The Rise and Fall Of FTX:

Synapse Network
10 min readDec 20, 2022

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The nosedive from grace of the third largest crypto Exchange.

We have so much liquidity that for us to buy an investment bank like Goldman Sachs is not a problem.” July 2021. Sam Bankman-Fried, 31, makes a statement to the Financial Times that stuns the financial world. It was the heyday of crypto. And he, founder of one of the leading digital asset trading platforms, FTX, was considered the Warren Buffet of digital finance.

Today, FTX is bankrupt. Bankman-Fried has resigned. His company, based in the Bahamas, managed nearly a third of the world’s cryptocurrency exchanges until disaster struck. FTX had grown to be worth $32 billion. Then the discovery of an $8 billion hole. In fact, it is the most significant crack recorded in the crypto world so far.

With consequences still difficult to calculate due to the multiple venture capitals involved, U.S. pension funds, investment banks and the many other financial institutions that have invested in Ftx over the years, the FTX crisis is going to spread its name far and wide before any kind of resolution. The FTX’s shares in the U.S. were classified as blue chip, thus a safe company, a recognition that made it a good deal in the eyes of investors. Until a few weeks ago.

History of FTX: a promising start.

FTX was an exchange founded in 2019 by Sam Bankman Fried as a part of the bigger Alameda Research project. In the short span of a couple of years, Bankman fried and the CEO of Alameda, Caroline Ellison, brought the exchange to the heights that we have seen in 2022.

More than a million users, 32 Billion dollars in capitalization, and a blue-chip status. Many had seen this meteoritic rise as a sign that shone light upon the birth of a new great entrepreneur, while also investing in the hot topic of the month, the FTX exchange and its amazing returns, the ease of access, and the many others features.

People saw FTX as a possible Binance/Coinbase competitor and were happy to see what the founders of the exchange were promising for the future.

A future that was bleaker than what anyone could have expected.

History of FTX: a sudden Halt.

FTX’s crisis became public on November 7th following a tweet. The author is Changpeng Zhao, founder of the world’s largest crypto exchange, Binance. One of his profiles is perhaps the most influential and followed profile in the crypto world, with CZ having reached an almost divine presence in the TwT space.

During the tweet, he confirms rumours that appeared in an industry journal just a few days earlier: FTX is facing insolvency and he himself will sell all his FTX tokens due to the nature of this insolvency.

It is quite common for an exchange like Binance to own tokens from another exchange. The crypto market is a rather interconnected market. And for Changeng, the value of FTX tokens was gone following that short article that came with a crucial snippet of information.

Because the Coindesk report previously published was showing that more than 8 billion dollars were missing from FTX reserves, meaning that nothing short of a miracle would save them in case of a mass withdrawal.

The effect is immediate. And it is panic. Investors start selling their crypto on FTX: they withdraw 6 billion in a few hours and condemn the company to total insolvency, the expected miracle never coming. Bitcoin loses 20 per cent in a few days It falls below $17,000 and the crypto industry burns $300 billion. FTX goes down with a net loss of 90% of its value.

History of FTX: Troubles in the shadows.

But how did FTX develop this huge solvency problem?

It turns out that the problems are running deeper than anyone could have ever expected. Not only FTX is going down, but seemingly, its parent institution, Alameda Research is the cause. Another element to complicate an already complicated picture, but essential to understanding what happened.

Alameda is a trading company/hedge fund founded in 2017 by Bankman-Fried, two years before he founded the FTX exchange. It is the heart of the entire empire of the 30-year-old American, who began taking his first steps as a trader on Wall Street. As of June 2022, Alameda was reported to own 14.6 billion in assets.

But most of these assets, it was later discovered, were FTX (FTT) tokens. Assets that gave it access to $7.4 billion in loans, directly coming from the investor’s funds. But as the crypto market collapsed, and as the value of companies offering cryptocurrency buying and selling services collapsed accordingly, those tokens began to be worth less and less. So much so that it became impossible to repay the debts, directly causing the fall of the third biggest exchange in the world.

History of FTX: Full Oversight.

