Deribit Exchange Wallet exploited for $28M
Deribit Exchange hot wallet was compromised for around $28 million.
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The spectacular downfall of one of the biggest exchanges unfolded like an action movie. It had everything: Sam Bankman-Fried’s fall from grace, wriggling with Alameda, Binance’s whipsaw, VC funds losing their stake, a hack that was an inside job, infinite market attention, federal investigation, and unprecedented calls for transparency via Proof of Reserves (PoR) Audit. Let’s review FTX’s bankruptcy in detail.
The major and most damaging implication of FTX’s saga is that the cryptocurrency industry once again falls out of favor with mainstream adoption. FTX pushed for exactly this type of credibility with enormous PR stunts, such as getting Miami Arena naming rights and running Super Bowl commercials. It turns out that sponsorships cannot beat integrity. The blow is especially devastating because insiders perceived FTX as one of the most stable exchanges in the unconstrained crypto industry. Sam Bankman-Fried (SBF), the CEO of FTX, had backing from Sequoia Capital and Lightspeed Venture Partners, two of the largest venture capital funds. Binance was one of the early investors in FTX.
One can only wonder what sorts of dangers are hidden in less publicized companies. No reason to be overly optimistic. We have no data on assets, liabilities, and net cash positions. Under current circumstances, we are confident that 95% of CEXs are gambling with client deposits.
FTX went from a $32-billion top-tier “blue chip” cryptocurrency exchange to being effectively dead.
The spectacular downfall happened in a matter of days, but the underlying causes took months in the making. There was just too little oversight. Why did FTX go bankrupt? What was the role of Almeda and Binance? Was it a hack or an inside job? Find out how exactly FTX came to nothing in our next article.
FTX’s doom may be a Lehman moment for crypto. The infamous 2008 Lehman Brothers collapse spilled over Wall Street and started a broad market failure. Will FTX set off something similar in the crypto market? Too soon to say, but the signs are worrisome.
Bitcoin and Ether plummeted. BTC fell to $16,300, the lowest price in a year. ETH did slightly better but still experienced a sharp drop. Shares of Coinbase exchange, a publicly traded company, dropped from $75 in late October to $45 on 9 November. Obviously, Alameda ended its trading business together with more than 100 affiliated corporate entities that filed for bankruptcy on the same day as FTX. The spillover is considerable. Genesis ended its lending obligations citing the loss of industry confidence. With this decision, Geminin couldn’t support its earning program.
Perhaps, the Solana ecosystem is the next big litmus test. Alameda held more than $1 billion in SOL (another token supported by SBF).
Public discussions about FTX’s case took over the world. Hacken’s CEO Dyma Budorin joined leading Web3 influencers on Twitter Spaces and CoinDeskTV in an effort to understand what happened, and find answers on what to do next. The consensus is that we cannot drop centralized crypto exchanges from the equation because they drive mass adoption. The only way forward is to have more transparency.
Sam Bankman-Fried, the man himself, said in an interview that he had “expanded too fast and failed to see warning signs.” SBF publicly apologized on Twitter, “Hopefully this can bring some amount of transparency, trust, and governance.” Naturally, the next question is how to reach those things.
We are witnessing a grand overhaul in the world of cryptocurrency exchanges. To have any hope of long-term operations and mainstream adoption, exchanges must engage in unprecedented self-regulating measures where they disclose their reserves.
Some call it “proof of funds,” we call it “proof of reserves.” In either case, the essence is the same: a credible auditor verifies on-chain funds against liabilities to assess collateralization. We already offer Proof of Reserves (PoR) Audits to crypto exchanges. Hacken has been preaching about transparency through disclosure since 2019.
Today, major players are picking up the trend of full transparency. CZ announced, “All crypto exchanges should do Merkle-tree proof-of-reserves. Binance will start to do proof-of-reserves soon. Full transparency.” Our partner CoinGecko added Reserves Tab to the exchanges’ profile page. Nansen and DefiLlama now provide data on assets or reserves. Crypto exchanges are disclosing the data voluntarily, but this will be a new norm, “If they can’t show the client’s funds – they are frauds!”
Transparency is not the only thing to gain trust. We also have governance. Good governance ensures sensible decision-making. A crucial point regarding governance is that FTX had zero outside investors on its board. This was something that SBF specifically called for. Sequoia Capital and Lightspeed Venture Partners (FTX’s largest VC funds) didn’t have any means to bind their investment to sound decision-making. SBF and a few more executives held all the power. The small circle surrounding SBF was literally isolated and cut off, as they all lived in the Bahamas. FTX’s downfall came as a surprise to most of its 300 employees, indicating poor communications inside the organization.
Gaining mass adoption is impossible without centralized crypto exchanges. They are the gateway into the world of cryptocurrency. The unprecedented push for transparency is a chance to make things right. Show your integrity and the market will trust you. Otherwise, your empire may fall overnight.