh and um and this is kind of what they were known for they were Traders and if you if you give money to a trading firm they're going to trade your token uh and and they were they were making so much money off of farming off of doing these Venture deals on these uh illiquid tokens and um uh Levering them up using them as collateral or just outright dumping them the moment that they were able to and that's a lot of how they made their money last year was on the association between Alameda and FTS so to me I think

most people in the industry knew this like last year we lost deals to Alameda which to us was like what how is Alameda winning deals for us but the answer was because they were they were considered to be the Venture arm of FTX until you know Sam uh decided to separate that out and make it FTX Ventures well I was just going to say there's always this question of like is is FTX in service of uh Alameda or Alameda in service of FTX and I think the way to see put it was right which was you know for most of the exchanges even if you have a market making arm the market making you know the trading arm of it is in service of making the exchange more successful and I think you know what what's slowly coming out here it appears that with FTX there was

the reverse right like FTX was really propping up Alameda after they experienced some very significant losses entirely you know possibly because Alameda was just making so much more money than FDX I mean they're just such a profitable you know if you kind of run the exchange numbers I mean I think people have been talking about this it's just it almost didn't make sense how much money they had you know just based on their Core Business um and so that money had to be coming through Alameda right through through their through their trading arm and so in some sense I'm not saying is valid but like you can see how a group of people if you think of these things as two business units of course you would try to make the more successful business unit even more successful to try to prevent it from falling over so you can

kind of see how they would have rationalized some some pretty terrible Behavior if that were actually the case when you what does it mean to be a ruthless when you think about like Alameda It's like because if you said they they had this reputation of being like just incredibly ruthless like what does that actually mean in practice here there is this famous story uh that people have been bringing up lately I think since 2019 when CZ accused Alameda or or Sam personally of uh Market manipulation of basically trying to engineer um a dislocation in the spot markets uh to it basically you know kind of cause uh purpose to get knocked over I don't know what the what the coin was but it was something you know some random coin that they were trying to manipulate

um I don't know if that's true and it's a bit of speculation uh exactly what happened um there was also this famous story about neutrino uh which was the stable coin on waves that again it was accused that Alameda was uh which I believe was an investor um went in and tried to de-pag neutrino in order to make some money now again all these are speculation I don't know we don't know any of the details and I'm sure now that they are going through bankruptcy uh which was just announced this morning that FTX FTX us and elementa are all filed for bankruptcy um there's a lot more that we are going to learn about what exactly did they do and and what if there were illegal or unethical acts that were committed um not just in the progress not just in the process of the dissolution of FTX

but you know over the last several years all that stuff is going to end up coming out as people go through the tangle of assets that were held by Alameda and by FTX um it's CR it's very clear that they had their hands in tons and tons of pots and you know when we we would occasionally speak to folks who would come out of Alameda um who were looking for a job and you know they were just like okay I like did my time at Alameda Alameda was considered to be a prestigious place to work um but as far as we could tell they didn't pay very well um so you know it was kind of the principle at Alameda who are making all the money and it was considered almost everybody who left Alameda and who would tell us about it would tell us that it was an absolute [ __ ]

show it was incredibly disorganized there was very little discipline um and uh it was it was basically run by kids and of course it was they were very good at what they did but it was a very they made all their money you know eventually especially last year doing decent stuff they made all their money yield farming they made all their money you know uh collapsing uh uh collapsing structures that they knew that they could profit from and uh if that's if that's the name of the game and you're the biggest player out there there's a lot of stuff you can do that no one else can do or that no one else has a stomach to do and that was that was elementa's Mo it seems to be that that's the way they made most of their money yeah do you of

each other do you think that FTX and Alameda were in fact actually pretty disconnected and then what happened here is uh they got on the wrong side of a big trade or just wrong yeah I guess wrong side of a trade is probably maybe the right way to say it with with Luna and Tara and like when basically when three arrows and Luna and Tara and all that stuff blew up they were on the wrong side of that Sam said oh [ __ ] uh let me move some some customer funds from like do you think that was what kicked this off or do you think this goes deeper than that I I suspect that's what kicked this whole thing off the challenge now is you know the the reasonable assumption like from an ethical perspective would have been to say these are these are separate

