What’s The Problem With Exchange Tokens?

Everyone is discussing the demise of one of the world’s largest crypto exchanges (FTX), Alameda Research, and the value of the FTT token. In short, FTX and Alameda Research went insolvent, which means their liabilities were greater than their assets, and hence they’re unable to meet their financial obligations like re-paying loans as well as facilitating exchange client withdrawals.

As a result, SBF is now joining the likes of Do Kwon, Kyle Davies, Zhu Su, and Alex Mashinsky, among others, as the newest high-flying individual to pull a rug and go insolvent.

What Just Happened?

Alameda Research, the investment arm of FTX, had its financials leaked showing the firm has a huge problem with regard to the assets it’s holding as well as who they owe money to. The glaring problem is the firm’s assets, of which the majority are in FTT (the FTX exchange’s platform token).

As mentioned in the tweet above, the problem here is the platform token (FTT) is an illiquid asset, which means there’s no buyer demand and no market for it. This is further compounded by the fact that Alameda Research owns most of the supply (over 50%), thus centralizing the supply, which further means they’re the only natural buyer. So if Alameda is the only buyer, everyone else is going to sell, and the rest of the FTT holders (traders on the exchange and outside investors) will be left with the bag.

Moreover, Alameda Research and FTX were leveraging the FTT, inflating its price, and propping it up as collateral. They had $8 billion in FTT against its real market cap of $3 billion, so essentially creating $5 billion of fake FTT value. So what were they doing with this extra FTT? In essence, they were taking their trader’s money and deposits, making risky investments and doing irresponsible lending, such as to Voyager. As a result, when the FUD erupted from CZ when he announced he was going to sell his FTT stake, it began a $500+ million dollars of spot selling, in addition to the entire market going short FTT.

When this news hit the headlines, FTX users immediately began withdrawing their money, selling FTT for USDC or USDT, and trying to get this money into fiat, back to their banks, or off the exchange. However, FTX doesn’t have the cash reserves or liquidity to meet this demand, thus they’re unable to service those requests – even after dumping all assets including Bitcoin, Ethereum, Solana, and other small-cap coins such as MAPS and ORCA.

As you can see below, by November 8, the exchange already lost up to $1 billion dollars. This number is now increasing by the hour.

In summary, the recent debacle was created by irresponsibly leveraging and trading customer deposits, and overleveraging the FTT platform token, which has no value other than for exchange trading fee discounts, OTC discounts, and occasional airdrops. So the problem is not that the platform token is bad, but rather the model was over-abused to the hundredth degree.

What Does A Good Model Look Like? Why Is Phemex A Responsible Exchange?

A financially responsible crypto exchange, such as Phemex, strives to create value through products, and not through a platform token. Moreover, we protect our user’s funds, and not our investment interests. For example, Phemex has no Alameda Research that it’s using to take advantage of retail traders’ money – and we have enforced cold wallet systems to defend trader finances. This is what a proper crypto exchange model should strive to achieve.

So to lend retail and big whales who are VIPs a helping hand, these traders who come to Phemex can experience an upgraded VIP benefit (such as VIP+2). The industry needs those who are committed to transparency, building, and creating a more financially inclusive future.