George Calle, Ian Devendorf, Greg Lim, Edvin Memet
An analysis of the macroeconomic factors depressing cryptocurrency prices, and the resultant blowups of centralized finance businesses that were overleveraged on these assets and/or each other.
While fiscal and monetary policy responses to COVID-19 created tailwinds for asset prices in 2020 and 2021, central bankers' responses to the resultant inflation created massive headwinds in 2022.
The Terra collapse brought down multiple funds, most notably 3AC, which had downstream impacts on creditors, notably BlockFi, Celsius, Voyager, and Genesis.
The FTX and Alameda bankruptcy added additional strain to creditors (disrupting the Voyager bankruptcy, causing the BlockFi bankruptcy, and forcing Genesis and Gemini to halt withdrawals), while wiping out equity investors in the business and generating massive value reduction to related tokens.
Weathering Macro Uncertainty
While the growth of crypto as a sector and blockchain as a technology follow their own trendlines, the price of cryptocurrencies and digital assets over the past year have been almost entirely a function of macroeconomic conditions (external) and various market crises resulting in liquidations (internal).
Like broader financial markets, the crypto market has responded acutely to US Federal Reserve actions, particularly the Fed's six rate hikes, along with monthly Consumer Price Index (CPI) releases, which generate expectations for how the central bank may leverage interest rates as a tool to curb inflation. While fiscal and monetary policy responses to COVID-19 created tailwinds for asset prices in 2020 and 2021, central bankers' responses to the resultant inflation created massive headwinds in 2022. Section 1 of this chapter explores various macroeconomic indicators that could be used as barometers for broader economic conditions.
Simultaneously, this year kept both market participants and the broader public captivated as many of the large, centralized institutions that service the digital asset industry or speculate on it have blown up spectacularly. Section 2 of this chapter outlines the most notable examples, focusing on lending firms, trading firms, and exchanges. It also examines the interlinkages between the affected counterparties.
Additionally, given the importance of credit within any financial market, we analyze various sources of demand for loans within the crypto industry.
We conclude that these two market drivers are not independent. Rather, external market pressures reversed last year's "everything rally," brutally punishing those overexposed to the riskiest strategies and their counterparties.
2022 Economic Data Summary
This section looks to provide an assessment of the major economic trends that occurred in 2022. Below are 5 key predictive indicators for the economy:
Infiation / Fed Rate
Figure 285: Federal funds and CPI data 2017 - 2022 Source: St. Louis FRED
The US Federal Open Market Committee (FOMC) meets eight times annually to set a target rate. The FOMC's target rate determines what commercial banks can borrow and lend to each other overnight. Central banks adjust short-term interest rates to influence economic inflation. Inflation is calculated from CPI which tracks changes in prices. High inflation led to institutional investors pulling back from crypto. Lower Fed rates enable easier borrowing with increased borrowing enabling more spending, causing growth and inflation to increase. Following the ongoing COVID-19 outbreak in 2020, the FOMC set a near-zero rate. On the other hand, higher rates discourage spending leading to lower inflation. Generally, healthy economies operate at a 2.0% – 3.0% inflation rate. According to the Quantity Theory of Money, as money supply grows, prices rise as each individual unit of currency is worth less. The Fed spent $4.13 trillion of its $7.09 trillion allocation in response to the pandemic.
An inverted yield curve is when long-term rates are lower than short-term rates. This means yield decreases at further dated maturities. Economists and market participants often cite an inverted curve as a reliable leading indicator for a recession. Per the above chart, investors believe the Fed will need to decrease borrowing costs in the long run. In conjunction with the prior commentary, a declining rate encourages more spending and helps alleviate economic burdens during a recession.
30-year fixed mortgage rate continues hovering at pre-2008 housing crisis levels of 6.80%. In mid-October 2022 to early November 2022, 30-year fixed rate traded above the 6.80% benchmark from 6.92% to 7.08%. The current 6.49% rate as of December 1, reflects a 108.7% increase from December 2, 2021.
Figure 287: 30-year fixed rate mortgage 2006 - 2022 Source: St. Louis FRED
On the other hand, while rates dramatically increased, housing prices remain inflated with the latest September 2022 data reflecting a 10.6% gain and 54.2% gain on 1-year and 5-year, respectively.
Figure 288: House price index for the United States 2000 - 2022 Source: St. Louis FRED
The inherent dislocation between inflated rates and prices indicates further corrections ahead. Per John Burns Real Estate Consulting, owning a home reflects an over $800 premium to renting. As demand falls for housing, there should be a subsequent contraction in housing prices.
Figure 289: MoM change in US Housing price index 2021 - 2022 Source: St. Louis FRED
On the institutional front, real estate investors like Blackstone's Real Estate Income Trust (BREIT) also suffered. Per the Wall Street Journal, BREIT's requested withdrawals in October exceed the monthly 2% and quarterly 5% thresholds. The majority of withdrawals come from Asian investors as they seek to offset losses from other areas. To note, Blackstone President John Gray clarified that BREIT is "designed for an inflationary environment." The fund is optimized for performance, rather than fund flows.
Figure 290: Blackstone share price performance in 2022 Source: St. Louis FRED
While the 2008 – 2009 recession saw unemployment peak at ~10.0% across all job-seeking adults, the current unemployment rate remains low at ~3.7%. However, the difference between this cycle and 2008 – 2009 is the increasing unemployment reflects high earnings professionals. Particularly prominent within this category is the number of layoffs within software engineering and technology fields. These high earnings with more disposable income for spending and retail trading and investing activities reflect a lagging variable as positions will eventually need to be liquidated for rainy day funds.
Figure 291: US unemployment rate 2006 - 2022 Source: St. Louis FRED
Per the latest quarterly household debt filing, US credit card debt reflects $0.93 trillion, higher than the 2008 – 2009 peak levels.
Figure 292: US credit card debt 2021 - 2022 Source: St. Louis FRED
Q3'22 marked the second consecutive increase in serious delinquency across US credit card debt.
Figure 293: Growth of new serious delinquent over 90 days 2021 - 2022 Source: St. Louis FRED
Q3'22 marked the third consecutive increase in new delinquency across US credit card debt.
Figure 294: Growth of new serious delinquent over 30 days since 2021 Source: St. Louis FRED
August saw a new high of 16.27% interest rate on credit card plans, a massive jump from May 2022 of 15.13% and February 2022 of 14.56%.
