1/ There's a lot of debate and speculation on crypto Twitter about how Alameda managed to lose so much money. But this may give a false impression of ambiguity in other aspects

There's one thing that's unambiguously and indisputably true. SBF and Alameda committed fraud. Period.
2/ For anyone who's been close to the chaos, this will seem so obviously true that it may seem laughable that I even have to make a thread to drive the point home. Not a single credible voice in the industry would tell that this wasn't naked, malicious and criminal fraud
3/ But Sam is engaging in a coordinated attempt to whitewash his crimes by painting a picture. It's a picture that many in the finance industry will quickly pattern match to. A picture of a stereotypical over-leveraged over-confident hedge fund where risk gets out of control Image
4/ The most famous is LTCM. And there's a lot to criticize about the hubris, maybe even negligence, in that story. But what Sam did is far worse. LTCM may have bet recklessly but they never outright stole money

Alameda is not LTCM. Alameda is Madoff

5/ And we can go back and forth debating theories about what happened to the money and how they lost it. Frankly it may be a very long time before we know. But regardless of how they ended up losing it, we already know that they fraudulently stole the money from FTX customers
6/ The core of Alameda's pathetic defense is customer funds were borrowed at "arms length" from FTX reserves. Just as it's not criminally illegal to default on your mortgage, Alameda's default (and subsequent loss of customer funds) was unfortunate, but non-criminal, bad debt
7/ This defense has more holes than a sieve. In the first place FTX was never legally authorized to loan out its customer deposits. The FTX terms of service clearly state that the depositor retain title to their assets, and rehypothecate of customer assets is explicitly forbidden Image
8/ This shouldn't be confused with the fact that FTX is a derivatives exchange. Customers could trade perpetuals where there is no upper bound to the potential for loss. Like any derivative exchange customers post collateral as a risk buffer to their potential derivative losses
9/ There is always the possibility a client's losses exceeds their collateral. In which case the exchange eats the loss

However FTX's terms of service prohibits it from dipping using one customer's deposits to cover another customer's losses (even if that customer is Alameda)
10/ Second, let's even pretend that FTX could lend out client deposits. There's a crystal clear breach of fiduciary duty to clients to enrich himself in a clear conflict of interest.
11/ Sam (FTX CEO) lent money to Sam (Alameda owner). With terms that would never be approved at "arms length" in a million years

Rehypothecation of customer deposits *always* creates a fiduciary duty. This is true of every financial institution in every jurisdiction
12/ A fiduciary's duty is to minimize in worse case scenarios. In the case of collateralized loans (i.e. the "loans" from FTX to Alameda), that means the lender must be very confident that in a distress scenario the collateral can be liquidated to recover the principal
13/ Sam and the senior management at Alameda had a bizarre obsession with expected value (EV) to the detriment of any risk management

For a prop trader, EV is important. For a lender, EV is *irrelevant*. Lenders only care about downside, because they don't participate in upside. ImageImageImage
14/ Imagine going to the bank for a $100,000 loan to buy Powerball tickets. Try to tell the bank the EV of the Powerball tickets is $100k, so you're good for it.

99% of the time you have zero to pay back. 1% you have $10 million, but the bank only gets the $100k face value back.
15/ The asset may have an EV of $100k, but as loan collateral it's essentially worthless.

Now imagine a bank that loans its CEO money (from customer deposits) so he can go out and gamble on Powerball tickets.
16/ FTX wasn't accepting Powerball tickets as collateral but it might as well have been. And this is where the "semi-liquid" tokens come into place.

The majority of Alameda's loans were collateralized highly illiquid "shitcoins".
17/ Again, remember the fiduciary duties to depositors is not about EV or last price or market cap. It is solely how much can I sell this thing for in a hurry if I'm in a distressed scenario.

A lender should *never* extend credit beyond a conservative estimate of that number
18/ With that being said, let's talk about the "less liquid" section of FTX's balance sheet. ("Less liquid" is a pretty flattering description, similar to how one might describe Osama bin Laden as "less alive".) Image
19/ Two tokens, FTT and SRM, collateralized $11 billion of loans to Alameda the week before the collapse. Even after the markdowns during the collapse these tokens SRM alone was still collateralizing $2 billion of loans.
20/ Let's discuss SRM specifically. (It's a pretty similar story for the rest of the "less liquid" assets)

Serum (SRM) is the most notorious project crypto for predatory "tokenomics". It was directly created by Alameda for the sole purpose of pumping top line market cap
21/ The playbook is to create a "low float" token, where the vast majority of supply is locked and therefore unavailable to buy or sell on the market.

SRM was created with 99% of the token supply locked. Even today, years after its debut only 4% of the token supply is float Image
22/ This creates a "down only" dynamic where the price of the token is continuously crashing because massive every unlock is a massive percentage increase in the supply of floating tokens.

SRM's entire price history has been nothing but a straight line down. Image
23/ This was the token that Sam (FTX CEO) decided was more than safe to collateralize $5 *billion* in loans to Sam (Alameda owner). All at arms length of course.

To reiterate a token where the entire floating supply was less than $300 million collateralized $5 billion in loans
24/ Of course, Sam (FTX CEO) thinks this is perfectly fine because Sam (Alameda owner) has assured him that it's +EV.

