Rumors are swirling about the possible insolvency of Three Arrows Capital. Once a major crypto hedge fund managing an estimated $10 billion in assets, it’s now “in the process of communicating with relevant parties and fully committed to working this out,” according to a vague tweet by co-founder Zhu Su on Wednesday.
Three Arrows Capital was a significant investor in the now-collapsed Terra LUNA ecosystem last month. It owned large amounts of LUNA ⏤ now nearly worthless. It also had financial dealings with Celsius, which paused withdrawals on Monday to avoid its own possible insolvency.
Three Arrows was also identified as a significant customer of controversial ‘stablecoin’ Tether, which has a history of de-pegging from the US dollar. Protos found the Bitfinex subsidiary has sent the hedge fund at least $674 million in USDT directly from Tether’s treasuries. The total amount handled is far more.
Three Arrows Capital is not responding to media inquiries.
The hedge fund was also a major participant in Ethereum 2 liquid staking schemes. As explained by Protos, Ethereum 2 is risky, leveraged, and centralized. Due to the financial incentive to stake ETH with a liquid staking service provider, ETH derivatives risk destabilizing Ethereum-based financial contracts.
Three Arrows Capital’s exposure to Ethereum 2 is especially risky
Ethereum 2’s largest liquid staking service provider, Lido, issues a supposedly ETH-pegged token, stETH. Three Arrows Capital had significant exposure to this peg, which has now broken by -5%. If this breaks down further, it could cause liquidations across decentralized finance (DeFi) and further impair Three Arrows Capital.
On June 10, co-founder Zhu Su shared a reassuring tweet by early Ethereum investor Konstantin Lomashuk. He said that “stETH is working exactly as it should stETH issued by Lido is backed 1 to 1 ETH.”
Just two days later, on June 13 at 9:45pm New York time, the stETH-ETH peg traded as low as 0.91 to 1.
At press time, one stETH was worth just 0.942 ETH. The two assets are supposed to be equally interchangeable. Su’s fellow co-founder, Kyle Davies, has not commented publicly for six days.