FTX Collapse, Binance Takeover – The Two Big Lessons to Learn According to Changpeng Zhao.
These two lessons are also intended to reassure the market about the strength of Binance.
It all started with an investigation by CoinDesk in early November 2022. In its investigation, CoinDesk revealed a big anomaly in the finances of Alameda Research, the trading company of Sam Bankman-Fried, the founder of the FTX exchange.
According to CoinDesk's investigative report, Alameda's balance sheet is dominated by FTT, FTX's native token. This, the article continues, poses insolvency issues for FTX.
As a result of this CoinDesk investigation, many FTT holders are priced out of the market. As a result, they are liquidating their FTT positions. One of these FTT holders is Binance. As investors rush to FTX to withdraw their cryptocurrency holdings, chaos ensues.
The value of FTT, as a result, falls by over 60% in less than 48 hours.
The pressure on FTX eventually leads to the collapse of the SBF ecosystem. Changpeng Zhao finally comes back as a savior by offering to buy FTX.
In this affair, CZ played a dual role. First, it is important to remember that Binance was often presented as the crutch of Alameda and SBF's empire. However, when CZ saw the difficulties coming, it did not want to relive the same experience as when Luna collapsed. CZ quickly liquidated its positions in FTT, which accelerated the decline of SBF's empire.
Indeed, when CZ announced the liquidation of his FTT positions, investors panicked. This allowed CZ to come and buy FTX by presenting Binance as the savior in this story. Rather well done when you think about it ...
From the events of the last few days concerning FTX, there are two major lessons to be learned for crypto exchanges according to CZ who presented them in a tweet:
First, CZ recommends that they never use their native tokens as collateral. In the case of Alameda, this has been the case. The balance sheet of the crypto exchange, as revealed by CoinDesk, showed that nearly half of the holdings were FTTs. Since Alameda controlled about 60 percent of the FTT supply, it and FTX couldn't liquidate them to meet disbursements such as advance loan payments.
The second lesson, according to CZ is that you should never borrow when running a crypto company. He continues this by stating that “these platforms should not use capital efficiently.” He adds “that you should instead have a large reserve.”
An analysis of Alameda's balance sheet shows that the company relies heavily on debt. It has used FTT to secure loans. It also has insufficient reserves to handle certain situations like FUD. This is a fatal mistake that could be expected when you see what happened earlier in 2022 with the Terra Luna ecosystem collapse ...
These two lessons were also meant to reassure the market about Binance's strength.
CZ clarified that Binance has never used its native token, BNB to raise money. He added that “all crypto exchanges should demonstrate Merkle-tree reserves. Banks operate with fractional reserves. Crypto exchanges should not.”
Finally, he announced that Binance will soon provide proof of reserves, in full transparency. And this is where a platform like Kraken makes a difference as I explained to you back at the very beginning of 2022. In an article explaining that not all cryptocurrency exchange platforms are equal, I had already told you that Kraken stood out by offering this process of Proof of Reserve that CZ is now calling for Binance.
The bad tongues may regret that CZ waited for this type of event to advocate the Proof of Reserve as a standard for all cryptocurrency exchange platforms that want to be serious and will thus resist the crypto winter.
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