Why wasn’t FTX’s fraud detectable on the blockchain?
10 comments
I came across this really good summary of FTX's fraud on Reddit the other day:
"SBF/Alameda's initial strategy was arbitraging price differences between US and Korea/Japan. The different crypto exchanges in different countries would have different prices for the same coin. In theory this was possible but in practice it was basically impossible. They lost money in Korea due to capital controls, they made some money in Japan but still lost money overall due to the enormous amounts they had to borrow and the high interest rates they were paying.
The arbitrage strategy wasn't working so they switched to shilling shitcoins. Basically they would create a new token backed by say $5m seed money, put like 1% of the total number of tokens created on the market, then use their own money to pump up the token price by 100x. Since they owned and controlled 99% of the total amount of tokens, this was easy to do. Now their initial $5m is worth $500m, but only on paper because liquidity on these tokens is tiny and if they actually tried to sell it would immediately crash.
Alameda did this in order to get loans using the tokens that they created and pumped as collateral. Then they took the borrowed money to make large directional bets on crypto prices. However it turned out they were bad at trading crypto and took billions in losses and the margin calls started coming in for their loans.
At this point Alameda was stuck, the collateral backing these loans were all shitcoins and if they started selling them the price would crash causing the entire company to go under. Since SBF couldn't meet the margin calls by liquidating the underlying collateral, he and the other founders decided to steal money from customer accounts at FTX to meet the margin calls. Basically they would give Alameda their own FTX token(FTT) and then have FTX loan customer funds to Alameda using the tokens they just gave them as "collateral". It was essentially the same scam as the one they pulled on lenders, only now they're doing it to customers while promising they would never touch customer funds.
Alameda kept losing money and eventually the scheme was discovered and it ended up being they stole something like 2/3 of the customer funds at FTX. Current estimates are at about $10 billion they lost gambling on crypto with customer money. It was a classic case of a gambler kept doubling down and borrowing and stealing until it came crashing down."
"SBF/Alameda's initial strategy was arbitraging price differences between US and Korea/Japan. The different crypto exchanges in different countries would have different prices for the same coin. In theory this was possible but in practice it was basically impossible. They lost money in Korea due to capital controls, they made some money in Japan but still lost money overall due to the enormous amounts they had to borrow and the high interest rates they were paying.
The arbitrage strategy wasn't working so they switched to shilling shitcoins. Basically they would create a new token backed by say $5m seed money, put like 1% of the total number of tokens created on the market, then use their own money to pump up the token price by 100x. Since they owned and controlled 99% of the total amount of tokens, this was easy to do. Now their initial $5m is worth $500m, but only on paper because liquidity on these tokens is tiny and if they actually tried to sell it would immediately crash.
Alameda did this in order to get loans using the tokens that they created and pumped as collateral. Then they took the borrowed money to make large directional bets on crypto prices. However it turned out they were bad at trading crypto and took billions in losses and the margin calls started coming in for their loans.
At this point Alameda was stuck, the collateral backing these loans were all shitcoins and if they started selling them the price would crash causing the entire company to go under. Since SBF couldn't meet the margin calls by liquidating the underlying collateral, he and the other founders decided to steal money from customer accounts at FTX to meet the margin calls. Basically they would give Alameda their own FTX token(FTT) and then have FTX loan customer funds to Alameda using the tokens they just gave them as "collateral". It was essentially the same scam as the one they pulled on lenders, only now they're doing it to customers while promising they would never touch customer funds.
Alameda kept losing money and eventually the scheme was discovered and it ended up being they stole something like 2/3 of the customer funds at FTX. Current estimates are at about $10 billion they lost gambling on crypto with customer money. It was a classic case of a gambler kept doubling down and borrowing and stealing until it came crashing down."
> Current estimates are at about $10 billion they lost gambling on crypto with customer money.
I just don't understand the scale of it. Ten billion dollars is huge. It takes months if not years, even to lose that much in gambling. Did nobody notice anything off? Was the entire company in on it?
I just don't understand the scale of it. Ten billion dollars is huge. It takes months if not years, even to lose that much in gambling. Did nobody notice anything off? Was the entire company in on it?
