Nov 28, 2022
The collapse of FTX: how was it
On November 11, the cryptocurrency exchange FTX declared bankruptcy. Several inquiries have been filed against the company’s management. Now, as experts try to figure out why Sam Bankman-Friede’s empire failed, we can see that warning signals were ringing from around. Read the details in the article.
For uninitiated readers, we created a chronology of the key events with an explanation.
Sam Bankman-Fried: Who is he?
- Sam Bankman-Fried (SBF), is the creator of the FTX crypto exchange and derivatives market and Alameda Research.
- In 2022, he was named one of TIME’s Top 100 Most Influential People. According to Forbes, he is also one of the wealthiest persons in the blockchain and crypto industries.
- Sam Bankman-Fried’s assets are estimated to be at $24 billion. In addition, he is the CEO of Emergent Fidelity Technologies, which holds a 7.6% share in online broker Robinhood.
What is the goal of Alameda?
Sam Bankman-Fried is a creator of Alameda Research. SBF operated both his own trading company, Alameda and the publicly accessible FTX crypto exchange. According to the research, he intended to exploit FTX to keep Alameda afloat. However, it is unsure whether SBF had meant it from the start or was merely making one last desperate attempt to save Alameda.
Chronology of events: As it was
Sam Bankman-Fried’s success story was nearly flawless. In just three years, FTX went from $0 to $32 billion. And it’s now back to zero.
The beginning
The FTX crash began with the publishing of the Coindesk investigation. It described the crypto exchange’s strong relationship with the hedge fund Alameda Research. According to the research, Alameda’s financial reserve mostly consisted of FTT rather than external assets.
Remark: FTT is FTX’s utility token used for transactions on the exchange and rewards.
“It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token,” said Cory Klippsten, CEO of investment platform Swan Bitcoin
Binance role
Following that, FTX stock dropped, and Binance, which was considering acquiring FTX, not only canceled the deal but also liquidated FTT. After a confirmed background investigation on FTX’s finances, CoinDesk reported on November 9 that Binance will likely cancel the deal.
Then, FTX customers also started to withdraw their funds. In general, they were able to withdraw almost $5 billion before FTX halted withdrawals.
Bankruptcy
FTX filed for Chapter 11 bankruptcy, and Sam Bankman Fried resigned as CEO. The FTX’s new CEO was John J Ray III, a lawyer previously engaged by the oil company Enron during its disastrous bankruptcy.
Culmination
Hundreds of millions of dollars began to flow out of FTX wallets late in the evening of November 11. Some withdrawals from Tether were instantly converted to DAI, which is decentralized and a safer asset for hackers. There is the wallet of the receiver.
After swapping USDT for DAI, the suspected hackers simply converted $44 million in stETH for ETH. Then, in the sender’s account, someone sent an onchain message with the hash “0x3d24a1ff” — this is the name hash of “Rug Pull All”. In the crypto world, it means that the developers are unexpectedly abandoning the project and selling or removing all of its liquidity.
Ryne Miller, FTX’s general counsel, claims that he does not know why money is being moved at this time.
Then, FTX announces in its main Telegram chat channel that it has been hacked. The funds are eventually pooled into a multi-signature at 0x97f99197171a37D4Ca58064e6a98FC563F03A71E5c.
Three hours after his first tweet, the General Counsel explains that all of the aforementioned measures were planned, which completely contradicts what he said a few hours before.
As a result, the FTX accounts lost $650 million.
What is the problem with FTT?
Experts have concluded that the majority of Alameda Research’s net value is derived from its own centrally managed coin (FTT). What does this imply? Assume SBF produced its token, boosted its price, and borrowed against its second firm to secure it. When the FTT token dropped, the loans became unsecured, resulting in a financial crisis and an $8 billion hole in the budget.
According to the WSJ, which cited a source, Alameda Research owes FTX $10 billion. Almost all of this is customer money that SBF utilized to support its second company’s questionable agreements.
Remark: 22% of all FTX deposits and withdrawals are tied to Sam Bankman-Fried-owned market maker Alameda Research.
Influence on the market
Following the collapse of FTX, DeFi platforms saw profits despite an outflow from centralized exchanges (CEXs). According to Cointelegraph, Onchain statistics revealed a rise in decentralized futures trading platforms as well as growth for DeFi protocols.
Nevertheless, this is not relevant for all DApps and protocols, as some have financial relations with FTX and Alameda. Yet, revenue statistics from DeFi initiatives suggest that at least three protocols, including Ethereum and the OpenSea marketplace, have topped $1 million in the previous seven days.
However, the collapse of FTX caused the crypto market to slump to a two-year low amid concerns that the company’s woes will spread to other crypto businesses. The failure of FTX has spread an infection, causing financial concerns for numerous other organizations. Genesis, a cryptocurrency brokerage, halted withdrawals due to an “abnormal” volume of requests that surpassed its existing liquidity. According to Bloomberg, Genesis is attempting to raise an additional $1 billion for its loan section.
