Understanding the Collapse of Sam Bankman-Fried's Crypto Empire

Tracy Alloway (0:10)

Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal. Now, Tracy, obviously, the big story which we haven't talked about yet is the collapse of the crypto exchange FTX and the broader empire, which was built by Sam Bankman-Fried, which includes his trading shop, Alameda Research.

Tracy Alloway (0:28)

That's right. It has been really a stunning two weeks for the industry, in part because Sam Bankman-Fried or SBF, as he's frequently referred to, had become arguably the face of crypto. He was highly influential in DC. He was a donor to numerous nonprofits and politicians, wildly rich. And of course, we have interviewed him a number of times on this very podcast.

Joe Weisenthal (0:54)

Right. So the last time we interviewed him, it had already become something of an infamous episode. We were joined by our colleague, Matt Levine.

And it was during that conversation that he described much of DeFi, or at least the concept of yield farming, in a matter that sounded a lot like a Ponzi scheme. And of course, he didn't describe FTX or Alameda's own business as a Ponzi exactly. We're still learning details about how it all collapsed. Nonetheless, in the wake of this implosion, I don't think there's any doubt that those comments are seen as just a massive red flag.

Tracy Alloway (1:26)

Right. And as you mentioned, this is all moving very, very fast. It is a gigantic, really sprawling story that ranks up there with some of the biggest corporate disasters and potentially frauds of all time. And given its size and speed, it's a little tough to do a complete overview of the story right now. There's already been a lot that's been written about it and reported on at multiple media outlets. So we're going to try to do things a little bit differently. We're going to try to break things up a bit. But first today, we are going to be speaking with a market participant who used FTX and was caught out in the scandal.

And then we'll be speaking to a whistleblower who was among the first to sound the alarm at something actually being wrong at FTX and Alameda.

Joe Weisenthal (2:14)

Right. And then we're going to be doing a follow up episode tomorrow with Matt Levine, where we'll try to understand more about what's happened and what is currently going on right now in the wake of the collapse. But for now, we want to start with Evgeny Gaevoy. He is the founder and CEO of Wintermute, which is the largest crypto market making operation. It had been very active on FTX, and he's going to help us understand a little bit more about FTX and Alameda's role in crypto market structure. So Evgeny, thank you so much for coming on the Odlots podcast. What do you tell us? What do you do and what is Wintermute?

Evgeny Gaevoy (2:48)

Yeah, hi. Thanks for having me. Yeah, I guess very quickly about Wintermute. We are one of the largest crypto market makers. We've been active since 2017

And I think at this stage, basically the largest crypto native market maker after the Alameda's demise.

It's an interesting way to grow the ranks with all that's going on. But basically, our businesses across centralized exchanges, decentralized exchanges have been active in DeFi since 2019 and of course OTC as well. So it's a lot of different diversified activities. We are trading billions, dollars per day on all kinds of venues and in general, very deeply intertwined with the crypto ecosystem.

Tracy Alloway (3:29)

Can you explain that a little bit further? What is a market maker in crypto actually do? And what is your business relationship with the various exchanges like FTX?

Evgeny Gaevoy (3:40)

Yeah, on centralized exchanges, it's fairly similar to how it works in traditional finance. We basically provide bits and offers algorithmically so that people get access to liquidity.

When it comes to how we work with different exchanges, there are no formal contracts as such. It's basically us creating an account just like everyone else, institutional account just like everyone else, and then effectively send orders via APIs that exchanges provide.

Joe Weisenthal (4:09)

So, you mentioned that you've sort of grown in market share since the collapse of Alameda, which was a competitor. Can you talk about prior to the implosion of FTX and Alameda, which of course we'll discuss, what was your understanding and what was your view of the FTX-Alameda relationship?

Evgeny Gaevoy (4:32)

I guess, yeah. I mean, Alameda part was pretty shocking because basically pretty much everyone in the industry, including myself, assumed that Alameda has been running a pretty big and successful operation across centralized and decentralized exchanges. For example, we've seen them being very active on Serum, the Solana native DEX. We suspected that they have a pretty decent market share on FTX itself, despite actually not being able to confirm it or deny it, simply because one of the great things that was about FTX is that they had a leaderboard for volumes and they were pretty public being there and saying that Wintermute is whatever, number eight or number three or like whatever, depending on the month. But you would never see Alameda in there, which was kind of annoying, but yeah, we kind of got that not everyone wants to show their presence as publicly as we did. And now I'm thinking, okay, probably their market share was either very big or maybe potentially very small, but more likely very big because like one of the main, because like, I guess the main question is given the size of the hole that FTX faces and that they lend money to Alameda, somehow they managed to lose all those billions. And one of the ideas that's traveling around crypto Twitter is basically they were just very bad market maker, I guess, because they were kind of forced to provide liquidity in FTX and they basically lost a lot of money over the years, supporting that liquidity.