6 ms·

Why wasn’t FTX’s fraud detectable on the blockchain?

28 points by ffggvv 4y ago

isn’t the whole point of crypto to have an auditable “public ledger”? why couldn’t people detect ftx shady behavior by auditing the blockchain?

thagerty 4y ago
Maybe the answer is as simple as you have to be looking for it. How many naysayers or watchdogs understand it enough to know where to look? All I know is it would be very sad if all of crypto vanishes because of a relatively miniscule number of bandits.
PaulHoule 4y ago
Good question. The simple answer is that they were doing many transactions internally. If you kept your BTC at FTX, FTX should have put your BTC in their wallet. Even though FTX customers would have been able to trade with each other off-chain, the total amount of BTC at FTX should have been visible. They must have been playing some kind of shell game that made this kind of auditing ineffective.
- sp332 4y ago
  Didn't they send a bunch of assets to Alameda? Alameda gambled with the money and lost it. SBF claims he misread the accounts and thought Alameda had put up enough collateral to cover it. But wouldn't that mismatch be publicly visible on the blockchain?
dimensionc132 4y ago
hobbitstan 4y ago
The entire crypto sector is fraudulent and hidden behind layers of nonsensical theory. What started as a way to anonymously pay for illegal services on the dark net, morphed into a Ponzi scheme aimed at low IQ tech bros.
- AustinDev 4y ago
  Remember when decent Marijuana was like 5 BTC for a quarter ounce? I just like to imagine that there is some dealer out there who has a couple thousand btc sitting on an old hard drive.
  - hobbitstan 4y ago
    They’re probably running crypto companies now tbh
  - landemva 4y ago
    I know this to be fact. $100M and she was still scrapping for rent money because she didn't know how touch it.
- mrkramer 4y ago
  >What started as a way to anonymously pay for illegal services on the dark net, morphed into a Ponzi scheme aimed at low IQ tech bros. That was never the point of Bitcoin. Read the whitepaper. Satoshi wanted to decentralize trust in the ecommerce world with the help of transparent P2P decentralized and distributed database called blockchain and he wanted to enable micropayments. There is no mention of buying drugs or any other illicit activities in the whitepaper.
  - hakfoo 4y ago
    ...and everyone is going to use their newfangled home computers to organize recipes and do biorythym charts. Even in a charitable interpretation of history-- ignoring that Bitcoin wouldn't scale to micropayment levels-- any early interest in micropayments was quickly overwhelmed by speculation and illegal trade. I think Dogecoin tips on Reddit circa 2014 are about as close as we ever got to viable crypto micropayments, and ISTR it was done off-chain by putting a balance in a bot.
    - mrkramer 4y ago
      Again read what Satoshi was saying; no home PCs or Raspberry Pi type devices instead server farms will process transactions. It can scale, no reason why it wouldn't. Look at the BitTorrent for example....still viable.
sarcasmatwork 4y ago
Public vs private. . . ? "Ledger suffered scalability issues amid FTX saga, says CTO" https://www.cryptopolitan.com/ftx-rattled-ledger/ https://www.cryptopolitan.com/ftx-rattled-ledger/
- trompetenaccoun 4y ago
  Ironically of the two most popular brands Ledger is the worse HW choice that's closed source and has had at least one serious vulnerability exposed in the past. But sure, if they want to trust them. There are still copies of the leak going around with customer emails and even home addresses. Many will probably also go from FTX straight to Binance or other shady CEXs. The mainstream never learns. Funds are safu :)
patrogizmo 4y ago
I came across this really good summary of FTX's fraud on Reddit the other day: "SBF/Alameda's initial strategy was arbitraging price differences between US and Korea/Japan. The different crypto exchanges in different countries would have different prices for the same coin. In theory this was possible but in practice it was basically impossible. They lost money in Korea due to capital controls, they made some money in Japan but still lost money overall due to the enormous amounts they had to borrow and the high interest rates they were paying. The arbitrage strategy wasn't working so they switched to shilling shitcoins. Basically they would create a new token backed by say $5m seed money, put like 1% of the total number of tokens created on the market, then use their own money to pump up the token price by 100x. Since they owned and controlled 99% of the total amount of tokens, this was easy to do. Now their initial $5m is worth $500m, but only on paper because liquidity on these tokens is tiny and if they actually tried to sell it would immediately crash. Alameda did this in order to get loans using the tokens that they created and pumped as collateral. Then they took the borrowed money to make large directional bets on crypto prices. However it turned out they were bad at trading crypto and took billions in losses and the margin calls started coming in for their loans. At this point Alameda was stuck, the collateral backing these loans were all shitcoins and if they started selling them the price would crash causing the entire company to go under. Since SBF couldn't meet the margin calls by liquidating the underlying collateral, he and the other founders decided to steal money from customer accounts at FTX to meet the margin calls. Basically they would give Alameda their own FTX token(FTT) and then have FTX loan customer funds to Alameda using the tokens they just gave them as "collateral". It was essentially the same scam as the one they pulled on lenders, only now they're doing it to customers while promising they would never touch customer funds. Alameda kept losing money and eventually the scheme was discovered and it ended up being they stole something like 2/3 of the customer funds at FTX. Current estimates are at about $10 billion they lost gambling on crypto with customer money. It was a classic case of a gambler kept doubling down and borrowing and stealing until it came crashing down."
- perryizgr8 4y ago
  > Current estimates are at about $10 billion they lost gambling on crypto with customer money. I just don't understand the scale of it. Ten billion dollars is huge. It takes months if not years, even to lose that much in gambling. Did nobody notice anything off? Was the entire company in on it?
georgeplusplus 4y ago
These scams are alot easier to catch when central banks don't have a too big to fail policy that ensures bailouts will always be available when things get too bad.
zubairq 4y ago
Because ftx was only crypto in name. In reality it had nothing to do with the blockchain, it was just a centralised company
GoldenMonkey 4y ago
Ftx is a centralized exchange. Nothing to do with any blockchain. Decentralized exchanges like uniswap does live on a blockchain.
i67vw3 4y ago
I had the same question, and the past 2-3 weeks I am still not able to find the answer. If FTX gave alameda shit tons of FTT and customer funds from FTX reserves by 'transferring' the amount, it should have been visible on the blockchain. The FTX collapse happened only because of an internal balance sheet leaked to coindesk. Why did coindesk require a balance sheet to write the story? Coindesk probably could have just done it, by looking into the blockchain ledger instead of the balance sheet.