Figure 295: Commercial bank interest rate on credit card plans 2005 - 2022 Source: St. Louis FRED
Figure 296: ICE BofA Global Credit Index since December 2021 Source: St. Louis FRED
Institutional credit markets reflect a (11.5%) return YTD and (12.1%) return last twelve months. ICE BofA Fixed Income indices provide a comprehensive view of the fixed income markets including investment-grade and high-yield bond issues that cover both developed and emerging market countries. Coverage includes both domestic and international bond markets, and performance can be denominated in a wide variety of currencies. Represents the ICE BofA AAA US Corporate Index value, a subset of the ICE BofA US Corporate Master Index tracking the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market. This subset includes all securities with a given investment grade rating AAA.
High uncertainty surrounding global interest rates and their impact on spending and various asset classes creates a frothy short-term outlook. The inverted yield curve represents a leading recession indicator. The Block Research believes that as more asset classes, like real estate, capitulate, investors will need to liquidate holdings and pull back from trading activities to cover losses. It is unclear where digital asset holdings and trading volume fall in the hierarchy, but it is likely that blue chip assets like Bitcoin and Ethereum contract even further as investors cover losses in other asset classes and seek liquidity. Furthermore, with rising rates, investors can lend capital to the US government to capture this yield as opposed to risk their capital in high-volatility positions like digital assets.
Centralized Finance Blowups
Warren Buffet has famously quipped, "It's only when the tide goes out that you realize who has been swimming naked." As both asset prices and investment appetite in crypto declined in 2022, a spate of negative market events revealed multiple types of shoddy investment practices across some of the industry's most reputable players. Specifically, this section outlines the following common strategies or events:
The rise and collapse of Terra and the acute shock it dealt the market
Circular webs of lending to counterparties that shared directional risk
Rehypothecation and generally poor sources of collateral
To color these strategies, this section is organized around the key trading and lending firms that faced the greatest stress over the past year. Specifically, 3AC and Alameda Research are the trading firms most impacted and culpable for the two large market events book-ending the past six months: the Terra crash and the FTX fiasco. This section also highlights lending businesses offering yield to retail investors: Voyager, Celsius, BlockFi, and Gemini (Earn), due to the strain felt by that market segment as credit dried up. Additionally, recent events regarding Genesis, the largest lender in crypto, along with its parent company Digital Currency Group (DCG), warrant inclusion.
Rise & Collapse of Terra
While the cascading failures of crypto businesses in 2022 have multiple interrelated causes, it is worth starting with the Terra collapse in May, as it was the first true "black swan" event of this market cycle.
The core product of the Terra protocol is its algorithmic stablecoin, UST. Unlike other decentralized stablecoins, UST is not directly backed by any crypto assets such as BTC or other stablecoins. Instead, the stability of UST is supported by Terra's seigniorage mechanism, which allows anyone to swap 1 UST with $1 worth of LUNA at any time. Theoretically, this mechanism creates an arbitrage opportunity whenever UST loses its $1 peg, incentivizing the market to continually reestablish the UST peg. For example, if the price of UST rises above $1, users can mint 1 UST by burning $1 worth of LUNA, subsequently selling UST for a profit. This sell pressure on UST should then drive the price down closer to $1. Conversely, if UST drops below $1, arbitrageurs can buy UST at a discount (driving price up), swap for $1 of LUNA, and sell for a profit.
By May 2022, Terra had become the second largest smart contract platform, with north of $20 billion TVL. Its native token, LUNA, had reached a peak market capitalization of over $40 billion in April (hovering around ~$30 billion in the days leading up to the crash), and the stablecoin, UST, had reached a market capitalization of over $18 billion.
One of the core drivers for adoption was the ability to earn 19.5% yield on UST in a DeFi application called Anchor. While yield was sourced in part from staking rewards from other PoS assets including ETH and LUNA, it was heavily subsidized by Terraform labs and LFG. In the months leading up to Terra's collapse, over 50% of UST's supply had been deposited into Anchor. Due to its deposit growth, the yield reserve was losing ~$5 million daily. This put Terra in a tough situation, where declining APY may encourage users to flee the Terra ecosystem, but retaining users carried an unsustainable cost.
On February 17, 2022, the Anchor yield reserve received $450 million from LFG to bring the total up to $507 million. On March 25, 2022, the Anchor community passed a governance proposal to implement a dynamic earn rate to ensure stability for the yield reserve. The earn rate would be adjusted if the yield reserve increases or decreases on a given time period.
Between May 7 and May 9, UST lost its peg, and in the following few days, the price of LUNA fell by over 99% as supply flooded the market while holders simultaneously looked to exit en masse. The exact dynamics of the crash are covered extensively in the Algorithmic Stablecoins subsection.
The actions and exposure of relevant parties provide useful background for the impact on major market participants.
Luna Foundation Guard
One may argue that the whole point of an algorithmic stablecoin is that stability is guaranteed by designing the protocol in a way where any deviations from a $1 peg should be arbitraged away. However, by the start of the year, in conjunction with UST's expansion into other ecosystems (such as Avalanche), Do Kwon, Terra's founder, embarked on a mission to build up exogeneous collateral that could be used in periods of potential market volatility to defend the stablecoin. LFG was formed in January 2022 to support this goal. Per LFG's inaugural Medium post on January 20: "LFG's core mandate is to buttress the stability of the UST peg and foster the growth of the Terra ecosystem. Building reserves that backstop the peg of algorithmic stablecoins amid volatility and funneling resources into research that further advances what's possible with stablecoins are only just the beginning."
LFG was initially financed via gifts of LUNA tokens from Terraform Labs (i.e., core operating company behind the Terra ecosystem), which it could use to purchase collateral directly or burn to create UST, which could then be lent or used directly to purchase collateral. LFG received multiple LUNA grants from Terraform Labs over the period during which it accumulated external collateral.
LFG first sourced external assets via a $1 billion OTC sale of LUNA on February 22. The raise, one of the largest in the history of the crypto sector, was led by Jump Crypto and 3AC, with Republic Capital, GSR, Tribe Capital, DeFiance Capital, and other unnamed investors participating.
On May 5, LFG announced the purchase of $1.5 billion worth of BTC for its stablecoin reserves. According to its announcement, "LFG bought 37,863 BTC ($1.5 billion) via over-the-counter swaps with Genesis Trading andThree Arrows Capital. Of the $1.5 billion, $1 billion was an OTC swap with Genesis while the other $500 million was acquired from Three Arrows Capital."
