24 hours have gone by since the FTX nuke struck CryptoLand.
We are witnessing the aftermath now.
Prices are sinking like bricks in the ocean. In this case, the Red Sea.
- BTC: -16.1%
- ETH: -24.1%
- MATIC: -26.9%
- SOL: -43.0%
And news just came out that Binance might be backing out of the deal after looking at FTX’s books/liabilities.
If true, major pain incoming.
Now, you might be wondering – where did it all go wrong for FTX?
How could this company have been worth $30B a few months ago…raise billions from investors… make 8 figures in revenue PER DAY…and suddenly, *POOF*, insolvent?!
Well, here’s the leading theory:
- SBF created Alameda & FTX as separate companies. You can think of them as cousin companies
- But turns out they were a lot closer than SBF led on. (aka the cousins were kissing)
- At the center of the relationship was FTT (FTX’s token)
Alameda used its huge FTT stash as collateral to BORROW from FTX (aka customer funds). But if Alameda’s investments go south, or the FTT collateral starts to dump in value…then Alameda goes down, and it pulls FTX down with it.
Jon Wu breaks down how he thinks it worked here:
So what now?
- If Binance pulls out, FTX is likely screwed. And so are its customers. It will be really hard for them to plug a multi-billion-dollar hole
- If Binance steps in, that’s a little better. But consumer confidence is severely shaken, and regulators are not going to forget this
- This could be bad. Really bad. Prices down. Trust down. And possible jail time if customer funds were misused
Also – CZ (founder of Binance) just dropped an internal email he sent to the team. You can read the full thing here.
But here’s the summary:
- No, this was not a “genius master plan”.
- FTX going down is not a “win” for Binance. It’s bad for the whole industry.
- Consumer confidence is severely shaken. Regulators will not forget this.
- Employees should not sell their bags (insider trading risk).
- Don’t comment on the sale, there’s not enough info yet.
- Never use a token you created as collateral.
That last point is the key one. It’s the same problem that sank Luna.
FTT, the token that FTX created, was inappropriately used as collateral to borrow against.
The same thing happened with Luna, the collateral used to back the UST stablecoin. When it faced downward sell pressure, it caused the whole system to break.
What about Nexo?
If you’re wondering what % of NEXO’s custodial assets are in NEXO tokens: the answer is less than 7%
The latest USD worth of assets on NEXO is $3.552bln, meaning that their NEXO token exposure should be less than $355mln.
Based on the daily Armanino Audit report, Nexo’s current Assets Under Management (AUM) i.e. their liabilities are fully backed by their assets.
Via this site