FTX founder SBF: Blockchain is not all speculation, three major applications can change payments, market structure, and communities

Even though more institutions are adopting cryptocurrencies in this bull market, the doubts about cryptocurrencies and blockchain being mere speculation have been increasing as crypto assets plummet. FTX founder SBF also shared his views on the potential applications of cryptocurrencies on Twitter, including payments, market structure, and social media.

FTX founder Sam Bankman-Fried (referred to as SBF) recently shared on Twitter the potential applications of cryptocurrencies, including payments, market structure (referring to the structure of financial trading markets), and social media. "This thread is not related to investment, so I won't mention investment-related uses like 'buying tokens might rise,' such suggestions; instead, I will focus on three aspects: a. payments b. market structure c. social media."

Domestic and International Payments

SBF pointed out that due to the advancement of the internet, payment methods have shifted from cash transactions in the past to credit cards or electronic payments. However, he believes that the fees for daily payments are still too high. He cited that the current fee is 1%, but data shows that the "money flow fee" of mobile payment operators in Taiwan is about 2.2-3%. Of course, operators also offer corresponding benefits, such as point rewards, etc.

If high fees for domestic payments are just a minor issue, then the dilemma of international payments is as obvious as an elephant in the room.

SBF stated that the dilemma of international remittances is evident. Apart from the high fees, it is also time-consuming: "If a U.S. company wants to remit $100 million to a European company, assuming the chosen method is a wire transfer. One day later, your bank executes the remittance, and in the next week, this fund will pass through about 3 banks, sometimes the funds may even get stuck in a certain bank, requiring you to unfreeze it in some way. Oh, in addition, you also have to pay a 1% foreign exchange fee, plus around $50 for the wire transfer fee."

Wire transfers usually also require "foreign exchange fees" and "wire transfer fees." International remittances involve currency conversion, and foreign exchange fees are additional fees that customers incur when purchasing currencies other than the U.S. dollar through foreign banks, typically ranging from 1% to 3% of the transaction amount. Wire transfer fees are the handling fees charged for transfers. Besides fees, the current clearing system is not real-time.

SBF mentioned that the clearing of interbank transfers and credit card transactions can be as short as one day or as long as a month. For example, salaries paid out by companies may take four days for employees to receive; checks given by tenants may take weeks for landlords to cash. "I give these examples to indicate: Payments are difficult. There are many reasons for this outcome, but they all revolve around a central question: What does it mean to remit money to someone? What does 'clearing' represent?"

There are many problems with both domestic and international payments. In comparison, the fees and time costs for using cryptocurrencies for payments are much lower. SBF conducted an experiment on the Solana network, creating two addresses and transferring $50, with the transaction fee for cryptocurrency being only $0.0002. "Blockchain allows anyone to create wallets for transferring out or receiving tokens, including stablecoins like the U.S. dollar. The settlement time for these payments only takes a few seconds, and the fees are less than a dime. There is no long waiting time, no uncertainty in the settlement of account balances." Of course, this does not mean that applying blockchain technology to modern electronic payments solves all problems; it simply demonstrates the potential of applying blockchain technology to everyday payments.

Changing the Structure of Financial Product Trading

Another application of blockchain is "changing market structures."

SBF mentioned that through blockchain clearing and "security tokenization," the current operation of traditional brokers can be changed, making the trading process simpler rather than convoluted. The current process for retail investors to purchase stocks is also quite complicated.

First, retail investors place orders through brokers or platforms like Robinhood. These orders are not directly sent to the exchange but are routed to PFOF companies ¹ (payment for order flow), such as Citadel or Virtu.

Some of these PFOF companies may then place orders through ATS ², and then the orders from ATS exchanges may be passed to another PFOF company. However, these orders will ultimately be placed on the stock exchange and settled through DTCC (Depository Trust & Clearing Corporation) after two days.

[Note*1]: Payment for order flow is the compensation stockbrokers receive from market makers in exchange for sending their clients' trades to that market maker.

[Note*2]: ATS can trade listed stocks like exchanges but without regulatory responsibilities.

If a client successfully purchases a stock, the stock goes through the following process from the exchange to the broker/platform: NASDAQ Stock Exchange → DTCC of PFOF#2 → ATS → DTCC of PFOF#1 → Broker DTCC.

So, to purchase a share of AAPL, there are about 10 inter-settlements between 11 different entities over the next few days. Theoretically, each of these clearings could fail.

The most glaring example is the short squeeze triggered by GME in January last year.

"On January 28, 2021, most securities brokers shut down. Users couldn't buy, and sometimes they couldn't even sell stocks. Even on some platforms, users who didn't have leverage were also liquidated. This was not due to 'stock shortage' or other reasons, it was simply because the system collapsed."

At that time, short-selling institutions heavily shorted GameStop (GME) stocks, seizing the opportunity, and retail investors bought a large amount of stocks and options, triggering a short squeeze, causing losses for institutions. Several securities brokerage firms urgently halted trading of the stock. "On January 28, 2021, retail trading volume was high, indicating that dozens of counterparties would need several days to complete billions of settlements. As GME's stock price rose, potential losses would increase if settlements failed. Finally, this risk was too great for brokers, so they had to close some trading pairs."

How does cryptocurrency solve these problems?

SBF stated that on the FTX exchange, everyone can directly send orders to the exchange. Therefore, if securities are tokenized, the purchase cost and time for stock settlements are almost zero. "Assuming we tokenize securities, stock trading no longer needs to wait two days for settlement; it only requires swapping APL token and USD token on the blockchain. Please note, the entire process takes about 10 seconds and costs around $0.002, with no settlement uncertainty and risk."

Application of Social Media

SBF believes that the biggest problem with current social media is "lack of interoperability."

In short, if you post on Twitter, your friends on Facebook cannot see the post. In the past, this isolated model worked because different communities had different circles of life. However, in the Web3 era, we have entered a borderless world, and the inability of social platforms to integrate has become a major issue. "Social media networks are isolated, lacking interoperability. This means that everyone must manage 10 different social apps simultaneously, making our conversations with others fragmented."

Furthermore, current social networks also have "pseudo-monopolies," where social media giants can use their massive network effects to undermine competitors. Another issue is censorship.
SBF pointed out that if we publish articles/posts on the blockchain, say on Blockchain-Twitter (BT), when you post on BT, friends using Blockchain-Facebook (BF) can also see the message because BF can automatically integrate blockchain data.

"By passing messages through the underlying public chain (meaning posting), we can integrate different social networks together. You can use any single platform and still communicate with friends using other platforms. Additionally, you own these messages and the ownership of the network, and if you wish, you can port data from platform A to platform B."

Another benefit is achieving genuine competition. Because switching platforms is virtually painless, it will encourage competition between platforms, including the establishment of review mechanisms.
SBF stated that the potential applications he sees now are for payments, market structures, and social media, but this does not mean that blockchain applications are limited to this. He believes that there are many areas for innovation, including DeFi or Web3 games.

Finally, although there are many potential applications and some impacts have begun, these areas have yet to experience a true crypto revolution. Therefore, the real question is how to implement these innovations: "Taking a step back, how many areas have undergone a crypto revolution so far? I think the answer is 'not yet.' Although crypto technology has started to have an impact, it is not comprehensive enough. Therefore, the real question is: How do we move from some impact to truly massive applications?"

1) To what end?

Some potential use-cases for crypto.

— SBF (@SBF_FTX) July 16, 2022