Figure 297: Luna Foundation Guard reserves in 2022 Source: Luna Foundation Guard, The Block Research
By May 12, all of the BTC in LFG's wallet had been emptied as LFG exhausted the vast majority of its reserves (313 BTC and some other assets remained, which LFG claimed would be used to compensate smaller UST holders) in its attempt to bring UST back to $1. Clearly, these attempts were unsuccessful. The LFG also lent out ~$1.5 billion in a combination of BTC and UST to various market makers and trading firms to help maintain the UST peg. Additionally, as a last-ditch effort, the LFG began reaching out to investment firms around May 9 to raise over $1 billion to protect the UST peg. The terms would include selling LUNA to investors at a 50% discount, along with two years of vesting. However, the deal fell through, marking the final nail in the coffin for the foundation and the broader Terra ecosystem.
The next section will focus on the impact of this market event on the centralized hedge funds involved in the Terra ecosystem and the lenders exposed to them. However, it is worth noting that while this event essentially removed tens of billions of dollars from the cryptocurrency markets and revealed inherent flaws in algorithmic stablecoin models in their current form, immediate impacts to other decentralized protocols could have been worse had Terra grown larger before crashing.
Specifically, just a month earlier, Terra founder Do Kwon boldly pronounced "the Curve wars are over", launching 4pool, a stablecoin pool on Curve that pooled liquidity between UST, FRAX, USDC and USDT. At that point, the deepest stablecoin liquidity could be found in the 3pool, which consisted of USDC, USDT and DAI. These stablecoin pools are useful because smaller market cap coins can pair with them to benefit from their depth. Ironically, UST leveraged 3pool heavily as it grew on Ethereum and required a liquid market. However, with the launch of 4pool, Kwon intended to incentivize users (via Curve emission bribes) to withdraw their liquidity from 3pool and deposit into 4pool. On May 5, the vote to supply CRV rewards to 4pool was approved. Had it not been for the collapse of UST days later, things looked very grim for 3pool, and potentially DAI.
Figure 298: 3-Pool UST liquidity on Curve in 2022 Source: Dune Analytics (@mhonkasalo)
Figure 299: Chronology of events surrounding the demise of Terra in 2022 Source: The Block Research
We introduce this as a crisis averted because had 4pool actually grown to the size of 3pool and become as systemic within DeFi, the fallout of the UST collapse could have been far greater. And ironically, while centralized lending platforms began blowing up in the face of a market wide credit crunch in the following months, Maker, the decentralized lending protocol that issues DAI, operated exactly as intended.
Initial Unraveling of Lenders
The following sections will walk through various companies that went bankrupt, faced significant stress, or resembled the business models of impacted companies over the remainder of 2022. In sum, there are five bankruptcy cases that will be of particular focus:
Three Arrows Capital (July 1, 2022)
Voyager (July 6, 2022)
Celsius (July 13, 2022)
FTX & Alameda Research (November 11, 2022)
BlockFi (November 28, 2022)
First Arrow to Fall
As soon as Terra collapsed, the crypto community looked to the major investors most publicly associated with the project. Given their involvement in the financing of LFG, along with publicly known positions in LUNA, creditors were quick to question 3AC.
The hedge fund was founded and run by Su Zhu and Kyle Davies, who met at Philips Academy. Both attended Columbia and later worked at Credit Suisse. The firm was founded in 2012 when the two were arbitraging emerging market foreign exchange derivatives, but by 2018 was exclusively involved in thecryptocurrency market. Its total AUM was never publicly confirmed. Internal documents show that assets grew to be worth over $3 billion as of April 2022, though Nansen, a crypto analytics firm had estimated the firm held $10 billion worth of crypto assets in March.
Of 3AC's portfolio, a significant portion was LUNA and UST. Specifically, as part of 3AC's participation in LFG's February 2022 token sale, 3AC assumed a $200 million position in LUNA, according to Kyle Davies' statement to the Wall Street Journal. In total, 3AC's affidavit claimed that the company held ~$600 million in UST and LUNA as of May 9.
Still, there is speculation that 3AC's exposure to Terra could have been even larger. In June 2022, it was alleged by a whistleblower from the Terra community forum that 3AC had purchased 10.9 million lockedLUNA, originally valued at close to $560 million, but whose value at the time of disclosure (June 14, 2022) had fallen to $670.45. So, there are at least three potential scenarios that arise for 3AC. First, 3AC only lost its initial $200 million investment; second, 3AC lost $560 million which represented an accumulated LUNA investment ($200 million plus $360 million); or third, 3AC lost $760 million which represented a cumulative LUNA investment ($200 million plus $560 million).
3AC was also heavily involved in the GBTC arbitrage trade, which was a profitable trade strategy when GBTC shares were trading at a premium to NAV in 2020. Investors would borrow BTC and exchange those with the trust for GBTC shares. After the six-month lockup, investors could sell their shares in the secondary market to retail investors at a premium, pay back the borrowed BTC and keep the rest as profit.
When The GBTC premium turned into a discount, this trade trapped traders who were locked in for six months. Over the past two years, the discount has onlygrown, sitting at ~30% in May and June 2022, and now ~40% at the end of November 2022. 3AC borrowed heavily to finance this trade and was known to be one of the largest holders of GBTC. Given that 3AC used GBTC as collateral in its 2019 and 2020 loans with Genesis totaling $2.6 billion (interestingly, Genesis and Grayscale, the manager of the GBTC trust, are both owned by DCG), it is possible that 3AC was able to build up significant amounts of leverage by using the borrowed money (against GBTC collateral) to further participate in the GBTC strategy.
Figure 300: Daily premium/discount of GBTC 2020 - 2022 Source: The Block Research
The third largest opportunity 3AC had pursued was liquid staking on Lido. Lido is an Ethereum DeFi platform that allows users to deposit ETH, allowing them to earn passive income from ETH staking along with a stETH token that represents their staked balance. The benefit of this approach is that the stETH is liquid and can be used for other purposes, such as collateral. Some traders had built up massive amounts of stETH leverage by using stETH as collateral in Aave loans for ETH, depositing ETH into Lido for stETH, and repeating the cycle. Sometimes stETH trades at a slight discount to ETH. For example, during the Terra collapse, Nansen reported that 615,980 bETH (staked ETH on Terra) was bridged back to Ethereum and unwrapped back to stETH. stETH was then sold back to ETH, creating pressure on the stETH price. Since 3AC was a large holder of stETH and used it as collateral for loans, deviations from the price of ETH placed immense stress on its on-chain activities. More information on liquid staking can be found in its Liquid Staking subsection of this report.
