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The collapse of FTX and Alameda explained

Here is a clear explanation of what happened in the FTX & Alameda Research fiasco, which doesn’t involve wild speculation, but is based on my decade-long experience, insights & understanding of how the crypto industry, exchanges, and market makers operate.

Let’s go!

1. Every up-and-coming, ambitious exchange needs to have liquidity. If you can bring liquidity to your trading venue, you’re on a rocket ship ready to fly to the moon.

2. SBF knew the liquidity puzzle very well, having a background in high-frequency trading & market-making, and given the close ties to Alameda Research, it was clear that Alameda will be the one bootstrapping liquidity. FTX will launch various products and Alameda will do market-making from day one.

3. In reality, bootstrapping liquidity is easier said than done, given the huge amount of capital & infrastructure required, hence to enable a lot of freedom to do market-making on FTX for various products, Alameda Research was given a trading account with no position & risk limits (i.e. non-liquidating account).

4. Since most of the flow on the exchange was retail - bread & butter for crypto market-makers - both Alameda & FTX were highly profitable and stars of the crypto industry.

5. Then LUNA/Terra collapse happened! Alameda was on the other side of all liquidating LUNA trades and they were buying into a rapidly collapsing market. This left a massive hole in Alameda’s balance sheet and SBF had two options: either let Alameda go down & lose liquidity on FTX or somehow try to fill the hole. The rest is history…

There are a lot of rumors running around, mostly pushed by people who did not spend time in the trenches or don’t have a relevant understanding of the reality of the crypto industry. My hopes are this post will bring transparency, insights, and guideline for our industry to move forward!

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