Three Arrows Capital may become another victim of stETH depeg

The recent crypto tumble is a gift that keeps on giving. After turning CE into yesterday’s news, it seems like another billion-dollar hedge fund company, Three Arrows Capital, might soon declare bankruptcy.

What is Three Arrows Capital, and why might it be facing insolvency?

Three Arrows Capital (3AC) is a crypto-focused hedge fund company based in Singapore. Merely a year old, 3AC saw a massive uptick during the golden years of the crypto market (last year).

3AC is known as THE FIRM within the crypto ecosystem, having backed projects such as Solana, Avalanche, and Terra. Being one of the biggest corporations to be active in the NFT space, 3AC also launched a $100 million fund last year to invest in the most famous artworks of that time.

However, if the reports are to be believed, the company is going through a rough patch, putting it on the path to insolvency.

DeFi is a double-edged sword. It gives a transparent way to interact with the economy, but no one can’t hide anything.

It is what has happened to 3AC. A crypto trader going by the name of Moon Overlord shared a screenshot of Twitter from Nansen, a blockchain data platform.

The image showed a crypto wallet of 3AC that conducted five massive transactions over the past week worth 30,000 ETH. At that time of the writing, that was worth $36.9 million (approx).

people think Celsius is the biggest stETH dumper but its 3AC and it isnt relatively close, they are dumping on every account and seed round address they have, most looks like its going to payback debts and outstanding borrows they have pic.twitter.com/9bZnmTXQzj

— moon (@MoonOverlord) June 14, 2022

This Tweet quickly started to spread around, making it look like 3AC is selling huge assets, including $40 million worth of stETH.

Crypto watchers didn’t keep quiet after observing these trends and are now saying that the Three Arrows Capital is doing these transactions as a last-ditch effort to keep the $35 million compound loan and $264 million Aave loan from going into liquidation.

Part of the reason investors are so paranoid is that just a couple of days ago, Celsius Network, one of the biggest purveyors of DeFi, ran into liquidity issues and froze all withdrawals.

How will the investors be affected?

Three Arrows Capital is a hedge fund, meaning that the liquidity pools it heads rely on investors’ deposits. If the rumors are true and the company is, in fact, struggling to maintain the strength of the liquidation pool, it rings warning signs for investors.

stETH De-Depeg – The Catalyst of the latest crypto crash

After the delay of Ethereum’s difficulty bomb, trust began to vain Lido finance’s stETH, a staked Ethereum that promises to equal ETH in value after the full launch of Ethereum 2.0.

But the upgrade isn’t the only thing to blame. After the biggest crypto crash of this year got orchestrated by Terra, the general sentiment of the crypto market entered a massive bear phase. It caused stETH to de-peg from ETH and led to a big stETH sell-off, further depreciating the value.

Although the token has almost regained its value with ETH, the recent Celsius debacle has further reduced any confidence it could give to the market.

There is no need to Panic: Su Zhu

After the apparent FUD started to circle around the social media, 3AC’s co-founder, Su-Zhu, got on Twitter and said that he and his team are fully committing to working this out.

“It’s not like 3AC is saying, ‘Hey, that’s definitely my address.’”, Eden Network’s Caleb Sheridan said.

But the company doesn’t deny that it is their address either. And the Tweet alarmed the community further because they didn’t deny the past stETH dumping they did.

On-Chain Wizard, another crypto analyst, has said that if Ethereum drops below the $1.2k test level and reaches $1047, 3AC would have no choice. But to liquidate the loan.

What if the loans get Liquidated?

If (or when) the worse comes, and the price of ETH drops further, 3AC would have to liquidate or sell the loans. In that situation, whoever sells the bit on collateral first would be eligible for a 5% bounty, paying 5% less for Ethereum.

And since ETH is in free fall, the winner must swap it for crypto that’s not going through market fluctuations, like USDC.

What should the investors do?

The current bearish wave of the market is enough to make people think twice about investing in the crypto market. However, we recommend that users pay heed to the trends. There are some altcoins that have seen a rapid upsurge in this market that might see a more profitable future.

The only way to survive in the current scenario is to stay updated about the changes the minute they come to the surface. Inside bitcoins is on the front lines to help investors make prudent investment decisions during these trying times. Stay tuned for more updates.

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