As anyone can guess Sam Bankman-Fried, after the disaster that occurred while he was CEO of FTX, no longer plays any role within FTX, FTX US or Alameda Research, and does not speak on behalf of these companies.

This is the statement made a few weeks ago by the new CEO of FTX, John Ray. He took over as CEO on 11 November, following FTX’s declaration of bankruptcy. Ray is best known for overseeing the bankruptcy of the former energy giant Enron, at the time the largest corporate failure in US history.

However, not even the exchange’s new CEO is so far able to provide enough reassuring news regarding a possible recovery of FTX. Indeed, as the latest tweet states, it is yet to be clearly understood how much money or employees the company has.

Another interesting tweet that also emerged soon after the mess began is a press release from FTX’s official account, which reads:

“FTX Group has established Kroll as its claims agent and all official documents filed with the US bankruptcy court are available online at https://cases.ra.kroll.com/FTX/."

Kroll is an American corporate investigation and risk consulting firm founded in 1972, based in New York City. And, apparently, now officially FTX’s agent for claims and official documents.

The hope is that, under the supervision of a prestigious firm like Kroll, at least all future FTX official documents will be handled in the best possible way.

A new question arises at this point: is the cause of FTX’s collapse to be found in external factors or was it simply negligence on the part of the exchange?

Leaning on hard data, it is possible to put together an analysis to unite the fallen dominoes of FTX and Alameda. In other words, through the transaction data and crypto wallet activity of the entities involved, one can attempt to reconstruct what happened.

At the heart of the study is an approach based on the theory that a list of wallet balances and transaction volumes processed through these wallets represent the focus of the question.

Specifically, the following timeframes are to be taken into account. First, until May 2019: Alameda’s first on-chain involvement in FTX. August 2019 and January 2020: FTT as the illegitimate child of FTX-Alameda.

May 2022 to July 2022: the study of Alameda’s reaction to the collapse of UST and its consequences, as well as a potential loan granted by FTX with FTT as collateral. September 2022: recent events and the fall of FTX and Alameda.

Alameda and FTX were both founded by SBF and have ongoing collaborations. However, it is rumoured that FTX really started to raise money for Alameda and that the two have been colluding from the beginning.

Apparently, the first connection between the two dates back to May 2019, the month when Alameda was first involved with FTX with multiple on-chain interactions. In fact, Alameda was one of the first providers of liquidity on FTX, if not the first.

Specifically, it can be seen that Alameda’s portfolio interacted with FTX even before it was launched in May 2019; apart from other CEX addresses, it was the only clearly identifiable counterparty.

Then, if one turns to the period between July 2019 and January 2021, one can observe that at the launch of FTT, FTX’s native token, there was an early distribution. FTT, as a utility token for the FTX platform, does not entitle users to a share in the platform’s revenue nor does it represent a share in FTX.

Thus, it is neither supported nor does it give control over FTX’s governance decisions or treasury. Given the ties between Alameda and FTX, it is not surprising that Alameda was in the seed round of FTT. However, one wonders if these were more than just investors.

Specifically, two days before the official listing on FTX on 29 July 2019, Alameda received FTT 5 million in three transactions directly from the FTX Deployer (who coined the FTT) into its FTX account.

In addition, 20 million FTTs were deposited by the FTX Deployer into an FTX-related FTX Depository Wallet on the day of listing. Those were all the FTTs in circulation at the time. About a week after the listing, on 5 August 2019, 5 million FTTs were returned to the FTX Deployer.

All of the above could mean that the five million FTTs returned to the FTX Deployer were the same as those deposited in the Alameda FTX account. In fact, the amounts matched perfectly.

It is highly unlikely that any other party but FTX itself had so many tokens at that time, about 25% of the circulating supply. As a seed investor, Alameda technically should not have fully transferable tokens at the time in the first place.

At this point, there are two possible interpretations of the issue, of Alameda’s involvement and why FTX collapsed. A first, very optimistic one, would be that Alameda was involved in the market-making of FTT tokens. This theory, however, does not explain why the funds were only sent back after a few days.

