FTX Aftermath

How deep does the rabbit hole go?

What is there to say more about the calamity that is Sam Bankman-Fried and FTX that hasn’t been said yet? The internet is riddled with information about what happened and how it happened. Every day, more and more interesting details get uncovered by the Crypto bros around the internet, working more like investigative journalists rather than DeFi Degens. Some of the uncoverings are truly profound and make you question – how did this go on so long?

When a troubled company has a few days to beg potential investors for a bailout before it files for bankruptcy, offering an analysis of its balance sheet in return for investment, it says a lot that they all passed one by one. It’s safe to say the balance sheet was in a dire state.

But how bad? FTX held $900 million in liquid assets, against $9bn of liabilities the day before it collapsed into bankruptcy. $5.5bn of this was titled “less liquid” and consisted of crypto tokens that were not widely traded. There is also an obscure $7mn holding called “TRUMPLOSE”. There are no bitcoin assets listed, despite bitcoin liabilities of $1.4bn – so yeah, that bad! All and all the balance sheet was an Excel document that only FTX executives could decrypt, not how most institutional companies work nowadays.

One baffling thing is the company’s largest asset – $2.2bn worth of a cryptocurrency called Serum. Serum’s market value was $88mn on Saturday, 12th Oct, according to data provider CryptoCompare, suggesting FTX’s holdings would be worth far less if sold into the market.

The Serum protocol was created and promoted by FTX and Alameda Research, the FTX-affiliated crypto hedge fund that was also founded by Bankman-Fried. FTX is a centralized crypto exchange and Serum, in a loose but meaningful way, was the decentralised exchange of FTX.

What is missing?

What’s missing is that FTX had at some point roughly $16 billion of customer money, but most of its assets turned out to be tokens that it made up. It did not pay $16 billion for those tokens, or even $1 billion, probably.

The most sensible order of events goes like this: during the crypto-market meltdown of this spring and summer, when markets were crazy and Alameda spent money propping up other failing crypto firms — FTX transferred customer money to prop up Alameda. And Alameda never made the money back, and eventually, everyone noticed that it was gone.

FTX was also an institutional exchange, and a number of crypto hedge funds seem to have gotten caught with their money trapped at FTX, similarly to retail investors – just at an x10000 (or more) scale.

Who is going to jail?

This whole situation is screaming intentional fraud and theft. Was it always coming to this? On the surface to someone who doesn’t know a lot about Crypto, this looks like a few university friends set up a gigantic international financial exchange after like a year or two of working in finance.

But do they have hard-won expertise, built up over many years, in accounting controls and business processes for running a giant organisation? Are they excited about making sure all the paperwork is correct? No, that stuff is boring.

In his first declaration as CEO of FTX Trading, John J. Ray III (who has been the Chief Restructuring Officer in several of the largest corporate failures in history, including Enron Corp.), said:

Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

If the guy who handled Enron is saying this, you know he’s not joking. An anonymous Crypto lawyer believed that all the elements are in place for Justice Department prosecutors to bring a case under a federal criminal law called Section 1343, which covers wire fraud, the statute of which carries a maximum penalty of 20 years in prison.


One of the key defining features of centralized exchanges is that they are custodial. What does this mean? It means that when you want to trade on a CEX, you keep your funds in a wallet tied to the exchange itself, instead of in your own wallet. What’s important is that the exchange keeps the private keys to the wallet, not you – instead, you get login details for the platform.

On the surface level, this has some benefits, especially for new users who are just getting a hang of the complexities of crypto. But beware: entrusting your coins and tokens to another party, with no access to the private keys, means you don’t really own that crypto. If the exchange is hacked, censored or goes bankrupt, your funds will meet the same fate.

Remember: not your keys, not your coins.

What exactly is a decentralised exchange? Like a CEX, the purpose of a decentralised exchange is to allow you to trade your crypto assets. But the structure of this type of exchange is fundamentally different.

There are two main types of DEX: order-book-based, and automated market makers.

Since a DEX does not exist as a central entity, there is no platform to put funds into – instead, you simply connect the DEX to your existing wallet, using your own private keys to manage your funds.

So unlike a CEX, using a DEX might not necessarily relieve users from the burden of self-custody – but the payoff is that your coins will never be controlled by anyone but you.

The question of self-custody is also becoming easier as the ecosystem evolves. With Ledger’s growing list of integrations now including decentralised exchanges such as Paraswap, using a DEX for swapping while managing the specifics of self-custody can still be a seamless experience, coupling clear signing and ease of use from within Ledger’s own ecosystem, with the absolute security of cold storage.

Since the selection of coins and tokens on a DEX is not limited to the agenda of a central entity, users are more or less free to find the projects they’re interested in and start getting involved. One of the best parts of this is the ability to be an early adopter in up-and-coming projects you managed to get some alpha on – so for traders who don’t mind doing the research on new projects, a DEX is probably the first place they’ll go when placing their chips on the table.

Which one should I use then?

This really depends on your situation, but we hope this gave you a short overview of the two major types of crypto exchange. With CEX, new users can make their first steps into crypto, focus on trading and leave all the other aspects of the exchange to the company in charge. But this comes at a price: However, DEXs offer more freedom and potentially better payoffs for users and opportunities – although they may require a more knowledgeable user. Which suits you more?

Crypto can be a confusing place to be but a little reading can change that! The beauty of crypto is that it’s constantly evolving, finding solutions to the tensions faced by its users and striving to offer more. With a little learning, you can take full advantage of what the industry has to offer – not just for your wallet, but for your life.

Written by Danny Placinta & Karolis Kundrotas

📅 This Week in Crypto 📅

This month’s collapse of FTX drove a dramatic increase in the profitability of running the Ethereum network as MEV (maximal extractable value) spiked while FTX faltered. “Volatility is MEV fuel,” said Chris Piatt, the co-founder of Eden Network, which runs a relay. “Any big news like this [the FTX implosion] that moves markets correlates with strong builder/searcher performance.”

There are key lessons for digital currency investors after the downfall of cryptocurrency exchange FTX, financial experts say. 1. Know the risks of where you’re holding cryptocurrency, 2. Diversification is “always important”, 3. Expect more crypto regulation, and 4. Back up your crypto transaction records.

The real reason why FTX was such a colossal failure is not because the crypto industry was duped, but because it proved that the industry was vulnerable to being duped. This distinction, while seemingly minor, strikes at the core of what crypto is supposed to be – a foundation to build systems that are trustless. The FTX blowup and contagion are proving, yet again, that the crypto industry, if not its core technology, is currently as trust-based and corruptible as the traditional financial system that it sought to circumvent.