Time to Pay the Piper
3AC also maintained trading books across different venues. While the exact timing for each counterparty is not known, by mid-June, multiple creditors and trading venues had initiated margin calls. According to the affidavit of Jos van Grinsven, who serves as Head of Compliance at Deribit, the leading crypto options venue, 3AC's account breached its margin limit. Deribit began working with 3AC to liquidate their positions via a Telegram conversation, where 3AC discussed sending the additional collateral (BTC and ETH) required to top up their account. However, 3AC stopped responding, prompting Deribit to fully liquidate the account on June 15. By June 20, the account had a negative asset value of 997.3101 BTC and 15,911.1270 ETH ($37,162,616.80). In addition, Deribit had provided 3AC with 1,300 BTC and 15,000 ETH in aggregate interest-bearing loans over a two-year period ($42,252,859). With interest, this puts the current amount outstanding to Deribit at over $80 million.
As trading balances dwindled and margin calls loomed, 3AC frantically attempted to raise cash, first by sourcing new lines of credit. On June 7, 3AC circulated an investment deck pitching a GBTC arbitrage trade ahead of a SEC ruling on whether GBTC could convert into an ETF, which would collapse the discount. This is interesting given 3AC's existing exposure to GBTC. Not only would the excess capital provide breathing room for the fund, but it could be used to potentially increase the value of an asset it held a lot of and used as collateral in two of its loans, including that of Genesis, its largest creditor. It was also claimed that when 3AC realized they probably could not raise any new capital, they began liquidating existing assets, much of which was on-chain.
Meanwhile, large lenders started making capital calls. Between June 15 and June 24, 24 different firms demanded capital back, totaling over $3 billion. The largest of which being Genesis, whom they owed $2.3 billion. Notably, Voyager, a crypto lending platform that will be covered later in this report, had an exposure of 15,250 BTC and 350 million USDC (total of ~$660 million) to 3AC, and had requested repayment on June 22, to be paid in full by June 27. When the required payments were not made, Voyager issued a notice of default to 3AC.
Figure 301: Event timeline of the 3AC collapse in 2022 Source: The Block Research
Figure 302: 3AC unsecured claims Source: Public filing
Figure 303: Chronology of events surrounding insolvent crypto firms in 2022 Source: The Block Research
The Next to Fall
The falling price of cryptocurrencies and psychology associated with collapsing firms created an inherent issue for businesses that relied on retail deposits for the remainder of the year. Particularly during market crises that tended to be characterized by lower asset prices and limited credit, depositors increasingly withdrew from these platforms exacerbating the stress.
During the days and months following the collapse of 3AC, multiple lending and trading platforms either collapsed, halted withdrawals or began some sort of restructuring process. While these events are unfolding, the remainder of this section will focus on two notable examples of lenders filing for bankruptcy over the summer, following their developments through the fall.
Voyager, whose core business was lending digital assets deposited by users to third parties, was the following firm to file for bankruptcy. As discussed above, Voyager was a direct creditor to 3AC, which officially defaulted on June 27. While 3AC, Alameda and Celsius both had nuances to their investment strategies worth investigating, for Voyager, it was really just a case of bad counterparty risk management.
Voyager's strategy was to lend to leading crypto funds in order to generate yields to pay retail depositors. This worked well when times were good, but collapsed once the music stopped in June. Specifically, the failure of 3AC, which was widely regarded as a top fund, to pay up on their loan by June 27 forced Voyager to mark the fund as having defaulted.
Figure 304: Voyager outstanding loans as of petition date Source: Public filings
In conjunction with the issues created by the Terra and 3AC collapse, on June 13, Celsius Network paused all account withdrawals, leading to further asset price corrections and a bank run for Voyager with mass withdrawals and liquidations. Due to the reliance on broader market participants and the circular nature of their brokerage, custody and lending services, Voyager lowered withdrawal limits on June 23, from $25,000 to $10,000 per day. Because Voyager lends out deposits, a bank run would cripple their entire ecosystem and business operations. Finally, on July 1, Voyager froze all withdrawals and trading activity.
FTX's Rescue: "White Knight" or Brazen Opportunist?
At time of bankruptcy, 3AC remained the largest debtor, followed by Alameda Research, which had a $377 million loan outstanding. Interestingly, at the time of 3AC's default, Voyager turned to Alameda to provide Voyager with a loan facility totaling $200 million in cash and 15,000 BTC. At the time of Voyager's bankruptcy, Voyager had drawn $75 million from the loan facility. This left a scenario in which Alameda represented 43% of Voyager's top 50 unsecured claims, with the remaining 57% attributable to customer deposits.
Fast forward to July 22, FTX Trading, West Realm Shires and Alameda Ventures made an attempt to purchase Voyager Digital customers' unsecured claims including digital assets and loans outstanding. Under the terms of the agreement, Alameda would purchase Voyager's digital assets and loans (except for loans made to 3AC), giving Voyager customers a faster path to liquidity on Voyager's remaining assets at a haircut. Given these assets and/or cash equivalent would be redeemable on FTX, the offer was viewed publicly as a land grab from a well-capitalized company looking to grow its deposit base. Voyager rejected the deal, claiming the offer as a "low ball" and "publicity stunt," sending the question of ownership of Voyager‘s digital assets to auction. This did not deter FTX, which on September 26 submitted the winning $1.422 billion bid for control of Voyager's assets. The price accounted for FTX's estimation of a $1.311 billion market value for the assets plus an additional $111 million in value, and the deal was inclusive of all claims against 3AC. With the deal, depositors would expect to recover 72% of assets.
Between FTX's unsuccessful July 22 offer and its successful September 26 bid, Voyager began the process of collecting repayments of loans from its debtors. Specifically, on September 19, Voyager filed an announcement detailing Alameda's repayment of their $200 million loan, which was primarily comprised of BTC and ETH worth ~$193.2 million at time of filing. In return, Voyager Digital would return Alameda's collateral which reflected 4.7 million FTT and 63.8 million SRM tokens. At the time of the Master Loan Agreement, September 2, 2021, the collateral was worth ~$886.3 million. At the time of the filing, the collateral reflected just $158.8 million.
In the following section dedicated to FTX, we will unpack the significance of this deal in greater detail and track latest developments pertaining to Voyager. However, now let's look at the other large yield platform, Celsius, which filed for bankruptcy protection just a week after Voyager did in June.
Figure 305: Event timeline of Voyager insolvency in 2022 Source: The Block Research
Celsius is essentially a crypto retail bank offering a yield on user deposited assets. The company aims to profit on the spread between the interest it pays on deposits and the return it receives from lending those deposits out. However, this description doesn't tell the whole story: since early 2021, when DeFi was booming, Celsius rapidly became more brazen in its attempts to generate high yields. Unlike Voyager, Celsius actively managed a portfolio of on-chain strategies, acting more like a hedge fund than a bank and creating a complex web of profit and losses.