entities yes there's there's some overlap in terms of management or Founders or whatever but we treat them separately you know no information goes from one to the other no funds can go from one of the other the accounts are segregated you know we would never touch user funds like those are all the things that you know if you were to do this and it's already a little bit as the thee was saying it's a little bit dubious that you would run a trading operation and a venture firm and an exchange because it creates it can create misalignments um but suppose you you're able to you know organizationally set that up such that that there are these separations the problem with that is that's what they've claimed but given given what they did it really cast out on whether that's that's actually what was happening right like if it were the case

that that is how they were operating it's it's very very like given what they did it's very likely that that is actually not how they were operated right like given this prior that we now have about their behavior and kind of what they did with user funds and how they how they chose to operate here I think it's entirely likely that actually there there was a lot more connectivity there than they would have led anybody to believe as a three or six or 12 months ago and and I don't fault uh I don't think this is on the employees or the or the investors or anything like that I think it's you know with with that small in operation it's entirely possible that it was you know five to ten people who were fully in the know and and that was the sort of connectivity between these organizations

and that in and of itself may have been extremely improper I I honestly I I personally think it's unlikely like it's you can't pass an audit if you're doing this kind of [ __ ] right like there's there's absolutely no way that they received almost a billion dollars of capital without audited financials like there's just no one I don't know I don't know man you cannot get that you should pass an auditor I yeah but but they don't have a board yeah I mean look I I think you can take money like wvc's but like is no I mean if you take money from BlackRock if you take money from Tomasek I think you I I if you go back they may have had already I think I remember seeing a tweet that was like audit

financials as of 2020 which they produced like or you know like earlier this year or something so they were going back and doing it so I suspect that the time that they received the funds that the audience is that right completed yeah I I I don't call me on that but I'm pretty sure I saw that flow by because I think I don't think they've completed like last year's audits yet or something but but I I think I mean what you're getting on to see if I think the macro point is kind of an interesting one right which is in a normal situation in normal times if you had a company you know raising at 20 billion 30 billion 40 billion and raising hundreds of millions of dollars raising a total I think they raised a total of 1.7 dollars um with those kinds of dollar amounts

you would see a board you would see a CFO you would see corporate governance you would see diligence you would see audited financials like you would see all these things and and it doesn't appear that many of those things were in place which really to me like like what you're saying sounds very reasonable to me like there should be audited financials but like given where we are and and given like you know the lack of a board and lack of oversight and lack of governance and all these things it makes me wonder like it's entirely possible that people gave them 1.7 billion dollars with like no audited financials I I I agree I think it is possible I I think on a broader level it does seem to me unlikely like so one thing that's clear right is that Alameda owned a huge amount of ftt

and they also owned a huge amount of the Solana ecosystem assets right so there was clearly connectivity not necessarily in terms of okay FTX was sending money to Alameda but there was clearly a situation in which elementa was benefiting from their position in knowing that FTX is growing and FTX is going to make certain assets more valuable and FTX is going to ensure that the assets on the balance sheet of Alameda are going to be valuable namely ftt which became their collateral that they were holding with all these different lenders um and so honestly I don't think they needed to do anything right I don't think they needed to go into customer funds I don't think they needed anything they killed it last year yeah to be to be clear I'm not suggesting that they were that they were using user funds prior but even that information sharing

is extremely improper right to your earlier point right like if you're trading against your clients if you're shorting the tokens of the of the companies that you've invested in like all that that sort of stuff would not even show up even if you grant that there might have been an audit that may just never show up on an audit and that sort of behavior I think you would you know it would be done between five to ten people and they could get away with it for a long time here's uh I brought this up eventually before we we started recording here but one of my uh like some something doesn't feel like it's adding up with the money and it seems like no they were just printing cash here but like you know Sam invested 500 million dollars into Sequoia he was buying you know he bought

what 200 300 400 million dollars of property in the Bahamas uh he was they were using cash to buy some of these lenders like that is a just an absurd amount of money right like that is a remarkable amount of capital was do you think of Alameda was just printing this much money and is that is that possible that that's my guess that I I mean we'll see um it's you know but who knows right like I and I don't want to speculate but given given the outright uh fraud and appropriation of customer funds and and you know lying that's happened you know anything's possible but my understanding along the way was it was just that Alameda was printing so much

