FTX implodes

In a matter of days in November 2022, FTX — a top-two exchange with a celebrity founder and ubiquitous branding — went from titan to bankruptcy. Customer deposits had been funneled to its trading arm, Alameda, and weren't there when everyone asked for them at once.

A custody failure, not a crypto failure

Nothing about Ethereum or Bitcoin broke. What broke was a centralized custodian doing what centralized custodians can do: spend balances it told users were theirs. The chains kept producing blocks the entire time.

Not your keys, not your coins — overnight it stopped being a slogan and became an operating principle.

How it actually unraveled

The trigger was a leaked balance sheet showing how much of Alameda's "assets" were FTX's own FTT token — a circular bet. A rival exchange announced it would dump its FTT; confidence cracked; users rushed for the exits. There was no run-proof reserve, because the deposits had been lent to Alameda. Within days, withdrawals froze and FTX filed for bankruptcy.

users deposit ──→ FTX ──(quietly lends)──→ Alameda
                                       │ posts FTT as "collateral"
                                       ↓
        FTT price falls ──→ collateral evaporates ──→ no reserves
        users withdraw ──→ nothing there ──→ freeze

Proof-of-reserves, and its limits

The reflex fix was proof-of-reserves: exchanges publishing cryptographic attestations of the assets they hold. Useful — but it only shows *assets*, not *liabilities*. An exchange can prove it holds a billion dollars while owing two. Real assurance needs both sides, audited. The deeper lesson didn't need an auditor: an asset you don't hold the keys to is a promise, not a balance.

The fallout pushed real interest into self-custody, proof-of-reserves, and trust-minimized, onchain alternatives to centralized intermediaries — escrow, settlement, exchange. (It's the backdrop against which I built a decentralized escrow the same month.)