SBF and the "cargo cult" of FTX and Alameda

In our interview, Block described what S.B.F. was doing with Alameda and FTX as a “cargo cult,” a phrase I had never heard before. Apparently, a “cargo cult” refers to the observed behavior of some indigenous, isolated societies that came to believe that certain rituals, such as building fake airports, could facilitate the arrival of mysterious people bringing desirable goods and advanced technologies. They associated one with the other, without fully understanding the concept of jets or airports. “It’s a real thing,” Block instructed. “Look it up. “It is a perfect analogy.”

FTX used its tokens, he said, to create a “facsimile of a real economy,” like a cargo cult. “Essentially, what they do,” Block told me, “is they make this token up, which is literally just a few 100 lines of code running on a blockchain. They sell some of them off to the public. They retain a lot more of them for themselves and give them to insiders. And the rest of them end up sitting on the company’s balance sheet… They take advantage of the fact that a relatively small number of the tokens are actually in circulation and then they’re able to kind of capitalize on that lack of liquidity to drive the price up on these markets.”

As the lack of liquidity of the tokens drives their price up, the S.B.F.s of the world then mark the tokens to the higher market value and tell potential investors that, in addition to being this newfangled, cutting edge ‘change-the-world’ kind of company, they also have a huge and valuable set of assets. “But basically, any test of liquidity destroys the token and that’s essentially what happens [to S.B.F.],” Block said.

Investors and customers fell for it in droves. But Block, given his background in psychiatry, had other views. S.B.F. was “probably one of the least charismatic Ponzi schemers in history,” Block said, “but maybe that’s what worked in his favor.” He continued: “It feeds into itself, like as you become more successful, the more likely people are to kind of give you the benefit of the doubt, and be less willing to challenge you. Crypto relies entirely on obfuscation, and it makes things seem more complex than they really are. A lot of the time when I try to explain this stuff to my friends or family who aren’t familiar with it, and they go, I don’t understand, maybe I’m not smart enough, my response is always, No, you’re smart enough. It’s just that dumb. It’s so dumb that you have to really think about it to understand that because it just doesn’t it doesn’t make any sense because it’s not sustainable and it’s not real.”