money for for one to two years there and as Steve's earlier point that if the principles were the ones taking it all you know could you imagine them pulling a couple hundred million out um that doesn't seem that doesn't seem crazy to me given given the volumes that they were doing well to be clear it's also likely that um there were some comment that was sold in some of these rounds just because they had the leverage I mean there's so many people wanted FTX Equity that there's a good chance that he sold some of his Equity there's also a good chance that he just borrowed against it I mean Sam was Again Sam was considered to be this unassailable Golden Child of the industry also really trivial for him to borrow against his FTX equity yeah I think that's a good call out too it's

entirely possible that's what he did why would companies take Venture investments from Alameda or or even from FTX Ventures like if they if I if I was a founder and I was in if I was building a protocol and I knew I was gonna have a token as well and you're like okay here you can go take money from like electric and dragonfly and all these amazing VC funds that are really going to help me out or I can go take Venture money from like this ruthless Market maker that's gonna like pick me off at the first sight of weakness like why is it because then they could get liquid on an on a big exchange and like you've got this brand name behind you is that is that yeah I think there are two yeah I think there are two you remember last year oh

go ahead yeah I I I think um there are two reasons one is uh I think the association with FTX The Hope was that that would get you at the very least some sort of relationship you know and and exchange listings and liquidity are are you know thing that that people care about um and I think this was more common internationally less less so in the US because the ft xus FTX International sort of bifurcation the other is there are many protocols that do need market makers and they do need liquidity um and so from that perspective having somebody who really understands that stuff on your cap table you can talk to or having them involved um you know to potentially offer those kinds of services in your ecosystem I

think can can make sense from a Founder's perspective um and so I think there were there were definitely reasonable rationalizations and then it's really a question of like how do you size that you know if you're letting them in for 250k or 500k or something like that you know that that to me is not crazy from a Founder perspective if you want that sort of perspective on your cap table but by the way this happens with other trading firms too yeah I think exchanges yeah 100 uh I think it's uh a lot of it was an artifact of what it looked like what it felt like last year that FTX was this rising star people believed at that time that FTX was going to overtake binance they were growing market share like crazy everything that listed on FTX went up Sam would just you know he was the man of the year

um everything that he touched turned into gold and so if you could get Sam on your side if you could enter into this this the Zeitgeist of Sam coins um then it was it was up only for you and uh Alameda of course was was basically profiting on this ambiguity of their relationship to FTX and then eventually I think really what happened was that after Alameda sullied their reputation with all of these predatory stuff that they were doing um Sam basically said okay you know what let's stop doing the Venture deals through Alameda let's now start doing the Venture deals through FTX it's the same team same team moved over you know it was the same guys who were doing all these Venture deals um they added a couple more people after they became FDX Ventures um but they just changed the name and now

it's FTX Ventures and FTX Ventures is we're friendly we're you know we're not Traders and so it's totally okay um nfgx Adventures kind of dropped the Alameda brand as it started to look worse and going through this brand new brand even though it was the exact same people and the exact same relationship with FTX um and I thought it was I thought it was a brilliant move um but you know obviously very mercenary in the the realization of what was happening with with Alameda that said you know last year and it's to do with the bull market you had the same thing from everyone which is that uh Alameda or all the market making firms realized that they can't do enough market neutral stuff anymore right Sam originally made his money you know the whole story about

this Japanese Yen Arbitrage Loop um which is a it's a great story um but you can you cannot do that for size right you cannot you cannot do that on billions of dollars there's just there just isn't enough size out there to be able to deploy that kinds of capital into marketing neutral strategies and so when you get too big you have to become structurally long there is no way to be Market neutral if you're that big and that's what happened last year is you had three arrows you had Alameda you had jump you had all these Market making firms that originally were doing Market neutral strategies have to become structurally long and the best way to be structurally long is venture that's why they all got into venture and um and they and again at that time it

was like okay these these Market making firms they can do not wrong and people didn't really understand the difference between a market making firm and a Trader and a VC and people understand that now and they can see in the trail of blood behind all these guys why Market making firms are very different from actual Venture capitalists all right everyone time for a quick word from Circle and uscc as a crypto user you know the power of stable coins dollar digital currencies that transcend borders banking hours and Legacy Financial rails while circles usdc has quickly become one of the most trusted and widely used stable coins it's simple people use usdc because of its composability its stability and its

