Catching Up With FTX: What’s the Verdict?
Every good thing must come to an end one day but the question is whether you are prepared for the worst times. 2022 was a year that was predicted to be the year where DeFI would rise to its potential and instead, it turned out to be a sad trip back to reality for the community. With the highs that were achieved in 2021 not everybody was prepared for what unfolds in 2022, one such example was FTX. Let’s recap the story of FTX’s fall from grace and the conclusion of its story within the DeFI Space.
FTX — A Harsh Reality for DeFI Community to Swallow
2021 was the year where almost any simple innovation can be considered revolutionary within the DeFI Space as the excitement has never been higher. From Memecoin to NFTs, as long as the project has enough hype from the community and is utilizing the blockchain network, everybody wants a piece of the pie for the next breakthrough opportunity. The feeding frenzy obviously had to end somehow but nobody was prepared for what was to come.
The community was expecting that the hype for the projects was going to continue while the institutions were hoping the investments continue to flow within the DeFI Space but what if it stops? 2021 was the year where our money supply grew exponentially in order to combat the pandemic effects while much of it flowed to the DeFI Space as everybody would like to seize the opportunity, 2022 was going to be a much-needed adjustment.
Interest rate starts to rise and most of the population is back to work while the global economy starts to trend back towards recovery. That’s when the sad reality begins to kick in for the DeFI Space as its market cap starts to slump below the $2 Trillion mark by the beginning of the year while Bitcoin continues on its downward spiral to below $40,000 by the first quarter. This kind of correction will be unsettling for all the DeFI Institutions within the space.
Prediction and Analysis for the year were revised as January 2022 came along while the DeFI community embraced the course correction. Liquidity crunch was the term heard very often during 2022 with some DeFI institutions prepared for the risk that’s about to come but the ones who don’t are about to follow the Collapse season of 2022. Plenty of institutions within the DeFI Space had to fall victim to the Liquidity Crunch with FTX being the most prominent one.
FTX was once the “Poster Boy” of the DeFI Space who unfortunately had to bite the dust as risk and leverage were taken too far. FTX’s origin and downfall were tied closely to its sister company Alameda Research with the latter founded 3 years before the incorporation of FTX in 2020. Sam Bankman Fried or “SBF” grew as the prominent figure behind both organizations with Alameda Research operating as a hedge fund while FTX operated as a Crypto derivatives exchange.
At its peak in 2021, FTX was the Third Largest Exchange Platform within the DeFI Space with $32 Billion in valuation while its sister organization Alameda Research acted as an arbitrage trading platform that constantly become the savior of many DeFI projects who are on the verge of falling out. FTX backers also add further credibility behind the project with Sequoia Capital, Softbank, and even CZ of Binance himself.
FTX was growing at a massive rate throughout its 3-year journey with a daily trading volume reaching more than $10 Billion and generating revenue of over $1 Billion. It also began to associate with high-profile sports teams sponsoring the likes of Mercedes — AMG F1 Petronas Team and the multi-million dollar naming rights of the Miami Heat basketball stadium, the FTX Arena. This growth not only brought SBF to the cover of FORBES magazine but also provided him the “Billionaire” status alongside CZ from the DeFI Space.
Unfortunately, all good things had to come to an end and plenty of losses & bailout will start the unraveling of this once huge dynasty. The tie between Alameda Research who sustain piling losses throughout 2022 and the huge bailout from FTX is what attracts questioning from the community. FTX had used customer deposit money from the accounts of its investors and then credited it with its Native token FTT, these investments are what were then used to prop up Alameda Research.
From this standpoint, we can see that there is a potential liquidity problem especially if the FTT tokens value continues to drop and there are mass withdrawals that occur during a panic market. This weakness was what led to its downfall when CZ announced that he would liquidate his stake in FTX and with that ensuing mass withdrawals as the community was continuously worried about FTX’s liquidity. Within a couple of days, SBF went from tweeting that “FTX is fine” to eventually filing for bankruptcy on November 11th as the company struggled to meet its obligations.
The aftermath of the collapse wiped out millions of customers’ funds that would be irrecoverable but it also depleted the trust within the DeFI Space. Their backers obviously had to write off their massive investments while the Ontario Teacher Pension Plan Fund also lost everything. The collapse also stretched out beyond the DeFI Space as Silvergate Capital and Silicon Valley Bank filed for Bankruptcy in 2023.
The lack of trust and faltering price painted a sour picture for the beginning of 2023 and left a scar on everyone’s mind fearing another “Lehman Brothers” moment. 2023 was deemed as the year “Crypto might never come back” but although it managed to recover spectacularly throughout the year, it put the DeFI Space in the spotlight for regulators who are looking to increase their oversight within the space as FTX its prime justification for doing so.
The Verdict……
The verdict on FTX was a battle that stretched throughout 2023 and involved plenty of countries in the process. FTX being incorporated within the Bahamas shows a flaw in the Caribbean Crypto Friendly regulation which is too friendly toward FTX, while the investigation is done by the United States which is still impending a regulatory framework for the DeFI Space. In the end, SBF had to be extradited to the United States to face trial for his misconduct.
The trial was once again about friends from math camp screwing each other with everybody pleading guilty of whatever was happening within FTX. Gary Wang, Nishad Singh, and Caroline Ellison pleaded guilty in an attempt to cooperate with the investigators. Although they might never actually do their time, they may very well be imprisoned or subjected to house arrest, and their lives are irrevocably changed, not the least by the various restitution requirements they are subjected to.
Gabe and Barbara Bankman Fried might have their reputation tarnished forever due to their involvement within FTX and barred from political arenas they once operated. It was Sam Bankman Fried who got hit the hardest, once adored amongst celebrities and political figures while now being guilty on all 7 accounts for fraud with a maximum prison sentence of 110 years with the sentence beginning on March 28th, 2024.
In the end, the story of FTX will remain as a company that grew too quickly during its time but fails to imply the basic risk management structure that comes along with that growth. It’s a story of how the community fell in love with the glitz and glamor that FTX had to offer but failed to look deeper and find out that something was wrong. It’s a story of how overnight success doesn’t exist and if something is too good to be true, it probably really is. We all need to take the lessons learned from FTX and invest our time & effort in a project that will be valuable and forge a dynasty over the long run. The question is, are you willing to do your research?
We from Nagaya Technologies Pte. Ltd surely hopes that the DeFI Space is heading to a better stage in 2024 and beyond. We understand in the early development of Nagaya the importance of the risk factor which is why we decided to back up each of your Nagaya with gold reserve to maintain the stability of its value while still allowing it to grow exponentially over the long run. This hybrid concept of cryptocurrency is the first of its kind in the space which will hopefully deliver massive sustainable value to all of you our valued holders. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io
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