GM. Holy moly. Let's skip the intro and get into it!
Here's what we got today:
- The FTX Aftermath
- Meme of the Day
THE FTX AFTERMATH
It's been 24 hours since the FTX nuke went off in CryptoLand.
And we're seeing the aftermath unfold.
Prices are sinking like bricks in the ocean. In this case, the Red Sea.
- BTC: -16.1%
- ETH: -24.1%
- MATIC: -26.9%
- SOL: -43.0%
And news just came out that Binance might be backing out of the deal after looking at FTX's books/liabilities.
[DB] Binance Is Strongly Leaning Toward Scrapping FTX Rescue Takeover After First Glance at Books: CoinDesk Source
— db (@tier10k)
Nov 9, 2022
If true, major pain incoming.
Now, you might be wondering - where did it all go wrong for FTX?
How could this company have been worth $30B a few months ago...raise billions from investors... make 8 figures in revenue PER DAY...and suddenly, *POOF*, insolvent?!
Well, here's the leading theory:
- SBF created Alameda & FTX as separate companies. You can think of them as cousin companies
- But turns out they were a lot closer than SBF led on. (aka the cousins were kissing)
- At the center of the relationship was FTT (FTX's token)
Alameda used its huge FTT stash as collateral to BORROW from FTX (aka customer funds). But if Alameda's investments go south, or the FTT collateral starts to dump in value...then Alameda goes down, and it pulls FTX down with it.
Jon Wu (friend of the Road) breaks down how he thinks it worked here:
Here's how it works:
- FTX creates $FTT
- Alameda buys or premines $FTT at super low price
- FTX pumps $FTT
- Alameda posts $FTT back to FTX as collateral, borrowing "real" assets from FTX's customer deposits
— jonwu.eth (@jonwu_)
Nov 8, 2022
So what now?
- If Binance pulls out, FTX is likely screwed. And so are its customers. It will be really hard for them to plug a multi-billion-dollar hole
- If Binance steps in, that's a little better. But consumer confidence is severely shaken, and regulators are not going to forget this
- This could be bad. Really bad. Prices down. Trust down. And possible jail time if customer funds were misused
Also - CZ (founder of Binance) just dropped an internal email he sent to the team. You can read the full thing here.
But here's the summary:
1/ No, this was not a "genius master plan".
2/ FTX going down is not a "win" for Binance. It's bad for the whole industry.
3/ Consumer confidence is severely shaken. Regulators will not forget this.
4/ Employees should not sell their bags (insider trading risk).
5/ Don't comment on the sale, there's not enough info yet.
6/ Never use a token you created as collateral.
That last point is the key one. It's the same problem that sank Luna.
FTT, the token that FTX created, was inappropriately used as collateral to borrow against.
The same thing happened with Luna, the collateral used to back the UST stablecoin. When it faced downward sell pressure, it caused the whole system to break.
SO WHERE DO WE GO FROM HERE?
First order of business - we hereby STRIP "SBF" of his acronym.
Nicknames are for winners. Nicknames are for the solvent.
We only refer to him by his government name "Samuel" or "he-who-was-formerly-known-as-SBF". Or fkSBF for short.
Next up, we're feeling super grateful for exchanges like Coinbase. The "slow & steady wins the race" tortoise-of-an-exchange is actually the real deal.
- U.S based
- Reports financials (their balance sheet is completely public)
- Doesn't co-mingle funds or lend customer deposits
- Didn't make up its own coin
The lesson: Being basic is based in the crypto world. It's like a girl seeing her Tinder date has a headboard behind his bed.
We're grateful for Coinbase for having its shit together.
Now, let's look at how other crypto names are reacting to the news on Twitter:
The rumours for this blowup seem so egregious and unnecessary to me. I can’t imagine running an exchange that does mid 8 fig PER DAY in revenue and thinking “how can we leverage this for more?”. I can’t imagine risking a 40+bn business to try & get a multiple on client deposits.
— Cobie (@cobie)
Nov 9, 2022
This is a false narrative that the media will perpetuate. Let’s be crystal clear:
SBF was never the good guy in crypto. He was an overly greedy and short term minded trader that co-opted narratives in a bull market and got flushed out in a bear market. That’s it twitter.com/EricNewcomer/s…
— 1492.eth (@NTmoney)
Nov 8, 2022
- Alameda paid their DeFi debt (Abracadabra) before their CeFi debt (FTX) because DeFi positions are public, can affect optics and DeFi protocols WILL liquidate you without a warning. This cements the usefulness of DeFi. I'm more bullish than ever over long term.
— Mudit Gupta (@Mudit__Gupta)
Nov 9, 2022
THE MILK ROAD & FRIENDS REACTIONS
TODAY'S EDITION IS BROUGHT TO YOU BY THIRDWEB
Crypto winter has been rough. Prices are dropping. Companies are laying off employees.
But I’ll let you in on a little secret - this is also the best time to build. It’s when the best companies & founders are born.
And guess what. Our favorite team of builders is hiring!
Introducing thirdweb - they build web3 tools to make it easy to add cool stuff like tokens and NFTs to your app.
And thirdweb has worked with some of the biggest companies like Coinbase, Dreamworks, New York Fashion Week, & more to launch and power their apps.
- 60,000+ developers
- 200,000+ smart contracts deployed
- Raised a $24m Series A from Haun Ventures, Coinbase Ventures, and more. The Milk Road boys got in on the action & are investors too.
Interesting in joining a dope team that’s working on building the future of web3? Look no further than thirdweb! Check em out here.
MEME OF THE DAY
Tom Brady is going to have to play until he’s 50.
— Dare Obasanjo 🐀 (@Carnage4Life)
Nov 9, 2022
That's a wrap for today. Stay thirsty & see ya tomorrow!
If you want more, be sure to follow our Twitter (@MilkRoadDaily)
What'd you think of today's edition?
VITALIK PIC OF THE DAY
The kings of crypto
— The Milk Road (@MilkRoadDaily)
Nov 9, 2022
DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.