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the growing ecosystem of crypto apps as a seamless trusted dollar digital currency usdc is a zero to one opportunity for the financial system if you want to learn more about usdc I would recommend you check out the recently published transparency Hub on circle.com it's a great update to circles content on usdc it outlines everything from links to their weekly Reserve reports monthly attestations blog posts that are written by their exact team that highlight how and why usdc was built so it is really recommend it just go to circle.com backslash transparency to access it now let's get back to the show foreign one thing I've been thinking about about a lot this week is why have we heard the

story of Sam's uh the Arbitrage the 2017 Arbitrage play like when you hear something like that like a Founder share that story so one founder share one story so much there's a reason behind it right there's a reason behind why someone pushes a narrative it just clicked for me it seemed the reason that he pushed that narrative so much is because I had in my head that Alameda was a market making firm not a directional hedge fund not a directional fund and that was the biggest surprise to me I knew they were ruthless I knew they were huge what I didn't know is when uh Ian Allison from coindesk got that got their balance sheet I didn't know that their portfolio looked like a bunch of my buddies who are like retail Traders like a d gen

Solana portfolio out here I was like oh yes are you serious like this is your portfolio this is remarkable this is reckless yeah if you want exposure here at scale you have to be structurally long and and the more d-gen you are um you know more that you think you can get out of those positions quickly when the market starts to go against you when we go into one of these bear cycles and it starts to unravel that's just going to work against you right and that's exactly it's going to implode like with that much Capital being you know trying to be liquid trying to be structurally long in the most Degen stuff and then everybody runs for the exits like it's going to implode yeah why um why is no one else talking about the fact that all

these other exchanges it's not like all these other exchanges are like oh yeah they don't have the market making teams anymore they still all have the market making teams they're all still running Market making teams like is this something that's just gonna like quietly keep happening I don't know I mean it's again for for a lot of these exchanges I mean there's they're they're overseas they're not regulated in the U.S like nobody in the US is doing that to be clear because that is super uh not okay from us Regulators um but these Global exchanges like you know if you're headquartered in the Bahamas or you're headquartered in uh uh you know Malta or in Dubai or whatever um as far as I know there's there's nothing illegal about it and so uh now you cannot trade against your customer you know you can't there's all sorts of

stuff that you're not allowed to do um but in principle you know everybody knew in the early days of FTX that Alameda was trading there and that Alameda was in fact I mean this this was well known as part of the reason why in the early days FTX got any traction at all FTX in the beginning was not a retail exchange no retail had even heard of FDX right the only people who knew FTX were people who knew Alameda and who knew Alameda but other trading firms so it was actually trading firms it was market makers that were the original customers of FTX in the very early days and the reason why they were trading there was because the prices on FTX were tighter than anywhere else now why was that happening why were the price on FTX tighter than everywhere else is because people knew that Alameda

was intentionally quoting tighter than they should in order to attract volume and so market makers would come on FTX because the fees were super low it was a really fast exchange so it was easy to hedge and kind of you know basically kind of almost like a way for just dealers to settle amongst each other um and because Alameda was creating arbitrages for other people to pick up and it was it was it was known that that was happening because there's no reason why the exchange with no retail should be quoting tighter prices anywhere else the only reason that's happening is that somebody is intentionally quoting too tight that was the story in the early days of Alabama and it was a successful strategy it got all the market makers to come on Alameda or start to come on FTX to trade with elementa now some people were like

look I don't trust it because it feels like a trap feels like maybe FTX is kind of laying these little you know our booby traps and they're front running out so they're doing all sorts of other shadiness but a lot of people were there and they said no that's fine FDX is doing this uh doing this as a loss leader to try to keep the prices tighter on uh FTX and to be clear that's what a lot of Market making shops within exchanges are supposed to be doing is they're supposed to be providing liquidity when when Market participants are not willing to in order to make it a better experience for customers and um that uh in some ways it's a it's a valid strategy as a startup um but the the way in which Alameda profited off of everything that FTX and the Sam empire were doing that was what

was exceptional that was what was very different than what any other Market making shop at binance or whatever uh do so um that that I think is the distinction is is as uh are you doing this in service of your exchange or are you doing this to try to make money yeah uh a lot of the market making operations that exchanges don't make money hmm I want to take us into like today basically and like into into this week I think the biggest uh the like obvious risk that people are talking about right now is um uh a like basically any like C5 platform like other like the like uh big lenders or big uh big other centralized uh exchanges especially the offshore ones people are worried about and people are saying you know move into something that

