FTX is a cryptoasset derivatives exchange, powered by a proprietary liquidation engine and clawback prevention protocol, offering futures, leveraged tokens and an over-the-counter trading portal. An ERC-20 token, FTX Token (FTT), serves as the exchange’s native asset, with ownership thereof conferring a series of monetary incentives including rebates and a system-wide buyback-and-burn program. The project seeks to provide an institutional-grade derivatives trading platform and match the profitability of competitors BitMEX and OKEx through enhancement of its exchange as well as its derivative products themselves. FTX is operated by Alameda Research, a quantitative cryptoasset trading firm and purportedly the largest liquidity provider and market maker for digital assets, with its daily trades comprising nearly 5% of global volume. Both FTX and Alameda are led by CEO Sam Bankman-Fried, a former trader on Jane Street Capital’s ETF desk holding a degree in physics from MIT, and CTO Gary Wang, a former Google engineer with a degree in computer science, also from MIT.
Derivative Product Details
FTX’s flagship products are its non-inverted (i.e. BTC/USD rather than USD/BTC), quarterly and perpetual cryptoasset futures, and the defining features thereof are a three-tiered clawback prevention mechanism, a centralized collateral pool, and universal stablecoin settlement. Socialized losses and clawbacks occur when markets move decidedly counter to large leveraged future positions such that the account holding them has a substantially negative net asset value; because the censorship resistance of blockchains make it impossible to repossess assets held outside of a given exhange by the operator of a bankrupt account, the exchange must subsidize its losses by repossessing profits from other accounts’ reciprocal future positions. While many exchanges maintain an insurance fund to reduce the need for such socialized clawbacks, outsized losses from exchanges’ typically low maintenance margins and poor liquidity often overwhelm these funds’ abilities to adequately compensate unilaterally. Further, coverage from insurance funds fail to resolve the position and, thus, prevent future losses should market trends continue.
In contrast, FTX’s liquidation engine intends to reduce the likelihood of clawbacks becoming necessary through three distinct steps. First, in the event a future position falls below its maintenance margin, FTX begins sending volume-limited liquidation orders regardless of the asset’s current market price to close down the position. Should this action fail to adequately resolve the position prior to bankruptcy, FTX’s ‘backstop liquidity provider’ system calls for consenting accounts to internalize the position and assume responsibility for its collateralization; the operators thereof then hedge their books via other exchanges, effectively transferring external liquidity to FTX’s ecosystem and removing the position’s toxicity from FTX’s books. Finally, if all else fails, FTX intends to compensate for excess losses through an insurance fund and, when necessary, minor socialized clawbacks.
Additional problems also arise in cryptoasset derivative exchanges from inefficient collateralization procedures. Often, collateral must be posted in separate margin accounts for separate positions and the collateralizing asset must match that underlying derivative contract. The result is an unnecessarily byzantine web of accounts and the counterintuitive requirement that one must directly hold the asset one intends to short. To address these hindrances, FTX adopts the collateralization protocol of traditional futures markets in which collateral for multiple positions may be denominated in a single currency and held in one central margin wallet. While addressing the aforementioned issues, this protocol also eases the rearrangement of collateral amongst an account’s varying positions to account for market movements, favorable or unfavorable. Currently, FTX accepts USDC and TUSD stablecoins, with whom it has established partnerships, as universal collateralizing assets. As such, traders experience USD price exposure and settlement without needing to attach a traditional bank account. Maker and taker fees of two and seven basis points, respectively, are levied on derivatives trades, though these are waived for ‘VIPs’ holding a certain number of FTX Tokens.
Further, FTX’s derivatives offerings extend beyond futures to leveraged tokens. These ERC-20 tokens, collectively referred to as ‘HEDGE,’ offer the ability to short assets or assume leveraged positions on spot exchanges rather than trade on margin through derivatives exchanges, dramatically simplifying the process for less experienced retail traders. Conversely, spot exchanges may now provide customers with inverse price action and leverage positions without the need for native margin trading protocols or liquidation engines. Current HEDGE offerings include 3x, -1x, and -3x leverage tokens for assets including BTC, ETH and XRP. FTX charges creation and redemption fees of 10 basis points and daily management fees of 3 basis points for leveraged tokens.
OTC Portal Details
FTX’s embedded OTC trading desk, which runs on Alameda Research’s liquidity pool, offers trading with zero fees and purportedly competitively tight spreads in which the counterparty is always FTX itself. The 24/7 portal offers instant quotes on over 20 cryptoassets, facilitating over $30M in daily transaction volume. Additionally, FTX OTC offers an API through which quotes can be generated within third-party software and applications.
FTX Trading was founded in 2018 as an offshoot of Alameda Research, which itself was founded the year prior. Following three private token sale rounds and $8M equity funding round led by Proof of Capital, FTX’s exchange platform launched in July of 2019 and remains live at present. FTT’s buyback-and-burn mechanism was implemented at the time of the platform’s launch, as well. Notably, FTX’s OTC portal existed prior to the exchange’s launch as Alameda Research’s OTC trading desk. In November of 2019, Bitcoin Manipulation Abatement LLC sued FTX for alleged market manipulation, seeking $150M in damages under the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The case, which accused FTX of flooding the market with BTC in order to cause artificial price movements, was dismissed by a judge the following month. In December of 2019, FTX received an undisclosed, eight-figure investment from Balance in exchange for a minority equity stake in the firm.
In February of 2020, FTX began offering futures contracts based on President Donald Trump's reelection, as well as the election of several other presidential candidates, in 2020.
The FTX Token (FTT) is FTX’s native, fungible cryptoasset. An ERC-20-compliant token, FTT is freely-tradable both within and outside of FTX’s ecosystem. While FTT’s current utility within FTX’s ecosystem is limited to collateralizing futures positions (as can be done with USDC and TUSD), its ownership confers several potential monetary benefits including discounts on trading fees and rebates for OTC trades. Further, FTT utilizes a buyback-and-burn mechanism popular amongst exchange tokens, using one-third of all derivatives trading fees, 10% of net additions to the FTX insurance fund, and a volume-dependent portion of OTC trading revenue to do so until at least half of the total supply of thirty-five million tokens are burned— burning occurs every Monday. Of the maximum thirty-five million FTX tokens, 175,000,000 were designated as treasury tokens, allocated to various company funds and founder rewards. Another 59.3 million FTX Tokens were sold in three private token sale rounds for a total of $9.5 million prior to launch in 2019. Remaining FTT were slated for airdrops and sale on FTX OTC and other exchanges at $1 each—though with varying discounts—raising an undisclosed sum.