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DeFi landscape leads to loss in FTX restructuring

DeFi landscape leads to loss in FTX restructuring

Image source: ET BFSI

DeFi: DeFi, or Decentralized Finance, refers to a set of financial services and applications that are built on top of blockchain technology.

It operates independently of traditional financial intermediaries such as banks.

The goal of DeFi is to create a more open, transparent, and accessible financial system.

In the DeFi space, “restructuring and recovering funds” refers to the process of addressing issues or failures in decentralized finance protocols, and finding a solution to regain access to locked or lost funds.

This can happen due to a variety of reasons such as smart contract bugs, hacking, or mismanagement by the protocol’s development team.

A team in charge of restructuring FTX and Alameda Research recently ran into some problems.

The news

The restructuring team tasked with locating and recovering customer funds in the FTX and Alameda Research bankruptcy process are going through some trouble.

The team navigated the DeFi space to move funds into the Alameda multi-sig wallet.

According to blockchain intelligence firm Arkham Intelligence, the team lost 4 Aave Wrapped BTC worth over $72,000 while trying to move funds to an Alameda multi-sig wallet.

The head of Arkham operations Zachary lerangis said it would be better to bring in an expert.

“The liquidators would benefit from having a DeFi expert to advise on the mechanics of closing Alameda DeFi positions and retrieving as much money as possible,” said Lerangis.

What happened

Aave is a decentralized lending and borrowing protocol built on the Ethereum blockchain, which allows users to lend and borrow a variety of cryptocurrencies, including Ethereum and stablecoins.

Users can lend their assets to the protocol and earn interest on them, while other users can borrow assets from the protocol and pay interest on them.

Aave uses a unique lending model called “flash loans” which allows users to borrow funds for a single transaction, and then immediately repay the loan, making it useful for high-frequency trading and other short-term strategies. 

It also requires loans to be overcollateralized.

Once the loans are repaid, borrowers can unlock their collateral.

However, Alameda liquidators were unaware of the system.

The Arkham team wrote a report, saying:

“Rather than paying back the debt to close out the position, the liquidators opted to remove the extra collateral, putting the position in danger of liquidation.”

“This resulted in the liquidation of around 4 WBTC, $72K at current prices.”

The team also went through nine attempts to move $1.75 million worth of Lido (LDO) tokens that were still vesting.

Read also: FTX recoups frozen funds, but not all of it

Wallets

Arkham reports that there is another Alameda wallet which sent $0.60 worth of DAI stablecoin and $0.02 COLLAR token to the multi-sig.

However, the wallet still has $1.5 million worth of funds waiting to be moved.

According to Arkham, the identified wallets have at least $25 million worth of Alameda funds in the DeFi protocols, including $6 million USDC – the stablecoin from Circle.

The funds are also being used to secure a $2 million NEAR loan on the Bastion Protocol.

In addition, there are funds retained on other chains.

One Alameda wallet has a $300 balance remaining on Etherscan, while Aurora holds a larger $4.4 million worth of ETH.

The fallen kingdom

In November, the once prominent crypto exchange platform FTX collapsed.

Bank runs prompted the company to confess that it no longer held one-to-one reserves of customer assets, freezing platform movement, and filing for bankruptcy.

Since then, Sam Bankman-Fried, the FTX and Alameda founder, has been arrested.

He is now charged with eight crimes in finances, including wire fraud and conspiracy to commit money laundering.

According to authorities, FTX customer funds were being funneled to Alameda for various purposes, including trading and investments.

As a result, the company lost billions of dollars.

Other notes

This week, the FTX restructuring team managed to locate $5 billion worth of assets.

FTX’s new CEO John Ray III admitted at the start of the bankruptcy process that liquidators were unaware of how much money it had or how they could access it.

After the bankruptcy protection in November, suspicious transactions persisted.

ZachXBT found Alameda wallets swapping obscure tokens for Bitcoin and Ethereum via mixers, which obscured transactions.

Reference:

FTX liquidators lost $74K in wrapped Bitcoin in ‘embarrassing on-chain faux pas’

Opinions expressed by Coin Week contributors are their own.

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