Preface

The Kama Sutra is an ancient Indian text written by Vatsyayana around the 2nd century CE. It is a treatise on the art of love, sensuality, and relationships, and deals with the different aspects of sexual behavior and pleasure. While the Kama Sutra is already well studied and widely available, a mystifying manuscript known as the "Token Sutra" recently emerged, exposing ways to attain satisfaction through a more lucrative form of liquidity.

Contrary to its more famous counterpart, the “Token Sutra” focuses on optimal positions for exploiting a partner using strict domination and selfish misaligned incentives. It contains positions and advice so predatory and explicit that certain passages could not be translated into modern English. The reason for its disappearance from civilisation is unclear but scholars believe the strategies and tactics inside were deemed too dangerous and destructive for a healthy civilisation.

Allegedly, the tome was unearthed during a several month-long excavation that took place during the building of FTX from late 2018 to summer 2019, funded by none other than Scam Sam Bankman Fried using the earliest customer deposits in FTX. SBF was quick to make the Token Sutra an internal bible during the early days of Alameda, and it formed the foundations of Alameda’s trading strategies. But the intoxicating allure of the Sutra’s power soon overwhelmed them. They started by exploiting small, insignificant token projects, and the rush hit harder than the morning’s first Emsam. The allure of the Token Sutra had them hooked.

In the end, Alameda was a shell of its former self - a cautionary tale of unchecked ambition and the destructive power of the Token Sutra. The following leaked pages were discovered during a law enforcement raid of the Alameda offices in late 2022, and are a fraction of the entire text.

The Token Sutra

We reviewed the Token Sutra to shed light into the dark underbelly of token market making and the predatory techniques that have been exploiting new token projects and users for years. We hope to expose these practices to educate projects on how to prevent past mistakes and pave the way for a more transparent and aligned future.

#13 The Sneaky Spread Eagle

The market maker slides the embedded call options deep into the founder’s loan agreement, squeezed tightly inside the loan terms for token liquidity. The token project gasps with surprise, but the market maker assures them that they are using industry standard protection. As the bull market rages, the founder's eyes widen as they feel the market maker's options pulsating deep inside their contract, the call option premium throbbing with potential profit. Little did they know, the market maker intended to squeeze maximum value out of every transaction, leaving the token project feeling exploited and begging them to stop. As the market heats up and the token's price rises, the market maker's options grow more engorged, ready to be exercised and release a giant load of gains.

Market makers often require token loans to carry out their market making activities, enabling them to acquire and trade tokens without the project bearing the risk of trading losses. The exploit is the embedded American call option in these loans, which gives MMs the implicit option to repay the loan in tokens or USD stables. Unbeknownst to project founders, this crafty tactic can leave them handing over massive sums of tokens at the time the option is exercised.

#21 The Call Option Caress

Like a silver-tongued suitor on a promising first date, the market maker slides into the founder's DMs, whispering sweet nothings about call options. "It's just a bit of harmless fun," they coo, "a safe way to play and maximize alignment." The founder, blushing and doe-eyed, hands over the reins, allowing the market maker to reach down for fistfuls of dirt cheap call options. It's only when the market maker has had their fill and left, and the harsh light of the morning sun hits the balance sheet, that the founder realizes they've been thoroughly shafted.

Call options were commonly issued as part of the Liquidity Consulting Agreement (LCA) as a way to hedge risk when market makers were required to maintain short positions selling loaned tokens. Unlike formal call options, these options were less standardized and were often not explicitly defined. These call options acted as a lottery ticket, giving holders exposure to the dramatic upside of tokens during a bull run, when tokens could rapidly 10x or 100x and materialize into 8-9 figures of option delta.

#32 The Moonshot Menagerie

The market maker seduces the founder with a big-brain display of financial engineering wizardry. The founder, too smitten by the market maker's intoxicating show of Monte Carlo simulations and Brownian motions, leaps deep into their well-lubricated financial fantasies. Unbeknownst to them, their newfound lover's promises are about as solid as the utility of a shitcoin in a bear market. As the founder is left with the aftertaste of a poorly negotiated deal, the market maker flees the scene, with the token project clutching its deflated dreams and staring at a chart that's crashed harder than an autist who ran out of stims.

There were numerous financial engineering tactics that savvy traders employed to maximize the Day 1 value they could extract from the contract, all while claiming to be more competitive than other market makers. These approaches ranged from fundamental tactics, such as competing on strike price or option tenure, to more advanced derivatives that introduced multiple tranches with varying strike prices or knockout clauses. The added complexity created an illusion of alignment and sophistication, but it further complicated projects’ ability to understand the predatory terms they were agreeing to.

#50 The DeFi Dirty Double Dip

The market maker swindles the founder's loan assets, plunging them deep into DeFi's moist depths of yield farming, as the founder moans in confusion, thinking they're in a monogamous liquidity relationship. The market maker has their way with them, exploiting their naivety to double dip into profits from yield farming and prop trading. The founder, now realizing they were nothing more than a side piece, cries out in betrayal, but it was too late. In the end, the DeFi dirty double dip was just another notch on the market maker's bedpost, a fleeting moment of pleasure before moving on to the next victim.

While the Kama Sutra sometimes permits polygamy, the Token Sutra strongly advocates for it as a way to maximise exploitation. This was of particular interest within Alameda's Bahamian offices, where the techniques were practiced religiously, both for work and for pleasure.

A common play was for market makers to secure token loans or VC investments, and be deliberately vague about specific details such as what the tokens can be used for, when they can be sold, which exchanges the tokens can be diverted to and the regularity and transparency of reporting. The omission of specific terms opened a loophole for market makers to siphon funds into whatever would produce the highest yield for themselves.

#69 The Big Brand Bondage

Market maker gags the founder with their big brand name, demanding complete submission and high compensation. The founder hangs onto every word from the dominating market maker, who promises support and exchange listings. Forced into an uncomfortable position, the token project still drools for the facade of legitimacy provided by their domineering partner, but is ultimately deceived by the illusion of prestige and security.

The Token Sutra taught market makers the power of leverage in forcing a subject to submit to their demands. Big brand funds, such as Alameda, leveraged their positioning within the industry. They overpromised on support, such as prioritized exchange listings, marketing benefits, and co-investment deals with top-tier VCs, in an attempt to "strong arm" projects into accepting a bad deal. This power became a core tactic for market makers to exploit projects for more fees, larger allocations, and more aggressive compensation.

During frenzied bull markets, support and focus would be directed toward more promising projects, and promises of potential exchange listings and after-market support were often left empty and at the complete discretion of FTX/Alameda management. Some projects like Reef Finance even faced the threat from Alameda of delisting from FTX and other tier 1 exchanges.

The FTX Raid

During the 2022 raid of FTX’s Bahamas offices, local authorities reported disturbing images of the cult-like worship of the Token Sutra. As they stormed the building, the air grew thick with the musky scent of stimulant abuse and desperation. The office led them to a back room where the Token Sutra was left on the floor, open with an evil aura emanating from its worn pages.

The news of the raid sent shockwaves throughout the crypto community. The fall of FTX was swift and brutal, leaving behind a legacy of debauchery, scandal and greed. As the dust settled, the once-proud empire lay in ruins, serving as a grim reminder of the dangers of unchecked ambition and the intoxicating lure of forbidden knowledge. The infamous mantra, "Om Liquida Shanti,"(Peace in Liquidation) echoed ominously, a haunting refrain of the destructive power of the Token Sutra.

💡 If you have stories to add to the Token Sutra or wish to provide feedback, please email us at contact@paperclip.partners.