Security in crypto comes from liquidity or the lessons we learned after FTX

The FTX bankruptcy has sent the crypto space into a downward spiral, and the crypto space is still buzzing to get all the details that led to this situation. Numerous reports have popped up, and the bankruptcy hearings bring new information daily. Considering the extent of FTX’s involvement in the global crypto space now is the time to take a hard look at what happened and draw some valuable lessons.

One thing is very clear from the start – what brought the exchange giant down was overallocation in low-liquidity tokens, mainly its own FTT cryptocurrency. While FTX specifically could get away with having tonnes of FTT on its balance sheets, sister company Alameda Research couldn’t get off the hook so easily.

On the one hand, it was extremely suspicious that the two companies had such close ties, which was often questioned in the media and across the general crypto grapevine. On the other, Alameda’s asset quality score was declining, as alleged by an Orthogonal Credit due diligence report compiled all the way back in early 2022.

And it turned out that this was precisely the case – Alameda was over-exposed to FTT, and when a sell-off was triggered on November 5th, both the trading company and FTX felt the heat.

The ripple effect

Alameda and FTX made the fatal error of putting too much trust and value toward the exchange’s native token, FTT. In a critical turn of events, this over-exposure led to the crash of both companies and a slew of other businesses that had assets locked on FTX. The ripple effect is strong in crypto, especially when a market giant like FTX crashes.

Take BlockFi, for example. This is one of the largest crypto lenders in the space, which has now also filed for bankruptcy as it loaned FTX $400 million in June this year. FTX once saved BlockFi, but this also turned out to be the reason behind the lender’s demise.

Another big name in the space that faces significant difficulty following the crash is the institutional trading platform Genesis Trading. The financial services provider has upwards of $170 million of assets stuck on FTX, making operations virtually impossible.

Unfortunately, one company’s liquidity problems led to a much larger crisis across the whole space. And we’re not even mentioning the thousands of retail investors who were affected by the FTX crash.

How to avoid a future FTX scenario?

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