What is FTX?

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robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

Hong Kong-based FTX is a cryptocurrency exchange that’s comparable to Binance, Coinbase, Kraken, or whatever may be your exchange of choice. They all do, and largely look, the same, and fees are generally comparable.

On the front end, they are all one-stop-shops for crypto trading. If you want to buy or sell Bitcoin, or any of the other hundreds of cryptocurrencies around, you can do so on a cryptocurrency exchange. You can often buy with fiat currencies—regular money, like the Canadian or U.S. dollars or the British pound—and trade crypto with other users via the exchanges’ proprietary matching engine.

This kind of trading, known as spot trading, is very popular on FTX. According to data from metrics site CoinGecko, FTX is the second largest cryptocurrency exchange by daily volume; it traded just over $1.1 billion on July 12, 2021. That’s slightly more than Coinbase, an exchange that focuses on the U.S. market, and about nine times less than the largest exchange, Binance.

FTX is also very popular as a derivatives exchange. Derivatives are assets, crypto or otherwise, that represent some underlying asset, like futures or leveraged tokens. Data from Skew Analytics shows that FTX is the fifth largest exchange for Bitcoin futures contracts—bets on the future price of Bitcoin—after Huobi, OKEx, Bybit and, by a large margin, Binance.

Fairly unique to FTX is its wide offering of tokenized stocks. These are, essentially, cryptocurrency tokens that track the price of a stock, like Tesla or Apple. Unlike competitors like Binance or Bittrex, which lock tokenized stocks within their ecosystem, FTX’s tokenized stocks can be transferred between wallets, just like any other cryptocurrency.

And FTX, unlike many other exchanges, has its own prediction market. Prediction markets are betting—you “predict” that something will happen, like the winner of the presidential election in 2024, by buying a prediction token. The more likely the market thinks that prediction is to being correct, the closer the token will get to $1. (As of this writing, TRUMP2024 is worth just $0.088). These trades aren’t available in Canada.

Trading on FTX is pretty cheap. Taker fees (paid by those who buy assets, or “take“ them off the orderbook), are 0.07% of the trade, maker fees (conversely paid by those to put trades on the orderbook, usually by selling crypto), start at 0.02%. Fees are lower for big traders, professionals, and those that refer friends—so much so that over-the-counter traders pay zero fees, and major market makers pay negative fees through rebates.

There are further discounts for holders of FTX’s own cryptocurrency, FTT. Described as the “backbone of the FTX ecosystem,” FTT is a kind of loyalty token for customers of the exchange. It reduces trading fees depending on how much one holds. Those with up to $100 of the token receive a reduction of 3% in fees, and that goes up to a 60% reduction for those with more than $5 million in FTT tokens.

FTX’s decentralized exchange

The above is a description of FTX’s centralized trading. But part of the appeal of the blockchain is that it is a decentralized technology. Without getting into the nitty gritty of it all, blockchains are about distributing the processing of financial transactions across thousands of computers all over the world. The point of all this is that it’s tricky for governments to shut down the network. And, because the network is decentralized, it’s difficult to hack—you can’t just march into a data center and shut the whole thing down.

It seems great in theory, especially if you value your privacy and self-determination. But in practice blockchains are very slow. So much so, that most crypto trading these days—about 95% of it—is done through centralized exchanges like FTX, Binance, or Coinbase.

Centralized exchanges are fast, but they undermine the whole point of using blockchain technology, since these exchanges can—and are, very frequently—shut down. Or their owners turn out to be scammers. Or their platform isn’t fast enough and the whole thing breaks under market stress. Canada was once home to Quadriga CX, a Canadian exchange that trapped all of its customers’ money after the death of its CEO.

However, in the past few years, something called a decentralized exchange emerged. This is an exchange that is non-custodial—it all happens on a blockchain through smart contracts (bits of blockchain code). These are what now account for the remaining 5% of trades. They are slow and often expensive, prohibitively so—in the spring of 2021, when Bitcoin soared to around $64,000, a single trade of a penny’s worth of cryptocurrency on decentralized exchange Uniswap cost north of $300 to process.

FTX is heavily involved with one of these decentralized exchanges and is betting big on the technology. It’s called Serum, and it runs on a blockchain called Solana. Its advantage is that it comes with on-chain orderbooks, meaning it looks similar to FTX’s centralized exchange. And unlike Uniswap, which runs on another blockchain called Ethereum, Serum is cheap; transactions cost a fraction of a cent. (Holding the Serum token reduces that by a further 60%.)

Who created FTX?

The exchange was founded in 2019 by Sam Bankman-Fried, an American MIT-educated math genius who left his job at the quantitative finance hedge fund Jane Street to leap headfirst into crypto. At 29 years old, the Hong Kong resident is one of the youngest billionaires in the world.

Bankman-Fried is a fond believer in effective altruism—the utilitarian movement that champions doing the most good possible with one’s life, and Bankman-Fried has earmarked billions of dollars in revenue for charities.

“I think you need to be quantitative about the whole thing, to me that is the core of effective altruism. You are never going to be able to quantify the world perfectly but you can try to turn everything into a number,” he told Forbes in May, 2021.

Bankman-Fried invites his customers to help inform where the money should go; they can vote on which charities he should send some of the company’s revenues to or contribute themselves. “I think there is a huge potential in crypto for people to be giving a lot to high-impact causes,” he told Forbes.

His first crypto venture was Alameda, a crypto firm that sought to profit from the nascent industry through complex trades. At Alameda, Bankman-Fried realised that the industry lacked structure, and the infrastructure that’s necessary to sustain a market.

He also wanted to solve another problem: Competitors like Robinhood jump through hoops to let their customers trade commission-free stocks, and one of the ways they do that is by letting clearing firms pay a premium to process trades. The clearing firms are more than happy to pay this premium because they can sell that trading data to brokerages, who can, for a consistent profit, bet against those traders. That’s why FTX trades tokenized stocks.

Bankman-Fried plays an active role in the cryptocurrency industry. When the founder of SushiSwap, a decentralized finance protocol that went viral in the summer of 2020, abandoned the platform and left it leaderless, the community elected Bankman-Fried to temporarily hold the reins while the protocol got back on its feet. With the keys to the castle, Bankman-Fried could have bled the protocol dry and disappeared into the ether. But he didn’t, and with his help the protocol is one of the most successful in all of DeFi today.

FTX’s crazy marketing

FTX has differentiated itself from its competitors by its wild marketing strategy. To get its name into the eyes, ears, and minds of consumers, it’s blown hundreds of millions of dollars of its marketing budget on sports partnerships. In June, 2021, FTX paid $135 million for renaming American Airlines Stadium to FTX Stadium for the next 19 years.

Then the exchange inked a deal with Major League Baseball to become its official brand partner, and put little FTX patches on the uniforms of the league’s empires, and then another, 10-year, $210 million deal to get esports team TSM to rename itself to TSM FTX. It’s the same for FTX’s subsidiaries, too. In April, 2021, Blockfolio, a price index app that FTX bought last year for $150 million, endorsed NFL player Trevor Lawrence. NFL star Tom Brady and supermodel Giselle Bunchen are among investors in the exchange.

Last Updated August 2, 2021

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