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What interested all of us in crypto, what Satoshi talked about, was the promise of moving from trust in institutions to trust in code/algorithms, trustless transactions and absolute transparency via blockchain - that thought captured my imagination back in 2014.

It’s clear now that only very few projects ever truly embodied that vision. I would argue that the entry of some VCs into the arena negatively changed the fabric of that space - one did not need to be a rocket scientist to understand the pitches and for all your dopamine receptors to fire at once, permanently, once you realized you could print your own money and generate crazy yield.

I’ve been analyzing what must be the most epic episode in the most disappointing year in Crypto’s history - the FTX debacle (If the media reports floating around have any merit, this whole episode may be labelled as a fraud)

I have to say I am shocked that folks are talking about SBF’s apology and trying to move past what actually happened. Given that it’s emerging and alleged that he used client funds does it really matter that he’s apologetic and sincere??

We have gone from an era of trust in institutions to trust in unregulated individuals with a scanty track record, and zero risk management (or even financial skills) in the hope that folks like SBF or Do Kwon had found their way into the fourth dimension and could defy the rules of physics, bounds of mathematics and premise of economics to create alpha out of thin air, making 1830 US free banking era style moves.

Hopefully, the positive out of all of this will be that VCs and their LPs will accept that there is no cheat code in this game and if something does not solve real-world problems in a better / faster / cheaper manner OR deliver innovations that unlock new opportunities - they deserve ultra scepticism and massive diligence rather than 8-9 figure checks.?

Additionally, I think the unravelling will expose the role of some of the mercenary wall street quant trader/hedge fund actors who brought their questionable methodologies to the crypto space and ran amuck like kids in a candy shop due to the lack of regulators and watchdogs. Those folks created a scenario of 100x leverage in some exchanges. That coupled with no restrictions or regulations on bid-ask reporting, slippage restrictions, transaction fees, transaction times etc. - effectively moved the typical Casino house edge of between 0.5% for blackjack to 15% for slots to 99% - AND THEY STILL BLEW IT UP!

The purge of this leverage should be positive for real projects and should reduce the level of noise and BS in the industry. Funding is bound to become challenging within the space as yet once again as the baby gets thrown out with the bathwater.

I really do hope that better sense prevails and that boring projects that make fundamental sense and solve real problems see the light of day in the next chapter…

On to FTX

Firstly, while I am no fan of CZ and I am sure Binance has its share of skeletons, I fail to understand the hatred towards CZ in this context - he did not degen with custody funds, the allegations are that SBF did. ????

People are vocally hating on him for threatening to dump Binance's $0.5 B FTT holdings publicly - even in a world where that is 100% wrong (is it? think about Elon and Twitter), how does that negate the conduct of FTX - SBF - AR, is an argument that had CZ not levelled the threat, somehow the house of cards would have somehow miraculously morphed into one of concrete? While I have always been sceptical of Tether, earlier this year they responded to such threats with a bring-it-on attitude, more on that later.

Who is to blame? the bro who built the house of cards or the dude who blew at it?

Charmed VCs are commending SBFs apologies on Twitter and other platforms, just as he concurrently deletes his tweets (probably a sign he lied, does not want to be held accountable for his words and expects prosecution) Hopefully, lawmakers won’t lose the transcript of this submission to a hall full of lawmakers

Here is a curated timeline - as you read, consider whether these are the actions of responsible people:

NOV 2: Alameda balance sheet is leaked - loved this comment from one of the analysts - “It’s almost as if SBF found a way to hack the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties”

NOV 6: CZ tweets liquidation of Binance's FTT holdings in the open market?“Due to recent revelations that have come to light”

NOV 6: Caroline Ellison on Alameda's balance sheet “we have > $10b of assets that aren’t reflected there”?Was this a disingenuous statement? It's been less than 4 days since that tweet and here is what one finds at their URL:

NOV 6: Caroline Ellison makes a move that IMO will go down as THE blundering trigger of the downfall, Tweets “Alameda will happily buy it all from you today at $22!”

Really puzzling. If she could buy it at $22 in a private deal, she should happily have lapped up all of Binance’s FTT as it got dumped. Open market moves to buy up FTTs in large clips would have indisputably proved Alameda’s solvency - in a way a private deal never could.

Tether.io came out stronger earlier this year, after weathering a "bank run" where it was under pressure from redemptions and shorts. Within days redeemed 20% of its market cap to holders - its detractors shut up after that episode and Tether's trading volumes now exceed $100B per day.

