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"Sam Bankman Fried was a very smart guy"

In the past few years, I've had plenty of discussions with colleagues about Sam Bankman-Fried, CEO of failed crypto exchange FTX. People were always like, "He's a genius, he's a genius!," and for a long time I disagreed. In light of what's happened, it seems I was right, but with everyone now disparaging him as an idiot and a crook, it's worth remembering that SBF's conception of FTX also identified him as an incredibly smart guy.

There was a reason FTX became the dominant exchange for crypto derivatives trading: it was built by technologists and had unbelievable functionality for institutional traders.

FTX and SBF invented the notion of the 100% algorithmic exchange. Algorithms determined how much leverage you could have, and on FTX they determined it in real time. If you go to the CME and you ask to do a dollar futures swap, the leverage you're offered will be a function of things like volatility and how well capitalized you are, and you will be margined at the end of the day. On FTX, your leverage was calculated constantly and the boundaries of that leverage were calculated by high frequency trading algorithms. This was SBF's innovation: he created a rules-based real-time system for determining permitted leverage. That's pretty smart. 

A key feature of FTX was autoliquidation. The site ran a so-called liquidation engine - an algorithmic system that detected when customers had exceeded their leverage targets and automatically liquidated their trades. For example, if you had 1,000 Ethereum it might allow you to buy 100,000 but if Ethereum dropped 1%, FTX would autoliquidate your holdings. The exchange got a reputation for aggressively liquidating trades as a result - Kyle Davis at Three Arrows, for example, famously complained that FTX had been hunting their positions down; Davis' co-founder Su Zhu, gloated when FTX itself began to go under. 

Irrespective of Sam Bankman-Fried's morality, 100% algorithmic trading and autoliquidation were valuable innovations. Ironically, though, when FTX went under, it was through this system. SBF was the guy who showed us all that computer can be better than people, and that rules-based algorithmic decision-making is a good basis for trading. But his system leaves no room for sentimentality. Having popularized the concept of autoliquidation, FTX was itself destroyed in the mother of all autoliquidations. As the algorithms of rival exchanges kicked in, there was no time to raise money or go back to investors. SBF became the victim of his own creation.

SBF was a shining example of everything that crypto and blockchain were trying not to be. He will quite possibly go down for fraud after raising money from private equity on the back of false promises. That does not mean, however, that he was stupid. Far from it. 

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AUTHORAndrew Ball Insider Comment
  • Ma
    24 November 2022

    "Was" doing a lot of heavy lifting in the title here.

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