What is FTX

FTX was a Bahamas-based cryptocurrency exchange founded in 2019 by Sam Bankman-Fried (SBF) and Gary Wang that rapidly grew to become the world's second-largest crypto exchange by trading volume. Its spectacular collapse in November 2022 the largest crypto exchange failure in history resulted in over $8 billion in customer fund losses, criminal charges against its leadership, and permanent changes to how the crypto industry approaches transparency and self-custody.

THE RISE OF FTX

FTX launched in 2019 with a sophisticated derivatives and spot trading platform, rapidly attracting professional and institutional traders. SBF became one of crypto's most prominent figures a Harvard-educated, altruism-professing billionaire who lobbied Congress, donated to political campaigns, and positioned FTX as the responsible face of crypto. At its peak, FTX processed billions in daily volume, held celebrity endorsements from Tom Brady and Stephen Curry, and was valued at $32 billion in a 2022 funding round.

ALAMEDA RESEARCH: THE HIDDEN CRISIS

FTX was closely intertwined with Alameda Research, SBF's trading firm. Internal documents revealed that FTX had secretly loaned billions of dollars of customer deposits to Alameda to fund leveraged trading positions. This use of customer funds was entirely undisclosed and constituted fraud. When cryptocurrency markets declined sharply through 2022, Alameda's leveraged positions generated massive losses that depleted the customer funds FTX had borrowed.

THE COLLAPSE

On November 2, 2022, CoinDesk published Alameda Research's balance sheet showing its primary assets were FTT FTX's own exchange token. Binance CEO CZ announced he would sell Binance's entire FTT holdings, triggering panic. $6 billion in customer withdrawal requests hit FTX in 72 hours. FTX could not fulfil them the customer funds were gone. FTX filed for bankruptcy on November 11, 2022.

LEGAL CONSEQUENCES

Sam Bankman-Fried was arrested in the Bahamas, extradited to the US, tried, and convicted on seven counts of fraud and money laundering in November 2023. He was sentenced to 25 years in prison in March 2024. Other FTX executives including Caroline Ellison and Gary Wang cooperated with prosecutors and received reduced sentences.

KEY LESSONS

Not your keys, not your coins FTX proved that exchange custody carries catastrophic counterparty risk. Regular proof-of-reserve audits are essential for exchange trust. Conflicts of interest between exchanges and affiliated trading firms must be disclosed and regulated.

Terms in addition to the FTX

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.