FTT, the new LUNA 2.0?

There is a phrase that perfectly defines the situation that is currently being experienced in the cryptocurrency ecosystem. And yes, it is true; “There is no better way for human beings to learn than by making mistakes.” The truth is that the phrase is not misdirected. After suffering 6 months ago one of the worst settlements In the history of cryptocurrencies, we once again stumble upon the case of the FTX exchange. Haven't you found out yet? Come on, in this cryptocurrency training we are going to discuss the keys to the FTX debacle and its utility token, the FTT.

What happened previously with LUNA?

As we already reported more than six months ago in a post on our blog, the Terra protocol was a promising blockchain in which a very interesting ecosystem was developing. It was one of the projects that best resisted the beginning of the bear market in which we are immersed, at the same time that it was one of the first to start the upward path again. But it all came at the moment when different events occurred that triggered the end of this blockchain. Everything happened based on three factors:

1. UST parity linked to LUNA​​

La Terra blockchain Apart from having its own native token (LUNA), it also had its own stablecoin, the UST. This stablecoin, unlike achieving parity based on a currency backing or other stablecoins, achieved parity through algorithmic calculations that balanced the parity linked to the LUNA token. That is to say, at all times the supply and demand of UST was balancing. Later, a sale of 285 million dollars caused the parity of said asset to be lost. It seemed viable, but trusting in a parity that arises out of the air could not end well, especially knowing that...

2. Terra's treasury was heavily exposed to BTC movements

Other factors that triggered the collapse of the Terra ecosystem was the management plan for the protocol's treasury reserves. Clearly entering a bear market and with signs of an escalation of a conflict between nations, sheltering a large part of the protocol's reserves in volatile assets does not seem like a great idea.

But it seems that Do Kwon found it the revelation of his life, and decided to start a series of massive purchases to have exposure to other crypto assets in his treasury. Between them, they obtained a total of 80.394 BTC. This reserve management strategy is a bit kamikaze if we put ourselves in the context of being in the middle of a bear market and not having reserves of stable currencies that can reduce the impact of massive sales. Not counting…

3. Unsustainable returns in DeFi protocols (Anchor)

The final straw on Earth (I mean, on Terra) was one of the DeFi protocols in its ecosystem. The so-called Anchor Protocol was a platform that offered surprising profitability since it had no competitors in its field. This was a fixed return of 18,5% on deposits of its stable currency, the UST. At first glance, for the entire community it was a unique opportunity to generate almost 20% profitability with an asset that guarantees protection against volatility.

Without first questioning whether it could be sustainable, UST's reserves in the Anchor protocol immediately reached unsuspected limits. The stablecoin reached a market capitalization that allowed it to enter the top 10 of the market capitalization ranking. Finally, when the UST peg was slowly sliding towards zero and LUNA was going headlong into hell, Bitcoin and the market suffered the consequences with drops of more than 10-20%.

What happened this time with FTT?

As we had commented at the beginning of this cryptocurrency training, human beings learn by making mistakes. The curious thing is that currently only six months have passed since the events that we have reported in the previous paragraphs occurred. Let's review what happened this time in the case of FTT:

1. CZ publishes the controversial and revealing tweet of the entire plot

The CEO and founder of the world's largest cryptocurrency exchange, Binance, posted a tweet on November 6 around five in the afternoon. In this he announced that the 2 billion they received from FTX when withdrawing their investment were returned in BUSD (Binance stablecoin) and in tokens from the FTX exchange, the FTT. Through recent investigations carried out by CoinDesk, they decided to announce that they were going to liquidate all the FTT tokens they had in custody. This was due to a possible liquidity crisis on the FTX exchange due to a lack of support for its utility token (we will see why later).

2. The confirmation tweet on Whale Alert

If we thought at some point that CZ could bluff to try to weaken his enemy, we could see that this was not the case. He reaffirmed his previous publication with a screenshot of the profile of Whale Alert, a bot that follows the most notable movements in the cryptocurrency ecosystem. In it you could see a transaction of almost 23 million FTT tokens transferred from a cold wallet to the Binance exchange.

These transactions are interpreted as possible sales or purchases that may give clues as to where the strong hands are directing their actions. In this case, we were able to verify that he was not bluffing, that the token was bleeding at the speed of light. To add fuel to the fire, CZ reaffirmed himself by indicating that “they had already learned their lesson with the Terra protocol.”

