This article comes from last night's Twitter thread by @FatManTerra, discussing the latest developments regarding Three Arrows Capital.
Background on @FatManTerra: FatMan is from the Terra Research Forum, providing research, updates, and analysis on the situation of Terra.
Original post link: https://twitter.com/FatManTerra/thread/1539974901464895490
Su Zhu is now back in Singapore working with a law firm specializing in white-collar crime. He really doesn't want to go to prison, and creditors are after him. But how did he get to this point? Where did 3AC go wrong, and what should you do next?
Su Zhu has returned to Singapore and is currently consulting with a law firm that specializes in white-collar crime cases. He really doesn't want to go to jail, but creditors are chasing him. But how did he end up here? What went wrong with 3AC, and what should be done next?
1. The Degen Trade/The Gambler's Trade
3AC had a massive margin long on BTC with a liquidation price of around $24k. They kept this a secret, even from their partners, because they didn't think it would realistically go that low. Terra, LFG, and market conditions sent bitcoin plunging...
3AC had a huge margin on BTC, with a liquidation price of around $24,000. They kept it secret, even from their partners, as they believed BTC could never fall to this price. However, the previous situations with Terra, LFG, and market conditions caused Bitcoin to plummet...
* Note: Degen Trade - Degen is short for degenerate, commonly used to refer to gamblers or reckless traders. For example, people who trade BTC and ETH might call those buying other coins 'degen', while those trading altcoins might label high-risk project traders as 'degen'. In the crypto world, 'degen' is also often used self-deprecatingly.
2. The Margin Calls/Margin Calls
Counterparties tried contacting 3AC to ask for collateral, but they ghosted everyone. They were forced to liquidate 3AC's positions, causing BTC to drop further from $24k to $20k. This move kicked off a spiral of cascades & bank runs for several parties.
Counterparties tried to contact 3AC for collateral, but they deceived everyone. The counterparties were forced to liquidate 3AC's positions, causing BTC to drop further from $24,000 to $20,000. This triggered an intensified price decline and a bank run.
3. The Painful Losses/Painful Losses
After the first default (Hidden Road), losses were exacerbated. Genesis allegedly faces high-nine-figure losses and will sue. BlockFi and BitMEX had some exposure, but not much. Other minorly affected parties include Cumberland, Galaxy, and Deribit.
After the first default (the first being Hidden Road), losses were further exacerbated. Genesis is reportedly facing losses in the hundreds of millions and will file lawsuits. BlockFi and BitMEX had some exposure, but not much. Other parties affected to a lesser extent include Cumberland, Galaxy, and Deribit.
4. "I Can Fix Her..."/"I Can Fix Her..."
During the collapse, in a desperate bid for liquidity, 3AC solicited BTC from whales and trading firms. They lied about the fund's AUM, didn't disclose the degen long, and promised an estimated 20% yield on whatever they got. Most funds smelt a rat.
During the crash, in order to gain liquidity, 3AC solicited BTC from Bitcoin whales and trading firms. They lied about the fund's AUM, did not disclose their gambling behavior, and promised a guaranteed return of approximately 20% no matter what. Most funds began to suspect either 3AC’s tricks or their deceitful actions.
5. The Collateral Damage/ Collateral Damage
Smaller market makers allegedly used 3AC's trading accounts as a prime broker to get fee discounts. Some of these entities, like 8 Blocks Capital, have accused 3AC of stealing their funds without permission - amounts as low as $1m.
It is alleged that smaller market makers used 3AC’s trading accounts as prime brokers to enjoy trading fee discounts. Some of these entities, such as 8 Blocks Capital, accused 3AC of stealing funds within their accounts without permission — amounts as low as $1 million.
6. The Degen Loan/The Degenerate Gambler Loan
In one of the most degen loans of all time, Voyager lent around $700m to 3AC - undercollateralized. They used interest payments to provide retail-facing yield through their platform and skimmed a cut for themselves. Upon this revelation, VOYG fell over 50%.
