Why Coinchange is unaffected by the FTX and Alameda Research Fiasco

November 9, 2022
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First of all, we want to assure you that your funds are safe and not affected in any way by the recent events related to FTX and Alameda.

Here’s what Coinchange is doing to increase user confidence:

  1. We are publishing monthly Asset Allocation Reports (Transparency Reports) which show how our users' funds are being used to earn yield. We openly provide our AUM breakdown, list the DeFi protocols and Blockchains we participate in, and inform you what the Coinchange team is working on next. 
  2. We have a robust risk assessment framework in place and will be working with one of the big 4 accounting firms to attest and verify that it follows financial industry evaluation standards. This consultation with the firm will also confirm that the framework is standardized in a manner that removes human discretion to the maximum, allowing anyone using it to derive the same final risk score that Coinchange uses internally.
  3. We are in the process of finalizing our financial audit and will do the attestation of assets  from Grant Thorton  in Q1 2023. 
  4. We are having concrete discussions with various DeFi cover providers to protect our user funds in case of black swan events (DeFi hacks, Governance attack, Smart Contract vulnerabilities, oracle attack, economic attack, de-peg event).
  5. Since the inception we have deployed user funds only in DeFi. We have never allowed any centralized counterparty to borrow our user funds directly. All the assets are strictly deployed on-chain. This causes our yield to be lower than some of our competitors but allows us to earn safe yield.

Understanding the current FTX/ Alameda Situation

Alameda Research is a quantitative trading firm and as of 2021, Sam-Bankman-Fried owned approximately 90% of it. FTX is a cryptocurrency exchange that offers derivatives, options, volatility products and leveraged tokens also owned and managed by Sam-Bankman-Fried. 

Alameda Research and FTX were intrinsically connected; Alameda had participated in FTX’s ICO and received $4.19B worth of FTT (FTX’s native tokens) in exchange. Fast forward to Q2 2022, many believe that Alameda blew up along with 3AC and others but they only survived because they were able to secure funding from FTX using some of the FTT as collateral. Later FTX continued to solidify its image as a solvent and responsible entity that could bail out any failing crypto business which helped FTT’s price which was crucial to save Alameda. 

All this would have been fine if the price of FTT didn’t collapse. However, on Nov 2, CoinDesk reported that Alameda’s balance sheets are largely made of FTX’s native FTT token. It showed that trading giant Alameda’s balance sheet was made up of a coin that a sister company invented. As per the article, “ As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.” Other major asset was SOL tokens which is Solana blockchain’s native currency which SBF was an early investor in. 

As this news spread, CZ the founder of Binance tweeted this:

This caused a FUD, resulting in a selling pressure on the FTT token. This puts FTX and Alameda in a bad spot as Alameda loans would get liquidated since they used FTT as collateral. At this moment we don’t have the full details but there is good reason to believe that the drop in price of FTT caused Alameda to become insolvent and a series of withdrawals from FTX users created a bank run on the exchange. 

At this point it is clear that FTX has a hole in their balance sheet because it lent money to Alameda either to generate yield or to bail them out following the 3AC collapse. Bottom line is that Alameda Research is a trading firm that secured centralized loans which they are unable to repay now. They also took some DeFi loans which they already repaid because those positions were public, and the liquidations happen by code without warning. So if you were an indirect lender to Alameda through a DeFi protocol, you got your money back. If you were a centralized lender to Alameda, you are in deep trouble. 

This is why Coinchange has never and will never participate in centralized lending activities although it might provide a higher return. 

Here’s what thee CISO at Polygon tweeted:

Here’s what Brian Armstrong, CEO of Coinbase tweeted:

As a centralized DeFi Yield provider we don’t lend out user funds off-chain, nor do we trade/lend to CeFi Exchange. Ever! We use our customer assets in DeFi protocols that are run by math/code and transparent blockchain data. Centralized Lenders such as FTX, Celsius and BlockFi have loaned out user funds off-chain and customers had to trust them without any transparency or control over the funds. Any individual can access DeFi yields if they have the right resources, knowledge and time. However it is extremely tedious, time consuming and expensive to earn DeFi yields but at Coinchange we have the benefit of  economy of scale to reduced the gas costs and optimize strategies algorithmically resulting in higher yield.

While Coinchange does not have a dominant market share yet, we are adhering by the DeFi rules. The unapologetic nature of this industry means that unsustainable and poorly managed companies get purged in each cycle and only those with sustainable and diversified business models survive, and over time benefit from the adoption. If you have any questions, we are available to setup a call with you here,

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