3. Third devastating tweet revealing the liquidity of its reserves 

This is when the plot is about to reach the beginning of the end. A day later, CZ struck again, this time talking about the value of Binance cold wallets 1 and 2 in ETH worth $8 trillion. This tweet referred to the great leak of reserves from the FTX treasury, which were completely emptied until the hot wallets (those necessary to enable withdrawals and deposits on their exchange) were left at zero.

This obviously ended up affecting users, as happened with the liquidity crisis that Celsius suffered a few months ago, with withdrawals being blocked. As an example, we can see a clear example in the following graph. BTC reserves on the FTX exchange dropped from 20.176 BTC on November 6 to 0.25 BTC in the early hours of November 8. This event negatively impacted the price of BTC, sliding from $20.500 to falling below $18.000 in 24 hours.

How similar are the cases of LUNA and FTT?

Certainly when reviewing in this cryptocurrency training the two cases of the collapses of Terra and FTX, we can see certain factors that have been repeated in a similar way, such as:

Token backup 

The main problem that we could find in the case of Terra was the support that its respective tokens had, both the native one (LUNA) and the stable currency (UST). The LUNA token was heavily exposed to the volatility of the cryptocurrency market. To alleviate the effects of market volatility, a stable coin was created, the UST, which was... backed by a volatile token, its own native token. Already giving these clues we saw that this could lead to terrible consequences. Well, the case of FTX is similar to the steps we saw in the previous training in cryptocurrencies. Let's review them: First, FTX was responsible for the printing of FTT tokens. Next, what was the largest investment fund in the cryptocurrency ecosystem enters the scene; Alameda Research. It turns out that Alameda had a close relationship with the FTX exchange, through which the exchange provided tokens for free to Alameda.

This is when things get complicated, at the moment when the investment fund begins to put up these tokens as collateral, which have no backing whatsoever... Until finally, Alameda begins to borrow USDT using the FTT tokens that they have provided as collateral. for the loan.

Lack of stability in reserves

It turns out that apart from having a treasury widely exposed to its own token, which also had no utility, FTX had its own Achilles' heel; stablecoins. Although in the case of Terra the problem with its stablecoin was that it was not stable, in the case of FTX it was that they did not have stablecoin support. Apart from having reserves widely exposed to the FTT token with no real value, the exchange's stablecoin reserves had reached historical lows during these weeks.

A red flag that reminded us of the problem we covered in cryptocurrency training about the collapse of Terra could happen if a project's treasury was not well managed. In periods of bear markets it is worth having good reserves of stable currencies to hedge against market volatility. As in periods of bullish markets, having a diversified portfolio to benefit the project.

Project rescue

This is the factor of this training in cryptocurrencies that differentiates one case from the other. While the Terra protocol decided to perform a hard fork of the blockchain to fork the network towards a new one, as with its stable currency. The old tokens were renamed LUNC and USTC respectively. This is when things change, because while CZ was posting his controversial tweets, Sam Bankman Fried (CEO and founder of FTX) was defending tooth and nail. Until he finally had to give in and recognize the risk due to the exchange's liquidity problems.

So, the controversy surrounding this whole conflict is that there has just been talk of a possible purchase by CZ of the FTX exchange, with certain conditions of course. This event temporarily catapulted the cryptocurrency market, but it has finally completely collapsed. This agreement has not yet been fully confirmed, since it is most likely that the regulatory authorities will end up acting due to possible investigations regarding the entire plot.

Conclusions from this cryptocurrency training

After having reviewed in this cryptocurrency training the similarities between the collapse between the Terra protocol and the FTX exchange, we can reach several conclusions:

• We still have not learned the lesson regarding the issue of project reserves, acting with unethical practices and compromising the continuity of the projects.
• The asset backing dilemma continues to plague us once again, which will eventually lead to strict regulation of the source of asset backing.
• It is true that CZ and Binance wanted to preserve the security of the ecosystem, although it could have been done behind closed doors and using OTC operations so as not to harm the entire ecosystem.
• The acquisition of Binance from FTX represents the elimination of a direct competitor, a move that in the investment community translates as an attack on decentralization. It is well known that each time Binance's reign expands like foam, centralizing decentralization, although it can be seen as a monopoly practice in a fairly large sector...