feels more secure like a coinbase or you know move into like put your put your coin on a ledger or something like that what are some of the things that you guys are thinking about inside of electric and dragonfly that you think maybe other folks aren't thinking about yet that they should be thinking about a vitro can I throw that question to you sure yeah I think the big one on our mind right now is how does this all unravel you know we just don't know what the second order effects are yet I think that's going to take a few weeks to a few months to really see and so you know we're Fielding calls from startups that had assets sitting on FTX um you know we uh you know I think you know we just don't know beyond the block flies of the world or the Genesis of the

world what happens here um and I think that's going to take a while to play out um and and the reason I think that's really important is because that is going to tell us who the ultimate victims of this really are like who's left holding the bag when you have this much leverage floating around and who you know who who ultimately has to eat these losses um and until we know that it's you know just we just don't know what the value of some of these aspects to be um I think that's just going to take some time to play out the other thing we've been thinking about is the regulatory because I think what this is going to do is this is going to arm people who are going to say hey look crypto is terrible it needs regulation not realizing that it wasn't the FTX U.S

folks that were doing this it was the offshore folks um you know the impropriety was happening out out outside of the U.S regulatory regime and the reason that that has happened is that the lack of clarity in the U.S has really pushed um so many people offshore that you've created these dark markets um and and so you know it's actually the consequence of of opaque and bad regulation and regulation by enforcement that has created this this environment that has sort of pushed it in this direction you know if you look at kind of how FTX was operating in many ways they were at an advantage to coinbase like coinbase which is following the rules in the United States and not doing these kinds of things operates at a significant disadvantage which which in a bull market shows up in your growth

rates and it shows up in your volume and of course in a bear Market you know you implode um or you can implode but I I worry that Regulators might actually learn the wrong lessons here when the right lessons are actually defy and transparency and auditability like these are the kinds of things that we should be pushing towards uh and so I worry about the sort of recoil that we may have away from crypto even though actually many of the Technologies in this space are actually the solution to exactly this problem hmm let's see what do you what do you what do you think here on the before getting into the regulatory side and the default because I fully agree with you guys it's like you know you know what worked really well through all this is like uniswap and Ave and compound and those have worked phenomenally through

all this I want to maybe close with that actually but let's see what else what else are you looking at at on the uh the contagion side of things like maybe are there any areas that you're like oh my god like people should really be focused on this and like they're all the eyes are over here but like it should be over here yeah I mean the the main answer so there are a lot of people who are scared right now about tether and about uscc and I think I I mean look I don't know what I don't know but I think those are not the places that you should be worried um those guys are very very well capitalized they have tons of money and they can absorb a loss even if they lost some funds at FTX um it's uh it's the I mean so a lot of trading firms a lot

of Market making firms almost certainly had capital on FTX they're going to get hit that's going to be a big blow to liquidity uh because you know the huge amount if you're a trading firm you have to be liquid on different exchanges that's that's how it works um and so all the trading firms you should expect to have lost money uh the big the big the big one is Genesis and if Genesis blows everything is down so those who don't know Genesis is big is the biggest lender in crypto they're a huge institutional uh lender run by uh owned by dcg and uh it was uh apparently this morning dcg stepped in to backstop Genesis but last night I was hearing a lot of rumors that Genesis was insolving um now I don't know if that is actually correct and it looks like genesis is one

of those things that um you know FTX uh it was a real question of how much people would step up to save it uh just to backstop the industry Genesis to me feels like especially especially after yesterday with the inflation print uh with the market feeling you know some legs again that um I think people I think people would have stepped up to save Genesis because if Genesis goes everything in C5 goes like that is the kind of central choke point that would have taken almost everything down because Genesis is almost everybody in the industry as a counterparty well I wonder actually to see if the the fact that dcg had to step up was actually an indication that others were not willing to step up I I think that the so what I heard is

that dcg stepped up for 130 million um that seems like an amount of money that if they couldn't produce it they could have they could have raised uh I think just their counterparties alone would have tripped in enough money to save them uh so I I actually think if that's the size of the hole Genesis would have been okay if it was bigger than that then it would have been a lot worse um you remember you know in um uh when when three arrows went down you know everybody announced oh we're fine we have no exposure and it was much later that we learned that the whole in Genesis was a billion dollars and so a lot of people were really scared that okay they showed a strong face during three arrows and they seem to have underplayed exactly how much damage they were dealt at that time

