Thread by @SBF_FTX

1) @arjunblj wrote up a piece on his thoughts on the future of crypto.

Some responses to that below.

arjun.af/crypto-market-…

2) I mostly agree with the 2.0 section:

new liquidity/maturity coming from:

--derivatives
--borrow/lending
--automated OTC
--stablecoins

A few disagreements:

(a) @arjunblj mentions institutional products. While they are growing, they are still small and not important.

3) This might change soon -- some of them (e.g. @FireblocksHQ) are showing promise -- but so far it's mostly just promise, not adoption.

(b) lending + stablecoins as reserve asset misses something key.

where are the loans coming from? who's the ultimate lender?

4) This is not widely known, though it's also not exactly a secret.

Ask any borrow/lend desk what capital is cheapest. It's not stablecoins.

It's BTC.

Stablecoins are the trading/exchange reserve; BTC is still the ultimate reserve. Why?

5) Well I'll leave it up to the reader, but *some* groups seem to have a very large and every increasing supply of BTC to lend out, combined with USD payroll demand.

They are powering the backend of crypto liquidity: unsung heroes of modernization.

6) So, now, 3.0.

I sort of agree here, but think there's a lot of missing context and pain points.

@arjunblj basically says that 3.0 will be prime brokerage + DeFi. Some responses:

7) (a) By cross margining everything, exchanges can do a bunch to help here.

FTX does this with futures/options/MOVE/etc. and soon will with spot as well (FTX US already does with spot).

(b) in CeFi, I think the post misses an important point: _exchanges are the bottleneck_.

8) It doesn't really help to have a prime broker right now.

In trad finance, exchanges don't liquidate, clearing firms do.

But in crypto, exchanges control the risk engines.

So everything has to get their blessing.

9) crypto-native clearing don't work unless exchanges trust their calculations -- and in turn other exchanges.

The borrow/lending desks are already repo markets -- but so are the spot margin pools on major exchanges.

This isn't anything new, the devil's in the details.

10) and moreso, *net capital* is what matters here.

Until people can borrow against illiquid assets or equity those don't help.

Lower on-chain confirmations help! But only if each exchange respects them.

And anyway they're just a shittier version of using Solana stablecoins.

11) And still, you're gated by exchanges releasing and processing withdrawals -- when things go to shit, all systems do, not just blockchains.

And true PBs either need exchanges to let them open omnibus accounts.

12) Sure they could give credit against cold storage -- but then why bother with the cold storage in the first place?

(Answer: yet another form of transmining.)

Ok, so what's the *actual* answer here?

13) I think it's one of the following:

(i) DeFi
(ii) very well capitalized MMs
(iii) borrowing against equity or illiquid assets
(iv) exchanges working together
(v) faster chains

14) Alright so on to the second section: DeFi.

Agree that AMMs are great for new listings.

Only sorta agree about best-ex requiring DeFi: that's only true because of farming.

When DeFi runs out of value to airdrop, the liquidity dries up.

15) Disagree on UX.

I agree there are advantages to it -- but net it's still way worse than CeFi. (Though this might change!)

But then to the last point -- DeFi cross-margin.

That point is correct. And it's fucking huge.

16) I think what really drilled this into me was:

(a) cTokens as collateral on FTX (e.g. cUSDT): double dipping.

(b) Compound/Aave + Uni/Sushi --> native margin trading

17) Composability means that you can seamlessly transfer positions between projects. You can provide liquidity on an AMM, take the LP token and use it as collateral on a borrow/lending book, then use that to trade on a DEX, etc.

*That* is what CeFi is missing.

18) On-chain means that exchanges aren't gating cross margin anymore.

But what we're seeing now is just the beginning.

What you *really* want is:

(a) PBs on-chain
(b) LP tokens from PB account can be used elsewhere
(c) PB has access to funds, but SC means it can't steal.

19) There's a core missing primitive there, which is really the core primitive to all of DeFi.

That primitive is a Pool.

And Pools are coming to Serum in the next week.

20) But there's also a problem with how DeFi is currently using composability.

Rather than borrow/lending + AMM --> leverage, DeFi is stacking Yield.

This seems great: more yield!

21) But...

Well, first, why are people giving yield? To inflate their TVL.

4x dipping means *all* TVL is inflated and fake. They're paying the community yield to trick itself into thinking they should use their products, whose valuations come from...

...yield.

22) But, also, there's systematic risk.

And it's big.

See, things don't *look* super leveraged. Unless you look harder.

Anything that uses aTokens or cTokens blows out if Aave/Compound do.

Anything that uses Uni tokens crashes if *either* side does.

23) Everywhere you look it's expensive to borrow USD and cheap to borrow crypto -- meaning everyone's leveraged in the same direction.

Long.

And remember, all the usage and valuations and TVL come from yield, which comes from altcoin prices, which come from...

...usage and TVL

24) The problem is that *each* platform has risk engines, of a sort. But they treat composed tokens and native ones the same -- even though composed tokens add in the risk of other positions.

So what happens if shitcoins crash too much?

LPs crash. Sell-side liqs on lending.

25) TVL crashes. Alts crash more.

Everyone's pulling their capital -- half of which is ETH, so it crashes too.

This further crashes LPs and altcoins.

Recurse.

It's like 3/12, but instead of one contract on one platform, it's all of DeFi composed.