The new CEO of FTX just released a declaration: "Never in my career have I seen such a complete failure of corporate controls..."
"In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors"
Sam Bankman-Fried's hedge fund lent billions to... Sam Bankman-Fried (Paper Bird is his entity), so that's at least part of the answer where the money went.
"In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors"
Sam Bankman-Fried's hedge fund lent billions to... Sam Bankman-Fried (Paper Bird is his entity), so that's at least part of the answer where the money went.
Bernie Madoff ran his scheme for almost 20 years before being caught.
https://en.wikipedia.org/wiki/Madoff_investment_scandal
https://en.wikipedia.org/wiki/Madoff_investment_scandal
Madoff claims he was just a front-man for a conspiracy by large investors. Which is why he was supposedly not caught.
The theory makes sense, but he refused to name names. It might be that the benefactors are too powerful, but probably he's lying.
The theory makes sense, but he refused to name names. It might be that the benefactors are too powerful, but probably he's lying.
How did SBF get his seed money? That's really the only difference between him and everyone else.
The entire crypto sector is fraudulent and hidden behind layers of nonsensical theory.
What started as a way to anonymously pay for illegal services on the dark net, morphed into a Ponzi scheme aimed at low IQ tech bros.
What started as a way to anonymously pay for illegal services on the dark net, morphed into a Ponzi scheme aimed at low IQ tech bros.
Remember when decent Marijuana was like 5 BTC for a quarter ounce? I just like to imagine that there is some dealer out there who has a couple thousand btc sitting on an old hard drive.
I know this to be fact. $100M and she was still scrapping for rent money because she didn't know how touch it.
They’re probably running crypto companies now tbh
>What started as a way to anonymously pay for illegal services on the dark net, morphed into a Ponzi scheme aimed at low IQ tech bros.
That was never the point of Bitcoin. Read the whitepaper. Satoshi wanted to decentralize trust in the ecommerce world with the help of transparent P2P decentralized and distributed database called blockchain and he wanted to enable micropayments. There is no mention of buying drugs or any other illicit activities in the whitepaper.
That was never the point of Bitcoin. Read the whitepaper. Satoshi wanted to decentralize trust in the ecommerce world with the help of transparent P2P decentralized and distributed database called blockchain and he wanted to enable micropayments. There is no mention of buying drugs or any other illicit activities in the whitepaper.
...and everyone is going to use their newfangled home computers to organize recipes and do biorythym charts.
Even in a charitable interpretation of history-- ignoring that Bitcoin wouldn't scale to micropayment levels-- any early interest in micropayments was quickly overwhelmed by speculation and illegal trade.
I think Dogecoin tips on Reddit circa 2014 are about as close as we ever got to viable crypto micropayments, and ISTR it was done off-chain by putting a balance in a bot.
Even in a charitable interpretation of history-- ignoring that Bitcoin wouldn't scale to micropayment levels-- any early interest in micropayments was quickly overwhelmed by speculation and illegal trade.
I think Dogecoin tips on Reddit circa 2014 are about as close as we ever got to viable crypto micropayments, and ISTR it was done off-chain by putting a balance in a bot.
Again read what Satoshi was saying; no home PCs or Raspberry Pi type devices instead server farms will process transactions. It can scale, no reason why it wouldn't. Look at the BitTorrent for example....still viable.
I'd go one further; Bitcoin as a payment method only makes sense if it is illegal, safe from State and inter-state meddling.
Bitcoin is by design not tied to the "State" if you will or in another words it makes the central bank obsolete but it still must operate withing the state and within the legal framework of finance and state criminal laws.
After all this years you guys are still getting it wrong; using Bitcoin is not about running away from your real world identity where you would freely be able to buy illicit goods and services. It is about decentralizing trust; giving the people the control of their money and it is about micropayments.
In today world of central banks, commercial banks and credit card companies like Visa and Mastercard, you depend on them to process your transactions but in the Bitcoin type system, P2P network nodes process your transactions.
