- FTX is a cryptocurrency exchange platform headquartered in the Bahamas but incorporated in Antigua and Barbuda. The platform was founded by Sam Bankman-Fried who became inspired to make money for the greater social good while studying at MIT.
- On a mobile-based trading app, retail and institutional traders can buy and sell futures, options, leveraged tokens, fiat currency, cryptocurrency, and non-fungible tokens (NFTs). Users can receive discounts on trading fees by using the native token FTT.
- FTX makes money through various trading fees, including maker fees, taker fees, NFT fees, and margin borrower interest. The company also charges interest on its institutional loan service and collects a fee from merchants that want to accept cryptocurrency as a form of payment.
FTX Origing Story
While studying at MIT, Bankman-Fried stumbled upon the philosophy of effective altruism.
The movement, which was founded by two Oxford University professors, encourages individuals to use evidence and reason to determine how to benefit others as much as possible.
Inspired by a meeting with one of these professors, he decided to devote his life to earning money for the express purpose of giving it away to those in need.
In the summer of his junior year, he decided to intern at Wall Street firm Jane Street Capital.
There, he discovered a passion for trading ETFs and Bitcoin, with the latter making him thousands of dollars in arbitrage profit between American and Japanese exchanges.
This income was then used to found Alameda Research, a quantitative trading firm moving as much as $25 million in Bitcoin daily.
Over time, however, Bankman-Fried and his associates grew tired of the one-dimensionality of mainstream exchanges.
Since they were mostly designed for inexperienced retail traders, most only allowed the buying and selling of cryptocurrencies.
This provided the impetus for the launching of FTX in June 2019, a platform now known for offering more sophisticated derivative products including futures, options, and tokenized stocks that track the value of real shares in companies such as Tesla and BioNTech.
In July 2021, it was reported that FTX was averaging $10 billion in daily trading volume across more than 1 million users.
Recent figures suggest the company is worth around $18 billion.
This made Sam Bankman-Fried (SMF) among the top crypto billionaires, with a cover from Fortune which portrayed it as the next upcoming Warren Buffet.
For a strange turn of events, on November 8th, 2022, FTX got crunched by a liquidity crisis.
SMF turned from multi-billionaire to millionaire in 24 hours following the event. Marking one of the largest cryptos crashes to date!
How does FTX work?
On the FTX platform, retail and institutional traders can buy and sell futures, options, leveraged tokens, fiat currency, cryptocurrency, and non-fungible tokens (NFTs).
Trading is performed in a mobile-based app, which lets traders build a customized interface layout using drag and drop boxes.
The company has also developed an exchange token for use in the FTX ecosystem called FTT.
Users receive lower trading fees for holding FTT and the token can also be used as futures collateral and for staking.
FTX customers can also receive a branded debit card which lets them spend crypto assets on offline purchases.
How does FTX make money?
Most revenue is derived from trading fees, with the company utilizing a tiered structure as follows:
- Tier 1 – 0.020% maker fee and 0.070% taker fee.
- Tier 2 (30-day volume over $2 million USD) – 0.015% maker fee and 0.060% taker fee.
- Tier 3 (30-day volume over $5 million) – 0.010% maker fee and 0.055% taker fee.
- Tier 4 (30-day volume over $10 million) – 0.005% maker fee and 0.050% taker fee.
- Tier 5 (30-day volume over $25 million) – 0.000% maker fee and 0.045% taker fee.
- Tier 6 (30-day volume over $50 million) – 0.000% maker fee and 0.040% taker fee.
As noted earlier, these fees can be reduced if the user stakes FTT. Taker fees can be reduced to as little as 0.015% depending on the amount staked.
What’s more, the company charges borrowers a daily interest rate when margin trading.
Leveraged tokens, which allow users to take a leveraged position in a cryptocurrency of their choice, also come with a 0.10% redemption fee and 0.03% daily management fee.
For its most sophisticated traders that meet certain criteria, FTX will extend a line of credit.
The company collects interest on these loans, with the interest rate likely to be dependent upon the prior trading performance of the entity and how much collateral they can access.
FTX NFTs is an NFT marketplace launched in September 2021 and built on the Solana blockchain.
Here, the company makes money by charging a 5% fee to both the buyer and the seller on each trade or sale.
Since its inception, FTX has made several investments in other related start-ups.
These include $150 million to acquire the cryptocurrency tracking app Blockfolio and a $100 million investment with two other partners in Web3 gaming development.
Interchange and payment fees
Like many neobanks and related organizations, FTX makes money on interchange fees.
These fees are paid by the merchant to FTX whenever a customer uses its branded debit card to make a purchase.
Note that FTX has to share this fee with the card issuer Visa.
For businesses that want to accept cryptocurrency as a form of payment, they can sign up for FTX Pay. For the privilege, FTX charges a 1% fee of the total purchase amount.
The Crypto meltdown: FTX demise and collapse
In a strange turn of events, on November 8, 2022, FTX turned into a liquidity crunch, which cascaded into one of the most significant crypto crashes since the foundation of Bitcoin.
