This article continues the first two parts of the conflict between Binance and FTX. The last part can be found here.
A brief recap of the conflict between FTX and Binance:
- Alameda Research, the trading arm of FTX, held $16.6 billion in assets at the start of July 2022
- Of the total amount, $5.8 billion was held in FTT, the currency of the FTX exchange. The article published by CoinDesk also pointed this out
- Once the FTT coin price started its collapse, it took the other two main entities with it: FTX and Alameda
Just as Binance Coin (BNB) is the currency of the Binance exchange, used to pay trading fees and to benefit from discounts and perks – we can also consider FTT to be the currency of FTX, minus the fact that the latter does not have the function of Smart Contracts.
Coming back: the fact that the FTT constituted such a broad position for the two entities (FTX and Alameda) became a significant problem for two reasons:
- It inextricably linked Alameda, the trading arm, to FTX. This meant that if FTX suffered financial damage or simply went down, FTT went down with it and Alameda ended up owning most of an evaporating coin.
- Alameda used FTT to declare collateral against the liabilities (or expenses) it held. This meant that if the FTT price fell, Alameda could no longer pay its debts.
FTX and Alameda Research tried to calm things down
After the story of Alameda's disastrous balance sheet leaked online, many key people at the two companies tried to calm things down, including Caroline Ellison, CEO of Alameda Research. She said in a message on Twitter that the information circulating on the Internet did not fully present the entire landscape and its details.
She was trying to suggest that the FTT is not that crucial to the story. The data, however, said otherwise.
On November 8, the price of the Solana coin was the first to suffer significant declines. FTX was known to be one of the entities with the most significant SOL holdings, so this drop suggested that the exchange was selling other holdings to keep the FTT price above $22.
As FTX and Alameda began selling other coins to support the FTT rate, it soon became clear to everyone in the market that FTT significantly affected the two firms.
The original tweets, which I mentioned in the second part of the conflict, probably wouldn't have led to such a sharp drop in price - but the most significant contributing factor was the fact that FTX users were they panicked and began massively withdrawing funds from the exchange. This led to a smaller and smaller balance sheet held by FTX until it collapsed completely.
Withdrawals of over $6 Billion from FTX in just 72 hours
Due to the panic induced among users, a vicious circle was created that led to the collapse of FTX and Alameda:
- Massive withdrawals from FTX were affecting the exchange's balance sheet
- Users were forced to sell FTT
- The FTT price drop has scared users even more
- All this further affected Alameda's balance sheet
Ultimately, Alameda suffered a total balance sheet implosion. The price of FTT sank so much that their collateralized lending positions were liquidated. FTX tried in vain to raise funds to cover the hole created by Alameda Research because investors were reluctant and lost confidence.
The story is still unfolding, but so far, we know that Alameda Research has been completely disbanded, that the FTX platform has shut down along with the storage and withdrawal operations on the platform – and that the company's CEO, Sam Bankman-Fried, is to be extradited to the United States to stand trial.