Banal example is when Visa and Mastercard mangle and eventually ban Porn related transactions. In the Bitcoin world, mining nodes collect the fees and don't care what you pay for. State decides what is legal and what is illegal not credit card companies who act upon their gut feeling of what transactions are "bad" and which ones are "good".
After all this years you guys are still getting it wrong; using Bitcoin is not about running away from your real world identity where you would freely be able to buy illicit goods and services. It is about decentralizing trust; giving the people the control of their money and it is about micropayments.
In today world of central banks, commercial banks and credit card companies like Visa and Mastercard, you depend on them to process your transactions but in the Bitcoin type system, P2P network nodes process your transactions.
Banal example is when Visa and Mastercard mangle and eventually ban Porn related transactions. In the Bitcoin world, mining nodes collect the fees and don't care what you pay for. State decides what is legal and what is illegal not credit card companies who act upon their gut feeling of what transactions are "bad" and which ones are "good".
but it still must operate within*
The ones I've encountered tend to have the zeal of relegioud converts and haughtiness of secret society members. I've read that recently senior managers have been leaving the space incipient stigma of working in the field.
Because ftx was only crypto in name. In reality it had nothing to do with the blockchain, it was just a centralised company
Good question.
The simple answer is that they were doing many transactions internally. If you kept your BTC at FTX, FTX should have put your BTC in their wallet. Even though FTX customers would have been able to trade with each other off-chain, the total amount of BTC at FTX should have been visible.
They must have been playing some kind of shell game that made this kind of auditing ineffective.
The simple answer is that they were doing many transactions internally. If you kept your BTC at FTX, FTX should have put your BTC in their wallet. Even though FTX customers would have been able to trade with each other off-chain, the total amount of BTC at FTX should have been visible.
They must have been playing some kind of shell game that made this kind of auditing ineffective.
Didn't they send a bunch of assets to Alameda? Alameda gambled with the money and lost it. SBF claims he misread the accounts and thought Alameda had put up enough collateral to cover it. But wouldn't that mismatch be publicly visible on the blockchain?
I had the same question, and the past 2-3 weeks I am still not able to find the answer.
If FTX gave alameda shit tons of FTT and customer funds from FTX reserves by 'transferring' the amount, it should have been visible on the blockchain.
The FTX collapse happened only because of an internal balance sheet leaked to coindesk. Why did coindesk require a balance sheet to write the story? Coindesk probably could have just done it, by looking into the blockchain ledger instead of the balance sheet.
If FTX gave alameda shit tons of FTT and customer funds from FTX reserves by 'transferring' the amount, it should have been visible on the blockchain.
The FTX collapse happened only because of an internal balance sheet leaked to coindesk. Why did coindesk require a balance sheet to write the story? Coindesk probably could have just done it, by looking into the blockchain ledger instead of the balance sheet.
Ftx is a centralized exchange.
Nothing to do with any blockchain.
Decentralized exchanges like uniswap does live on a blockchain.
Nothing to do with any blockchain.
Decentralized exchanges like uniswap does live on a blockchain.
Maybe the answer is as simple as you have to be looking for it. How many naysayers or watchdogs understand it enough to know where to look? All I know is it would be very sad if all of crypto vanishes because of a relatively miniscule number of bandits.
Public vs private. . . ?
"Ledger suffered scalability issues amid FTX saga, says CTO"
https://www.cryptopolitan.com/ftx-rattled-ledger/
"Ledger suffered scalability issues amid FTX saga, says CTO"
https://www.cryptopolitan.com/ftx-rattled-ledger/
Ironically of the two most popular brands Ledger is the worse HW choice that's closed source and has had at least one serious vulnerability exposed in the past. But sure, if they want to trust them. There are still copies of the leak going around with customer emails and even home addresses.
Many will probably also go from FTX straight to Binance or other shady CEXs. The mainstream never learns. Funds are safu :)
Many will probably also go from FTX straight to Binance or other shady CEXs. The mainstream never learns. Funds are safu :)
These scams are alot easier to catch when central banks don't have a too big to fail policy that ensures bailouts will always be available when things get too bad.
why couldn’t people detect ftx shady behavior by auditing the blockchain?