The other, on the other hand, would be that Alameda profited from the ICO participants by selling the tokens before other investors’ tokens were unlocked and buying them back at a lower price later to return to FTX, which is something more likely, even if the moral implication of the issue are taking a turn for the worse.

Shortly before FTX collapsed, it appears that on 28 September Alameda received FTT 174 million from the FTT ICO contract and sent it to the FTX Deployer, further corroborating this theory.

Thus, between 31 October and 1 November, an unusual list of continuous stablecoin transfers from FTX International and FTX US to Alameda’s Circle, Binance and FTX wallets was identified.

These stablecoins included USDC, BUSD, TUSD, PAX and totalled $388 million.

And finally, we reached the 2 of November, the day when CoinDesk published a report on Alameda’s balance sheet, revealing that $5.8 billion of the $14.6 billion in assets on Alameda’s balance sheet would be in FTT and other tokens in the Solana ecosystem. Most of the equity in Alameda’s business was actually FTX’s centrally controlled token, FTT.

Then, on 6 November, the CEO of Binance announced that they had decided to liquidate the remaining FTT on their books, worth ~$584 million in FTT. From that moment on, a chain reaction set in, which, as we know, led to the liquidity crisis for FTX and its subsequent irretrievable collapse.

No clear answers, no clear winners: The story is not over yet.

The massive waves sent in every direction from the collapse of FTX can be felt in the downfall of multiple minor exchanges, projects and market suppliers in the DeFi scene, as well as in the sentiment of the crypto holders that have been spectators to one of the biggest flops in the history of modern economics.

We have seen another effect of the crypto winter, and we have seen what happens when projects can’t maintain their promises or a healthy internal regulatory system. When an organization is driven only by the unrealistic vision of its founder, with no real backing from actual tangible utility problems are going to arise en masse at the first hiccups in its trajectory.

And now, we are also seeing the other face of the medal. New audits for many huge projects are being done every day, regulatory systems are being introduced at unprecedented rates, companies have to show their solvency and the roadmaps lauded to the various communities are being backed by solid infrastructure.

This, of course, will bring some problems in the future, as well as some opportunities. At the moment, the general consensus is on full-blown panic, but many of the older veterans of the market see this moment as a necessary evil.

First of all, the market that will be born from the ashes of this disaster will need to follow cleaner rules, will need to be more secure, and all in all, to mature for an audience that is looking for fewer risks, an audience that is willing to set in for lesser gains if it means that they are properly cared for.

And second, everyone is acting like the crypto market is the only one taking losses. We are in a full-blown recession, the war in Ukraine isn’t over yet and the complications arising from that conflict can be felt all around the world.

Tensions in Asia are reaching a boiling point, India and China are almost escalating their conflict, the COVID situation in China has once again turned their country into a prison, and basically, everything is going to different levels of shit for the world.

And the consequence is a bad market state for everyone, everywhere. There is plenty of reason to panic, but there isn’t really a need, since it won’t solve anything. Bunker down people, accept the momentary loss and be aware of the opportunities that are coming our way

History always repeats itself, from hard times hard men are born and boy we for sure can expect some very resilient people coming out of this crisis, but, without having to rely on sayings, you can simply look at the data accrued in the millennia we have been on this earth: after a crisis, a golden age follows. We now need to not lose our minds and move carefully in a market and a world that is giving us some difficulties to face.

Today we have covered a big part of what the FTX case entailed, but we think that there are still positives and negatives left yet to analyse, and we will look for a new release on the topic in the following weeks.

In the meantime, we thought that our series: How to survive on the crypto jungle may give you some more tips on how to weather this storm, so, while this is all for today, don’t forget to check out this and always tune up to our channels to be informed about what’s happening in the wonderful DeFi ecosystem!

About Synapse Network

Synapse Network is developing a cross-chain investment and start-up acceleration ecosystem based on blockchain technology to give everybody an equal chance to contribute to great upcoming projects and to do so early on. We are bridging the gap between the traditional & crypto market. The idea of the Synapse Network technology goes beyond the standard offer of launchpads available on the market, becoming a true technological brand providing tech solutions.

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