How many times will Alameda Research liquidators get liquidated?

Since the November collapse of disgraced Sam Bankman-Fried’s crypto empire, liquidators have been attempting to consolidate the crypto holdings of both FTX and Alameda Research, with the aim of eventually returning some value to creditors.

FTX’s downfall was precipitated by a report of Alameda Research’s precarious balance sheet. The trading firm’s $8 billion in liabilities were propped up in considerable part by the exchange’s FTT token, which dropped more than 90% over the following days.

Despite the lack of risk mitigation procedures at Alameda, it appears that those in charge of liquidating the remaining assets may be just as gung-ho as the previous leadership.

Read more: From Alameda chief to bankrupting FTX, meet Caroline Ellison

On-chain evidence of repeated errors paints a worrying picture for those hoping to one day recoup some of their funds.

Alameda was deep into DeFi

As well as trading against FTX customers on the exchange (while itself exempt from risk of liquidation), Alameda Research was deep into DeFi, trading, borrowing, and farming tokens across the sector.

Over the past weeks, the withdrawal of funds from lending platform Aave has resulted in repeated liquidations of Alameda’s wBTC (bitcoin ‘wrapped’ for use on the Ethereum network) collateral. This was used to borrow CRV, the governance token of decentralized exchange Curve Finance.

DeFi lending requires over-collateralization. The value of assets supplied as collateral must be more than that of borrowed assets in order to maintain the position’s collateralization ratio (CR). If the position’s CR drops, the position’s collateral may be liquidated in order to pay back borrowed funds. This process is generally conducted by liquidation bots that generate profit in the process.

While consolidating funds into a single address — which has so far accumulated crypto worth a total of $174 million — an Alameda-labelled wallet made a withdrawal of 11.4 wBTC (worth $190,000 at the time) from Aave on December 29, putting the position into risky territory.

Over subsequent weeks, as the price of CRV rose against BTC, the position became eligible for liquidation multiple times. Specifically, this happened on December 31 (for 2.6 wBTC), January 9 (1.5 wBTC), and January 13 (0.8 BTC), losing a total of 4.9 BTC. This is over $100,000 at current prices.

Read more: Documents reveal Alameda Research bought FTX stake from Binance

If the CRV had been repaid first (the consolidation address contains 68k CRV, more than enough to repay the 20k CRV loan) the entire wBTC collateral could have been withdrawn without the risk of losing funds.

Such a basic error inspires little confidence in those who should be working to return as much as possible to creditors. Unfortunately, other on-chain movements spotted over recent weeks show a similar pattern.

Liquidators should focus on risky positions not dust

In accumulating small quantities of various crypto assets (known as dust), liquidators have been spending far more on gas fees than the dust is worth. A January 6 transaction moving less than a cent’s worth of staked ETH cost the Alameda 2 address $1.43 in gas, as The Block’s Eden Au pointed out on Twitter:

Not the best bang for the creditors’ buck. Maybe the liquidators should focus on closing risky positions before sweeping up dust.

Additionally, on December 27, a number of Alameda-linked addresses suddenly sent a total of $1.7 million worth of crypto to exchanges ChangeNow and FixedFloat. Given their lack of KYC, these are favorites among hackers to mix stolen funds, and the transfers may represent a rogue employee or a security breach in Alameda wallets.

Nobody is expecting the liquidators to make it back in one trade, but it hurts to see on-chain evidence of them losing funds that could later be returned to creditors.

While the amounts lost so far are a drop in the ocean compared to Alameda’s multibillion-dollar shortfall, hiring an experienced DeFi consultant may avert further losses in unraveling Alameda’s chaotic web of investments.