Conversation with Defiance Partners: How Did the FTX Collapse Impact Crypto VC?
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Conversation with Defiance Partners: How Did the FTX Collapse Impact Crypto VC?
"The Solana ecosystem should be able to survive, but it's uncertain whether it can restore user activity and market capitalization to their peak levels."
Navigating Web3 tides with focused insightsWritten by: Revelo Intel
Compiled by: TechFlow
In this episode of the Empire podcast, Arthur, CEO of Defiance Capital, joined hosts Jason and Santi from Blockworks to discuss FTX's collapse and its impact on the industry.
Below are key takeaways from the podcast:
How did Defiance perform?
Arthur: This has been the toughest six months I’ve ever experienced. The 3AC incident in June prepared Defiance well for crisis and risk management.
Defiance primarily used Binance and FTX, and was relatively unaffected by the FTX incident.
Due to recent market conditions, all of Defiance’s funds have been moved from CEXs to wallets.
Defiance also conducts OTC trades with firms like Galaxy.
How did FTX dominate in Singapore?
Arthur: Local cryptocurrency exchanges only offer spot trading services.
FTX had a seamless UI, better liquidity, and offered perpetual futures trading.
Binance stopped serving Singapore in 2021. MAS (Monetary Authority of Singapore) placed Binance on its investor warning list. Despite offering similar services as Binance and being headquartered offshore, FTX was not included on the investor warning list.
Singapore’s sovereign wealth fund, Temasek, led a recent funding round for FTX. The government appeared to tacitly support FTX, given its absence from the warning list and Temasek’s involvement.
With Binance unable to operate, FTX naturally became the second choice.
Jason: People were aware of Alameda’s preferential trading, but continued using FTX due to tight spreads.
Arthur: Not really—Alameda wasn’t FTX’s largest market maker after its first year; other market makers such as Wintermute were involved. One of FTX’s biggest innovations was cross-margining.
Did Defiance consider investing in FTX?
Arthur: We only researched FTT trading back in 2019. We rejected the trade because Arthur didn’t believe a new exchange could compete with an established one.
We never looked at equity deals.
Due diligence during bull markets
Arthur: We were affected by the pace of market changes.
Between Q4 2021 and Q2 2022, Defiance made 5 to 7 deals per month, which exceeded expectations.
With widespread optimism across ecosystems and verticals, it was natural to become more aggressive in investing.
Less time and resources were spent on due diligence.
Defiance still conducted thorough due diligence, but in some cases didn’t allocate sufficient time.
Generally, less investigative work is done during bull markets.
The ripple effects of FTX
Arthur: This will lead to a significant drop in liquidity and may cause some projects to lose substantial funds.
According to recent updates, fewer than five projects in Defiance’s portfolio were impacted by the FTX collapse. Two of these companies had significant funds on FTX. More may be affected, but haven’t reported yet.
More than half of the companies in Defiance’s portfolio should be fine.
If including venture funds, the proportion affected by FTX isn’t high. Over the past 12–24 months, most new funds were venture funds, which likely weren’t severely impacted by FTX.
Liquidity funds, especially those running active arbitrage and delta-neutral strategies, were most vulnerable to FTX’s collapse because they needed to keep capital on exchanges.
Did Arthur see warning signs?
Arthur: Alameda had two accounts on BitMEX’s P&L leaderboard, giving them legitimacy.
People believed Alameda were excellent traders.
We were cautious about FTX/SBF creating new tokens on Solana with high fully diluted valuations (FDV) and long vesting periods. We viewed this as predatory and poor business practice—but not fraud.
We never expected them to commingle user funds, given FTX’s reportedly high profitability.
Was SBF always this bad?
Arthur: I think SBF may have used effective altruism principles to justify his actions. In early 2021, SBF actively pursued low-floating, high-FDV tokens and saw no issue with it.
Being celebrated and welcomed in political circles made him believe he couldn’t do wrong. I think this is similar to other firms like 3AC and Celsius that scaled too quickly.
Jason: I think this behavior has been going on for years. SBF wanted people to believe Alameda was a neutral firm rather than a directional fund, but their portfolio management was poor.
Why did CZ wait?
Arthur: I don’t think CZ knew about FTX’s commingling of user funds. CZ simply sensed that Alameda’s balance sheet was fragile.
Binance Labs is typically a long-term investor and rarely sells its investments, yet it wrote off its investment in Luna.
Binance earned so much money that it didn’t bother exiting most investments.
Binance’s investments gave it leverage against FTX and SBF; once sold, that leverage would disappear.
Damage to the Solana ecosystem
Arthur: The community is trying to fork Serum because the private keys are held by an FTX employee. FTX marketed their Solana projects to investors to raise funds quickly.
I think it will take a very long time for the Solana ecosystem to recover. It should survive, but it’s uncertain whether it can restore user activity and market cap to previous highs.
Santi: Agrees with Arthur—there are strong builders on Solana.
Arthur: FTX held 6–8% of Solana tokens. Due to uncertainty over how bankruptcy proceedings will handle these holdings, Solana faces significant sell-side pressure over the next 12 months.
The liquidation process
Arthur: I believe this will be the most complex liquidation process in history, as numerous creditors are spread across different jurisdictions. At least 5–10 major countries’ courts must recognize the liquidation before execution can proceed.
Since FTX did not file for bankruptcy protection and hasn’t declared bankruptcy, the possibility of restructuring, repaying creditors, and continuing operations is minimal.
The brand is tainted—it’s impossible to continue operating.
FTX Trading was an Antigua-based entity, and FTX Digital Markets was headquartered in the Bahamas. He questioned why FTX, including FTX International, filed for bankruptcy protection in a way that bypassed Antigua and the Bahamas’ jurisdictions.
Impact on token deals
Arthur: Under current U.S. regulations, the standard practice is to bundle token deals with equity.
Pure token deals will be unpopular unless projects and teams are built in a decentralized manner from day one.
Most future deals will continue to be equity + token warrant structures.
Public vs. private markets
Arthur: Defiance’s new fund will be a liquid risk fund.
There are many opportunities in public markets worth dedicating time to.
Liquid funds can manage market risk better than venture funds.
Santi: Crypto venture funds need active management; otherwise, there’s huge potential for bad deals. Public markets are attractive, but currently the risk-reward ratio isn’t sufficient.
Takeaways
Arthur: Bad actors are given more opportunities than good ones.
It’s much easier to rise quickly in crypto if you’re willing to cut corners.
There need to be checks in place to mitigate such behavior and stop bad actors early.
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