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Using On-Chain Data to Investigate the Fall of FTX

By The Coin Metrics Team

In a shocking turn of events, FTX suffered an unexpected downfall. In this State of the Network issue, we use on-chain data to investigate the details surrounding FTX’s fall.

The Fall of the FTX Empire

On November 2nd, Coindesk published an article stating they had obtained a copy of Alameda Research’s balance sheet, which showed that it was holding billions of dollars worth of FTX’s FTT token. Alameda Research was a trading firm founded by Sam Bankman-Fried (SBF), also the CEO of FTX, formerly one of the largest exchanges in the world. 

Even though they were both founded by SBF, Alameda and FTX were theoretically supposed to be two separate entities with separate CEOs and balance sheets. However, the FTT token was issued and controlled by FTX, so questions began to circulate about how independent Alameda and FTX truly were. 

Then on November 6th, the CEO of Binance, who is commonly known as CZ, tweeted that “due to recent revelations that have came [sic] to light,” Binance would be liquidating the rest of the FTT they had on their books. Binance, the largest crypto exchange in the world by quite a margin, received roughly $2.1 billion of FTT as part of an investment exit in 2021. 

Despite assurances from SBF and from Alameda CEO Caroline Ellison that FTX was fully audited and that there was nothing to worry about, the market disagreed. By the night of November 7th, the price of FTT began to drop from above $22 to less than $16, even though Ellison had tweeted that Alameda would “happily buy” all of Binance’s FTT for $22 a token.

Caroline @carolinecapital

@cz_binance if you're looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!

4:03 PM ∙ Nov 6, 2022

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8,328Likes1,249Retweets

By the morning of November 8th FTX stopped processing withdrawals. Then a little after 11 AM, SBF Tweeted a surprise announcement that Binance had signed a non-binding letter of intent to acquire FTX. Soon after, FTT price went into freefall, dropping below $5. 

The next day, Binance announced after only 24hrs of doing due diligence that they would not be going through with the acquisition. By the end of the week, FTX, FTX.US, and Alameda had all officially filed for Chapter 11 bankruptcy.

Alameda’s Blow Up

FTX at first appeared to fail out of nowhere. But as more details have come to light, it has become evident that FTX and Alameda were in trouble long before the collapse. For example, multiple reports have emerged that FTX was allegedly loaning customer funds to Alameda without customer consent. Furthermore, there are allegations that SBF may have had a “back door” in the FTX software that allowed him to move funds between the companies without alerting others.

The details are still coming to light and will probably take months, if not longer, to fully emerge. But using on-chain data, we can start to put together some pieces of the puzzle by tracing Alameda’s public transactions on the blockchain. 

Source: Coin Metrics Network Data 

Using Coin Metrics ATLAS we discovered a large transfer of over $4B worth of the FTT token on September 28th. After looking into the transaction, the FTT apparently belonged to Alameda Research and was set to vest automatically to them after a lockup period. Although unusually large, this initial transaction was not immediately suspicious. 

Transfer from Alameda address to FTT Deployer Contract; Source: Coin Metrics ATLAS

However, we also found another transaction that showed that after the tokens were automatically unlocked, Alameda almost immediately sent them to the FTT token deployer contract. This is highly unusual since deployer contracts are not typically used to receive large transfers. The FTT deployer contract is likely connected to FTX, considering FTX launched and managed the FTT token. 

Lucas Nuzzi @LucasNuzzi

1/ I found evidence that FTX might have provided a massive bailout for Alameda in Q2 which now came back to haunt them. 40 days ago, 173 million FTT tokens worth over 4B USD became active on-chain. A rabbit hole appeared 🧵👇

11:22 PM ∙ Nov 8, 2022

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This September 28th transaction may have been a roundabout way for Alameda to repay FTX for a large loan. In short, Alameda may have blown up in May or June 2022, along with the LUNA collapse and 3AC collapse (amongst others). However, FTX could have provided Alameda with a loan at the time to cover the losses. If this was the case, it’s unclear where this loan came from or which assets it included. Furthermore, there is currently no known on-chain evidence of such a loan, so if it did occur, it likely happened off-chain. 

It’s important to note that this theory is still speculative and unproven—it is based on on-chain activity—but there is still no definitive “smoking gun” proving FTX provided a loan to Alameda. But more and more evidence is starting to pile up. On November 10th, Reuters published an interview with former FTX executives where a transfer of the same size was mentioned:

Seeking to prop up Alameda, which held almost $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood Markets Inc, the people said. Alameda had disclosed a 7.6% share in Robinhood that May.

Also, on the 10th, the Wall Street Journal published an article alleging Alameda Research owes FTX about $10 billion and that FTX extended loans to Alameda using customer deposits. On the 11th, Reuters reported that at least $1 billion of client funds were missing from FTX. Former Alameda CEO Caroline Ellison even reportedly confirmed the use of client funds in a meeting with Alameda employees:

Around the time the crypto market crashed this spring, Ms. Ellison explained, lenders moved to recall those loans, the person familiar with the meeting said. But the funds that Alameda had spent were no longer easily available, so the company used FTX customer funds to make the payments.

Further complicating things, late Friday night hundreds of millions of dollars began to mysteriously flow out of FTX, leading to questions about whether the exchange had been hacked.

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