The two previous weeks have been one of the worst in crypto history. It's tough to know where to begin with so much that has transpired in such a short amount of time. Much has been written (and hypothesized) about what led to the events that occurred, so we wanted to get together and offer our perspectives on where we are and, more crucially, what this means for the future.

It's critical to emphasize that there's still a lot we don't know. We don't know the specifics or when depositors will be able to retrieve assets stuck on FTX. We don't know what will happen to them now that the corporation (and its affiliates) have declared bankruptcy. We also don't know the full magnitude of the possible contagion risk following its collapse. What we do know is that FTX began this week as the third-largest crypto exchange by volume, and it will conclude the week as one of the worst disasters in the market. Whatever happens next, a lot of damage has already been done, both financially and psychologically, that will last for months. This report will cover the aspects that have been impacted by the FTX collapse.

On-chain analysis

The best method to find out the on-chain side of the equation is to look at capital flows. Coins held in huge numbers by FTX and Alameda have been struck the worst for obvious reasons. Among the notable examples are FTT, SOL, and SRM.

The leading cryptocurrencies going into exchanges from "smart money" wallets in the previous week, according to Nansen's Ethereum exchange flows monitor, have been FTT, SRM, cbETH, MATIC, SUSHI, and GUSD. In the instance of FTT, just 12 addresses amounted to $37 million in FTT flowing into exchanges. It should be noted that this research is limited to Ethereum and excludes chains such as Solana and Avalanche.

The data suggests that quality assets are fleeing exchanges, probably into cold wallets or self-custody wallets. The assets with the highest net withdrawals from exchanges from "smart money" wallets during the previous seven days were USDC (-$220m), BUSD (-$102m), USDT (-$35m), BIT (-$30m), MIM (-$29m), and DAI (-$17m).

The presence of BIT and MIM is unexpected. However, for background, FTX possessed a significant quantity of BIT, and it is plausible to believe that the exchange outflows are related to this. Although BitDAO has one of the largest on-chain treasuries, around 60% of it is housed in its own currency (BIT). Furthermore, Alameda held a significant portion of MIM through debt, therefore it is possible that they are transferring it off exchanges to pay off their loans.

A week filled with volatility and sharp declines is certain to pique the interest of market makers and trading firms. Jump Capital and Wintermute, two of the top crypto market makers, had net withdrawals from centralized exchanges and brokerages of (-$362M) and (-$144M).

Genesis Trading, a major centralized crypto business that provides a variety of financial services, was a net depositor to exchanges last week, depositing $299 million. It is important to note that these statistics are all net; most of these companies have significant withdrawals and deposits to exchanges.

However, the withdrawal of liquidity from exchanges by two of the top market makers (Jump and Wintermute) is remarkable, but not surprising given the events of this week. It should be noted that this simply monitors trade flows into Ethereum, thus the figures are likely to be greater, particularly for Jump, if networks like Solana are taken into consideration.

It is also not just institutions that are withdrawing funds from controlled exchanges. Across the board, CEXs are losing capital. According to statistics from BTC net-exchange movements, 2022 has already witnessed two of the greatest exodus of BTC from exchanges in history. The measure reached a high of 135k BTC per day in July 2022, and a low of 115k BTC in late October 2022.

The image painted by larger exchange flows into Ethereum is not what one may anticipate. With close to $1.1B in excess withdrawals over deposits in the previous week, FTX, predictably, tops the field in net outflows to the Ethereum network, according to Nansen. Bitfinex is in third place with -$360M in net outflows from the exchange, followed by OKX in second place with -$776M.

Binance, as predicted, has been the greatest winner of the last week, collecting $285 million in extra deposits. It's not surprising that Binance has benefited the most and FTX has suffered the most, as many predicted. But make no mistake: CEXs as a whole are still under pressure, with certain enterprises seeing substantial capital outflows. This comes at a time when trade volumes have dropped significantly since their highs last year. According to The Block statistics, total spot volumes for exchanges peaked in Q2 2021.

Cex spot volume

Source: The Block

For example, Coinbase's transaction revenue, which has typically accounted for more than 85% of the company's sales, has suffered a significant knock this year. Coinbase's transaction revenue fell 66% year on year in Q3, owing in part to a 72% drop in retail trading volume, which is a major driver of the company's top line.

