FTX's downfall and Binance's consolidation: the fragility of centralised digital finance

David Vidal-Tomás, Antonio Briola and Tomaso Aste

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper investigates the causes and the consequences of the FTX digital currency exchange's failure in November 2022. Analysing on-chain data, we report that FTX heavily relied on leveraging and misusing its native token, FTT, and we show how this behaviour exacerbated the company's fragile financial situation. To gain further insights into the downfall, we employ state-of-the-art network science instruments to model the evolutionary dependency structures of 199 cryptocurrencies on an hourly basis, and we investigate tick-by-tick public trades at the time of the events. We identify the collapse of the Terra-Luna ecosystem as the pivotal event that triggered a significant decrease in the exchange's liquidity. Results suggest that the crash was actively accelerated by Binance tweets causing a systemic reaction in the cryptocurrency market. Finally, identifying the actors who mostly benefited from the FTX's collapse and highlighting a generalised trend toward centralisation in the crypto space, we emphasise the importance of genuinely decentralised finance for a transparent, future digital economy.

Keywords: binance; cryptocurrency; FTX; network science; Terra-Luna; ES/K002309/1; EP/P031730/1; Horizon 2020; H2020-ICT-2018-2 825215 (search for similar items in EconPapers)
JEL-codes: G10 G11 (search for similar items in EconPapers)
Date: 2023-09-01
New Economics Papers: this item is included in nep-ban, nep-des and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Physica A, 1, September, 2023, 625. ISSN: 0378-4371

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