The FTX saga - An overview and my thoughts
Background story, the aftermath, and my personal thoughts.
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If you read my article “Chronicles of the LUNA/UST Collapse” and thought, holly sh*t this is crazy, then take a sit my friend because sh*t just went crazier than ever.
FTX, one of the largest cryptocurrency exchanges, and Alameda Research, one of the largest market makers, just went belly up together.
This is a story in development. Every day that passes, something new comes to light.
There is already so much said and written about this, but given the magnitude of this event, I had to sit down and summarize what we know so far about this collapse, the collateral damage, and help put into perspective just how dramatic this event is.
Let’s start with some background information about who is responsible for this fallout
There is 1 person and 2 companies you should know:
Sam Bankman-Fried, aka SBF.
Alameda Research
FTX
Sam Bankman-Fried, aka SBF
Sam Bankman-Fried, holds a degree in Physics from MIT - but seems like Sam, like many of us, did not want to work in his field of studies. He spent the first 3+ years of his career as a trader for Jane Street (one of the world’s largest market makers).
Apparently, Sam enjoyed what he did because he then went ahead and founded a crypto trading company with his friend Gary Wang. Yes, you guessed it, this company was indeed Alameda Research.
Alameda Research
Alameda became well-known in 2018 by buying cheap BTC in the US and selling it off at a premium in Japan, where BTC was more expensive. This arbitrage deal combined with the fact that Alameda was basically trading every cryptocurrency, quickly became one of the largest market makers in crypto (market makers essentially provide liquidity to exchanges for their users to trade).
FTX
In April 2019, FTX was founded with Sam as CEO (until just a few days back), Gary as CTO, and Binance as one of its biggest backers.
FTX is a centralized cryptocurrency exchange.
FTT is its token, with a maximum supply of 350M tokens. It first started as an ERC20 token on the Ethereum blockchain, but today FTT runs on the Solana blockchain.
Many believe that the catalyst that kickstarted FTX’s exponential growth was the private sale of FTT tokens in the summer of 2019. Thanks to its close relationship with Alameda and Binance, there was enough confidence in its legitimacy.
Without going into details of FTT tokenomics, I will make 2 callouts about its shady structure:
Seems like more than half of FTT’s initial supply was allocated to the company and team - therefore highly centralized.
Like many exchanges, FTX uses part of the trading fees to buy back and burn the FTT token. But it has the most aggressive schedule of them all - doing this every Monday. Obviously buying FTT raises its price, whereas burning it decreases its supply which further increases its price if demand stays the same. Who do you think this benefits?
Long story short, in 2020 FTX’s popularity started to explode thanks to its trading features and the bull market gathering steam. With this, SBF pretty much became one of the richest people in crypto, and therefore one of the most famous.
His new gained massive wealth served as a badge of legitimacy and credibility, opening many doors for him, including the doors of many high-profile politicians as well as the door of the Congress of the US.
How did SBF go from being one of the key references in the crypto industry globally to the biggest scammer? Let me explain.
How it all started?
Let me just first say that, up until now, we knew that both FTX and Alameda were founded by Sam. But what was the exact relationship between both was unclear.
Enters Coindesk.
Coindesk published an article on Nov 2nd, revealing Alameda’s balance sheet (read full article here). In a nutshell, a significant amount of its assets was held in FTT, which is FTX’s token. To give you a better idea, as of the 30th of June more than a third of a $14 billion balance sheet was in FTT.
With this giant red flag, people were no longer “ok” with the previously unclear relationship between Alameda and FTX, and speculations about FTX funding Alameda behind the scene with its users’ funds started to spread like wildfire.
Why was this so alarming?
Let me walk you through the thought process:
If the majority of Alameda’s asset is based on a cryptocurrency minted out of thin air by its sister company, then this means that it is built on a very shaky house of cards.
Now, if so much FTT is in Alameda Research when technically FTX and Alameda Research were “independent” companies even though they were founded by the same person, is a very strong clue that FTX might have been funding Alameda, and probably helped cover the hole for Alameda created by the TERRA Luna fiasco that took down 3AC and Celsius.
So if FTX sent so many funds to Alameda, then the key question here was how much was left in its own pocket to honor all users that deposited funds in the exchange?
The Catalyst
The catalyst that sealed FTX’s fate was when CZ, Binance CEO, twitted that Binance will be liquidating their entire FTX token position given “recent revelations”.
This crashed the price of FTT, and also led to a bank run.
