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

Vidal-Tomás, David, Briola, Antonio and Aste, Tomaso (2023) FTX's downfall and Binance's consolidation: the fragility of centralised digital finance. Physica A, 625. ISSN 0378-4371

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Identification Number: 10.1016/j.physa.2023.129044


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.

Item Type: Article
Additional Information: © 2023 The Author(s)
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HG Finance
Q Science > QC Physics
Q Science > QA Mathematics
JEL classification: G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Date Deposited: 03 Aug 2023 10:21
Last Modified: 15 Jul 2024 03:03

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