SBF's underlying thinking logic: The North Star of progress, the endgame of faith and public chains

Author: Deep Tide TechFlow

What is the underlying logic of SBF's thinking? Many articles or interview materials seem to have not answered this confusion of mine, until I recently listened to an interview audio of Patrick with SBF, which suddenly enlightened me. It involves a series of underlying thoughts behind SBF's ability to navigate uncertainty.

The content mainly includes:

1. What is the guiding North Star for SBF?
2. How does SBF identify the pain points in the construction of trading markets?
3. In the future, where are the new opportunities in trading markets?
4. How does SBF view global policy regulation?
5. Why does FTX invest heavily in brand building?
6. How does SBF view the current parallel structure of new public chains?
7. After accumulating massive wealth, how has SBF's mindset changed?

The North Star of Progress

SBF has seemingly become a new global icon in the crypto industry, surrounded by a halo, but we can't help but explore the underlying driving force behind this halo, such as what the North Star guiding him is.

In the interview, SBF's answer is relative; he believes the North Star is not fixed, it depends on the position from which one speaks.

In situation one, when he wakes up, goes to work, receives an email, and must respond and make a decision, what often comes to mind is how to build a good product and a strong, effective exchange. The key question is whether the risk engine is effective. A well-designed risk engine can provide flexibility while ensuring platform safety. Another important aspect is whether the overall design of products in the field is meaningful.

In situation two, he often reflects on his priorities in doing things.

For example, charity may not necessarily be the most relevant thing in daily life; it might even be trivial compared to product design.

But when he thinks about what he should do in his life and how he should prioritize, the North Star may emerge, such as effective altruism and utilitarianism.

The essence of both lies in how to maximize his positive impact on the world.

Additionally, interviewer Patrick intuitively observed the immense energy and research SBF invests in building a good market, while acknowledging that continuous market construction benefits humanity more than any linear charity organization absorbing dollars. Given this, it is puzzling why SBF would invest energy in charity rather than fully commit to building more financial infrastructure to benefit more people?

In response, SBF's thoughts appear to be at a higher dimension and align with his definition of an inner North Star.

He observed that countries imposing excessively high stamp duties on stock markets have stifled liquidity and effective markets, thereby harming the economy, so he firmly believes that efficient markets will have a tremendous impact on the world.

From the perspective of long-termism in world development, charity has its necessity.

Although there are many ineffective charitable organizations, if one seriously considers how to do the best things with life and funds, the perspective would be entirely different. SBF believes that some deeply thoughtful and powerful charitable organizations will have a lasting impact on the long-term development of the future world, with their influence extending to hundreds of trillions of people a decade later and very likely truly changing the course of history.

He cited the COVID-19 pandemic as an example, expressing humanity's confusion in facing and solving pandemics.

"What we should look at is how much effort society is putting in now to better prepare for the next pandemic, rather than how we reacted to this one. But right now, there is basically no discussion about the next pandemic, which is crazy. Frankly, we are a bit lucky because COVID-19 was not that deadly, allowing you some time to utilize time, money, and resources."

In the interview, SBF expressed concerns about common human issues, believing that people should prepare for the next pandemic, as saving trillions of dollars and millions of lives is crucial.

Although some countries did an amazing job avoiding COVID during this pandemic and prevented more deaths, SBF believes they are in a closed state, with the economy stagnating, and no one knows how their path forward will look. Therefore, it is essential to think about how to make measures super effective and build a more comprehensive risk model, which may be one of the reasons he funds those charitable organizations with strong thinking capabilities.

The Trading Market Needs Improvement

Referring to the current imperfections in trading markets, SBF pointed out that the complex trading steps in traditional trading markets lead to inefficiencies, information asymmetry, and high trading costs.

For example:

1) The Order Book Dilemma

In today's financial markets, if you are unwilling to spend tens of millions of dollars annually on payment data services, you will passively trade on an order book where you cannot see other players' orders. Therefore, for exchanges, aside from allowing trading, they must support price discovery.

2) Complex Trading Processes Filled with Intermediaries

In cryptocurrency, people are accustomed to all income from trading fees, unlike stock exchanges, which monetize data and introduce numerous intermediaries.

Such a strange business model may be wrong for an effective market, and the user experience is really poor.

Suppose you want to buy Apple on NASDAQ; you cannot open an account directly to purchase; you must enter the market through a broker. Thus, the number of intermediaries in the stock market is insane, leading to a series of strange occurrences.

For instance, payment for order flow (PFOF) exists because trading forces people to go through six different companies from start to finish, making trading more chaotic and complex.

Therefore, he believes that creating a clean, simple, modular market infrastructure is very valuable. Of course, you might still ask why none of this operates 24/7; this is due to many reasons, one of which is that you must apply to the U.S. Securities and Exchange Commission and then wait for the application to be approved.