Source: Coinbase

However, this is not limited to Coinbase. If anything, the previous week provided an opportunity for the incumbent to demonstrate why it is recognized as one of the most trustworthy exchanges, a trait that will only grow more significant in the aftermath of FTX's demise.

Collateral damage

As previously stated, the potential for contagion across the whole crypto business is enormous due to the size and integration of both FTX and Alameda Research. FTX expanded to become the third-largest exchange by volume, and FTX Ventures began investing in a diverse range of crypto projects and enterprises. Alameda Research, a quantitative trading business and former industry leader, had relationships with several counterparties as well as its own investments in crypto protocols and enterprises. The explosion radius is likely to be vast, and the possibility of contagion will undoubtedly weigh on markets until we know more about the magnitude of the damage.

Last week, Alameda and FTX made headlines by filing for Chapter 11 bankruptcy. The most pressing concern at this point is how large the real hole is. Several sources now estimate it to be in the $8-10 billion range. The net asset gap at Alameda is already being speculated about, but it's tough to nail down given the wide ranges for both their assets and liabilities (filings show from $10-$50B). However, the filing indicates that Alameda will have cash left over to allocate to unsecured creditors (but take this with a grain of salt since if we've learned anything from the previous week, it's not to place too much weight in any disclosures until the truth is revealed).

It will be difficult to quantify the whole collateral damage from this, and we won't know how far the virus spreads for some time - it will be a long time before we understand the full depth of the problem. However, considering which parties may be most impacted helps give a picture of how terrible things may grow. Among the key actors in question are:

Companies and projects with a portion of their treasury placed in FTX
Hedge funds and venture capital firms with a percentage of their AUM invested in FTX
Market participants with liquidity locked in FTX
Funds that were supported by FTX
Projects that got FTX/Alameda Research investment
Entities to whom FTX/Alameda Research provided credit lines
Exchanges where Alameda Research may have had special access to market-make

Here's a list of well-known firms with varying degrees of FTX exposure. Let's also look at some isolated cases relating to the players mentioned above. BlockFi appeared to be on the verge of collapse in July when FTX came in with a $400 million credit line, potentially saving the day. We don't know how much of the promised credit line has been delivered to BlockFi so far, but it doesn't appear to be enough. Given the FTX announcement, BlockFi announced that it will be unable to do business as usual.

Core Scientific just received $80 million in financing from BlockFi. However, Core Scientific declared a suspension of loan repayments a few weeks ago owing to a deterioration in Bitcoin mining profitability. Assuming the FTX credit has not yet been completely received, the news this week will most certainly have a negative influence on BlockFi's capacity to continue operations. The announcement recognized the company's fragile condition, including the decision to freeze withdrawals/deposits on the platform.

Unfortunately, one of the most terrible downstream consequences is for projects/protocols that relied heavily on FTX for a major percentage of their treasury reserves, since they may be compelled to engage in a down round or shut down entirely. Projects funded by FTX Ventures and Alameda Research may see their token values fall even lower if the scenario develops into a formal asset liquidation. Companies directly controlled by FTX, such as LedgerX (FTX's CFTC-registered derivatives exchange), are also likely to be targeted.

Due to Three Arrows Capital and the Terra contagion, we've already seen phase one of a similar situation play out with creditors. If Alameda Research is in danger, centralized crypto lenders might face a second wave of sanctions. Genesis Trading reported around -$7M in losses on behalf of Alameda a few days ago, which is a quite robust sum given the size of Alameda and Genesis' loan book.

Many of the industry's major investors and traders still have cash stranded on FTX. That is a lot of potential traffic for other exchanges, particularly DEXs and derivatives protocols, which will likely gain from the distrust instilled by FTX.

Trapped assets also indicate less liquidity for the cryptocurrency market as a whole. Smaller tokens are particularly vulnerable, as market participants have pulled cash and reduced risk exposure amid increased uncertainty.

If those market players do have access to those monies sooner rather than later, we might see a significant inflow back into alternative trading platforms. The longer this takes, though, the more probable it is that risk appetite will be dampened. Traumatic events like this one tend to leave a lot of scars in their aftermath.