The confirmation of FTX being insolvent didn’t take long, and withdrawals were paused quite immediately.
There was a glimpse of hope with yet another tweet from CZ confirming a non-binding LOI for a potential acquisition. This rescue attempt was very short-lived. While the entire crypto world was still processing CZ’s tweet, Binance already issued the confirmation that they will not proceed with anything.
Given that this all happened within short hours, we are all assuming that Binance saw FTX’s balance sheet and say “no way, Jose”.
And Binance was right - with the filings for bankruptcy it came to light that the hole in FTX’s balance sheet is of AT LEAST $10B.
But I’m getting ahead of myself.
What’s the aftermath?
Alameda Research, FTX US, and over 100+ of subsidiaries, all filed for bankrupcy.
Let’s not forget that Alameda is a market maker, meaning a substantial % of all the crypto on every exchange is owned by them. It is also the largest recipient of all the USDT ever minted by Tether.
The actual domino is still unfolding. Let’s highlight a few areas:
The most affected are of course those with the most direct exposure to Alameda and FTX. Both entities together are estimated to have invested in over 250 crypto projects.
Within this list, one of the most affected is without a doubt Solana, which was the go-to blockchain for both FTX and Alameda, as well as some of its most prominent projects in the ecosystem such as Defi project Serum.
Also - all centralized exchanges are being questioned due to concerns about solvency, which led to commitments to share proof of reserves.
Currently, crypto.com and Huobi are two that have been receiving the most heat.
In the case of crypto.com, two things worsen its credibility:
Upon revealing its proof of reserve, meme coin SHIB is its second largest asset, representing more volume than ETH.
Speaking of ETH, seems like crypto.com transferred around $400M worth of ETH to exchange gate.io “by mistake”.
This last move raised even more concerns in the space, as many are wondering if these exchanges are sharing funds among themselves, which raised the concern around exchanges sharing among themselves to falsify their reserve.
The drama continues…
Just when everyone thought things couldn’t get worse… FTX was hacked and around a billion dollars of user funds have been drained.
Apparently, the hacker was identified by the Kraken team… How and why is beyond me. But there is enough suspicion that this was an inside job.
Meanwhile, SBF and his team are in the Bahamas (where FTX is based), under “supervision”
Why is this so important?
The reach of SBF.
He was a very established and prominent leader in the crypto space.
He was the spokesperson for our industry. He mingles with politicians, and we have even seen him in the US Congress.
It is also no secret that SBF is the second largest donor of the current US President.
When a high-profile reference like Sam Bankman-Fried turns out to be a scam and goes down by losing billions of user funds, it destroys years of effort of the entire crypto space, to say the least.
We lost credibility. And it’s going to take us much longer, and be much harder, to recover. Particularly because unfortunately, there are more SBFs…
My Thoughts
This is A LOT to process - so after struggling to organize my thoughts, I’d say three things.
1. Just because a project is in the crypto space, doesn’t mean it is decentralized or non-custodial.
We need to do a better job of educating about the difference between centralized and decentralized companies. We are in crypto because we want to build trustless, decentralized, and non-custodial alternatives to the existing financial system.
Just because FTX is a cryptocurrency exchange, doesn’t mean it is any different than traditional exchanges. The only thing that changes is the assets they operate. This is NOT crypto.
2. We need to be more critical
I keep hearing people say that in hindsight, it was quite obvious that FTX and Alameda were colluding.
I watched some videos of the CEO of Alameda, Caroline Ellison (who seems to be SBF’s ex…), and people were right - she was definitely shady. business
The same goes for Sam Bankman-Fried.
But how did they manage to go so far? Sam was literally discussing crypto regulations with the SEC, speaking in front of Congress, and received investments from top-tier investors. These are all smart guys, so what happened? Why did we all choose to trust them?
I can only think that we tend to get blinded by people’s wealth and fame, and believe those are good enough to prove someone is legitimate. We believe that because some other big shot chose to trust them, then it should be safe to trust them as well. Ideally, this should be the case. But we are learning the opposite the hard way.
Again, crypto is about building trustless protocols, not about trusting one person.
3. The most affected…
Lastly, I want to say that my thoughts are with every user affected by this terrible collapse. Unfortunately, it is always the end user who is most impacted.
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This is a tragic time for the crypto space. Let’s hang in strong everyone.
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Jazmin, have you seen this article? Truly bonkers. https://decrypt.co/114719/tumblr-blog-linked-ex-alameda-research-ceo-explored-race-science-imperial-chinese-harem-polyamory