[Music] um everybody was worried that they hadn't learned their lesson and that the LA you know why did everybody have so much exposure to three arrows during that Saga the answer was that when rates were going down the only people willing to pay high rates was three arrows and so if you wanted to be able to be competitive as a lender you needed to give as much money as possible to the most credit worthy person who's willing to pay high rates which was three hours now that was Alameda and so the fear was that that's where all the money was going that's where everybody was lending to um and that when you actually uncover the loan books it's not that everybody learned their lesson but rather that everybody went to the next most institutional borrower which was

elementa now it seems like that didn't actually happen right so Genesis announced that when they when they liquidated their counterparties um they had seven million dollars in losses in in uh liquidating their collateral um that is really not bad very very not bad um and it seems to indicate and this is what we've heard from a bunch of lenders is that actually their exposure to Alameda was very low because of the fact that everybody did learn the lesson of what the hell is this ftt [ __ ] like this this thing is not this thing is not high quality collateral all the Risk Managers got fired after three arrows and they brought in people with more experience and who weren't uh married to the way in which risk management was done pre-three arrows and they were like okay we have to lower our exposure to

this because no single person is going to be that uh robust in uh you know a real downturn scenario and so I think actually what happened my suspicion is that the lenders actually did wise up and lower their exposure to Alameda which is why Alameda had to go to FTX is because nobody else was willing to lend to them against their shitty collateral the only person willing to do that became FDX and that's my suspicion is that that's why this is where this is where the Acquisitions too of Someone Like a Block fight and a voyager come into the story too yeah that's the speculation right the speculation is that the last piggy banks that Alameda had were Voyager and blockfi and a voyager in blockfi blue then they were going to have to liquidate the ftt

collateral that they held which was uh not you know it was not liquid and there was no market for it um and that was also going to expose the web of relationships that Alameda had which was not going to look good for them yeah and so if they bought them out then they could continue the they can't continue the thing going that's the speculation again we don't know what we don't know um but we we got a message say I I have no idea if this is true or not this is all specular a lot of rumors floating around obviously but we've got a rumor today that uh part of the um part of the line of credit for the FTX block by deal was contingent upon block by moving off of I think they use like Gemini a combination of like Gemini and bitco as custodians like these great

custodians moving to FTX for custody oh geez so technology total total rumors I'm just saying like this is 100 rumors so yeah yeah but yeah um are you guys worried about any other like these kind of maybe other offshore exchanges like tier two tier three exchanges other other lenders like there's still some companies floating around where I'm like oh man like that all right yeah I mean the the thing that's scary about these situations is that um that you hear about the people who are fine first it's easy for them to raise their hands I have no exposure I only have a few million I'm okay you know don't yeah yeah we're all good don't pull your money

um it's the people who are actually in trouble who are quiet right now and who are scrambling behind the scenes trying to figure out what can they get out what can they do is there some way they can fill the hole can they get a loan can they so um it's it's scary because of the fact that uh we're gonna find out soon who was really hurt and the same thing happened with Rios is that there was the obvious stuff right away and then there's less obvious stuff that shows up later um that's what that's what worries me I you know I've heard that kucoin is is in trouble um there are a few other exchanges that seem to have issues but for the most part I mean the reality is most exchanges don't do this [ __ ] uh most exchanges uh they they understand how to run an

exchange business which is that you leave the funds where they are well there's supposed to be on chain in a cold wallet there's a third order effect here right which is that you know if FTX is the first order the second order is that people had assets on FTX or they were somehow tied up and had left money to Alameda and then the third order is as soon as you you say that and you say hey look you know we we had 200 million or 300 million or 400 million there's some some large amount of money sitting over there then you have a bank run on your own exchange or you have a bank run on your own lending product so the third order effect is you now even though you could have absorbed the loss as soon as you admit that there was some exposure