Another source of concern is the possible impact of FTX's demise on some of the industry's biggest and most active VCs. Many have already marked their position in FTX to zero, which may hasten the decline in fresh financing and capital accessibility. This just adds insult to injury for many cryptocurrency startups and businesses, who are already under pressure to slash expenses in every way they can in order to survive.

sequoia mark ftx investment to zero

Source: Sequoia

One of the biggest problems confronting the crypto industry moving into next year is a lack of inexpensive finance, especially given this week's expected impact on liquidity and risk appetite. Many in the business have been affected by this year's weak market, and the uncertainty surrounding its resolution will continue to impact investor allocations.

Solana: good ecosystem but bad investors

Solana will suffer the most damage out of all of them in terms of the ecosystem. It's no secret that FTX and Alameda were significant Solana investors and that they currently have large spot SOL positions to sell in addition to a sizable portfolio of ecosystem tokens. Alameda has about 18.6 million SOL ($316 million) left as of the timestamp in the graph below, which was unstaked in epoch 370 (the "waiting withdrawal" tokens are now free to go). Obviously, it is unknown how much of this has already been effectively sold.

The "Solend Whale" was the next immediate consequence. This was a notorious Solana DeFi position, the greatest single borrow of $50M USDC against SOL collateral, with a liquidation price of $21. With Alameda being one of the main on-chain liquidity suppliers on Solana, as well as the severe price changes in SOL caused by their desire to sell and the ensuing panic, there was a significant potential for bad debt here.

The liquidation procedure is done in 20% increments, and while it began off well, it finally became drastically undercollateralized as the price of SOL sank below $12. Selling 500k SOL ($9M) on-chain now incurs 62% slippage.

Solend whale got liquidated

Source: Twitter

Surprisingly, this position was liquidated with only $6.25 million in bad debt. And, with a treasury of $17M USDC, users are protected (waiting DAO vote + other potential bad debt accruing).

The next significant implication for Solana DeFi revolves around Sollet-wrapped tokens. These are tokens for non-Solana assets like BTC, ETH, and USDT that are linked to FTX. There are few facts about these tokens, and their solvency is unknown. Fortunately, most ERC-20 assets (ETH and USDT) were migrated a few months ago when Solana DeFi switched to Wormhole-based versions of these assets instead. Unfortunately, this does not apply to BTC, hence the BTC on Solana has an unknown backing (possibly $0, though this has not been proven).

With others following suit, protocols like Solend decreased the LTV to 0% and liquidated any customers who had outstanding debts against soBTC. Although it's natural that this last-second choice has upset some users, there was still some on-chain liquidity for soBTC, and, according to their team members, they have no bad debt on soBTC as a result of doing so. Liquidity on-chain has largely disappeared as a result of the latest FTX bankruptcy announcement (which also includes FTX US).

There were unconfirmed accounts of users being able to deposit soBTC to FTX US and withdraw monies in the hours before FTX's insolvency. On-chain, we can notice this movement because all of the soBTC transfers in the last two days have been from un-tagged/other addresses to FTX US.

It appears that 1,390 BTC ($24M USD) was placed to FTX US and (hopefully) withdrawn. The remaining soBTC on Solana appears to be trapped now that bankruptcy has been declared. Following the bankruptcy news, the remaining renBTC in the Saber pool was swiftly depleted. Solana DeFi appears to be in over 2k BTC ($44M) debt.

Speaking about renBTC, it's worth noting that Alameda is their parent firm, and while transactions are still being processed, DeFi protocols like BadgerDAO (the top BTC platform on Ethereum) are deprecating and alerting all users to redeem. While the bridge is still open, the Ren team has been getting funds from Alameda over the last year, and with Alameda going bankrupt, the future is uncertain. Over the last 24 hours, there have been no clear explanations as to who truly holds the keys, and if the biggest BTC application on Ethereum is alerting users, that alert should be taken seriously.

There's no sugarcoating it: the Solana ecology has been devastated. On-chain DeFi has been practically eliminated: TVL has dropped from $10 billion at its height to $1 billion a few days ago, and is now less than half that amount.

With the ultimate count of bad debt on different borrow/lend methods and whomever unhappily still possesses Sollet-wrapped assets, there will be a lot of wreckage to go through. Furthermore, Alameda was the top on-chain market maker, contributing more than 50% of Serum maker volume on a regular basis. That is now set to zero.

