On FTX

Nov 11, 2022

A collection of some thoughts on the FTX meltdown over the last few days.

What happened? Out of $16 billion in customer assets, $10 billion was loaned to Alameda for trading. When Alameda Research was margin-called, and users tried to withdraw their funds from FTX, the money wasn't there.

People are still piecing together what happened and where the $10 billion hole came from. Signs seem to point to FTT, a token used by FTX to provide loans and liquidity to Alameda. With high fully diluted value (FDV) and low circulation, FTX was lending much more margin to Alameda than it seemed. The contagion continues to grow with the numerous companies funded or bailed out by SBF in the last few months.

Some early reflections.

  • FTX did not have a board of directors. I'm all for founders having the freedom to follow their vision, but the most successful leaders surround themselves with even smarter people who challenge them.
  • Regulation matters. FTX was headquartered in the Bahamas, and Alameda Research is in Hong Kong. FTX.us is a US-based exchange, which is much smaller.
  • The relationship between FTX and Alameda Research seems like it crossed the line. Having both an exchange and a market-maker business  (more like a hedge fund) can quickly get you in trouble if you aren't careful.
  • When everything looks good, it's easy to gloss over specifics. So you have to do deep research no matter what. FTX had raised from top venture capital firms – Sequoia, Race, Ribbit, and Softbank.
  • Is this a failure of crypto or the very thing crypto is meant to prevent? Not sure if it even matters. Retail investors will lose billions of dollars. Trust is the feature of these systems, and trust was broken.
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