In one of the most degenerate loans in history, Voyager lent approximately $700 million to 3AC without sufficient collateral. They used interest payments to fund retail yields on their platform and kept part of the profits for themselves. After this news broke, the price of VOYG dropped by over 50%.
7. The Damage Report/Loss Report
Most of 3AC's remaining assets are in the form of illiquid equity investments like Deribit and Starkware (their L1 tokens have crashed heavily), so this is just an estimate. Assets: $400m. Debts: $2b. Net worth: minus $1.6b. Absolute insanity.
Most of 3AC's remaining assets are illiquid equity investments like Deribit and Starkware (their L1 tokens have already crashed significantly), so this is just an estimate: Assets - $400 million, Debt - $2 billion, Net Worth - negative $1.6 billion. This is absolutely insane.
8. Their Next Move/Their Next Step
There will be lawsuits. There will be liquidations. Creditors will come for everything they possibly can. There's a fair chance 3AC did something illegal, especially in their final days. They will try to stay out of prison and resolve everything cleanly.
There will be litigation, there will be liquidation, creditors will try to get their money back. 3AC may have done illegal things, especially in these last days. They will try to avoid going to jail and clean up all the problems.
9. The Missing $1.6 Billion
Most creditors will never be paid because there simply isn't enough money to go around. Around $1.6b is gone - money that went to BTC miners who dumped their positions and large funds with open shorts (perhaps even a fund who is extending bailouts right now).
Most creditors will never be paid because there simply isn't enough money to go around. About $1.6 billion has disappeared, this money flowed to BTC miners, who liquidated their positions and a large amount of short-term capital (and may even be the fund that is expanding the bailout right now).
10. Withdraw to Hardware Wallets
In the face of this knowledge, what should you do? There is one crucial, actionable piece of advice. Pull all of your money out of centralized yield services like BlockFi, Voyager, and Nexo for the time being. It is not worth the risk. Withdraw it all into your Ledger.
In light of this knowledge, what should you do? There is one crucial, actionable piece of advice. Temporarily withdraw all funds from centralized asset management companies like BlockFi, Voyager, and Nexo. It's not worth the risk. Withdraw it all to your hardware wallet.
11. A large cut in interest rates
Bailout loans help with cashflow, but they don't get the money back. Additionally, these services will have to introduce heavy interest rate cuts due to market conditions and lower availability of lending counterparties, making the reward far less worth it.
Bailout loans help with cash flow, but they can't recover their funds. Besides, due to market conditions and the reduced availability of loan counterparts, these services will have to significantly cut interest rates, making the returns unworthy.
12. Wait for the dust to settle
This sort of contagion can ripple out for weeks and we still don't know who was affected and to what extent. The best part is, when the dust settles, you can always redeposit into your favourite platform without issue. Wait a month or two and see how everything plays out.
This contagion could last for weeks, and we still don't know who has been affected and to what extent. The best part is, when all the dust settles, you can always re-deposit on your favorite platforms without any issues. Wait a month or two and see how things play out.
13. Reduce risks
There is no reason to have money in these services right now, because their long-term viability is uncertain and you are gambling on solvency. You will potentially give up 0.5% in yield (or less, once they reduce rates), but you lower your risk massively.
There is no reason to keep money on these platforms now, as their long-term viability is uncertain and you're betting on their solvency. You might forfeit 0.5% yield (which could be even less once they cut rates), but you'd significantly reduce your risk.
14. Stay safe and stay vigilant
So - and I can't stress this enough - bring all of your coins into self-custody until yields stabilize and the situation is clear. This is a wise risk-adjusted decision given the scenario, and you can always come back later. Stay safe & stay vigilant!
So, I cannot stress this enough: self-custody all of your tokens until the dust settles and things become clearer. Given the circumstances, it's a prudent risk-adjusted decision to step back and come again later. Stay safe and stay vigilant!