Here’s what happened in blockchain and crypto this week.
As the dust settles following the FTX bankruptcy, crypto firms and industry participants are still assessing the damage on their businesses and the fallout on the industry as a whole, with the fate of some firms and funds potentially hanging by a thread. Unfortunately, the FTX contagion has rapidly spread to other crypto firms and crypto projects whose funds are stuck on the platform. To cushion the blow, Binance is now planning a $2 billion crypto recovery fund with contributions from Jump Crypto, Polygon Ventures and other firms. After the collapse of FTX triggered a sharp selloff in crypto markets fueled by high-profile bankruptcy fears, regulatory pressure and rampant short selling, prices of cryptoassets have largely stabilized.
Many industry participants have rightfully pointed out that contrary to popular opinion, the FTX collapse was not necessarily a crypto issue. Instead, it was a failure of centralized finance, or CeFi. FTX was a centralized crypto exchanged that likely misappropriated $10 billion in user funds (see also below) while lying to investors. It also violated its own terms of service which prohibited the loaning out of customer funds. The narrative according to which the FTX collapse was a run on the bank, as suggested by a number of reports, is therefore a mischaracterization. Importantly, FTX’s implosion could probably have been avoided under a “proof of reserves” (PoR) system, an on-chain audit that provides transparency and evidence that a custodian or exchange actually holds the cryptoassets it claims to own. As a result, many crypto exchanges are rushing to publish PoR in an attempt to reassure investors that their funds are safe.
To the astonishment of the crypto community and a number of US lawmakers, both critical press coverage by large media outlets and enforcement by regulators have been largely absent so far. Crypto heavyweights including Kraken CEO and founder Jesse Powell, Coinbase CEO and founder Brian Armstrong or former Andreessen Horowitz VC Balaji Srinivasan have criticized the “puff pieces” published by major US newspapers that downplayed FTX’s downfall and the role that founder and CEO Sam Bankman-Fried has played in it. Others, including former Meta head of crypto David Marcus and US congressman Tom Emmer have pointed out the lack of government oversight and enforcement, especially by Gary Gensler’s SEC.
Meanwhile, a number of blockchain analytics firms have looked behind the scenes and into the factors that precipitated the exchange’s collapse and the ramifications for the broader market. An in-depth CoinMetrics piece suggests that Alameda Research’s large position in the FTT token – the cryptoasset that was central to Alameda’s and FTX’s survival – might have been used as collateral for a large loan from FTX. Through this loan, Alameda may have received funds that belonged to FTX’s users. Given Alameda’s poor risk management, these funds were subsequently lost. Another report by Glassnode shows that outflows from other crypto exchanges in the wake of the FTX collapse have been at unprecedented levels, with BTC and ETH holders seeking safety in self-custody.
While a more detailed account of the scope of recent FTX would go beyond the scope of our Weekly Wrap-Up, below is an overview of major FTX-related headlines this week:
The global cryptoasset market capitalization currently amounts to $868 billion – little changed since Friday last week, with bitcoin accounting for 36.6%. Among the Top 30 cryptoassets by market cap, Litecoin (LTC) outperformed, gaining roughly 20% over the week. During the same period, the price of bitcoin (BTC) decreased by another 1.2% to $16,516 while the price of ether (ETH) fell slightly by 0.8% to $1,192. The total value locked (TVL) in DeFi sits at $41.3 billion – down from the $43 billion last week – with Ethereum accounting for about 57.5% of TVL.
This Week’s Headlines
Notable Deals and Fundraising
Manuel Trojovsky, Head of Crypto Investments & Research
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