how-does-ftx-work-and-make-money

How Does FTX Work And Make Money?

  • 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

FTX is a cryptocurrency exchange platform headquartered in the Bahamas but incorporated in Antigua and Barbuda. The platform was founded by Sam Bankman-Fried in 2019. 

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.

Image Credit: Fortune

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?

In line with its diverse product offering, FTX has a varied revenue generation strategy. In this section, we’ll take a look at some of the main sources of income.

Trading fees

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.

Loans

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.

NFT fees

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.

Investments

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.

In many cases, FTX sells the investment at a later date for a profit. In the interim, it collects valuable user data that guides its expansion or product development strategies.

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.

Things have come full circle, and http://FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for http://FTX.com (pending DD etc.).

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.

Source: CZ, Twitter

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.

Read Next: Blockchain Business Models Framework Decentralized FinanceBlockchain EconomicsBitcoin.

Read Also: Proof-of-stakeProof-of-workBlockchainERC-20DAONFT.

Related Blockchain Business Frameworks

Web3

web3
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.

Blockchain Protocol

blockchain-protocol
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.

Hard Fork

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In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.

Merkle Tree

merkle-tree
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.

Nothing-at-stake

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The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.

51% Attack

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A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

Proof of Work

proof-of-work
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Application Binary Interface

application-binary-interface
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.

Proof of Stake

proof-of-stake
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.

Proof of Work vs. Proof of Stake

proof-of-work-vs-proof-of-stake

Proof of Activity

proof-of-activity
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Blockchain Economics

blockchain-economics
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).

Blockchain Business Model Framework

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Sharding

sharding
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).

DAO

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A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Smart Contracts

smart-contracts
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.

Non-Fungible Tokens

non-fungible-tokens
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Decentralized Finance

decentralized-finance-defi
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

History of Bitcoin

history-of-bitcoin
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.

Altcoins

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An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.

Ethereum

ethereum-blockchain
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Ethereum Flywheel

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An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.

Solana

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Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

Polkadot

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In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.

Filecoin

filecoin
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.

Brave

bat-token
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.

Decentralized Exchange

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Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.

Get The 450 Pages Blockchain Business Models Book

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Read Next: Coinbase Business Model, Metamask, Rainbow.

Read Also: BAT TokenProof-of-stakeProof-of-workBitcoinDogecoinEthereumSolanaBlockchainBATMoneroRippleLitecoinStellarDogecoinBitcoin CashFilecoin.

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