Complex Systems with Patrick McKenzie (patio11)

Patrick McKenzie (patio11) reads his 2022 Bits About Money essay demystifying financial leverage, starting from the balance sheet math that lets you work out in your head how big a drop in asset value wipes out a firm’s equity: add one to the leverage ratio and take the reciprocal. A firm levered ten to one is gone after a loss of about 9%. He walks through how brokerages manage customer leverage with margin calls, and why paying down the loan lowers your risk more than depositing the same amount in shares. He then tells the story of a whale’s account blowing up on the DeFi lending protocol Solend during the FTX collapse. Solend pushed the interest rate on SOL deposits to 2,600% and still couldn’t attract enough, and Patrick spent an evening in Tokyo liquidating the whale’s debt by hand, 22 times, through software that crashed about 70% of the time.Postscripts cover Solend’s rebrand to Save, what 2x leverage on Google would have earned since the essay was written, and why today he would just have an AI agent write the liquidation bot.–Full transcript available here: https://www.complexsystemspodcast.com/liquidating-a-whale-by-hand-22-times/   –Presenting Sponsor: MercuryComplex Systems is presented by Mercury. Mercury Payroll puts payroll, benefits, and compliance right inside your Mercury account. An in-house team backed by AI registers you in new states, files and remits your payroll taxes, and handles the notices, so you don’t have to copy from PDFs to Excel to web portals. Setup takes minutes, and Mercury Payroll is free for eligible Mercury customers through the end of 2026 at mercury.com/payroll –Links:Source essay: https://www.bitsaboutmoney.com/archive/demystifying-financial-leverage/ –Timestamps:(00:00) Intro(01:06) Basic balance sheet math(02:20) Why leverage as a concept is useful(03:55) Managing leverage of one’s customers(07:40) Mismanaging customer leverage(09:10) Decentralized finance innovations in leverage management(09:48) Sponsor: Mercury(12:13) Solend and the whale(21:31) Closing thoughts(22:03) Wrap

Patrick McKenzie (patio11) is joined by returning guest Zvi Mowshowitz, AI watcher extraordinaire, to read Anthropic’s S-1 and what it shows about the AI industry. They cover a founder-controlled structure built on a single Class F share that holds 50.1% of the vote, an uncapped 3:1 employee donation match that may be the most expensive perk ever offered, and about $900 billion in forward compute commitments. They also discuss why softer Q3 revenue points to a shortage of GPUs rather than of customers, the bubble and circular-financing bear cases, and who should be blamed when AI-assisted hackers take $5 billion from Binance.–Full transcript available here: https://www.complexsystemspodcast.com/reading-the-anthropic-s-1-with-zvi-mowshowitz/  –Presenting Sponsor: MercuryComplex Systems is presented by Mercury. Mercury Payroll puts payroll, benefits, and compliance right inside your Mercury account. An in-house team backed by AI registers you in new states, files and remits your payroll taxes, and handles the notices, so you don’t have to copy from PDFs to Excel to web portals. Setup takes minutes, and Mercury Payroll is free for eligible Mercury customers through the end of 2026 at mercury.com/payroll –Links:Anthropic S-1: https://www.sec.gov/Archives/edgar/data/2130357/000162828026068676/anthropicpbc-sx1ax1.htm Zvi’s past Complex Systems episode: https://www.complexsystemspodcast.com/episodes/betting-trading-zvi-mowshowitz/ –Timestamps:(00:00) Intro(01:35) How the S-1 talks about existential risk(07:45) Anthropic has long had an attitude(12:20) Anthropic’s uncapped donation matching(14:18) Postscript: what the matching program will actually cost(16:00) Sponsor: Mercury(18:29) Revenue growth and cohort economics(22:25) Postscript: Q3 was a supply story, not a demand story(24:55) Is it a bubble?(28:27) Sizing the market for tokens(31:02) The commodification bear case(31:56) Cash efficiency and $800 billion in compute commitments(36:44) Postscript: what happens if the commits go bad(39:20) Flexing compute between training, inference and subleasing(43:37) Reading an S-1, with and without an LLM(46:49) Circular financing and the dot-com comparison(50:08) Wall Street versus the tech industry(52:02) The three AI pills(54:53) Industrial revolutions and how weird the future gets(57:31) AI mathematics and the bitter lesson(01:00:52) Capabilities nobody trained for(01:04:40) Capabilities versus diffusion(01:07:12) Token spend at the frontier(01:09:09) Final thoughts on the S-1(01:11:48) The Hackening and who bears responsibility(01:17:49) Trapdoors and irreversible decisions(01:19:12) Wrap

