The collapse of crypto-exchange FTX was most likely triggered by the collapse of Terra. What is the connection between these projects?
The bankrupt crypto-exchange FTX and the trading company Alameda Research were both founded by the same person, Sam Bankman-Fried. There was never a clear line between the two organisations in terms of financial transactions, as the same funds were used to support both companies. However, since the collapse of Terra in the spring of this year, the model has been in flux, meaning that FTX and Alameda have had serious problems for months. Terra’s collapse was partly a starting point for the current crisis, according to a statement by analyst platform Nansen. We present their analysis in more detail.
Note that the extent of the impact of the collapse of FTX on the industry is serious enough. In particular, the day before, analysts published a chart with FTX investors and lenders, who disclosed their relationship with the cryptocurrency exchange and at the same time named the volume of their own positions. As can be understood from this data, the platform’s problems will provoke a notable liquidity hole for other niche participants.
FTX investors and lenders
What is the cause of FTX’s collapse?
Almost a week after the official bankruptcy of both Bankman-Frieda organisations, the Nansen team has published a lengthy report analysing the blockchain transactions involving the two companies. Here is a quote from that publication.
Piecing together snippets of our blockchain investigation, it became clear that the Luna/Terra collapse revealed a deep flaw in the tangled relationship between Alameda and FTX. Around the Terra/Luna/3AC situation, there was a significant outflow of FTTs from Alameda to FTX.
Apparently, the trading companies tried to help the blockchain project, but this ended up only in financial losses. They ended up including leading to the situation we have today.
FTT exchange rate over the last 90 days
As a reminder, Alameda was founded in 2017 and FTX came two years later in 2019. Before the exchange was founded, the wallets that later became owned by it received constant transactions from Alameda. Here’s how analysts comment on this.
Despite the relatively small volume of transactions – an average of $160,000 – it suggests that either Alameda was heavily involved in the creation of FTX, or there was no clear separation between Alameda and FTX at the time. Or perhaps both.
FTT transactions from Alameda to FTX
According to Decrypt’s sources, a fortnight ago it became clear that Alameda had at least $5 billion in native tokens on its FTX platform called FTT, with most of these funds being illiquid. Following rumours of financial problems at the exchange, there has been a record outflow of user funds. That is, FTX was trapped – the exchange could not meet all of its obligations and Alameda was once again unable to help it financially, as much of its balance sheet was also illiquid.
Nansen’s analysis showed that FTX controlled about 80 per cent of FTT’s supply. And this is despite the fact that the company’s documents report only needing to keep half of its 350 million-dollar token offering on its balance sheet. In addition, Alameda could not sell tokens from its balance sheet without causing a serious collapse in its price, which would also increase suspicions of financial insolvency for both organisations.
Moreover, the history of blockchain transactions shows that Alameda borrowed from the Genesis platform against the FTT. Genesis representatives confirmed that the company has a “significant stake” in FTX, but did not comment on any of the theories that it is a major lender to Alameda. The company suspended customer withdrawals on Wednesday, citing “unprecedented market turmoil”.
Alameda and Genesis transactions
Analysts speculate that Alameda had little capacity to repay all its loans after Terra collapsed and borrowed from FTX. And around the time Terra collapsed with a $40 billion loss, there was a $4 billion inflow from Alameda to FTX in the exchange’s native tokens. In other words: both FTX and Alameda could well have gone bankrupt months ago, but the Bankman-Frieda team tried to delay the inevitable. We already know the result.
Stablecoin outflows from exchanges
Meanwhile, the Bahamas Securities Commission (SCB) announced that on November 12 it ordered the transfer of all digital assets of FTX Digital Markets (FDM) to a wallet owned by the regulator. The SCB said the regulator used its powers based on a Supreme Court ruling, Cointelegraph reported. FTX assets are being transferred to the new address “for safekeeping”.
The exact amount of funds in the transfer is not disclosed. In addition, the coins can only be moved to the new address after obtaining permission from the interim liquidator appointed by the Supreme Court.
We believe that any previous actions by FTX and Alameda are unlikely to surprise the cryptocurrency community any more. Still, as previously revealed, Sam Bankman-Fried not only used the platform's clients' funds for the needs of his colleagues, but also simply transferred money as a loan between his own companies. In addition, a lock on Alameda's positions was built into the FTX liquidation mechanism, which means they may not have been liquidated when they should have been. Accordingly, something less shocking is unlikely to await us next - but we could have already prepared for that.
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