there's a there's another bank run that happens which then Cascades and that's how these dominoes fall right it's like every in in these moments of illiquidity and and sort of like you're hitting up close to those marginal places where okay we'll be okay as long as everybody keeps their money here we'll earn it back that if everybody pulls their money then then you have another second order effect and a third order effect and then these dominoes sort of start to start to fall and that's what worries means we just don't know who's who's holding you know a 20 30 40 loss on their books right now and if that gets out is there another bank run and does that Bank Run sort of you know Domino into something else and and that I think is just going to take a couple months to play out yeah

um talking about D5 guys uh and eventually I know you have a hard stop coming up soon so we can we can think about wrapping this kind of soon but there's a couple things I want to get answers to one is um like tier one D5 is obviously fine right like it seems like you know again like I've mentioned this the unit swap saves compounds makers of the world operating great this is they're like a shining light through all of this again what's the impact on maybe some of the smaller protocols maybe some of the five to ten person startups they raised a series a maybe they raised a seed round had any of them like I guess there's like a hodgepodge of questions here like had any of them given tokens to Alameda and FTX to like hold for them or to like Market make for them or uh

what's the like structural impact on maybe some of the smaller like D5 protocols as well um I I don't know it's like an open-ended question here but let's see if I'll throw that to you it's too early to say right now we don't again we don't know how this is going to play out elevated just filed for bankruptcy and um we've been hearing that they were paying people back and doing all these um uh paying back loans and doing all sorts of stuff which uh some of it might end up getting reversed in a bankruptcy um so very often if you if you know that you're going into bankruptcy you're not allowed to be settling debts or to be paying people back unless it's basically the ordinary course of business or you know that you're doing it for fair market value um just because of the fact that in a

bankruptcy there is a very strict ordering to how people can get paid out with your assets and if you're violating that ordering then a bankruptcy judge can unwind those transactions so right now we don't really know um everything at Alameda is supposed to be Frozen and nothing's allowed to be touched except you know just keeping the lights on until a bankruptcy judge uh decides how this is going to get Unwound uh the same thing can be true for FTX us and for FTX Global so um I might yes and again right now it's just a guess they're obviously a number of teams that had funds on FTX um if you're a startup and you had all your money in FTX you probably were doing something very wrong um but we know if some service had some money on FTX you know it's unfortunate um but at least so far in our portfolio

we haven't seen anybody with catastrophic losses um some people had you know just kind of trading funds on FTX and that and that uh got wiped out but for the most part um the the it's it's like if you just said the second and third order effects that are going to be hitting people the most if Alameda owned a lot of your tokens they're probably Frozen there for a while and they will very slowly in a very long time from now get liquidated uh in some kind of auction that's that's the most likely outcome for a lot of the things that that elevator holds on the balance sheet um and same for FTX Ventures uh We've we heard that people were trying to buy uh FTX Ventures saps actually layer zero announced I think yesterday that they bought out uh FTX Ventures from all

their ownership in uh in layer zero um I I suspect that that may get Unwound if they did that not at uh fair market value yeah so there's there's a lot of stuff like this that like when you go through bankruptcy bankruptcy is a very complex very legalistic process and it takes a very long time and so I think unless you know that you lost money at FTX you don't know what's going to happen with your counterparty exposure to FTX or elevator for quite a while from now uh crypto.com just laid off 50 of the company wow holy crap holy [ __ ] yeah oh man you know and this is the tricky thing too two thoughts on this one um you know people have to posture that

they're okay to prevent these Bank Run scenarios right and so I don't want to throw anybody under the bus but there have been people posturing that they're okay that that are definitely not okay and that's what makes this so hard and that's why it takes a while for this to really play out is because the reality will will surface but until that point because you need to prevent a bank run type of scenario in a low liquidy environment people are going to posture that they're okay and so it just makes it very very challenging um to know what's actually going on until it actually happens and then two I I do agree with the Steve I think people likely are very underestimating how long this is going to take to play out you know like people haven't gotten their Mountain gocs claims paid out yet it's

like eight years later um you know inverted I was looking at the Bernie Madoff situation I think it's been about eight or nine no it's been close to ten years now and they've gotten about 80 of the money back um but you know for the first couple years you've got nothing uh and so even 10 years later you think they've only managed to recover about 80 of the assets and this is a global thing with a bunch of interconnected entities in the mail every I get it I gotta check every every month from yeah my family got was impacted by Bernie Madoff and we I give a check still every single month from The Bernie Madoff like unwinding fund or whatever it's I don't know what it's called like