28 points by ffggvv 4y ago

isn’t the whole point of crypto to have an auditable “public ledger”? why couldn’t people detect ftx shady behavior by auditing the blockchain?

thagerty 4y ago

Maybe the answer is as simple as you have to be looking for it. How many naysayers or watchdogs understand it enough to know where to look? All I know is it would be very sad if all of crypto vanishes because of a relatively miniscule number of bandits.

PaulHoule 4y ago

Good question. The simple answer is that they were doing many transactions internally. If you kept your BTC at FTX, FTX should have put your BTC in their wallet. Even though FTX customers would have been able to trade with each other off-chain, the total amount of BTC at FTX should have been visible. They must have been playing some kind of shell game that made this kind of auditing ineffective.

sp332 4y ago
Didn't they send a bunch of assets to Alameda? Alameda gambled with the money and lost it. SBF claims he misread the accounts and thought Alameda had put up enough collateral to cover it. But wouldn't that mismatch be publicly visible on the blockchain?

dimensionc132 4y ago

hobbitstan 4y ago

The entire crypto sector is fraudulent and hidden behind layers of nonsensical theory. What started as a way to anonymously pay for illegal services on the dark net, morphed into a Ponzi scheme aimed at low IQ tech bros.

AustinDev 4y ago
Remember when decent Marijuana was like 5 BTC for a quarter ounce? I just like to imagine that there is some dealer out there who has a couple thousand btc sitting on an old hard drive.
- hobbitstan 4y ago
  They’re probably running crypto companies now tbh
- landemva 4y ago
  I know this to be fact. $100M and she was still scrapping for rent money because she didn't know how touch it.
mrkramer 4y ago
>What started as a way to anonymously pay for illegal services on the dark net, morphed into a Ponzi scheme aimed at low IQ tech bros. That was never the point of Bitcoin. Read the whitepaper. Satoshi wanted to decentralize trust in the ecommerce world with the help of transparent P2P decentralized and distributed database called blockchain and he wanted to enable micropayments. There is no mention of buying drugs or any other illicit activities in the whitepaper.
- hakfoo 4y ago
  ...and everyone is going to use their newfangled home computers to organize recipes and do biorythym charts. Even in a charitable interpretation of history-- ignoring that Bitcoin wouldn't scale to micropayment levels-- any early interest in micropayments was quickly overwhelmed by speculation and illegal trade. I think Dogecoin tips on Reddit circa 2014 are about as close as we ever got to viable crypto micropayments, and ISTR it was done off-chain by putting a balance in a bot.
  - mrkramer 4y ago
    Again read what Satoshi was saying; no home PCs or Raspberry Pi type devices instead server farms will process transactions. It can scale, no reason why it wouldn't. Look at the BitTorrent for example....still viable.

