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- 5 Minute Explanation of FTX's Meltdown
5 Minute Explanation of FTX's Meltdown
GM and happy Friday from The Mint. A lot has happened in the last few days, so let's not waste any time.
FTX, one of the largest cryptocurrency exchanges in the world and a multi-billion dollar company, has effectively been shut down.
This devastating news has been a few days in the making, so we'll try to summarize as best as we can. Also, since we're an NFT publication, we'll talk about what this news means for NFTs.
So, What Happened?
Event 1: A leaked balance sheet showed that FTX's sister company Alameda Research (a prominent hedge fund in the space) held billions of dollars of FTT, the native token of the FTX exchange. The fact that one firm held so much of the supply was worrisome, so people began to ask questions.
Event 2: Whale Alert, an algorithm that detects large crypto transactions, shows that over 22,999,999 #FTT ($584,818,174) was transferred from an unknown wallet to Binance.
For those that don't know, Binance is the largest crypto exchange in the world. Binance was an early investor in FTX. Last year, they sold their stake in the company and took ~$2 billion of the buyout in the form of the FTT token.
Event 3: Binance CEO Changpeng “CZ” Zhao tells the public that in light of the leaked balance sheet, Binance would be liquidating all of the FTT that they held. CZ did this knowing that liquidating that much FTT would cause the markets to swing dramatically, and the value of the FTT token would plummet. This would give Binance an opportunity to acquire FTX and enter the US market (Binance doesn't currently operate in the US).
Event 4: Binance signs an LOI to enter into a non-binding contract to purchase FTX to help them cover the liquidity crunch from the mass selloff of FTT tokens.
Event 5: So, Binance is buying FTX, right? Wrong. Binance took one look at the books and says "nevermind."
Event 6: FTX's domestic and foreign sites urge users to stop trading on the platform, and say that trades/withdrawals will be shut down in a few days. FTX is actively looking for ~$8 billion in funding so that it can allow users to make full withdrawals. As of 11/11, most firms under the FTX umbrella filed for bankruptcy.
So, as you can see, this is a really bad situation. During this whole process, Sam Bankman-Fried, the CEO and founder of FTX and Alameda Research, assured the public that everything within the firm was fine.
Everything was not fine. As people saw in the leaked balance sheet, FTX and Alameda's net worth was almost wholly determined by their reserves of FTT tokens, which were extremely illiquid. Once the token selloff began and the value dropped, FTX wouldn't have enough liquidity to allow users to withdraw their money.
So, what's next?
SBF is in big trouble. There's a good chance he will be prosecuted for his carelessness. Think Madoff, Enron, and Theranos. This event will likely hold the same weight.
The Department of Justice is going to ramp up its regulation of crypto exchanges, which is probably a good thing.
Exchanges will have to be far more transparent with how much $ they have in reserves.
And what about NFTs?
We’re now in the depths of the bear market. NFT transactions have slowed down considerably since this news hit the shelves. Many retail investors will likely give up on NFTs and crypto and won't get involved in the space until it's more regulated.
All this being said, crypto is not dead. It’s just wounded.
The Mint still believes in this space. We think that builders will continue to innovate and give internet users more ownership of their content. If anything, web3 will be held to higher standards of transparency and communication, and we believe that the industry will be better for it.
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That concludes this week's version of The Mint! Thanks for reading, and make sure to share your freshly-minted knowledge with your friends and coworkers.