On November 11, 2022, the cryptocurrency exchange FTX collapsed, nine days after a copy of the balance sheet of its affiliated hedge fund, Alameda Research was leaked. Once it was revealed that Alameda and FTX were significantly intertwined, and that FTX was suffering from serious liquidity shortages, the exchange's customers rushed to withdraw their funds. Many found that they could not do so. Behind the scenes, Alameda had been hemorrhaging money on bad trades and using FTX customer funds to cover those losses. Sam Bankman-Fried resigned as CEO, and FTX filed for bankruptcy. A month later, he was arrested. Bankman-Fried faces 13 criminal counts, ranging from fraud to foreign bribery. The implosion of FTX was the most spectacular in a series of cryptocurrency industry collapses that started in the spring of 2022.
Modern cryptocurrencies emerged in 2009 with the launch of Bitcoin, the first consequential virtual currency to rely on blockchain technology. Blockchains are essentially databases; their distinguishing feature is that, instead of relying on a centralized authority to update them, they use some form of consensus mechanism to decide who gets to add transactions to the database. The consensus mechanism varies, but the most common two are proof-of-work (as used by Bitcoin) and proof-of-stake (as used by Ethereum). Proof-of-work relies on people known as "miners," who validate transactions. Proof-of-stake selects validators from a pool of people who own the relevant cryptocurrency. In both cases, chosen validators are compensated for their work, and although the validator could theoretically be anyone, in reality, economic incentives have led to extremely concentrated pools of validators.
From Foreign Affairs
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