sarcasmatwork 4y ago

Public vs private. . . ? "Ledger suffered scalability issues amid FTX saga, says CTO" https://www.cryptopolitan.com/ftx-rattled-ledger/ https://www.cryptopolitan.com/ftx-rattled-ledger/

trompetenaccoun 4y ago
Ironically of the two most popular brands Ledger is the worse HW choice that's closed source and has had at least one serious vulnerability exposed in the past. But sure, if they want to trust them. There are still copies of the leak going around with customer emails and even home addresses. Many will probably also go from FTX straight to Binance or other shady CEXs. The mainstream never learns. Funds are safu :)

patrogizmo 4y ago

I came across this really good summary of FTX's fraud on Reddit the other day: "SBF/Alameda's initial strategy was arbitraging price differences between US and Korea/Japan. The different crypto exchanges in different countries would have different prices for the same coin. In theory this was possible but in practice it was basically impossible. They lost money in Korea due to capital controls, they made some money in Japan but still lost money overall due to the enormous amounts they had to borrow and the high interest rates they were paying. The arbitrage strategy wasn't working so they switched to shilling shitcoins. Basically they would create a new token backed by say $5m seed money, put like 1% of the total number of tokens created on the market, then use their own money to pump up the token price by 100x. Since they owned and controlled 99% of the total amount of tokens, this was easy to do. Now their initial $5m is worth $500m, but only on paper because liquidity on these tokens is tiny and if they actually tried to sell it would immediately crash. Alameda did this in order to get loans using the tokens that they created and pumped as collateral. Then they took the borrowed money to make large directional bets on crypto prices. However it turned out they were bad at trading crypto and took billions in losses and the margin calls started coming in for their loans. At this point Alameda was stuck, the collateral backing these loans were all shitcoins and if they started selling them the price would crash causing the entire company to go under. Since SBF couldn't meet the margin calls by liquidating the underlying collateral, he and the other founders decided to steal money from customer accounts at FTX to meet the margin calls. Basically they would give Alameda their own FTX token(FTT) and then have FTX loan customer funds to Alameda using the tokens they just gave them as "collateral". It was essentially the same scam as the one they pulled on lenders, only now they're doing it to customers while promising they would never touch customer funds. Alameda kept losing money and eventually the scheme was discovered and it ended up being they stole something like 2/3 of the customer funds at FTX. Current estimates are at about $10 billion they lost gambling on crypto with customer money. It was a classic case of a gambler kept doubling down and borrowing and stealing until it came crashing down."

perryizgr8 4y ago
> Current estimates are at about $10 billion they lost gambling on crypto with customer money. I just don't understand the scale of it. Ten billion dollars is huge. It takes months if not years, even to lose that much in gambling. Did nobody notice anything off? Was the entire company in on it?

georgeplusplus 4y ago

These scams are alot easier to catch when central banks don't have a too big to fail policy that ensures bailouts will always be available when things get too bad.

zubairq 4y ago

Because ftx was only crypto in name. In reality it had nothing to do with the blockchain, it was just a centralised company

GoldenMonkey 4y ago

Ftx is a centralized exchange. Nothing to do with any blockchain. Decentralized exchanges like uniswap does live on a blockchain.

i67vw3 4y ago

I had the same question, and the past 2-3 weeks I am still not able to find the answer. If FTX gave alameda shit tons of FTT and customer funds from FTX reserves by 'transferring' the amount, it should have been visible on the blockchain. The FTX collapse happened only because of an internal balance sheet leaked to coindesk. Why did coindesk require a balance sheet to write the story? Coindesk probably could have just done it, by looking into the blockchain ledger instead of the balance sheet.