The puzzle of Three Arrows Capital

Three Arrows Capital is at the center of a mystery, and rumors are rife.

On June 15, Zhu Su, founder of Three Arrows Capital, tweeted that we are communicating with relevant parties and are committed to resolving the issue.

What is the problem being solved?

The block said that Three Arrows Capital’s total liquidation amount on lending platforms such as Deribit and BlockFi is as high as $400 million. Currently, Three Arrows Capital is handling its relationship with lenders and other counterparties.

As the news spread, information came from multiple sources.

1. In the past 24 hours, StarryNight, an NFT fund backed by Three Arrows Capital, has cleared all of its 70 collections on the SuperRare platform. Since August last year, the fund has spent more than $21 million to purchase these NFTs.

2. The wallet marked as Three Arrows Capital (3AC) on Nansen has been actively repaying AAVE debts to avoid the liquidation of its 223,000 ETH, about $264 million, position. This wallet borrowed $198 million, with a pledge rate of 85%, and ETH would be liquidated if it fell 11% to $1,042.

3. The above liquidation price is currently $1,016.

4. Three Arrows Capital once used $559.6 million to purchase 10.9 million $LUNC, and then locked and pledged these 10.9 million $LUNC on the nodes to earn interest. Now 10.9 million $LUNC is worth $660.

5. Three Arrows Capital has been selling coins and has sold nearly 8,000 ETH in the past half hour.

6. According to Bitfinex data, Three Arrows Capital ranked second in the monthly loss ranking on Bitfinex in May, with a total loss of US$31.37 million.

These scattered messages from multiple sources have led to another speculation on Twitter: Is Three Arrows Capital going to go bankrupt?

Three Arrows Capital was one of the most active capitals in the past bull market. It participated in the Luna Foundation LFG and endorsed the Terra system with BTC reserves. It also built a large position in ETH in the past six months and also tried its best to sing the praises of multiple "Ethereum challengers."

As the market continues to decline, these actions are exacerbating outside speculation about Sanjian’s situation.

Based on multiple information sources, the key asset losses of Three Arrows Capital are due to GBTC, stETH and Luna.

According to public information, as of the end of 2020, Three Arrows Capital was the largest holder of Grayscale GBTC, holding 5.6168% of GBTC shares, and these positions were severely reduced due to the decline in currency prices and decoupling.

stETH is "unpegging" recently. The circular lending model coupled with liquidity shortage has caused stETH to be exchanged for ETH, which is depreciating. On-chain data shows that Sanjian is selling stETH through every account and seed round investment address it owns.

LUNA (LUNC) saw its original investment of US$559.6 million shrunk to US$660.

As for other "Ethereum challengers" that it once praised, such as Avalanche and Polkadot, they have experienced a halving in the past two months.

In summary, the mystery of Three Arrows Capital is ongoing, and the degree of market stability may still deal a fatal blow to Three Arrows.

Yesterday, ETH fell to $1,070, but it did not yet cause the liquidation price of Three Arrows Capital in AAVE mentioned above.

In today’s secondary market, the prices of BTC and ETH are already in jeopardy. In a panic, a price drop or a quick plunge may liquidate these loan assets.

Zhu Su, founder of Three Arrows Capital, has now simplified his Twitter signature, removed the projects he is bullish on, and deleted his Instagram content, which has added more doubts to the outside world.

If we leave out these details and only look at market changes, we have to say that when the currency price is in a downward range, the industry is deleveraged by falling prices.

In the cryptocurrency world, liquidity is established by a small number of assets in high-frequency trading, and leverage is inevitable. The benefits provided by Defi such as lending are also constantly increasing the leverage ratio. These leverages show high returns in the process of currency price rising, while in the process of currency price falling, lending may reach the liquidation price, and there will be a chain effect after liquidation. In the end, an asset with several times the value may not retain 50% of its original value after liquidation.

When capital that has been heavily invested in an upward or stable trend begins to face downward and chain reactions, this may be the situation that Three Arrows Capital is facing now.

One can only hope that the Three Arrows will be fine in the end, because if the Three Arrows cannot hold up, it will inevitably have a short-term impact on the market and unpredictable long-term impact.