Some thoughts on the FTX Collapse/Debacle

Presenter: Andreas Park

The Terra Implosion

UST Stablecoin

LUNA (cryptocurrency of the TERRA network)

A timeline

May 7: selling pressure on UST from Curve withdrawals

May 12: LUNA and UST at $0.01

June 27: Three Arrows Capital ordered to liquidate

June 12: Celsius Network suspends withdrawals

July 13: Celsius files for Chapter 11

July 6: Voyager Digital files for Chapter 11

July 4: Vault suspends withdrawals

Three Arrows Capital lost >60% of value and faces numerous margin calls that they did not react to

partially saved by $\ldots$ FTX

The FTX Implosion

A timeline

Nov 8

What's next?

DEX vs CEX Tradeoffs

Option	Exchange-side risk	User-side risk
Custodial exchange (eg.Coinbase today)	User funds may be lost if there is a problem on the exchange side	Exchange can help recover account
Non-custodial exchange (e.g.Uniswap or dydx today)	User can withdraw even if exchange acts maliciously	User funds may be lost if userscrews up

Source: https://vitalik.ca/general/2022/11/19/proof_of_solvency.html

Core problem with QuadrigaCX:

Gerry Cotton sold people crypto he did not have.

Core problem FTX

used customer funds to prop up their market maker Alameida
=> they gave Alameida customer assets

In finance terms

call it unhedged "leverage"
hedge means that you have an off-setting position

Possible solution

prove your aggregate positions:
prove your assets & liabilities
if asset = liabilities $\Rightarrow$ solvency

Source: https://vitalik.ca/general/2022/11/19/proof_of_solvency.html

Core Problems with CEXes

Assets: cash in bank accounts and crypto assets in exchange wallets
Liabilities: crypto and cash deposits made by customers

Proof of cash assets
- requires an auditor report
Proof of crypto asset
- publish all exchange wallets
- problem: cold storage
- proof of control: shift assets from one address to another at a pre-determined time

Proof of liabilities
- public customer balances - customer can check
  - own holding
  - positive customer balances
  - sums to assets
Problem: privacy
- Solutions:
  - hash of customer
  - Merkle tree-type organization
  - zero-knowledge proofs

Proof of assets & liabilities

Core Problems with CEXes

Some thoughts on the FTX Collapse/Debacle

DEX vs CEX Tradeoffs

Core problem with QuadrigaCX:

Core problem FTX

In finance terms

Possible solution

Assets: cash in bank accounts and crypto assets in exchange wallets

Liabilities: crypto and cash deposits made by customers

Proof of cash assets

requires an auditor report

Proof of crypto asset

publish all exchange wallets

problem: cold storage

proof of control: shift assets from one address to another at a pre-determined time

Proof of liabilities

public customer balances - customer can check

own holding

positive customer balances

sums to assets

Problem: privacy

Solutions:

hash of customer

Merkle tree-type organization

zero-knowledge proofs

Thoughts on the FTX Debacle

Thoughts on the FTX Debacle

Andreas Park PRO

Some thoughts on the FTX Collapse/Debacle

DEX vs CEX Tradeoffs

Core problem with QuadrigaCX:

Core problem FTX

In finance terms

Possible solution

Assets: cash in bank accounts and crypto assets in exchange wallets

Liabilities: crypto and cash deposits made by customers

Proof of cash assets

requires an auditor report

Proof of crypto asset

publish all exchange wallets

problem: cold storage

proof of control: shift assets from one address to another at a pre-determined time

Proof of liabilities

public customer balances - customer can check

own holding

positive customer balances

sums to assets

Problem: privacy

Solutions:

hash of customer

Merkle tree-type organization

zero-knowledge proofs

Thoughts on the FTX Debacle

More from Andreas Park