yeah 13. yeah so um guys I know I know we got to wrap this up here um you guys came on the podcast nine months ago and we were really exciting podcast we're talking about like multi-chain future and uh we're talking about Cosmos a little bit we're talking about Solana how does this impact your guys I mean we're one year into bear Market it's gonna be a deep bear Market obviously uh ciao Who I Really respect and like ciao came out yesterday and he's like I think this bear Market's gonna be uh worse than 2014 and worse than 2018. I would just love to get maybe closing thoughts on on what you guys are looking at and then uh over the

next like maybe year or so and like how you guys are thinking about this market right now I think um our take on this is yeah our take on this is that this is I mean we were not personally around for 2001 we've talked to a bunch of our investors and have talked to you know older friends um who were through that I think this is going to be like 2001 for crypto and what I mean by that is that um the size of a hole here is going to be large and it's going to take time to dig out from that whole um financially speaking um the number of people impacted is is now significant whereas 2014 they're just not that many people in crypto so if crypto died you know how many people did it really Impact versus today like

you're talking about exchanges that have potentially tens of millions of users these are real real numbers and billions of dollars but uh if you get through that and the people who are focused on building and creating real value persist two three four years later uh you you might actually continue and you might actually create real value and ultimately the real value is what's going to matter I think if we build stuff that people all over the world can actually use if you can if you know Merchants can pay people faster if you can pay your employees better if people who don't have access to financial services can get those things if uh creators have a new business model and they can actually monetize their fans and not have to pay exorbitant fees to middlemen um you know all these things that we've talked about for for many years we now

have all of the pieces in place to actually execute on you know like all the stuff that was theoretical in 2017. you know l2s and stable coins and D5 and eth going to proof of stake and Cosmos is going to be up and running and IBC is going to work one day and like you run through the list and you're like holy crap all of those things are real like all of that stuff actually exists now and and so it's really up to the builders uh we know whether or not they're going to take all these pieces and plug them together and create real value and if that happens I think we come out of this you know as a as actually a thing that goes up the s-curve we go mainstream a billion users will use this stuff it'll change the world and if we can't if we can't

persist for the next three years and and sort of grind it out um then we may not and that was the sentiment in 2001 it just was not clear whether Tech was ever coming back or the internet was a fad and it was not coming back or or if it was and and you know clearly worked out one way and I think it can you know my bias is that based on the people we talk to at least there are enough committed people here now you know tens of thousands of people writing code that I think we will persist but it will not be easy yeah this thing um this thing is a lot worse than Terra or or three arrows this thing really kind of hit at the heart of what crypto is about

and it it hurts all the more because of how beloved Sam was how many people through their um hopes and dreams behind him and uh he he betrayed that trust it it makes me it it makes me think a lot about like why we're actually here we're not here to build centralized exchanges right centralized exchanges are in many ways the compromise that we need in order to bridge from the old world to this new world that we're building when Satoshi Nakamoto created bitcoin he said that the purpose of Bitcoin was to allow people to transact without the

need for trusted intermediaries and the reality is we're not there yet we're not at the place yet where we can fully transact without trusted intermediaries and that's why exchanges exist exchanges exist because D5 is not ready yet because all of the pieces that we need in order to have that connective tissue such that normal people the normal people who are trading on FTX who are using all these products who trusted Sam um so so they could not interact directly with what the blockchain gives you which is guarantees of correctness right the freedom to not have to trust any single person to not have to trust a single company

um the the goal in crypto is just to have it so that this kind of thing doesn't have to happen not that it doesn't happen that it doesn't have to happen because of the fact that the code itself guarantees that people do the right thing and that's what I want to be a part of in uh in crypto and that's why I I intend to continue investing in the space and also believing in the space because that's that's the reason that that um everybody who's excited about crypto is fundamentally here so to me it kind of it renews the call of coming back to the core values of what crypto is about crypto is not about recreating Wall Street and that's ultimately the the Folly that led to the downfall of ftrs

you see can't think of a better way to end it than that um levitral thank you haseeb thank you guys I hope you guys can get some sleep and can spend some time with fam and and get away from the Twitter Doom scrolling this weekend so I will see you guys on the other side of this sounds good stay safe everybody [Music]