Celsius' yield generating activities can be broken down into five categories: institutional lending (e.g., lending to institutions, exchanges, and other counterparties on terms set off-chain), retail lending (e.g., Celsius allows users to borrow stablecoins against their crypto assets at an advertised interest rate), Bitcoin mining, DeFi deployments, and other trading strategies.
Celsius was one of the biggest players in DeFi, actively allocated billions of capital and accounting for a huge portion of the funds deployed to the three largest DeFi protocols – Compound, Aave, and Maker. Notably, a lot of the strategies deployed by Celsius relied on leverage; on-chain analysis of Celsius wallets indicates that Celsius had billions of dollars in leveraged positions on DeFi protocols that were threatened with liquidation in the June crypto market crash. The fragility of Celsius' leveraged positions forced the company to deploy $750 million of liquid assets – funds that could no longer be used to honor customer withdrawals – across Maker, Aave, and Compound to protect their positions frombeing liquidated.
On the trading side of the business, in order to generate the high ETH yields it advertised, Celsius converted customers' ETH into stETH – liquid staked ETH that can be further lent out to generate additional yield (besides ETH staking yield). This almost got them into trouble when they managed to narrowly escape insolvency in May by withdrawing ~$535 million worth of stETH from Anchor just prior to Terra and UST's collapse. After the May incident, Celsius sent nearly all of its stETH to theAave lending protocol as collateral, against which it promptly took on ~$145 million worth of stablecoin debt. Amid the market crash, fears of a broad crypto asset selloff triggered by forced liquidations of Celsius' on-chain positions grew to a head around June 8-9, when Celsius withdrew a total of 50,000 stETH from Aave and deposited the funds to FTX, presumably signaling an OTC deal that would help pay down its debts. Ultimately, Celsius – similar to 3AC – painted themselves into a corner with the stETH carry trade; with 409,000 stETH deposited into Aave and 127,000 ETH remaining in Compound, Celsius would have no way of offloading their stETH without incurring substantial losses from slippage, not to mention from the struggling stETH price.
A lawsuit between the entity behind 0xB1 and Celsius sheds further light on Celsius' basic failure to hedge against trading risks. 0xB1 alleges that, since Celsius failed to maintain ETH holdings equal to ETH-denominated user liabilities (deposits), it incurred heavy losses when it was forced to buy more ETH in the open market at higher prices to service ETH withdrawal requests. 0xB1 also alleges that, in response, Celsius became a de facto Ponzi scheme, as it began offering double-digit interest rates in order to lure in new depositors whose funds could be used to repay earlier depositors and creditors.
At a high level, the collapse of Celsius can be attributed to poor management of their (customers') assets, in the futile chase of unsustainably high yields during a prolonged market downturn. It is very unlikely Celsius possessed the level of skill, sophistication, and specialized personnel required to operate as a de facto hedge fund, especially since it seemingly started out as a more traditional lender. In particular, their $50 million loss in the $120 million BadgerDAO hack also illustrates their lack of sophistication. The hack was apparently carried out through a front-end exploit, which indicates that Celsius managed some of its assets in a Metamask wallet, with no multi-party computation or multi-sig.
In addition to negligence and lack of skill, there are also signs of potentially fraudulent activity. On-chain analysis of Celsius' wallets and their CEL transactions show that Celsius was purchasing hundreds of millions of dollars of its CEL token to pay out to users electing to be paid in CEL. One possible explanation for purchasing CEL rather than distributing it from its own treasury is that Celsius was trying to prop up the price of CEL, and consequently the wealth of CEL whales such as CEO Alex Mashinsky. At the same time that he was promoting CEL to users and denying that he was selling the token, Mashinsky appears to have been quietly selling tens of millions of dollars worth of CEL, as indicated by activity on eight Ethereum addressesidentified as likely belonging to Celsius' CEO. In particular, Mashinsky tweeted on December 9, 2021, "All @CelsiusNetwork founders have made purchases of #CEL and are not sellers of the token." While just 5 days earlier, a suspected Mashinsky address sold 11,000 CEL.
Building a banking business on the model of high yield at low risk is a perfect model in theory, but in practice it requires finding someone who will take the other side of the trade. If other lenders agreed that a loan was low risk then it would not be high yield, so you have to rely on systematically beating the market. This is hard to do with billions of dollars of capital at rates many times those of conventional low-risk loans, especially if you do not nearly possess the level of sophistication required to do so.
Figure 306: Celsius unsecured claims Source: Public filings
Taking a look at Celsius' creditors, It is worth noting that Pharos Fund, which has a $81 million claim, was reported to have close ties to Alameda Research, another Celsius creditor, and FTX.
Figure 307: Event timeline of Celsius insolvency in 2022 Source: The Block Research
Collapse of FTX & Alameda Research
While crypto markets traded sideways or down alongside macro in H2 2022, it is worth shifting attention to the more recent market crisis pertaining to the FTX and Alameda insolvency. The event is certainly notable in its own right, but it also helps indirectly explain some of the rescue packages from the summer, along with more directly leading to further collapses that are currently unfolding.
Over the course of 2021 and 2022, FTX emerged as one of the most central players in the crypto ecosystem, established a dominant brand presence through celebrity endorsements and aggressive advertising campaigns, and became a leading crypto voice in Washington DC. FTX also came to embody the coming mainstream adoption and acceptance of crypto from a product perspective, as the company pursued licenses in the US, submitted proposals for regulated financial products to trade on its platform, and began building out suites of products to enable more mainstream game developers and payments providers. Additionally, FTX had taken in capital from some of the most distinguished investors in the world, ranging from blue chip venture capital and private equity firms, to pension plans and sovereign wealth funds, further cementing the firm's institutional credentials.
Figure 308: FTX funding overview Source: The Block Research
Roughly estimating the revenues of a crypto exchange is not rocket science. Exchange volumes can be sourced directly from APIs or on the websites of multiple data aggregators that list volumes by exchange, and each exchange lists its fee structure online. FTX did $G12 trillion in spot and $2.9 quadrillion in futures volume in 2022, with FTX US adding an additional $65 billion in volume within the lucrative US market. So one might wonder, how could a business that is seemingly printing money go bankrupt and why would management enable risks to jeopardize it?
