The Downfall of FTX and Alameda Research So Far

4 mins read

So... we all know FTX went bust, but how did that happen? Did Sam Bankman-Fried (SBF) use users' funds? Was it a bank run induced by Champeng Zhao? How does Alameda Research fit in the big picture? Let's see.

FTX, Alameda, and SBF: Where all starts and ends

You can't talk about FTX without first talking about Alameda Research. 

Alameda Research is a quantitative trading firm founded by Sam Bankman-Fried in 2017. A couple of years later, SBF founded FTX, a derivatives exchange that took the world by storm. We saw its name in stadiums, TV commercials, and the Super Bowl.

In late August, Sam Trabucco, co-CEO of Alameda Research, stepped down. He claimed he wanted to spend some time traveling and living a quieter life. This could've been seen as a natural career step, yet more was to come. 

Chaos was about to ensue.

Although SBF used to stress that FTX and Alameda were separate entities, the relationship was very close. In early November, Alameda Research's balance sheet was leaked, showing a large insolvency. Much of Alameda's balance sheet was FTT and coins launched by the exchange. 

And this is where the problem started. 

The timeline for disaster

The date was November 6th. After many insolvency rumors, Caroline Ellison, CEO of Alameda Research, decided to talk. She claimed the leaked information about the company was incomplete. She said they held more than $10B in assets that weren't reflected in the leaked data. 

And then came Changpeng Zhao, Binance's CEO. CZ said they would liquidate all its FTT exposition for post-exit risk management after learning from the LUNA debacle. He also said he wouldn't support people who lobby against other industry players. This last comment is due to the regulatory rules that SBF was proposing for cryptocurrencies.

Ellison said that if Binance wanted to sell any FTT, they'd buy it at $22 to minimize the impact on the market. Binance allegedly held around $529M in FTT tokens (around 23M FTT). Yet, many people speculated Alameda had loans on FTT, and if it fell further, it would liquidate their positions.

Only one day went by, and SBF replied back. He said a competitor tried to go after FTX with false rumors. He claimed all assets were fine and that he'd love to work with CZ to bring clarity to the space. The tweets have since been deleted.

On November 7th, FTX said they had one of the highest revenue per employee of any company in the world. Yet, FTT started to dump — and it did really fast.

There was too much noise... and then the unexpected happened.

FTX's failed acquisition and bankruptcy 

November 8th came, and early in the morning, FTX stopped processing withdrawals. People were starting to lose their minds, but suddenly a new development changed the story's direction. FTX was under a liquidity crunch, and Binance intended to buy them out. 

Yet, due diligence was pending, and Binance could back out if it saw fit. 

After reviewing FTX's books and the news of the U.S. looking to probe it for handling customer funds, Binance called it quits on November 9th. 

Not only did all FTT assets start to go down, but assets related to it too. And that includes Solana (SOL). That same day, the Solana Foundation revealed that Alameda bought around 58M SOL, some with linear vesting up until late 2027. 

Another day passed, and a new development came from SBF's mouth. According to him, FTX US remained unaffected and was liquid. They were looking for solutions, after all. 

Twenty-four hours later, around 130 companies from the FTX conglomerate, including FTX US and Alameda Research, filed chapter 11 bankruptcy. 

SBF resigned from his CEO position

Then November 11th came by, and it brought even more surprises. After the bankruptcy announcement, the exchange finally paused withdrawals. They also claimed that FTX was moving its own assets to cold storage. But something else was happening.

The hack and cryptic SBF tweets

November 12th, we learned that FTX was hacked – around $600M stolen from the platform.

A day later, a former FTX engineer under the pseudonym Yung Dot said SBF implemented a "backdoor" in the accounting system that allowed him to alter records and move money undetected. SBF used the "backdoor" to ship $10 billion from FTX to Alameda without setting off alarms in the books.

The attacker most probably exploited this backdoor during the hack.

After the attack, SBF starts to tweet cryptic one-letter tweets. This annoyed many people, as it seemed like a game for him. He later used this thread to say Alameda had more liquid assets than liabilities. 

Yet, its assets weren't liquid (such as the 58M SOL it had yet to receive). However, Alameda seemed to be using these illiquid assets as collateral. When crypto started to go down, their loans went too. Sam says he's still meeting with regulators.

He also apologized and said it was a "leverage miscalculation". 

Yet, people from the FTX team have decided to ignore his comments. John Ray, FTX's Chief Restructuring Officer and CEO, disassociated the exchange from SBF's recent comments. Ray remarked that Sam Bankman-Fried had already resigned from FTX.

This is a tragic story for thousands of users who find themselves without an answer. A story full of lies in which we see how greed can lead many to ruin. Will Sam Bankman-Fried and most of Alameda Research end up in jail?

Time will tell — we can hope justice is served.