Serum volume

Source: Austerity

While it may appear like you are grabbing at straws right now, there is a silver lining. The Solana ecosystem has always been recognized as an Alameda/FTX chain, and their removal allows Solana to rebuild and develop its own image from scratch.

There will be short-term (and medium-term) hardship, but if Solana survives, they will have won their keep in this sector. We don't believe it's too bold to claim that this will be the most difficult test any ecosystem has faced, even more terrible than Ethereum's experience in 2018 when it traded down to $80. Only a week ago, the ecosystem saw a resurgence of enthusiasm during the Breakpoint conference. There are respectable builders there; they simply need to stay.

The impact on NFT

The FTX meltdown has had a significant impact on NFTs. Alameda is home to a number of NFTs (81 Sandbox lands & 2 Mutant Apes). So yet, no large project team has publicly acknowledged a loss of treasury funds. However, it is likely that certain NFT teams are affected. We'll find out in due course.

We're keeping an eye on two important patterns. First, it appears that investors who lost money in the FTX crash are selling their NFTs for liquidity.

The number of WETH offers approved on OpenSea has increased dramatically in the last two days. This currently accounts for about half of all deals on OpenSea (by volume). This suggests that people are more likely to sell their NFTs at lower-than-floor prices in order to acquire immediate liquidity. It is an excellent moment to submit WETH bids on NFTs that you wish to acquire since they have a better chance of being approved.

Since the FTX debacle, one of the most popular collections has been Bored Apes, with sellers outnumbering purchasers. The floor price dropped as low as 55E (-25% from the previous week), causing a wave of BAYC liquidations on BendDAO, an NFT lending protocol.

Further 50 BendDAO BAYCs are in high danger of liquidation and will be auctioned off if the floor price falls another 10-20%. This might put more downward pressure on BAYC pricing.

Anecdotally, there have been several reports of individual collectors (presumably influenced by FTX) selling their NFTs, including two alien CryptoPunks that are currently for sale.

The severe harm done to the Solana NFT ecosystem is the second trend.

The two primary supporters of Solana were SBF and FTX, and the fact that one of the most powerful figures in cryptocurrency was behind their blockchain provided solace to Solana NFT users. Now that their king has been "beheaded," there is a sizable overhang.

As previously noted, Alameda has significant quantities of SOL, which will probably be liquidated as FTX tries to close the gap or declares bankruptcy (and they actually declare bankruptcy).

Degod NFT plummet

Source: hellomoon

Last week, the price of SOL decreased by more than 60%. Because Solana NFTs are priced in SOL, their values have also plummeted dramatically in USD terms. As a result,

Collectors sell in a frenzy in order to limit losses and SOL exposure.
Builders and artists are thinking of leaving Solana.

DeGods is a prime example of this, with floor prices plummeting and its creator Frank openly tweeting asking if they should switch to Ethereum. The good news is that, after the first shock, it appears that Solana NFT groups are banding together in strong support and solidarity for the ecosystem.

The events of this week demonstrate how the choice of blockchain can have far-reaching consequences for NFT projects that are beyond their control. Because Solana was intimately identified with SBF and FTX, a stain remained on its branding. Future projects will most likely reconsider building on Solana and may choose alternative chains such as ImmutableX and Polygon in the short run.

Market outlook

As the entire scope of the FTX/ Alameda meltdown becomes clear, we believe there are many market ramifications that investors should be aware of. To begin, if we can force ourselves to remember the horrible events of June 2022, we may gain some insight into what we might anticipate in the future.

During the June massive sell-off, 3AC blew up, most likely as a result of their exposure to the LUNA/Terra ecosystem, which had failed just a month before. Prices plummeted (BTC dropped about 40%) as a result of the significant sell pressure on 3AC's holdings, as well as the fear and contagion risk surrounding CeFi lenders and counterparties. It took several days, if not weeks, to determine who was impacted and the extent of the harm. Unfortunately, as we'll see in this study, the FTX-Alameda explosion is far worse in many ways. A similar sequence of events is expected to occur over a considerably longer length of time.

Now fast forward to the present. The 5-month consolidation range generated by the June liquidation events has collapsed as a result of possibly the worst crypto catalyst to date, surpassing even the most notable scandals of the past. Many people believed that the bottom had been reached. What does this imply for the markets? Let's start with a high-level overview of where we are on the BTC chart.

