Thursday Community Call Recap 12.20.2022

Hello everyone! Welcome to the weekly Thursday Community Call Thread. We really want to engage our community to think and learn about new topics in these calls. Unfortunately not everyone gets a chance to attend the call and those that do don’t always get a chance to speak due to time constraints.
There is value in continuing the types of conversation we start in these calls. We don’t want the call to be the last time people engage with the topics addressed. We want to enrich your days with inspiration and open eyes to new concepts. These topics might be applicable to some of your works or spark a personal interest. It is our goal to facilitate new ideas and creative thinking through this thread.

Community Call Link: Lucas Nuzzi: What Went Wrong with FTX? - SCRF Community Call

12.20 Community Call Recap:

Context

The Community Call from last week was a discussion led by Lucas Nuzzi on the activates surrounding the FTX debacle that explain exactly what went wrong. There were many interesting developments regarding FTX and Sam Bankman-Fried (SBF), but Lucas’s specialty was looking the on chain part of the story. He looked for warning signs that could have signaled the problems that caused the collapse.

He focused on flow analysis of FTX and Alameda Research, especially of the FTT token. In early November, FTX and Alameda were heavily trying to defend the price of FTT. There are rumors that they were issuing loans using FTT tokens as collateral… which is a huge problem given that FTX was issuing that very token. They could have debased the asset at any time - a huge conflict of interest.

A bit about FTT:
It was used to offer discounts to traders on FTX in varying tiers. It was similar to BNB in structure, but was bootstrapped by Alameda Research - this led to Alameda being given a substantial amount of FTT. There were many other parties that received FTT and equity. FTT was subject to a vesting schedule, where the tokens could not all be received or sold at once.

Lucas set out to understand the dynamics of FTT and found a multibillion dollar FTT transfer on the 28th of September - one of the largest sequences of ERC-20 transfers ever. This transaction was one of the largest releases of vested FTT. Alameda received these FTT tokens, as per their vesting schedule, and promptly sent the tokens back to FTX, almost as if a repayment.

The concern here was the fact that these two entities were supposed to be very separate… so why are they sending tokens back to FTX? What does this transfer represent? Coin Metric’s hypothesis was that Alameda was in fact insolvent / had blown up in the recent times. They were operating at a net loss and FTX came in and bailed them out. The payment was a repayment to FTX for the bailout. And this was the very beginning.

FTX had no board. It was only SBF and the inner circle who made decisions. It was likely that they knew Alameda was in a bad spot prior to September and decided to bail them out rather than let them blow up. Why? If Alameda blew up, all of that FTT they were set to receive would have been liquidated in the open market. This bail out came from user funds, and there lies the issue that caused FTX’s collapse and fraud.

Given all of this context, is there any sort of positive side to this story?

The transparency aspect of blockchain technologies enabled us to reason about the financial health of FTX objectively. This is one of the biggest instances of financial fraud ever, the transparency aspect is highlighted… although vastly underutilized to date. On chain analysis is a unique and positive thing for crypto assets.

Privacy

Although blockchain does highlight the openness and ability to audit, what kind of privacy concerns are there in this industry?
This event was a custodial / centralized entity fraud that could have been discovered earlier by the openness of blockchain. However, when is privacy needed?
2008 showed us that closed doors can cause massive harm, and FTX as a hybrid entity caused a disaster. Will we shift towards completely decentralized entities after this incident? There is the potential for full transparency here.

There is interest in self-custody and the true value proposition of blockchain is coming forward. FTX was all about get rich quick mentality, but now we again see that this is not the purpose of crypto assets nor technology.

So how decentralized can we get in the short term?
The structures that blockchain provide will likely be irresistible in the near future as people realize the structures of power are toxic. People will be incentivized by control of their monetization and profit sharing through the apps they engage with. However, being very idealistic is not productive right now. There are not any function apps that are replacing social networks at the moment. More time is needed to create a functional system.

Where are we on the scale of fraud? Is this likely to be the last one of this scale?
Hopefully, but given that not every user is safe holding their own crypto and there is still not 100% secure way to secure seed phrases, there can still be issues in the future. Both the user and institutional fronts have improved though. It is unlikely something like FTX will happen again systematically.

Does the public data help without context?
Blockchains are transparent, but all the information from a node is not legible. The meaning of the transaction is obscured. This is a huge problem in trying to run analysis. The tool s are not up to where they need to be and computation is not free.

Thanks for reading the recap!

A few questions to consider from the call

  • Is there any positive light to this?
  • Where will privacy go from here?
  • Is decentralization going to gain a bigger foothold from this?
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