NOV 7: Wise folks of crypto Tweet up e.g. Onchain Capital CEO Ran Neuner tweeted “Get your funds out of FTX. This is financial advice.”

NOV 7: SBF tweets “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries),”

NOV 7: FTXs official handle tweets “FTX is fine, withdrawals were slow as we refill hotwallets but have been processing all day”

NOV 7: CZ could not be more crystal in his Tweet about the situation “We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.”

NOV 8: SBF Tweets “A competitor is coming after us with false rumors” & “assets are fine”

This was the most disingenuous smoke bomb that he could throw at such a time - makes me think the emperor was wearing no clothes and was trying to deflect…

NOV 8: In what has to be the most epic of all capitulation moves SBF announces a “strategic transaction” with Binance...

The moment he did this he lost his ability to trash CZ, if he wanted to preserve that privilege, he should have approached other sources of liquidity.?

However, based on his latest tweets, he does not seem to stop digging himself into a hole, in true crypto bro fashion he recently said “At some point, I might have more to say about a particular sparring partner, so to speak.” - IMO the sparring partner has already spoken and its best captured with this image

NOV 9: CZ states openly that the deal will not go through alluding to corporate diligence issues, allegations of customer funds mishandling and regulatory inquiries.

NOV 9: SBF allegedly tells investors in closed meetings that FTX's Bankruptcy Likely Without Cash Injection

NOV 7-9: FTX employees with Twitter accounts expressing confidence in FTX start going private.

NOV 10: The downfall?- SBF “First, one way or another, Alameda Research is winding down trading”

NOV 10: FTX abruptly starts deactivating employee email and slack accounts

NOV 11:?Everyone starts panicking about contagion...

- Bahamas Freezes FTX Assets, calls for Liquidator

- BlockFi pauses withdrawal

- Genesis sheepishly admits to exposure with fancy lawyer talk.

- brace for more impact: what is the FTX exposure of Crypto.com , KuCoin Exchange and others? How reliant are Aptos Labs , Solana Labs and others on Alameda Research ? Silvergate partnered with BlockFi and others (very silent about FTX exposure, albeit they hold a banking license and would be subject to regulatory rigour)

Perils of the search for that sweet yield

The thirst for yield/returns has been the common factor that destroyed these companies / projects:

• LUNA: in a near zero interest rate world, let’s offer 10x of TradFi markets - how’s 20%?
• Celsius: we don’t print our own money so 20 is too high, how about 5x of TradFi markets?
• Alameda-FTX: Regardless of their corporate veils and shareholding they will likely be proven to be acting in concert as sister companies. Applying MIT math to yield maxing yield using their sister company’s self-minted currency. (Side note watch this rare interview with Caroline Ellison to get a sense of Alameda's thinking)
• 3AC: let’s package this sweet yield into a PE format
• and many others...

For all the yield seekers out there, think about this -> Argentina's 10Y Government Bond offers ~ 50% yield and Zimbabwean debt of shorter tenures pays over 60%…?

Why are these folks less worthy of trust as compared to crypto-sphere high-yield projects?

The irony

What prevents a debacle like Terra or FTX? DeFi - trust in code and not in people or institutions.

Did indeed SBF have his cross-hairs trained and rallied his Potemkin village and its denizens to lobby against it? DeFi

What did he allegedly want regulators to attack and take down? DeFi

Are proof of reserves the answer and if so do you know who already publishes these in real-time? DeFi

Sadly, in the washout of these disasters created by the actions of their founders turned malicious actors, what will regulators go after? DeFi

Here's a remark from Larry Summers in a recent article in Fortune Larry Summers warns FTX debacle could lead to more aggressive regulation of the crypto market | Fortune that alludes to this:

“What’s going on in crypto in the last few days is going to scare people and is going to scare regulators into action,” he said. “I think there are a fair number of people who were charmed or bought by [Sam Bankman-Fried], who are looking and feeling fairly silly and who want to get well on that set of errors by looking concerned and anxious. And my sense is that there’s a fair amount of discretionary regulatory authority to do things sitting particularly at the highly energized SEC chairman’s discretion.”

#ftx #alameda Sam Bankman-Fried Caroline Ellison #changpengzhao BlockFi #binance Alameda Research #riskmanagement #economics Changpeng Zhao #SamBankmanFried #carolineellison