3) Unreasonable Trading Fees

In theory, trading fees as a revenue model are normal, but their range must be reasonable and should not exceed the actual advantages seen by the company.

There is a reasonable basis range, possibly between 10 basis points and two basis points. Once it exceeds this range, it will stifle trading and liquidity. We see some countries imposing taxes of 10, 15, or 20 basis points on each transaction, but the stock market may not even rise by 20 basis points throughout the trading day. So if you charge 20 basis points as a fee on both sides, users will not trade.

Thus, setting reasonable fees for an effective market is very important; this fee is not just for matching engine costs but for every fee throughout the trading process, the total fee paid when one party transfers assets to another.

Underlying Thoughts on Improving the Trading Market

After pointing out the problems in traditional trading markets, SBF also expressed his underlying thoughts on improving trading markets, including what a nearly perfect market needs in terms of ultimate value. In all infrastructures of the market, exchanges, and market data connected to it, how low must the latency be to derive most of the economic value?

Regarding how low the latency needs to be to capture most of the economic value, his answer is that latency must be lower than the speed at which new economic information is released to avoid situations where two different economic events occur, but the exchange does not have time to internalize the first event.

What is that speed? Very diverse. SBF believes that when people are in milliseconds, there usually won't be two significantly different economic pieces of information generated because the distance between them is less than a millisecond. However, if it is within the same day or hour, that won't work, so the answer is definitely less than an hour, which is highly efficient compared to the delays of NYSE and NASDAQ, but it is somewhat deceptive.

Because the delay of the New York Stock Exchange is a fraction of a millisecond, but it may close overnight due to federal holidays, which is crazy.

Therefore, he believes that making the architecture as low-latency as possible is not the most important thing; what's more important is to keep it always open.

The State of a Nearly Perfect Crypto Market

When discussing the openness and efficiency of capital markets, Patrick believes that the current state of the crypto market may be closest to the perfect market SBF describes, with open order books and greater fairness. SBF briefly introduced the current state of the crypto market.

He stated that the crypto market is still in a relatively disordered and chaotic state, but it has improved compared to three years ago, with enormous room for development.

For example, when the market is highly volatile, there are many arbitrage opportunities, mainly cross-regional arbitrage. Although the crypto market is an unregulated system, it still relies on wire transfer infrastructure to penetrate various regions. So to some extent, the crypto market can only operate rapidly when the fiat currency system keeps up, avoiding issues like insufficient liquidity and inefficient operations.

However, in the short term, the existence of stablecoins can at least partially improve this situation. If everyone in the crypto industry uses USDC instead of USD, then users can move 24/7, eliminating reliance on wire transfers. This is one of the reasons why stablecoins are so massive in the crypto space; it is simply a simpler and better legal way.

SBF expects a significant influx of fiat currency into the cryptocurrency ecosystem in the coming years. Although this has not yet been realized, it is very likely to happen, which can fill the capital base of cryptocurrencies and start injecting these dollars into the ecosystem, bringing the capital-to-market value ratio in the ecosystem close to 1.

How Does Crypto Construction Attract SBF?

The outside world believes that SBF's entry into the crypto market was not early, but he has very pragmatic ideas. So people are curious about how the crypto system stimulates him to invest attention and time in it. Deep Tide has organized the following four points from his answers:

1. The demand in the crypto market is enormous, especially for all the infrastructure related to cryptocurrencies, which is clearly in short supply.

A few years ago, cryptocurrency exchanges were crashing almost daily because they could not handle the load, and risk engines were burning millions of dollars of customer funds daily because they could not meet margin calls on time. It looked like a mess. But the mess was just a surface issue; the crypto market simply did not have time to mature, nor did it have time for the infrastructure to keep up. The more this is the case, the more business opportunities there are, and the fact proves that there is a significant demand for new businesses in the crypto market, which must be addressed.

2. In the process of trying to engage in crypto trading, he realized the problems with existing financial infrastructure (mentioned earlier).

3. He feels that although the crypto market seems filled with nonsense performances, it is still easier to use than banks, and there are clear ways to make this space more efficient.

4. The characteristics of decentralization, cross-border, transparency, and openness in crypto made SBF realize that there are numerous opportunities to start entirely new native digital and social ways, which is very cool.

What Should Be Done Next?

SBF believes that development is dynamic, and often one must respond super quickly to the global environment. If a crypto company does not seriously consider regulation and compliance, then it has made a mistake.

This was not so obvious a year ago when many crypto companies did not have real compliance departments; now it is entirely different. So what are the next steps? He would provide some non-absolute ideas but would dynamically decide the priorities of things.

For example, statistics are being prioritized. SBF stated that the trading volume of cryptocurrencies is almost as large as that of U.S. stocks, with a significant volume. The global cryptocurrency trading volume is about $200 billion, with derivatives trading volume around $130 billion and spot trading volume about $55 billion, with a ratio of approximately 2:1.

