On November 11, the cryptocurrency exchange FTX declared bankruptcy, having lost (or perhaps stolen) around $8 billion in customer funds. After FTX’s collapse, a lot of people have been talking about an interview that CEO Sam Bankman-Fried (SBF) did on Bloomberg’s Odd Lots podcast back in May.

At one point in the interview, Bloomberg’s Matt Levine asked SBF to explain yield farming, an investment strategy that enables cryptocurrency owners to generate earnings using their digital tokens. When SBF finished his explanation—which I’ll describe in more detail shortly—Levine and the podcast’s co-hosts seemed stunned.

“I think of myself as like a fairly cynical person, and that was so much more cynical than how I would have described farming,” Levine said. “You're just like well I'm in the Ponzi business, and it's pretty good.”

SBF responded that this was a “pretty reasonable response” with “a depressing amount of validity.”

SBF now faces accusations that he ran a literal Ponzi scheme, so many people have understandably interpreted this as effectively a confession of his own guilt.

But SBF was actually making a broader point about the speculative dynamics that drove last year’s cryptocurrency boom. And the dynamic he identified didn’t just happen in crypto—something similar was happening in the broader world of venture-backed technology startups during the late 2010s.

The Box and the X Token

Yield farmers deposit cryptocurrencies with decentralized finance platforms and earn returns in much the same way that you can deposit dollars in a conventional savings account and earn interest. In 2021, yield farmers were earning a lot more than you could get from conventional financial products, which made some people wonder if something shady was going on. In that May interview, Levine asked SBF to explain how yield farming worked.

In response, SBF sketched out a “toy model” of yield farming involving a box that could hold digital assets. “For now ignore what it does,” SBF told his Bloomberg hosts, “or pretend it does literally nothing” aside from storing people’s tokens.

This hypothetical box was associated with an equally hypothetical X Token, SBF said. X Token holders get to vote on changes to the box, and if the box ever turns a profit, X Token holders would get a share. Every day, the box creates a bunch of new X Tokens and gives them to anyone who has stored money inside