Patrick McKenzie (patio11) reads his 2022 Bits about Money essay “Markets in power,” prompted by a SoftBank push notification asking him to cut his air conditioner use between 5 and 8 PM, and updated for the era of AI data centers. He walks through why electricity has to be consumed almost the moment it is generated, how base load, intermediate, and peaker plants divide up a day’s demand, and how virtual power plants turn software and contracts into the economic equivalent of a peaker plant. The new commentary covers CoreWeave’s start as a GPU host for Ethereum miners, why ERCOT paid a Bitcoin miner tens of millions of dollars during the 2023 Texas heat wave, and why AI data centers, whose chip depreciation is five to ten times their electricity bill, behave more like base load than Bitcoin miners do–Full transcript available here: https://www.complexsystemspodcast.com/why-softbank-paid-me-17-yen-to-skip-the-air-conditioning/ –Links:(Source essay) Markets in power: https://www.bitsaboutmoney.com/archive/markets-in-power/  –Timestamps:(00:00) Intro(02:58) Electricity is ubiquitous, and other polite fictions(06:35) Electricity supplied and demanded are necessarily equal(07:57) Demand for electricity fluctuates over the day and over the year(09:53) The power generation mix(13:34) Demand response and virtual power plants(19:50) A quick aside about meter reading(21:05) Why this sudden interest in power?(26:22) Wrap

Patrick McKenzie (patio11) reads his 2022 Bits about Money essay on the infrastructure behind American charitable giving, prompted by the wave of AI-generated wealth expected to flow into philanthropy. He explains donor-advised funds, a chimera that is legally a charity but works for donors like a financial institution that can time travel: someone with a windfall takes the tax deduction now and recommends grants for years afterward. Along the way he covers why the IRS-required donation receipt is simple enough for a seven-year-old to produce while the industry still spends billions on record-keeping, why DAFs still mail so many paper checks, and how Anthropic’s reported uncapped three-to-one donation match could push tens of billions of dollars through this machinery.–Full transcript available here: https://www.complexsystemspodcast.com/the-charity-that-is-also-a-time-machine/ –Presenting Sponsors: Mercury & ElevenLabsComplex Systems is presented by Mercury—radically better banking for founders. Mercury Spend hands your team and agents their own cards with limits you set once, so nobody waits on you to approve a SaaS invoice and nobody chases a receipt. Apply online in minutes at https://mercury.com/. ElevenAgents by ElevenLabs are AI voice and chat agents that look up accounts, handle routine requests, and pass a fully developed ticket to a human rep when needed, which is what IVR always promised. They handle more than 10 million conversations a week, in over 70 languages. Book a demo at elevenlabs.io/complexsystems.–Links:(Source essay) Charitable donations and the infrastructure supporting them: https://www.bitsaboutmoney.com/archive/charitable-donations-infrastructure/ The Third Wave of American Philanthropy:https://nanransohoff.substack.com/p/the-third-wave-of-american-philanthropy –Timestamps:(00:00) Intro(02:24) How charities are organized in the U.S.(06:09) Recordkeeping for charitable donations(10:00) Charitable donations and time travel(10:55) Sponsors: Mercury | ElevenLabs(15:02) Charitable donations and time travel (cont'd)(22:54) This is a pattern seen elsewhere(23:49) Postscript(26:40) Wrap

Patrick McKenzie (patio11) reads his 2022 Bits about Money essay "Finality does not exist in payments." It argues that how final a payment is depends on the rails, the parties, and the governing law, not on the payment method alone. He explains why the reversibility of credit cards is what made internet commerce possible. He also covers the "hold harmless," the brief phone call between operations staff that quietly unwinds wire mistakes every day. He then applies the essay to Citibank's 2020 accidental wire of nearly $900 million to Revlon's lenders: a district court let recipients keep about $500 million before an appeals court reversed it. He closes with how the UK, India, and Japan have each tried, with mixed results, to make fraudulent instant payments less final.–Full transcript available here: https://www.complexsystemspodcast.com/the-900m-wire-that-wasnt-final/ –Presenting Sponsors: Mercury & GranolaComplex Systems is presented by Mercury—radically better banking for founders. Mercury Spend hands your team and agents their own cards with limits you set once, so nobody waits on you to approve a SaaS invoice and nobody chases a receipt. Apply online in minutes at https://mercury.com/. If meetings consistently leave you with hazy action items and lost context, Granola handles the transcription so you can actually participate and gives you searchable notes afterward. Try it free at granola.ai/complexsystems with code COMPLEXSYSTEMS–Links:(Source essay) Finality does not exist in payments: https://www.bitsaboutmoney.com/archive/no-payments-are-final/ –Timestamps:(00:00) Intro(01:23) Finality is a technosociolegal construct(03:26) Non-state agreements for dispute resolution(07:34) Wait, are you telling me wires are reversible?(12:43) Why does this matter?(13:26) The $900M mistake(14:52) Sponsors: Mercury | Granola(18:11) The $900M mistake (cont'd)(20:37) Final, then not final(23:09) How other nations handle finality(32:39) Wrap