The downfall of once-prominent hedge fund Three Arrows Capital and collapse of algorithmic stablecoin TerraUSD left many to assess systemic risks in crypto’s ecosystem.
Investors, whether major LPs or retail, were deceived in some way during both catastrophic implosions.
Before reports of risky trades, Three Arrows’ founders Kyle Davies and Su Zhu were long hailed as legendary investors with impressive track records. Although some saw the writing on the walls with TerraUSD, this didn’t stop retail participants from parking their savings in the token, in hopes of nearly 20% annual percentage yields. Meanwhile, CEO of crypto derivatives platform FTX, Sam Bankman-Fried has been on a dealmaking spree to try to curb further contagion throughout the industry. In recent months, lender BlockFi and the now-embattled brokerage Voyager Digital received loans from the mega-billionaire’s LLCs. (Bankman-Fried now predicts a $70 million loss on its Voyager Digital bailout attempt, however.)
In an interview on Decrypt’s gm podcast, Bankman-Fried breaks down how participants can spot red flags in yield products and determine which projects are sustainable based on lessons the industry has learned this year.
“I do think that people have lost some faith. It was mostly froth, to some extent, that was lost. I think it was always sort of overeager confidence that led us there in the first place,” Bankman-Fried said of the recent downfall of major firms. “There’s going to be more scrutiny next time around. There’s going to be more attempts to be discerning about platforms and to understand, if something seems like free money, where is it really coming from.”
SBF on yield products, 10-year emerging tech outlook
Investors can suss out bad actors by looking at a project’s marketing. When a platform offers eye-popping rates with low risk, Bankman-Fried warns that these may have a similar fate to recent big names in the crypto borrowing and lending space.
Centralized lender Celsius, for example, offered customer’s yields of up t0 17% for depositing money with its platform. In July, the company filed for bankruptcy on insolvency concerns. Users initially flocked to these offerings because of their promised yields in contrast with traditional savings accounts, which have 0.04% interest rates on average, according to data from the FDIC.
“If you want to be responsibly running this type of product, you have to be aware of the fact that if it is designed correctly and safely, it will probably have lower yields in a lot of the environments and your marketing should be in line with that,” he said. “You shouldn’t be marketing ‘20% yields,’ ‘for forever,’ and ‘definitely safe.’ It’s basically never the case that all those words go together.”
FTX International has a a peer-to-peer margin borrow and lending book, per Bankman-Fried. The difference with this offering, however, is that loans are “uber-collateralized,” interest rates are significantly lower, and there’s a 24/7 risk engine involved.
In general, “most of these methods work well in environments that are less volatile and bullish,” Vijay Ayyar, the vice president of corporate development and international at the crypto investing company Luno, previously told Insider of centralized lending. “But when things turn ugly, and people want to get their money out, this essentially becomes a bank run.”
Outside of crypto during the interview, Bankman-Fried touched on his outlook for emerging tech and regulation. In the next 10 to 20 years, the exec predicts artificial intelligence, or AI, will be an area of “exponential” growth.
The most powerful AI right now looks “basically like decent chatbots,” he says, but this will change and educated policy surrounding it will be crucial.
“You might start approaching scenarios where AI is potentially positioned to reshape the world,” he said. “It’s going to be really important what policy is on advanced computer systems so that’s one area that I expect to become important.”
Bankman-Fried was the second-largest donor to Joe Biden’s presidential campaign, gifting the current POTUS $5.2 million, according to a report from the Wall Street Journal. He is also a member of Future Forward, an ultra-wealthy Democratic super PAC, with members like ex-Google CEO Eric Schmidt and Facebook co-founder Dustin Moskovitz.
“I think that just fostering a bipartisan, constructive, collaborative attitude in DC is really important for getting things done,” he added. “And for being able to kind of tone down the hyper-partisan, acrimonious rhetoric and move back in a direction of working cooperatively together.”
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