Figure 309: FTX spot volume and market share 2020 - 2022 Source: The Block Research
Figure 310: FTX derivatives volume and market share 2020 - 2022 Source: The Block Research
Alameda Research: Poor Trading Sowing the Seeds of Collapse
Alameda Research was a secretive quantitative trading firm founded around October 2017 by Sam Bankman-Fried and Tara Mac Aulay, which later filed for bankruptcy in November 2022 along with its sister company FTX in a plot twist that shook the crypto market to its core. Notably, in what can now symbolically be interpreted as a crossroad of sorts for Alameda, co-founder Tara Mac Aulay along with a group of other employees decided to quit Alameda only 6 months after its founding, citing concerns over Bankman-Fried's business ethics and risk management.
After the latter's spectacular fall from grace enabled the general public to finally get a glimpse into the inner workings of secretive Alameda Research, it might be said that Alameda's undoing was baked in from the very beginning, via the culture instilled by Bankman-Fried. This appears to have been a culture epitomized by extreme recklessness and hedonism, one that glorified untenable and short-sighted practices, such as use of stimulants or working to exhaustion.
In January 2018, soon after founding Alameda, Bankman-Fried organized an arbitrage trade to take advantage of the higher price of BTC in Japan compared to the price in America, which netted around $20 million. Obviously, this was no trivial task as – in Bankman-Fried's words – it required putting together an "incredibly sophisticated global corporate framework." However, according to an alleged former Alameda employee, most of the profits earned from this trade had been subsequently lost over the next 2 to 3 months to a series of bad trades and egregiousmismanagement of assets:
"Examples included some number of millions lost to a large directional bet on ETH (that Sam made directly counter to the predictions of our best event trader), a few million more on a large OTC trade in some illiquid shitcoin that crashed long before we could get out of it, another couple million in a series of XRP transfers that nobody noticed had never arrived, and that had fallen in value by something like 90% when they finally showed up much later, and various other random small things like a junior trader accidentally transferring half a million dollars of USDT to a BTC address [...] due to a complete lack of safeguards on transfers, etc. Not to mention absurd levels of expenditures, e.g. an AWS bill that at one point reached about a quarter million dollars per month."
Such a scale of organizational failure and reckless risk- taking is consistent with the timeline and reasoning cited for the April 2018 exodus of co-founder Mac Aulay along with a number of other employees.
If true, this anecdote from early on in the life of Alameda perfectly encapsulates its subsequent trajectory, succinctly painting a paradoxical picture comprising both extremely clever wins and absurdly thoughtless losses. Remarkably, Bankman-Fried learned nothing from such costly failures in fundamental systems such as operational security and accounting, as it was revealed by Alex Pack who was considering investing in the company in early 2019 that Alameda was unable to provide him with an answer to a basic inquiry regarding the origin of a $10 million loss incurred in an earlier month. More recently, shocking revelations also surfaced about the manner in which FTX was run, including but not limited to their (lack of) basic accounting or their use of an unsecured group email account for storing unencrypted wallet private keys.
Alameda initially managed around $55 million, capital that came from a mix of the group's own funds and high-interest cryptocurrency loans from wealthy investors, according to a 2018 firm presentation viewed by The New York Times. Based on archived versions of their website, Alameda's AUM grew to over $100 million by August 2019 and over $1 billion by July 2021. The company blurbs recorded in these archives also shed light into the massive scale of Alameda's operations, with daily trading volumes as high as 5-10 times their AUM, spread across thousands of products; for example, in July 2021 the landing page stated:
"We manage over $1 billion in digital assets and trade $1-10 billion per day across thousands of products: all major coins and altcoins, as well as their derivatives. We have a full-scale global operation with the ability to trade on all major exchanges and markets."
Not only the scale, but also the scope of Alameda's strategies can be described as ambitious, encompassing market making, arbitrage, MEV, OTC quoting, and DeFi. It is difficult to fathom how Alameda could successfully carry out operations of such scale and scope, given their trademark disregard for basic bookkeeping. One answer might be, simply, that they could not; according to 2021 tax returns, Bankman-Fried's businesses, which primarily consist of Alameda Research and FTX, had posted a net loss of $3.7 billion since their inception in 2017 and 2019, respectively.
This is counter to the theory that the seeds of Bankman-Fried's downfall were sown in 2022, when Alameda reportedly took huge losses after Terra's implosion. It is difficult to say – possibly even for those directly involved – when the brunt of Alameda's losses took place, but a popular theory for why the losses occurred in the first place is that at some point Alameda lost its competitive edge as more experienced firms like Jump Crypto ramped up their crypto trading business; in response, Alameda moved away from its initial focus on making high-speed, market-neutral bets that did not depend on predicting if cryptocurrency price would rise or fall towards less sophisticated strategies such as discretionary positions and news/event-based trading. For example, by early 2022, Alameda had invested several billion dollars in directional, unhedged, illiquid, and/or long-term investments, funded through loans from digital asset lending platforms, traditional bank lines of credit, and its unlimited borrowing abilities on FTX (including its access to customer funds).
In this scenario, even though their market making activities had been hemorrhaging money, Alameda either did not realize this because of shoddy bookkeeping, or they justified keeping those systems running on the rationale that, when considering the Alameda-FTX conglomerate, the results were still net positive, as the inflated trading volumes generated by Alameda on FTX would justify higher venture valuationsfor the exchange (and its FTT token). The latter theory seems highly plausible, given revelations that Bankman-Fried seriously considered shutting down Alameda but ultimately decided against it citing the interconnectedness between Alameda and FTX. That doesn't completely exclude the first theory from also being a factor: if FTX/Alameda only had a vague understanding of their books, especially considering the incredible amounts of money that FTX expended on advertisements, branding deals, and other discretionary expenses, it is possible that the Alameda-FTX conglomerate did not realize the severity of their situation until their loans started being recalled after the Terra implosion.
That Alameda may have been hemorrhaging money long before Terra is surprising, running counter to Alameda's notoriety as one of the most sophisticated and ruthless players in the market. This reputation is, no doubt, part of the reason why virtually everyone was blindsided by the collapse of Bankman-Fried's house of cards. Given their apparently huge trading volumes, they definitely amassed a lot of resounding wins among their potential losses; some of these wins they publicized themselves while others seeped into the collective consciousness anecdotally, usually via disgruntled retail traders caught on the other side of the trade.
