FTX Trading Ltd.
Once the world's second-largest crypto exchange, FTX collapsed in a matter of days following a bank run that exposed a massive hole in its balance sheet. The failure was rooted in the illegal commingling of customer funds with its sister trading firm, Alameda Research.
The Autopsy
| Section | Details |
|---|---|
| Startup Profile | Founders: Sam Bankman-Fried Funding: Venture Capital |
| Cause of Death | Commingling of Funds: The exchange secretly "lent" billions of dollars in customer deposits to its sister trading firm, Alameda Research, to cover its massive trading losses. Token-Backed Collateral: Using its own illiquid token (FTT) as collateral for multi-billion dollar loans created a "house of cards" that collapsed as soon as the token's value was questioned. The "Bank Run": A single tweet from a rival (Binance) regarding the liquidating of FTT triggered a $6 billion withdrawal surge in 72 hours, exposing the missing customer funds. |
| The Critical Mistake | Commingling: Customer deposits lent to Alameda for trading losses. Token Collateral: FTT-backed loans created house of cards. Bank Run: Single Binance tweet triggered $6B withdrawals in 72 hours. |
| Key Lessons |
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Deep Dive
The "original sin" of FTX was using its native token, FTT, as collateral for loans. The Death Spiral: Alameda Research borrowed real USD/stablecoins from FTX using FTT as collateral. When the price of FTT dropped, Alameda's collateral became worthless, creating a deficit in FTX's customer accounts. Since the tokens were illiquid, FTX could not sell them fast enough to pay back withdrawing customers. The Legacy: FTX is the ultimate cautionary tale in Crypto/Blockchain regarding custodial risk. It led to a global push for "Proof of Reserves" and proved that even the most "regulated-looking" entities can be hollow shells without transparent audits.
Key Lessons
Custodial risk: Customer funds should never be used for proprietary trading.
Self-issued tokens as collateral is a circular, fragile structure.
Social media can trigger instant liquidity crises in crypto.