But that raises the question of how exactly did Sam (FTX CEO) think users would recover that $5 billion in liquidation.
25/ Sam, who traded crypto for 7 years, clearly knew there's no way to liquidate $5bn into a market with less than $300mn of liquidity. Recovery would be literal pennies on the dollar

(Not to mention they shouldn't even technically be able to liquidate locked tokens)
26/ There is no way to "organically" stumble into lending $5 billion on a token with less than 1/10 that amount in the entire floating supply. All to enrich his personal slush fund (*ahem* Alameda)

This was premeditated and deliberate fraud committed with full awareness Image
27/ Mean, motive and opportunity.

Despite the picture his coordinated PR campaign is trying to paint, Sam is not a boy genius who flew too close to the sun. He's a low brow criminal who fraudulently and knowingly stole billions from millions of people. End of story.

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with Doug Colkitt (🐊,🐊)

Doug Colkitt (🐊,🐊) Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @0xdoug

Nov 11
1/ Very rough and speculative sketch of what I increasingly think happened at FTX as more info comes out…

The central question is where did the money go? Yes malfeasance and fraud is necessary, but at one point in the cycle cash actually has to go out the door
2/ At 3AC we knew it went to losses on leveraged long positions. At Lehman it went to bad mortgages. At Enron it went to boondoggle mega projects.

Some FTX money obviously went to seed rounds in bad or illiquid projects. But AFAICT nowhere near enough to explain the hole.
3/ Let’s rewind to 2017/18. Alameda the prop firm is a big fish in a little pond. They’re mediocre traders (there’s a video of SBF bragging about how their quoter latency is down to something like two seconds). But crypto is still a weird asset class that most won’t touch
Read 23 tweets
Oct 14
1/ IMO settling with the Mango exploiter was the correct move. It's very unlikely the exploiter would have been criminally prosecuted, even if they were doxxed.

To understand why, it's important to distinguish "computer fraud" from "securities fraud".
2/ The vast majority of hackers (crypto or otherwise) are prosecuted under the Computer Fraud and Abuse Act. Computer fraud is very easy to prosecute, and US Attorneys are very comfortable bringing cases, having a clear template for prosecution.
3/ But... computer fraud requires some type of "breach" or "unauthorized access" to a computer system

SCOTUS clarified in Van Buren that simply using the authorized part in an unauthorized way is insufficient. You have to explicitly touch a part of the system that is off-limits
Read 10 tweets
Sep 4
1/ The economics of BSC are really interesting. Anyone trying to build meaningful value accrual in an L1/L2should pay attention

Yes, BSC fills up a lot of blockspace. (About double Ethereum and the rollups combined) But IMO the key driver of BSC is the high floor price for gas
2/ For years, and even today, the default fee model for L1s is a totally free and unrestricted market for gas. This is the model that Ethereum uses. There's no meaningful floor price for gas, and prices keep falling until supply clears.
3/ This works when there's robust demand for blockspace relative to supply. For Ethereum this works because blockspace supply is highly limited.

(Though I'd argue even Ethereum's fee market model is starting to show cracks in the current blockspace recession)
Read 12 tweets
Sep 2
1/ Toy model showing that MEV extraction from ordinary users will be slightly worse in post-Merge PoS compared to PoW...
2/ Two simplifying assumptions...

First the value of MEV scales with the divergence between on-chain prices and real-time prices at CEXs (this is basically true for CEX-DEX arbitrage, and increasingly true for other MEV which is more stat-arb driven)
3/ Second, price divergence prices scales with the square root of block time.

Price volatility essentially scales with the square root of time. It gets a little gnarly at high-frequencies but is basically true. CEX prices will move by sqrt(T) while on-chain prices remain frozen
Read 7 tweets
Aug 30
1/ IMO there's essentially no way to make the economics of an on-chain order book sustainable. At least in a general purpose chain

IMO the only solution is an order book specific appchain with application aware pricing. A general purpose chain can't profitably host an order book
2/ The issue comes down to order books requiring a tremendous stream of "rebalancing activity" by specialists to create efficient markets and provide reliable liquidity to organic users.

In modern TradFi, the ratio of HFT messaging to organic activity is at least 25:1
3/ Which means unlike an AMM, where liquidity providers typically execute fewer transactions than swappers, order books require huge and constant transaction throughput to effectively operate

So, we just have to make a hyper-scalable blockchain with cheap transactions, right?
Read 12 tweets
Jul 27
1/ For entertainment’s sake let’s assume Chandler Guo’s ETHPOW fork gets any traction… Some fun consequences to imagine when forking a chain with active DeFi activity. (ETC was well before any real on-chain applications)
2/ First consequence. USDC and USDT on the ETHPOW chain is immediately worthless after the fork, because it won’t be recognized by the Circle/Tether. DAI is more complicated, but similar story because DAI is largely backed by USDC.
3/ Which means any AMM pools with a stablecoin leg will be immediately drained post-fork. Everyone will swap worthless USDCPOW for not completely worthless ETHPOW.

Similarly money markets will be drained. Borrow ETHPOW with worthless USDCPOW, and default on the collateral
Read 7 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Don't want to be a Premium member but still want to support us?

Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!


0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy


3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us on Twitter!