Was FTX & FTT a Ponzi Scheme? What is a flywheel scheme?

How FTX & FTT WorkShow more

From https://coinmarketcap.com/currencies/ftx-token/

A year after its founding, FTX Exchange introduced the exchange token called FTX Token or FTT. The FTT coin is an ERC-20 standard token that is actively used by ecosystem participants.

Initially, FTT was established as a reward for exchange transactions; however, over the years the list of functions has grown:

FTT is applicable in the creation of leveraged tokens on the FTX Exchange; users can receive VIP discounts in the form of FTT depending on the number of coins they own, and it’s possible to earn rewards for providing liquidity through futures positions.

In order to maintain its value, the exchange regularly buys back and burns its tokens, spending on the purchase of FTX: 33% of trading fees, 10% of the reserve fund, and 5% of other commissions.

FTT Token use cases:

1/3 of the commissions received from transactions on FTX are utilized to buy back FTT. Tokens redeemed in this way are burned;
FTT tokens are used to reduce trading fees and to secure futures positions;
Profits from massive market movements are distributed among the holders;
By purchasing a white label version of FTX’s OTC portal and futures market, institutions and investors pay expenses in FTT tokens;
By creating leveraged tokens, projects can pay listing fees with FTT;
Users can stake FTT to benefit from discounts, bonus votes, and blockchain fee waivers.

One benefit of FTX Token (FTT) is commission discounts. Members pay a low fee and obtain tighter spreads. Traders use FTT as collateral, and those who are active on FTX Exchange see percentage differences of up to 60%. Traders get insurance protection, which ensures a net profit in moments of market volatility, then makes it possible to continue trading even without a margin call.

In addition to the fact that FTT is useful for opening positions with leverage, FTT staking also offers perks: discounts, the opportunity to win NFTs, participation in airdrops, bonus votes and IEO tickets.

The FTT token isn’t an equity, it’s more like credit card points or airmiles rewards. There’s no ownership stake or guaranteed returns, instead you get perks related to trading. However, unlike credit card points, FTT can be openly traded with others in the crypto market and FTX commits to using ⅓ of its commission revenue to buy back FTT. This causes FTT to act like a bet on FTX, the more trading that occurs on FTX the more FTT FTX will buy, presumably driving up the value of FTT.

SBF Description of Yield Farming

There is now an infamous interview from the Odd Lot’s podcast where SBF describes yield farming as essentially a ponzi scheme.

From: https://www.bloomberg.com/news/articles/2022-04-25/sam-bankman-fried-described-yield-farming-and-left-matt-levine-stunned

Was FTX/FTT A Flywheel Scheme?

From: https://dirtybubblemedia.substack.com/p/is-alameda-research-insolvent

The structure of a flywheel scheme is quite simple:

Create a token: Tokens are literally just bits of code on a blockchain. Program that sucker up and get rolling. Make sure you retain the majority of those tokens on your balance sheet for maximum flywheeling.
Pump the token’s price: Retain a “market maker.” Buy tokens using your customer’s assets. Wash trade it to infinity. Do whatever it takes to drive that price sky-high! And since you kept most of the tokens for yourself, there’s that many fewer tokens out there to pump.
Mark those babies to market: That’s right! Now you reap your rewards; at least, on paper. Now you can show billions of dollars in “assets” on your balance sheet.
Show off your success: Now’s the time to cash in. Hook some savvy investors (suckers), like pension funds, into massively overpaying for your equity or into making you big loans collateralized by your token.
Keep that flywheel spinning: Now you have real dollars. Buy yourself something nice, like stadium naming rights, politicians, or failed crypto companies. But don’t forget: If the flywheel stops spinning, you’re gonna have a bad time.