Review of FTX SBF’s short selling incident: a “genius trader” without faith

FTX is about to release tokens anchored to well-known US stocks, attracting a large wave of traffic. Not long ago, YFI, a giant in the DeFi field, fell from its highest point of $43,966 to around $16,000, a staggering 64% retracement (recently falling below $12,000).

The community blamed all this on the legendary trader Sam Bankman-Fried (hereinafter referred to as SBF), believing that his aggressive short selling led to the plunge of YFI. SBF is also the CEO of FTX and Alameda Research. He has led the issuance of platform coins FTT and SRM, and has control over the decentralized exchange SushiSwap.

According to Chain News, SBF mortgaged a large amount of FTT, SUSHI and SRM on the decentralized lending platform Cream Finance, while lending out valuable ETH and USDT, as well as UNI, MTA, CREAM, LINK and other DeFi coins, and short-selling them on the trading platform for profit. Therefore, he was suspected of using the centralized tokens he issued to manipulate decentralized assets.

The Cream community believes that FTT may bring systemic risks to the entire platform, so it launched a proposal to vote to delist FTT. SBF’s response can be found in "FTX founder SBF responds to the CREAM community's proposal to vote to delist FTT: Pros and cons discussion".

His views can be summarized into three points: First, he believes that the market value of CREAM is mainly supported by FTT, and removing FTT will cause investors to suffer losses; second, the price volatility of FTT is much smaller than that of other DeFi tokens, and it is not the main source of risk; third, reducing the collateral rate of FTT or setting a 20% lock-up limit for a single asset is a compromise. However, we believe that SBF's remarks are sophistry and do not directly respond to the real risk points of his operation.

Use Cream to cash out FTT in disguised form without transaction slippage

According to data from Cream Finance, as of October 13, the total locked-in amount of the platform reached 170 million US dollars, of which the asset value of FTT reached 78.3 million US dollars, accounting for 46.19% of the total locked-in amount. It can be said that almost half of Cream is serving FTT. The APY of FTT on CREAM is 0, which means that users have almost no borrowing demand for FTT, and it also means that except for SBF, the issuer of FTT tokens with a holding cost of 0, no one else will pledge FTT to the CREAM platform.

As a platform currency, FTT has poor liquidity. Coinmarketcap's trading data shows that the daily trading volume of most FTT trading pairs is less than 1 million US dollars. In the past 24 hours, the total transaction volume of FTT on the entire network is less than 5 million US dollars. The mortgage rate of FTT on Cream is 20%, which means that by pledging FTT worth 78.3 million US dollars to the platform, it can cash out other cryptocurrencies worth 15.66 million US dollars. This amount is more than three times the total daily trading volume of FTT on centralized exchanges!

Imagine that if SBF dumped $15.66 million of FTT on the market, the price of the currency would almost drop to zero. However, with Cream, he could borrow DeFi coins with high valuations and poor trading depth (only a small amount of coins is needed to smash the market by more than 10%), and at the same time exchange for a large amount of low-cost ETH and USDT, and make a profit by selling the borrowed DeFi coins and using USDT or ETH to buy the bottom when the market panics and falls. This method is equivalent to cashing out FTT in disguise, draining the market with a trick of making money out of nothing.

So the question is, who is the biggest loser in this game? Obviously, it is the other lenders on the Cream platform. Once these lenders are attracted by the high APY of the platform, it is easy for the tokens they lend to become the prey of short sellers, and suffer large losses on their positions.

This is a siege of decentralized cryptocurrencies by centralized cryptocurrencies. Not only FTT, but any lending platform that simultaneously launches company coins and community coins will lead to similar risks. This may cause a devastating blow to the growing cryptocurrency community.

It can be seen that Cream launched SUSHI and FTT on September 2, and it was from this day that DeFi coins started a cliff-like drop like a battle royale. Is it a coincidence, or is there another mystery?

Who decides on listing on a decentralized lending platform?

Why can FTT be used as collateral? Who decides the tokens and collateral ratios on decentralized lending platforms? The official answer seems to be community autonomy, but from Cream's announcement, the platform does not have clear listing rules. The development team may listen to some community opinions, but the lending currencies listed on the website are ultimately decided by the Cream project. In addition, although FTT has been criticized in the Cream community, there are only 37 voting addresses participating in the topic of "whether to remove FTT", and the total market value of CREAM held by these addresses is less than US$500,000.

As the fork source of Cream, Compound platform may be a better example. The community needs to vote on every adjustment of coin listing, mortgage rate and interest rate.

However, the standardization of the process cannot prevent the possibility of the community being manipulated by capital. Taking UNI as an example, a total of 57 addresses in the Compound community participated in the vote for "listing UNI coins", with a total of 537,376 COMP votes, of which the top 10 addresses accounted for 96.7% of the total votes. However, since COMP itself is of high value and its circulating market value is close to US$300 million, large holders lack the motivation to do evil. The circulating market value of CREAM coins is less than US$6 million, and the community voice is weaker. Compared with COMP, it has worse risk resistance and is more likely to be used by those with ulterior motives to become a weapon to snipe the market.

It's all just a trading game

SBF has publicly expressed his negative views on yield farming. At the same time, he is not optimistic about DeFi based on ETH 1.0 because the platform's non-scalability is fatal to the project. SBF believes that he shorted certain coins not out of malice, but simply felt that the value was overestimated. When the market collapsed, he would buy what he thought was undervalued from panic sellers. Having worked at Jane Street, a proprietary trading company in the traditional financial industry for three years, SBF looks like a typical Wall Street trader: calm and rational, sticking to trading strategies, and not being disturbed by the market.

SBF also seems to be a Trump supporter. The election model of polling aggregator FiveThirtyEight shows that Trump's chance of winning is about 16%. He believes that buying Trump at this point is the right decision. SBF once again treats this as a trading game of buying low and selling high.

"Given that 2020 is so weird, this probability of winning seems underestimated," he said. (Special author: miaohash Editor: Wu said blockchain)