FTX's downfall and Binance's consolidation: The fragility of centralised digital finance

TL;DR

This paper analyzes the causes and systemic effects of FTX's 2022 collapse, highlighting the role of market dependencies, leverage, and social media influence, and discusses the implications for decentralization in digital finance.

Contribution

It provides a detailed on-chain and dependency analysis of the FTX failure, revealing how market dynamics and social factors contributed to the collapse and centralization trends.

Findings

FTX heavily relied on leverage and native token misuse.

Binance tweets accelerated the market reaction.

Collapse benefited certain actors and increased centralization.

Abstract

This paper investigates the causes of the FTX digital currency exchange's failure in November 2022. We identify the collapse of the Terra-Luna ecosystem as the pivotal event that triggered a significant decrease in the exchange's liquidity. Analysing on-chain data, we report that FTX heavily relied on leveraging and misusing its native token, FTT, and we show how this behaviour exacerbated the company's fragile financial situation. To gain further insights into the downfall, we study evolutionary dependency structures of 199 cryptocurrencies on an hourly basis, and we investigate public trades at the time of the events. Results suggest that the collapse was actively accelerated by Binance tweets causing a systemic reaction in the cryptocurrency market. Finally, identifying the actors who mostly benefited from the FTX's collapse and highlighting a generalised trend toward centralisation in the crypto space, we emphasise the importance of genuinely decentralised finance for a transparent, future digital economy.