Indeed, Alameda had developed a reputation for aggressively yield farming (i.e., using a protocol to generate token-based rewards) and selling those tokens back onto the market, including farming over $1billion on Iron Finance, whose seigniorage token eventually collapsed spectacularly. Other Alameda strategies border less on the unsavory and more on the illegal, as – according to public data reviewed by The Wall Street Journal – Alameda amassed a total of $60 million worth of various crypto tokens ahead of FTXannouncing it would list them. Coming back to DeFi, Alameda also interacted frequently with cross-chainbridges, possibly in an attempt to perform cross-chain arbitrage. Given that many bridges ended up being exploited for large amounts of money, Alameda may have suffered some losses there. More information on hacks and exploits that happened in 2022 can be found in the DeFi Exploits subsection.
Whether Alameda was losing substantial amount of money before Terra's implosion or not, it seems that Terra was the single most devastating blow to Alameda, who took huge losses during the debacle which all but sealed its fate. Alameda was the "backstop liquidity provider" on FTX, injecting liquidity to cover large liquidations that could otherwise result in a possible bankruptcy for FTX. If, as a result, it absorbed anexorbitant amount of LUNA and UST, Alameda would have had no way to offset the losses. Terra-fueled liquidations may have further impacted Alameda's balance sheet as counterparties defaulted on loans.
In addition, the sharp market downturn fueled by Terra's collapse also crippled Alameda indirectly, who had been taking on excessive leverage collateralized by largely illiquid coins such as SRM and FTT (FTX's own token). Notably, only a tiny portion of FTT was traded in public markets, with FTX and Alameda holding the vast majority of its reserves, whereas SRM had similar tokenomics. So while those holdings were effectively illiquid – impossible to sell at the open market price – Alameda was nevertheless taking out loans marked at these fictitious prices.
This highly reflexive bet would blow up in their face when the market downturn caused a lot of selling pressure on FTT/SRM prices, forcing Alameda to buy up these coins to prevent their prices from tanking and their collateral from being liquidated. These overleveraged, poorly collateralized bets would explain why Alameda ended up with a balance sheet dominated by FTT. Similarly, it is speculated that Bankman-Fried was all but forced to bail out Voyager and BlockFi to prevent them from liquidating the substantial amount of FTT/SRM collateral they held, which would negatively impact every other loan that Alameda has taken against these tokens. Interestingly, Bankman-Fried reportedly stated privately that he was pursuing an aggressive acquisition strategy in part to gain access to additional sources of capital that could be used to support his existing businesses and fill the hole in customer funds that had been created.
Finally, it is worth noting the massive amounts of capital Alameda spent out of its venture capital arm. Alameda allocated a total of $5.3 billion, spread across equity or token investments in startups ($3.2 billion) and investments in other funds ($1.1 billion).
Figure 311: Alameda investments by type Source: Financial Times
Unpacking the Fallout of the FTX Collapse
As has become customary, we will use this section as an opportunity to walk through the strategies and downfall of another centralized crypto business, BlockFi being the most recent to file for bankruptcy. However, before recapping BlockFi's tumultuous year, it is worth quickly highlighting two other businesses, Genesis and Gemini, which faced stress as a result of the FTX and Alameda bankruptcy, though events are still unfolding.
Genesis, one of the original DCG portfolio companies, has grown into one of the largest providers of trading and lending services to the digital asset market. During this most recent market cycle, Genesis also become potentially the largest lender to cryptocurrency funds. In the process, they emerged as a critical partner to companies offering retail depositors interest-bearing crypto accounts, essentially serving as a de facto yield-as-a-service provider to these businesses.
As a result, Genesis became one of the key B2B pillars within the crypto credit ecosystem, and unsurprisingly appeared at multiple junctures within this recap of centralized finance (CeFi) business crises. Specifically, they were the largest lender to 3AC, who borrowed a total of $2.36 billion from them alone. In the wake of the FTX and Alameda bankruptcy, Genesis suspended redemptions and new loan originations after seekingan emergency loan of $1 billion (later slashed to $500million). While the total impact of the bankruptcies on Genesis is unclear, DCG publicly stated that they provided Genesis a $140 million equity infusion since Genesis derivatives had $175 million locked on FTX.
What we do know is that shortly after Genesis suspended redemptions, Gemini halted withdrawals from its Gemini Earn platform. Genesis is one of the partners in Gemini's Earn program, where users could lend out their crypto for returns. Just days before publishing, the Financial Times reported that Gemini is in the process of recovering ~$900 million from Genesis. Developments across both firms will be key for understanding further fallout resulting from the FTX and Alameda collapses.
Figure 312: Event timeline of FTX insolvency in 2022 Source: The Block Research
BlockFi: The Most Recent Domino to Fall
Like Celsius and Voyager, BlockFi's flagship product is interest-bearing accounts for retail depositors. Similar to industry peers, BlockFi grew rapidly during the bullmarket of 2020-2021, growing users to over 650,000 by early 2022 while raising over $4G0 million across eight funding rounds, carrying a $3 billion valuation from its March 2021 raise. By 2022, the firm was reported to have an AUM of ~$15 billion.
BlockFi, however, has had one of the more tumultuous years of any crypto business, facing challenge after challenge in every quarter of 2022. In Q1, BlockFi faced a large regulatory settlement, greatly reducing its cash on hand. In Q2, the lender suffered losses as a 3AC creditor. Shortly after, the business felt the strain of the market-wide credit crisis as other impacted lenders began recalling loans and depositors rushed to withdraw in early Q3. Finally, BlockFi filed for bankruptcy in Q4 after FTX fell despite best efforts to cut costs and seek emergency funding throughout the year.
The February $100 million SEC settlement occurred in the backdrop of rampant crypto spending as other retail-facing businesses used excess cash to pursue a land grab strategy. In that same month, FTX, Crypto.com and Coinbase all sought mass adoption through splashy Super Bowl advertisements and broader marketing campaigns. BlockFi viewed protecting its flagship product, the BlockFi Interest Account (BIA), as critical to its future growth. BlockFi even described the settlement positively, framing it as a "landmark resolution with federal and state regulators providing clarity on the pathway for crypto interest securities." Indeed, getting regulatory approval for a yield product would give BlockFi a massive advantage over competitors. However, the road to such approval is long given the uniqueness of a crypto yield product. In conjunction with the settlement, BlockFi also madeBIAs unavailable to new US clients and forbade thetransfer of new assets within existing BIAs for US users. Also, according to Morgan Creek, a BlockFi investor, the $100 million fine represented nearly all of the $130 million BlockFi had in the bank at the time, just enough to prevent technical insolvency. Notably, Coinbase decided to drop its Coinbase Lend product after the SEC threatened a lawsuit.
