Introduction
Federal currency is the currency that exists either in physical or digital form and it is backed by government of the respective countries in the world. Whereas, cryptocurrency is a decentralized digital finance, the underlying technology being blockchain. Unlike federal currencies, in cryptocurrency, transactions are entirely digital and highly encrypted, making them highly secure.
The first Bitcoin was mined in the year 2017, by alias named Satoshi Nakamoto. In simpler terms, imagine that a single person keeps a record of transactions carried out by all the people in the world. It is a tedious process and the chances of data getting manipulated and hacked are high but here, when the same transaction is recorded in multiple books across the globe, it is almost impossible to hack that, right? That is what blockchain is all about. Block chain refers to recording an information in a way that makes it impossible to hack.
Just like how NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) provides efficient platform for stock trading, FTX is a cryptocurrency exchange built by traders for traders.
All about FTX
Sam Bankman Fried [SBF] – a 2014 MIT graduate, is the son of 2 Stanford Law Professors, made money by doing Bitcoin arbitrage where he bought Bitcoin in one market and sold it in another one at a higher price.
During his days at MIT, SBF became aware of effective altruism (a philosophy that advocates reasoning to determine the most effective ways to benefit others.) Even after the success of FTX, he continued to live by altruism and donated 1% of the revenue to charity.In 2017, SBF founded a crypto research and trading firm called Alameda research whose CEO Caroline Ellison is also an MIT alum.
Later in 2019 SBF found the platform FTX.com.
FTX is the crypto exchange for spot trading and derivatives trading where they get their main revenue from. FTX offers a web platform where one can buy, sell, and trade crypto. In addition to that, the platform also offers NFTs and stocks.
Binance, one of the biggest rivals of FTX, was started in 2017 and is still the leading crypto exchange in the world by a huge margin. However, FTX in which Binance invested in 2019 has grown aggressively under SBF and is now the 2nd ranked exchange in the world.
SBF in recent times has made significant donations in US politics, it was seen as corrupt as he was siding with politicians instead of siding with people.
The recent FTX collapse, all began when SBF tweeted his thoughts regarding crypto regulation on Oct 19, 2022. The proposal almost meant centralizing crypto which means turning it into the existing system. The revolution that crypto had brought to the world of finance was decentralized finance using technology, and this proposal was fundamentally flawed.
Since then, SBF faced a backlash from the crypto industry, in particular an article written by Erik Voorhees – a famous crypto personality on MoneyState, ripped apart the proposal and the Twitter exchanges between them summarized the general mindset.
Alameda research is another trading firm owned by SBF. Alameda Research has used FTT tokens from FTX as collateral which is natural.
On Nov 2nd, the Balance sheet of Alameda Research was leaked to Coindesk which stated that Alameda had $14.6 billion of assets as of June 30, 2022 and much of it is in the form of FTT token (a utility token that provides access to the FTX trading platform’s features and services) issued by FTX.
Conclusion
As it is a trading firm, if people tried to withdraw their assets and stable coin, the balance sheet will expose the weakness that the over-reliance on the FTT token in Billions of $ could result in another Lehman Brothers crisis if the FTT value was to fall.
We are yet to see how many businesses will be affected by this (the contagion). In time, this will become clearer.
– Rupasri B
