Post FTX Market Updates

We’d like to provide updates on some of the market indicators we’re watching following the collapse of FTX last week.

Overall, while other firms may face insolvency, many market fundamentals remain stable. Reporting suggests the FTX situation stems from financial fraud rather than a blockchain or crypto-specific failure.

First, the increase in crypto-for-USD trades we observed last week using Kaiko Data exchange order book data has died down. Users now appear to be cashing out of crypto at roughly the same rates they were before the FTX crisis.

After staying mostly flat last week, net inflows to centralized exchanges have dropped, and are below zero in most hours, meaning users are withdrawing more than they’re depositing.

Where are those funds going when they leave centralized exchanges? Mostly to other centralized exchanges. But we’ve also seen spikes in funds sent to personal wallets for safekeeping (of course, they can always move again), and to DeFi protocols.

The increase in funds sent to DeFi is especially interesting, as many have reported huge spikes in DEX trading volumes in what’s being framed as an embrace of self-custody. Our data confirms that DEX transaction volume has indeed increased. But there’s more to the narrative.

CeFi-to-DeFi flows have increased, but they’re not the driving force behind DEX tx volume growth. Roughly 90% of funds going to DEXes are coming from other smart contracts. Since November 12, the second-biggest source is a single MEV bot.

For context, MEV bots are programmed to scan pending transactions in the Ethereum mempool, identify profitable ones, and execute them before the originals can be confirmed to the blockchain, thereby extracting the value for themselves.

This particular MEV bot has sent just under $19 billion to DEXes since November 4, making it the third-biggest source of funds sent to DEXes among all smart contracts.

Overall, the data suggests that the DEX trading spike isn’t primarily driven by inflows from CEX users looking to self-custody. Rather, it’s driven by existing DeFi users trading on the volatility in the market, and one industrious MEV bot attempting to front-run them.

We’ll continue to monitor for updates and share as much as we can.

We’d like to provide more context on how MEV bots like the one described here interact with DEXes. While MEV bots do engage in some frontrunning, the vast majority of their activity is focused on finding arbitrage opportunities, which ultimately benefits the DEX and its users.

In addition, the specific MEV bot we highlighted in our thread also frequently supplies Just-in-Time (JIT) liquidity, meaning it scans the mempool for large DEX trades and then supplies liquidity to the relevant pools just before the trades go through in order to get the fees.?

JIT liquidity provision is a niche form of MEV, but ultimately helps both the traders and the DEX itself by helping large trades go through with minimal price impact. You can learn more about JIT liquidity here.