In contrast, the U.S. spot trading volume is about $10 billion, and the derivatives trading volume is about $1.5 billion. So this ratio is not 2:1 but rather 0.1:1. A little deduction reveals that there is about $25 billion of trading volume missing, indicating a significant demand for derivatives trading from the U.S.

However, because mainstream cryptocurrency exchanges have not obtained CFTC licenses, they do not have the regulatory capability to offer futures in the U.S. FTX recently acquired Ledger X, a crypto derivatives platform that has obtained CFTC approval.

SBF and his team will collaborate with the CFTC to discuss methods for developing this platform over time to fill this market gap.

Embracing Regulation

This is a problem that all practitioners in the global crypto industry must face. SBF's attitude towards regulation can be summarized in one sentence: actively embrace regulation and take a compliant and transparent approach.

In SBF's view, regulatory policies in various countries, including the U.S., lag behind the crypto market. This is a brand new asset class that few people paid attention to five years ago, and five years later, it has grown wildly into a trillion-dollar market, while the U.S. typically does not attempt to launch a completely new financial regulatory framework every three to five years.

However, he is very optimistic about the future, believing that in the coming years, the U.S. will establish a more complete framework, which will make the U.S. a more robust hub for crypto business.

However, regulating decentralized protocols or products themselves is quite challenging. Regarding specific regulatory policies, a reasonable approach is to try to find strategic parts of the ecosystem and incorporate most of the regulation into them, such as centralized exchanges and any institutions operating fiat-to-crypto conversion businesses.

Regulation does not need to pursue perfection; the correct approach is to take a step in the right direction, starting to build a framework that protects consumers while preventing financial crime without stifling the industry.

Derivatives and Innovation

In the field of derivatives, perhaps no one has more authority than SBF.

There are many derivatives exchanges, and SBF believes that FTX's core competitive advantage lies in cross-margining.

At FTX, almost any asset can be used as collateral—euros, dollars, Ethereum, Bitcoin, USDT, Microsoft equity tokens… any asset can be immediately used for derivatives trading.

What is it like on some other platforms?

First, you have to sell your assets to obtain USDT, then buy spot Ethereum, transfer the Ethereum to the Ethereum futures margin wallet, and use it as collateral before you can trade Ethereum futures.

In SBF's view, this contradicts the entire meaning of futures. It is foolish to trade spot before trading futures; it increases the risk of being liquidated and offers no flexibility, leading to a chaotic system.

FTX's Brand Building

In SBF's view, traditional methods, such as advertising on Google and Facebook, setting up a large purchase button linked to the website, are not what FTX truly wants to do.

"Most user acquisition is done through social media. How do we acquire most users? They see a post on Twitter and think, 'FTX sounds really exciting, so I should check it out.'"

What FTX truly considers in marketing is how to make as many people as possible aware of us? Secondly, to let people know who we are, what we do, and want to actively learn about FTX.

Currently, FTX sponsors many sports events. In SBF's view, these endorsements are not just about having people see the letters FTX somewhere but to establish a stronger connection and convey some messages:

"We are a legitimate exchange, we have legitimate products, and reputable institutions have conducted due diligence on FTX. For example, if you hear that a basketball player is associated with a certain product, would you think, 'Oh, that's interesting?'"

Public Chains and Bitcoin

When discussing the current parallel structure of multiple public chains, SBF believes this is only temporary.

"I see no reason to need two (public chains). It's not that there won't be, but why do we need two? Why not just one? There are many public chains now, and there should be competition among them, driving them to continuously improve and helping the world find the one public chain they want to use."

So what is the endgame of blockchain? The truly important goal is to cover 1 billion users and transact trillions of dollars. This inevitably requires public chains to meet millions of transactions per second.

Moreover, applications need to be natively composable, allowing seamless transfer of funds between different applications, rather than relying on sharding, Layer 2, or sidechains to achieve this.

Therefore, in SBF's view, a single, native, composable public chain with millions of TPS has enormous value.

Regarding Bitcoin, SBF does not see it as a general-purpose blockchain; the TPS determines that it is insufficient to serve as a universal medium of exchange, thus differing significantly from Ethereum and Solana.

Wealth and Belief

SBF is the fastest young person to accumulate wealth on this planet, without exception.

When discussing the rapid growth of wealth, SBF believes that wealth affects him less than most people and has not changed his views on most things, but wealth does change how others interact with him, especially those he does not know well.

Finally, Patrick asked SBF a non-business-related question, "What is the kindest thing someone has done for you?"

SBF replied, "Supporting me, you know what I've been doing, believing that this could be feasible when most people didn't believe in me."

Then he provided an answer that resonated more with his values.

"Perhaps what resonates more with me is that I think many people in the effective altruism community are completely unaffected by me or anything, are very dedicated and selfless in what they do in their lives, and have achieved truly spectacular things in a way that involves personal sacrifice and seeking altruistic benefits. In a sense, I think these people resonate with me more."