The major event that hit every large lending desk, 3AC's collapse, did not spare BlockFi. On June 16, BlockFi CEO tweeted that they liquidated a "large client thatfailed to meet its obligations on an overcollateralizedmargin loan", in a clear reference to the now defunct hedge fund. According to Morgan Creek, the loan was130% collateralized with 1/3 of the collateral made upof GBTC and 2/3 BTC. Even with this over-collateralization level, BlockFi experienced loan losses due to the sharp price decline of both assets and the deepening GBTC discount since the collateral had been pledged. Specifically, offloading the GBTC at a discount led to BlockFi's first loss of capital on a loan in the company's history, according to Morgan Creek. Even with a large drawdown in BTC price, Morgan Creek claimed BlockFi had no loan losses until the 3AC blowout due to the illiquidity of the GBTC collateral. According to Morgan Creek, BlockFi had even liquidated other GBTC loans in 2021 and "took the pain in Q4  when the rest of the business was doing well." Still, Morgan Creek claimed the 3AC claimed that the loan represented 15% of BlockFi's loan book, which is corroborated by the November 28, 2022 affidavit of Mark Renzi, BlockFi's bankruptcy advisor, who claimed that "3AC was one of BlockFi's larger borrower clients" and "led to material losses for BlockFi."
It's worth noting that BlockFi was well known to be alarge holder of GBTC through early 2021, though it is unclear if GBTC remained a key holding into 2022. According to the February 2021 GBTC SEC filing, BlockFi had a $1.7 billion position in GBTC (36,156,866 shares; 5.66% of the total outstanding) as of December 2020.
An updated filing on June 24, 2021, showed that BlockFi reduced its GBTC position, with an updated count of 19,852,158 shares (2.87% of the total outstanding). It is difficult to track the current GBTC position BlockFi is holding as the company is no longer obligated to report ownership (136 filing tracks stock ownership changes that exceed 5% of a company's total stock), but any reduction from the updated position would have incurred massive losses as GBTC discount has been on a downward trend.
While BlockFi claimed to have no direct exposure to the other desks that blew up in June and July 2022, Celsius and Voyager, the widespread panic in the market led to a dramatic increase in withdrawals. This could not have come at a worse time, as BlockFi was just starting to recover from the SEC fine and its loss on the 3AC loan. BlockFi had tried to raise a Series F at a discounted valuation to provide cushioning, but the deal was ultimately put on hold following rumors of potential insolvency and due to the overall poor funding environment at the time.
It was with this context that FTX US swept in with a dealto provide a $400 million credit facility to provideliquidity for BlockFi. The rescue package was subordinate to customer deposits, but essentially wiped out all equity holders by granting FTX US the option to buy out the business. In the following four months, the deal seemed to accomplish its goal. Some degree of faith was restored in BlockFi, which now had the backing of the seemingly cash flush FTX. But then on November 8, the day FTX halted withdrawals, BlockFi requested $125 million pursuant to the loan agreement, which FTX did not provide. FTX filed for bankruptcy three days later. The remaining $275 million had presumably already been provided to BlockFi given it showed up as an unsecured claim inthe BlockFi bankruptcy filing.
Figure 313: BlockFi's unsecured claims Source: Public Filings
But BlockFi's entanglement with the FTX and Alameda empire was not limited to the July rescue package. BlockFi was in the business of generating yield for its depositors, and Alameda Research was widely regarded as one of the preeminent crypto funds that could absorb loans from BlockFi's. According to Mark Renzi's affidavit, "BlockFi acted as a lender to Alameda, one of the FTX companies (starting in 2019) and traded on the FTX platform (starting in 2021)." Following questions surrounding Alameda and FTX's financial health and the subsequent FTT price fall from ~$22 to ~$3, according to the affidavit, "BlockFi took several proactive measures to attempt to limit its exposure to FTX and Alameda through a combination of margin calls and recalls of open-term loans. In early November 2022, BlockFi made an additional borrowing request per the terms of the FTX Loan Agreement, which was not honored. Alameda thereafter defaulted on ~$680 million of collateralized loan obligations to BlockFi, the recovery on which is unknown." Given FTX's failure to meet their obligations, BlockFi paused withdrawals, liquidated some of their remaining cryptocurrency to generate cash, then finally declared bankruptcy on November 28.
Figure 314: Event timeline of BlockFi insolvency in 2022 Source: The Block Research
In summary, due to the change in macro conditions, the prices of cryptocurrencies would probably be depressed in 2022 regardless of any specific blow ups. Rather than looking at asset prices as the symptom of market crises, the nature of a risk-off market can shine light on the strategies that brought ruin to the slate of bankrupt and struggling firms and broken protocols. A few common, and somewhat related, themes emerged:
First, the positive feedback loops that facilitated the explosion of certain DeFi protocols in times of growing asset prices turn into negative loops once prices turn south. For example, the burn-and-mint mechanism created a virtuous cycle in 2021 when there was a demand for UST via Anchor, and the stablecoin started to grow on other blockchains. Since the minting of new UST required the burning of LUNA, the value within the entire ecosystem grew as the price of LUNA appreciated. However, as soon as a shock created forced selling of UST (in excess of LFG's backstop reserves), the redemption of UST for LUNA created a supply glut at the same time investors were looking to sell.
Similarly, the market did not appreciate how much leverage firms, traders, and protocols had amassed secured by endogenous or highly correlated collateral. The most glaring example of this was Alameda and FTX's use of FTT, SRM, and MAPS as collateral in loans. Given FTT was created by FTX and seen as a pseudo-equity in the business, the value of the token eroded exactly when FTX was most vulnerable.
Although the above paragraph already alluded to the more fundamental flaw and potential inevitability of the Terra crisis, the mechanism designed to protect it chose bad collateral. Since the goal of LFG was to backstop UST, a stablecoin dependent on new flows of crypto users, choosing a cryptocurrency as a backstop is a poor hedge. Third, while nothing disastrous came of this example, the Lido-Aave feedback loop (i.e., deposit ETH into Lido, receive stETH, borrow ETH on Aave with stETH collateral, and repeat) theoretically introduces risks of massive liquidation cascades in times of strain on stETH.
The third theme is the lack of appreciation for trading strategies that tie up liquidity for long periods. The largest example, though somewhat outdated, is the GBTC trade, which put arbitrageurs underwater when they were forced in the position for six months, and likely used borrowed capital. Similarly, potential risks with Ethereum liquid staking derivatives could emerge in times of market turmoil if large holders are forced to sell before staked ETH withdrawal is enabled. Especially in a market as volatile as crypto, liquidity is king.