FTX’s founder’s announced:
1) Hey all: I have a few announcements to make.
2) Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. It may take a bit to settle etc. — we apologize for that.
3) But the important thing is that customers are protected.
4) A *huge* thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem, and creating a freer economic world.
5) I know that there have been rumors in media of conflict between our two exchanges, however Binance has shown time and again that they are committed to a more decentralized global economy while working to improve industry relations with regulators. We are in the best of hands.
6) (Note that http://FTX.us and http://Binance.us–two separate companies–are not currently impacted by this. http://FTX.us’s withdrawals are and have been live, is fully backed 1:1, and operating normally.)
Originally tweeted by SBF (@SBF_FTX) on November 8, 2022.
On the other hand, Binance’s CEO, CZ, also made an announcement over Twitter:
This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire http://FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days.
There is a lot to cover and will take some time. This is a highly dynamic situation, and we are assessing the situation in real time. Binance has the discretion to pull out from the deal at any time. We expect FTT to be highly volatile in the coming days as things develop.
Stay #SAFU. 🙏
Originally tweeted by CZ 🔶 Binance (@cz_binance) on November 8, 2022.
What happened there?
Apparently, the lack of corporate governance of FTX, which at the same time, was doing business with Alameda research, by borrowing deposits from FTX customers to enable Alameda research to speculate on the price of crypto assets, created a hole in FTX.
In addition, to recap a bit of the history.
CZ, founder of Binance was also an investor in FTX in the past. Yet, as he divested his shares into FTX, FTX gave Binance, in exchange for its stake, two billion dollars worth of FTT.
What’s FTT? It’s a token that FTX created for crypto rewards and discounts for trading on its platform.
The interesting thing, as it seems, is the relationship between CZ and SMF deteriorated in the last few years. Culminating with a war between the two.
Apparently, CZ, maddened by the fact that SMF might have been talking badly about Binance to regulators, finally decided to unload its FTT position, thus creating a liquidity crunch on the over-leveraged FTX.
Thus, at the same time, forcing FTX to be potentially taken over!
Yet, on November 9th, after reviewing the balance sheets, Binance decided not to go for the deal.
CZ, Binance’s co-founder, shared on Twitter the letter explaining the last days before the potential deal.
As CZ explained, the core points of the discussion.
And Binance also explained on Twitter:
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of http://FTX.com.
And further articulated:
In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.
This showed a complex situation where FTX’s liabilities on balance sheets are way worse than expected.
A systemic collapse might be on the way in a crypto ecosystem with no last-resort savior.
FTX Hacked, and funds siphoned
The story of FTX gets even worse. Following it on Twitter, as the days go by, it seems almost like watching the unraveling of Enron live!
As the story unfolds, details that seem to come out straight from a Netflix series emerge about FTX corporate governance.
FTX was using an auditing firm whose only headquarters was in the Metaverse!
The FTX case is such a mess, as SBF had placed a series of bets everywhere in the crypto ecosystems.
In addition to the madness of the story, on November 12th, FTX seemed to have been hacked. And it’s not clear whether this hack came from insiders who tried to siphon funds out from the exchange before liquidation.
- FTX Overview:
- FTX is a cryptocurrency exchange platform headquartered in the Bahamas and incorporated in Antigua and Barbuda.
- Founded by Sam Bankman-Fried, who was inspired by effective altruism during his time at MIT.
- Offers a mobile-based trading app for retail and institutional traders to trade various financial products, including futures, options, leveraged tokens, fiat currency, cryptocurrencies, and NFTs.
- Users can receive trading fee discounts by using the native token FTT.
- FTX Revenue Generation:
- FTX earns revenue through various means, including trading fees, maker and taker fees, NFT fees, margin borrower interest, institutional loan service interest, and fees from merchants accepting cryptocurrency payments.
- Trading fees are tiered based on trading volume, and users can reduce fees by holding and staking FTT.
- FTX charges interest on margin trading and fees for leveraged token redemption and management.
- NFT marketplace (FTX NFTs) charges a 5% fee to both buyers and sellers.
- FTX invests in related startups and later sells investments for profit, using valuable user data for expansion strategies.
- Earns interchange fees when customers use branded debit cards for purchases, sharing some fees with card issuer Visa.
- FTX’s Liquidity Crunch and Collapse:
- On November 8, 2022, FTX faced a liquidity crisis, leading to a significant crypto crash.
- FTX’s founder, Sam Bankman-Fried, announced a strategic transaction with Binance to cover the liquidity crunch.
- Binance CEO CZ confirmed their intention to fully acquire FTX and assist with the liquidity crunch.
- The liquidity crisis exposed FTX’s over-leveraged position, and CZ’s decision not to acquire FTX was later announced on November 9.
- FTX’s liabilities on balance sheets were worse than expected, raising concerns about a potential systemic collapse in the crypto ecosystem.
- FTX Corporate Governance Issues:
- FTX’s corporate governance came under scrutiny as details emerged about its use of an auditing firm with headquarters in the Metaverse.
- The situation highlighted complex bets made by Sam Bankman-Fried in various parts of the crypto ecosystem.
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