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

Paper: arXiv 2302.11371

Authors: David Vidal-Tomás, Antonio Briola, Tomaso Aste

Abstract

This paper investigates the causes of the FTX digital currency exchange’s failure in November 2022. We identify the collapse of the Terra-Luna ecosystem as the pivotal event that triggered a significant decrease in the exchange’s liquidity. 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 study evolutionary dependency structures of 199 cryptocurrencies on an hourly basis, and we investigate public trades at the time of the events. Results suggest that the collapse 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.

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 7.5/10
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides a strong, data-driven forensic analysis of the FTX collapse using granular on-chain data, trade prints, and evolutionary dependency networks. While mathematically light, its empirical rigor and detailed timeline analysis offer valuable insights into market fragility and centralization risks in crypto asset markets.

Research Flowchart

  flowchart TD
    A["Research Question: What caused FTX's collapse & its market impact?"] --> B["Data Collection: On-chain data, hourly prices (199 cryptos) & public trades"]
    B --> C["Methodology: Leverage analysis & evolutionary dependency structures"]
    C --> D["Analysis: Terra-Luna trigger & Binance tweets accelerate FTT run"]
    D --> E["Findings: FTX misused FTT; Binance consolidated market power"]
    E --> F["Conclusion: Highlighted fragility of Centralized Digital Finance (CeFi)"]