As previously said, BTC has finally broken out of the consolidation area (approximately $18.5k-$24k) that it has been stuck in for the better part of the last six months, thanks to an exceptionally powerful catalyst. Throughout this time, we have constantly been warned that when this price range is ultimately breached, either to the upside or to the downside, it is unlikely to be a fading move. This is due to two major factors.

To begin, consider the consolidation range to be a spring that has coiled up over time and is full of potential energy. Each successful rebound off of support and rejection from resistance provides additional potential energy to the system. When prices finally break out of the range, the first unwinding of a coiled spring may be tremendously powerful.

Second, this breakdown has coincided with one of the weakest crypto catalysts to date, dragging on investor mood and asset values. When you combine the native crypto trigger in the FTX-Alameda meltdown with a persistently grim macroeconomic backdrop that hasn't shifted substantially, continuing to the downside is the route of least resistance at this moment, rather than a reversal. We should keep an eye on the following important levels for BTC:

Resistance: $18,500-$20,000
Resistance: $21,500-$22,000
Support: $14,000-$16,000
Support: $9,000-$12,000

In light of recent developments, ETH is holding up relatively better than BTC, but has yet to shatter the lows recorded in June. Realistically, it is extremely possible that no coin will be spared while the specifics of what transpired are revealed and the real repercussions become clearer.

As previously mentioned, Solana took one of the most significant blows the previous week. SOL was down more than 60% at one point but has subsequently regained some of its losses. This was more of a liquidity-driven selloff, but as we have stated, there are some significant obstacles for the Solana ecosystem to overcome in the aftermath.

But Solana was not the only one caught in the crossfire. Many crypto assets experienced significant intraweek losses as the whole market responded to the previously unthinkable.

Intramarket correlations between tokens tightened across numerous key sectors, which is usual amid market crisis.

Despite FTT's recent >80% drop, competitor exchange tokens have held up rather well, even when compared to mega-caps like BTC and ETH. We noted how Binance may be one of the greatest winners in the long run.

Cex token performance

Source: Tradingview

When comparing intraweek drawdowns from all-time highs, the previous week's price behavior matches with the rankings of big centralized exchange tokens.

Once the dust settles, the demise of FTX should provide a welcome boost to Coinbase. COIN recovered from its lows when the extent of FTX's demise became clear. However, equities have had a significant increase in the course of two days, so it is too early to interpret the market's reaction.

Other exchanges may gain from the death of FTX, but the number of trapped assets may limit trading volumes in the short term. Centralized exchanges were already seeing significant decreases in trading revenue, and it's difficult to see how FTX's demise would change that.

Apart from that, if we take a step back, the entire saga just serves to strengthen the argument for decentralized platforms.

DeFi: A new hope?

At this point, everything may appear to be lost. Understandably, negative emotion is out of control. It's tough to see a silver lining in this circumstance. But there is, and it is significant.

The previous week served as public advertising for the advantages that DeFi provides. When you think about it, this is a big tailwind for the long-term adoption of decentralized technologies. The primary benefits of public ledger blockchains and apps built on them are extreme transparency and real-time supervision.

Could an FTX-like scenario have occurred with a DEX? Customer assets are either held in the customer's own wallet or in immutable smart contracts. With genuinely decentralized exchanges, such a scenario is out of the question. dYdX is one example, where the matching engine and orderbook are now centralized infrastructure, but all money transactions occur on-chain and can be watched in-depth 24 hours a day, seven days a week.

Looking ahead, this might be a long-term benefit for decentralized exchanges in general. Uniswap, Curve, 0x, and other successful DeFi spot markets already exist. Only dYdX has demonstrated product-market fit in derivatives, but its ability to service a large number of traders is due to the use of a centralized orderbook.

The spot/derivatives volume ratio of CEXs to DEXs has a significant dislocation. DeFi protocols are currently at a very infancy stage as the top spot DEX's volume smashes the top perpetual DEX, despite derivatives markets on CEXs doing multiples of the comparable spot volume.

Uniswap and dYdX, on the other hand, have seen significant volume increases in recent days. However, this is more likely due to increased volatility and investors/traders scrambling to liquidate positions than a transfer of users from CEXs to DEXs. During the LUNA/UST crash in mid-May, we noticed a similar rise.

