What happened at Alameda Research

If you want to read a poorly researched fluff piece about Sam Bankman-Fried, feel free to go to the New York Times. If you want to understand what happened at Alameda Research and how Sam Bankman-Fried (SBF), Sam Trabucco, and Caroline Ellison incinerated over $20 billion dollars of fund profits and FTX user deposits, read this article. (And follow me on Twitter at @0xfbifemboy!)

To be clear, we still don’t have a perfect understanding of what exactly happened at Alameda Research and FTX. However, at this point, I feel that we have enough information to get a grasp on the broad strokes. Through a combination of Twitter users’ investigations, forum anecdotes, and official news releases, the history of these two intertwined companies becomes progressively less hazy, slowly coalescing into something resembling a consistent narrative.

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A simpler way to memorize seed phrases

Seed phrases are mnemonic phrases of 12 or 24 words where each word is drawn from the BIP-0039 list of 2,048 distinct English words. There is a well-defined process where a seed phrase can be used to generate arbitrarily many private keys for cryptocurrency wallets. For people who self-custody their assets, i.e., directly access and interact with their own wallets, it is imperative to have access to the seed phrase used to generate them, in case of device failure, theft, unrecoverability, etc. However, memorizing 12 or 24 arbitrary words can be challenging and error-prone, while storing a seed phrase elsewhere (in a password manager, on a piece of paper, via a hardware wallet, and so on) exposes you to a variety of other risks.

I propose a novel method for generating “easily memorizable” seed phrases, which can be easily personalized or adapted as the user desires. These seed phrases are easy to remember, but hard to derive unless you have access to the Internet or a computer. In general, because you don’t typically benefit from having perfect recall of your seed phrase at all times (while you’re in the shower, hiking the Swiss Alps, and so on), you can memorize a procedure that is only computable with Internet access that is much easier to remember than a list of 12 or 24 arbitrary words. That is to say, we can choose to trade off “ease of reproduction” in return for “ease of memorization.”

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Posted in Crypto | 3 Comments »

The doomer case for the final death of crypto

to pick up the pieces and formulate one concrete picture of what the future might look like. Perhaps none of this will happen! Perhaps crypto will blossom into the foundations of a new financial system based on transparency and equal access! But even if you’re bullish, shouldn’t you try to think through the worst case scenarios?

Well, without further ado, everyone loves a bit of baseless prognostication, so…

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On the supposed “nihilism” of the Mango Markets arbitrageur

For those unfamiliar with the context, Mango Markets recently lost ~$110m as a result of a series of trades performed by Avraham Eisenberg. A portion of the money was subsequently returned, so that depositors will be made whole, and the exchange itself will take on the remaining shortfall. These “open market operations” have been variously characterized as “market manipulation,” etc.

I would like to respond to various claims made by people such as Matt Levine or Evgeny Gaevoy that these “open market operations” represent a sort of “nihilistic” or perhaps “classless” behavior. In general, these comments seem misguided. I explain why below.

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Posted in Crypto | 5 Comments »

The future of maximal extractable value (MEV)

In the past year, the phenomenon of maximal extractable value (MEV; formerly known as miner extractable value) has captured the public consciousness, in part because of the apparent high level of technical skill required to extract MEV and in part due to the lucrative nature of successful MEV extraction. However, the discussion of MEV is often confused and imprecise, despite the increasingly critical role that MEV plays in blockchain ecosystems. With total extracted MEV plausibly in the billions of dollars (600M in tracked MEV on Ethereum mainnet alone via MEV-Explore), it is unsurprising that the bulk of MEV dialogue focuses on the profits of MEV extractors; however, the scope, evolution, and management of MEV are far-reaching topics with potentially existential consequences for blockchain security in the very long term.

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“Code is law” is valid even if the social layer is the base layer

Some people say “code is law” to justify any action permissible by code executable on a blockchain, including actions that might constitute hacks, attacks, etc. which drain protocol funds and enrich the executor of the code. Other people have argued that “code is law” is not valid, because the layer of social consensus always is the most basic layer of consensus, as reflected in cases like the fork of Ethereum after the hack of The DAO.

I believe that these counterarguments against “code is law” are largely missing the point, because “code is law” is itself fundamentally a social statement.

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Interviewing tuba on Sifu, ZetaZeroes, and DeFi’s perilous future

I’m incredibly pleased to have been able to interview tuba, CEO of Psyops Capital, builder par excellence, on an exciting and diverse array of topics, covering everything from Sifugate to the Indexed Finance hack and the gradual evolution of DeFi over the coming years.

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Six long-term crypto predictions

It is always fun to make predictions. But it is even more fun to make predictions while procrasting on editing a long draft of a different article!

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Theoretical advances in AMM understanding

Since the launch of Uniswap V1 in November 2018, decentralized exchanges (DEXes) with liquidity pool-based automated market makers (AMMs) have become a dominant model in decentralized finance with total daily transaction volumes reaching well into the hundreds of millions of dollars. Although liquidity pool-based AMMs had been described prior to Uniswap, most notably in Hanson (2002), Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation, traditional financial markets have typically relied on central limit order books. In the context of decentralized finance, however, where on-chain state storage and computation are relatively expensive and slow, passive provisioning of liquidity pools that automatically ‘update’ after each order offers significant advantages.

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An anti-populist vision of DAOs

I fundamentally don’t believe in popular rule.

That’s not to say that I don’t believe in representative democracy, general voting rights, or other cornerstones of modern liberal democracies, but at a basic level I favor models of governance that are close to Singaporean rule-by-elites. I don’t trust the general public to make informed, high-quality decisions that optimize for collective outcomes over long time horizons.

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