Lessons we learned from the Terraform-FTX implosions
In May 2022, Terraform Labs’ LUNA cryptocurrency and TerraUSD (UST) stablecoin collapsed, triggering a massive shock in the crypto industry. Six months later, the bruised industry took another hammering as one of the largest cryptocurrency exchanges, FTX, filed for bankruptcy protection and billions of dollars of user assets went missing. The FTX empire, once valued at more than $30 billion, fell to zero in fewer than 10 days.
FTX reportedly has more than 1 million creditors, most of whom are retail investors who were convinced that FTX would not collapse and had been keeping their assets on the exchange. Taking a look at Mt. Gox in 2014 — whose creditors still failed to reclaim compensation — FTX may be a repeat of that mistake.
It can be said that FTX succeeded because of Alameda Research, and failed because of Alameda too. An investigative report led careful users to uncover serious problems with Alameda’s balance sheet, which then led to a deeper dive into its unclear, unexplained financial dealings with FTX.
Many well-known venture capital and crypto companies have also been caught in the trouble. Sequoia Capital, Temasek and others announced that they were making their investments in FTX down to zero; BlockFi, a crypto lending platform, has filed for bankruptcy due to its exposure to FTX; and crypto broker Genesis, a subsidiary of Digital Currency Group, is on the verge of bankruptcy due to a liquidity crisis and may not be able to repay investors’ funds.
When the crypto tide ebbed, we knew who was swimming naked. After the craze, the market is left in a mess.
The collapse of FTX provides a precious opportunity for all users, practitioners and lawmakers to reflect on the problems and reinvent the crypto industry.
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