The Alameda-FTX death spiral | Financial Times

Crypto has many problems. But the transparency of on-chain transactions does occasionally offer some pretty fascinating insights into shenanigans like the fall of Sam Bankman-Fried’s magic bean empire.

Blockchain analytics firm Nansen has been digging into the incestuous links between SBF’s trading firm Alameda and the crypto exchange FTX, and their subsequent mutual death spiral. The report is now out, and makes for interesting reading.

Despite SBF often insisting they were run independently, Nansen shows what everyone always suspected and is now obvious. They were closely entwined from the very start and remained so through their brief lives. Even before FTX officially launched in May 2019, Alameda’s wallet had started interacting with it in a major way.

© Nansen

The ties only deepened and became even more problematic when FTX launched its utility token FTT, and Alameda was an immediately instrumental counterparty.

Nansen estimates that of the 350mn total supply of FTT, 280mn was controlled by FTX, and about 27mn ended up in Alameda’s wallet (interestingly, Nansen says 10.7mn FTT is unaccounted for, and 10mn of FTT untouched at address 0x4aa).

That means that very little of FTX’s token actually traded out in the wild, but both entities could use the theoretical value of their FTT stashes as collateral to obtain leverage.

Alameda and FTX owned the vast majority of the total FTT supply from the very beginning, meaning:

— The actual circulating supply (and liquidity depth) is low when compared to the total supply (ie low float)

— Prices can be easily influenced to move up (or down) with relatively small amounts when compared to the resulting increase (or decrease) in valuation

— Since both Alameda and FTX held the majority of FTT supply, if one entity is forced to sell its FTT holdings, then the other entity may consequently take a huge hit to its balance sheet

The Nansen report then explores how Alameda, FTX and their control of FTT helped propel each other in the crypto summer of 2021:

Being massively levered long crypto based on dodgy collateral was obviously not a great idea going into the crypto winter of 2022.

Nansen reckons Alameda first hit serious problems back in May, in the maelstrom that brought down and was in turn stirred by the collapse of crypto quasi bank Celsius, crypto hedge fund 3AC and the Terra/Luna stablecoin ecosystem.

On-chain data doesn’t conclusively prove that FTX first made a $4bn loan to Alameda around then (as reported by Reuters, among others), but Nansen found that Alameda did deposit as much as $4bn of FTT tokens on FTX in June-July, with the peak deposits happening when 3AC imploded in mid-June.

It also found several other “mystery” transfers from FTX to Alameda, such as this 155k ethereum ($323mn) transfer on May 12, which Alameda then transferred to Genesis, a crypto lending platform.

By the end of October, an “unusual list of continuous stablecoin transfers from FTX International and FTX US to Alameda’s Circle, Binance and FTX wallet was spotted”.

Together the transfers amounted to stablecoins worth $388mn in total just on Oct 31-Nov 1. Not great.

On November 2, CoinDesk journalist Ian Allison published the report that revealed that $5.8bn of Alameda’s $14.6bn of assets was in FTT, the death spiral started, and the rest is history.

Nansen did highlight some “unusually” large withdrawals from FTX in the 24 hours before it was forced to freeze, most notably a mammoth $245mn net withdrawal by “ETH Millionaire”. But the company’s main conclusion was that the collapse of Alameda/FTX was probably inevitable.

Piecing together the pieces from our on-chain investigation, it was evident that the Luna/Terra collapse revealed a deep flaw between Alameda and FTX’s muddled relationship. There were significant FTT outflows from Alameda to FTX around the Terra-Luna/ 3AC situation. Based on the data, the total $4bn FTT outflows from Alameda to FTX in June and July could possibly have been the provision of collateral that was used to secure the loans (worth at least $4bn) in May / June that was revealed by several people close to Bankman-Fried in a Reuters interview.

We also observed slightly unusual large continuous outflows of stablecoin tokens from FTX to Alameda’s wallets during that time period. Given the cascading effect of the Luna collapse, many firms like 3AC were liquidated causing a contagion across the crypto lending market. While our on-chain investigation did not directly verify that user funds were being siphoned from FTX to Alameda in attempts to “save” them from liquidation, the unusually large FTT inflows from FTX post-Luna/ 3AC hint at a plausible case.

From this point on, the intermingled relationship between Alameda and FTX became more troubling, given that customer funds were also in the equation. Alameda was at the stage where survival was its chosen priority, and if one entity collapses, more trouble could start brewing for FTX. Given how intertwined these entities were set up to operate, along with the over-leverage of collateral, our postmortem on-chain analysis hints that the eventual collapse of Alameda (and the resulting impact on FTX) was, perhaps, inevitable.

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