Given the upheaval of this week, token prices for certain DEXs and derivatives projects have held up rather well. dYdX, for instance, has not only regained its losses but has also been on an upswing.

Dex token performance

Source: Tradingview

This is undoubtedly a tailwind for DEXs, but it is unlikely to materialize anytime soon. CEX and DEX user experiences are now worlds apart; DEXs must overcome this gap in order to win substantial market share versus centralized competitors.

Market makers have also received a wake-up call this week: regardless of their connection, they cannot completely trust that their exchange is running as it should. Because orderbook DEXs are more familiar, this erosion of confidence might serve as another trigger for them.

It is critical to step back and see that this is not a failure of blockchain technology, but of a single, centralized firm that did not operate in the best interests of its clients. Overall, we won't know the actual impact of this scenario for at least a few weeks, if not a few months. As a result of this week's events, regulatory pressure and supervision will only get more controversial. There's already a lot of conjecture, and the reality is that we don't know all of the facts. The most we can do is make sense of the data we have based on and pieces of information that will continue to emerge from reliable sources.

This has the makings of a crypto "ice age," at least in the short run. But, if anything, the last week's news reinforces the case for decentralized technology. It demonstrates that firms and programs that operate in a transparent atmosphere make a meaningful difference in situations like these. That's a significant plus. While the user experience of cryptocurrency has a long way to go before it can appeal to the typical investor or trader, the necessity for decentralization has never been more apparent.

Have we hit the bottom?

But it's not all doom and gloom. We recently witnessed one of the largest left-tail occurrences in crypto history, yet ETH has yet to break below its June lows - it's rebounded to where it traded for most of September and October. The previous bear market bottomed in a dramatic fall shortly before Christmas in 2018. Almost precisely one year after its top, we had a vicious selloff that sent BTC to a new cycle low. There are significant alterations between then and now, but the timing of peaks and troughs has remained consistent.

ETH's fall has also been less severe this time around. In the previous cycle, it plunged 93% from peak to trough. Given the improvements in ETH's supply-side fundamentals, history is unlikely to repeat itself. Speaking of which, one silver lining in this week's upheaval is that ETH's net supply emissions have finally gone negative since the Merge, owing to a spike in transaction activity. The panic induced by the FTX fallout has resulted in a significant spike in gas fees during the last several days. Since November 8th, the average ETH gas fee has been 22.6 GWEI, resulting in a 5,300 ETH supply reduction for the last 7 days. This was the final cause behind ETH's recent transition to deflationary issuance.

ETH deflation

Source: ultrasound money

The Ethereum deflationary narrative is meaningless in the face of a lengthy bad market, but it will come to life during the next bull run. When prices are rising, narratives become more important, and ETH has one of the best narratives of any asset.

Conclusion

The previous few days have easily been the worst we've ever had. Aside from the obvious financial loss, we believe one of the reasons this is all so painful is that everyone feels misled. SBF was held in the greatest regard in our industry. Prior to last week, some would have argued he deserved a position on the Mt. Rushmore of crypto innovators. DeFi is also fantastic. However, the two can coexist, at least until we have a better user experience for decentralized peers. Furthermore, FTX was more than simply another centralized exchange. Many people outside of the crypto community lauded SBF as a visionary, which helped restore confidence in the sector.

This year, FTX, Alameda and SBF seem to be at the heart of practically every important turning point in the crypto markets. When the market began to spiral in what appeared to be a liquidity crisis in May/June, and reports began to circulate about other significant crypto enterprises caught in the crossfire, SBF was out in front, making bailouts left and right for companies on the verge of collapse. The news helped to soothe some tensions, which helped to stop part of the bleeding. One may argue that this was important in preventing the market bottom from being retested, at least at the moment. So the reality that this was all a ruse caught all of us off guard, and we all have reason to be concerned.

Last week's events will linger with us for a time, but we don't think they will be the end of us. Some predict that FTX's now-famous failure will set the industry back several years. That is not our point of view. Yes, there will be a lot more headlines and material coming out over the next few weeks (and even months). But crypto has too much velocity right now - the train has already left the station. The fall of one person's empire isn't enough to destroy all this industry has accomplished.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

The FTX Contagion Report