As the Commodity Futures Trading Commission (CFTC) deliberates whether or not to allow FTX to algorithmically settle margin trades, its founder and CEO, Sam Bankman-Fried (SBF), recently revealed how DeFi works similar to a Ponzi scheme.
In an eye-opening episode of the Odd Lots podcast, Bankman-Fried explained how yield farming works. The hosts weren’t the only ones left stunned by the digital currency billionaire’s explanation of how this shell game operates under the hood.
SBF explains yield farming with a box analogy
In an attempt to explain how yield farming works, Bankman-Fried asks viewers to imagine a box. He says, “You start with a company that builds a box,” and that the marketers of this box will attempt to sell it as some sort of world-changing protocol. He explains how you can put digital currencies like Ethereum into the box and get an IOU.
The next step is for the developers to issue a token. Holders of said token will often have governance rights over what happens inside the box. For example, they might get to say what happens to the newly minted tokens that derive from the box. This token is then given away or purchased, giving it a larger market cap, causing other market participants to notice it and view it as valuable.
“I acknowledge that it’s not totally clear that this thing should have a market cap, but empirically I claim it would have a market cap,” Bankman-Fried pointed out.
The FTX boss then describes how the high returns…
