Centralized Exchange Blowups Have Limited Impact on DeFi

Prices of FTX-linked cryptoassets like solana (SOL) have tanked, but not all is doom and gloom for DeFi protocols

article-image

Decentralized; Blockworks exclusive art by Axel Rangel

share

As Binance mulls an acquisition of FTX, the harrowing events surrounding the potential bailout of Sam Bankman-Fried’s exchange by rival CEO Changpeng (CZ) Zhao has dampened sentiment within the crypto community. But there’s a bright spot: DeFi exchange volumes are surging.

Customers of FTX.com don’t yet know if or when they will have access to their funds, and prices of cryptoassets across the board have broken down to new yearly lows.

Alameda Research, the Bankman-Fried founded trading firm has deleted its website, adding to the dour outlook.

In an interview with Blockworks, Bobby Ong, COO and co-founder of CoinGecko said that the industry is still in the process of determining what the exposure of decentralized finance (DeFi) protocols to Alameda Research may be.

It is still uncertain if we are looking at another Three Arrows Capital (3AC) situation, where firms will have to liquidate significant positions, likely at a loss, in a frenzied scramble for liquidity, he said.

“Just as we have seen from the 3AC fall-out, these liquidations may also have spillover effects on other tokens — for example, the price of solana (SOL) has already suffered in the last few days,” Ong said.

The Solana connection

Bankman-Fried was an early investor in Solana, and had been some of the biggest investors for projects in the ecosystem. At the time of writing, the price of SOL sits at $14.30, down about 40% from the day before.

Loading Tweet..

According to Blockworks research analyst Dan Smith, the tanking prices of Solana are only just the beginning.

“More pain is on the horizon as 57.6 [million] SOL will unstake and become fully liquid at roughly 3AM ET. $675 million SOL leaving the network impairs both the SOL price and the network security. For those looking to sell, there will be a race to exit these positions,” Smith said.

Smith added, “the cost of corruption, or the amount of dollars needed to take control of a PoS network, also takes a material hit.”

Traders turn to DeFi exchanges

There is, however, a silver lining to all the unfolding chaos. 

Ryan Rasmussen, a crypto research analyst at Bitwise told Blockworks, “Regardless of where the unwinding ends, it’s the same takeaway as it was back then: DeFi is more robust, transparent, and scalable than CeFi.”

“While the impact of FTX’s insolvency and the sell-off we are seeing today will prolong the bear market, at least events like this spotlight the trade-offs that users make when they choose centralized services over decentralized ones,” he said.

“It’s a harsh — and expensive — lesson, but it’s essential. That’s a long-term positive for DeFi,” Rasmussen said.

This sentiment is shared by Calanthia Mei, co-founder of Masa Finance, a decentralized identity protocol. Mei told Blockworks that ultimately, the events that have transpired have really shown the importance of transparency.

The turmoil in centralized exchanges has reinforced the crypto ethos of “not your keys, not your coins” and sent traders to seek out decentralized alternatives like Uniswap.

Loading Tweet..

Bankman-Fried has previously touted the transparency of his exchange in testimony before the US House of Representatives, and specifically praised FTX’s “24/7 risk engine,” which supposedly represented an improvement over traditional finance.

“If you think about how the entire drama unfolded, it’s about the murky relationship between FTX and Alameda Research in the first place,” Mei said. “I am confident that DeFi protocols — that are mostly collateralized — will be able to retrieve money from Alameda.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

kamino cover.jpg

Research

Kamino has solidified its position as the leading money market on Solana and is emerging as a DeFi bluechip. Although DeFi competition is fierce, Kamino has kept iterating on its product to provide the best-in-class UX, paired with a robust risk management framework and battle-tested infrastructure. Given the rollout of Kamino Lend V2, the protocol may scale aggressively over the coming months, penetrating previously untapped markets in Solana DeFi.

article-image

Also in the tokenized fund space, Franklin Templeton launches on Base and Securitize hits $1 billion in tokenized RWA onchain

article-image

It turns out that bitcoin never actually hit an all-time high in March. Thanks a lot, inflation.

article-image

Spire, Citrea and Nillion also announced raises this week

article-image

The latest recipient of an SEC Wells notice is a Web3 gaming company

article-image

Thursday’s selloff was led by tech stocks, triggered by disappointing outlooks from giants Meta and Microsoft

article-image

Historically, positive returns have been a bit more of a toss-up during the year’s 11th month