By Donavan Choy of Bankless
Three Arrows Capital Contagion, Act III
The dominoes continue to fall from 3AC’s collapse.
The fund was ordered into liquidation by a British Virgin Island court after failure to repay debts.
Singapore’s central bank MAS — where 3AC was previously headquartered — then stated that the fund willfully submitted false information on its balance sheets, and exceeded its allowed assets under management for several months.
The collateral damage from 3AC’s implosion has spilled over into other crypto companies, namely Voyager Digital and BlockFi.
Last week, Voyager halted withdrawals on its platform. This week saw Voyager issuing 3AC a default notice after the latter failed to make payments on a $670M loan.
Meanwhile, SBF’s Alameda Ventures stepped in with a $500M loan package to save Voyager, of which $75M has already been accessed. VOYG shares have taken a hit of ~60% in the past two weeks after news of its exposure to 3AC broke.
BlockFi’s troubles include an overcollaterized loan of $1B to 3AC, which was liquidated early on in the domino charge. In a public message released today, BlockFi reported a loss of ~$80M in the past month’s events, as well as a credit line of $400M from FTX (also an SBF joint) which to-date has not yet been drawn on.
Current state of crypto contagion. pic.twitter.com/MDTpfweQNz— Ape Digest (@ApeDigest) June 25, 2022
How 3AC ended up in this mess is beyond the scope of this newsletter, but it’s a heady brew of bad investment decisions and poor risk management involving overleveraged loans from other institutions and DeFi protocol treasuries.
With FTX and Alameda scooping up the rubble from the fallout across the contagion, this looks like an effective power play by Sam Bankman-Fried, see:
- Crypto Billionaire Sam Bankman-Fried Inks BlockFi Deal, Eyes Distressed Miners Next
- Sam Bankman-Fried Says He’d Consider Acquiring Troubled Crypto Miners Next
- Sam Bankman-Fried Out to Win Whole Crypto Market, Early FTX-Backer says
- Crypto billionaire Sam Bankman-Fried says more exchanges will fail as the industry faces a brutal downturn
Sam Centralbankman-Fried may well be the first trillionaire after all these distressed liquidations— zerohedge (@zerohedge) July 1, 2022
* * *
Grayscale sues the SEC
Grayscale Investments’ application to convert its GBTC asset into a spot-based Bitcoin ETF saw rejection by the SEC this week.
We’ve filed a lawsuit against the SEC. $GBTC— Sonnenshein (@Sonnenshein) June 30, 2022
The official press release charges that:
“... the SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934”.
As it stands, the Grayscale GBTC financial product is a trust that enables investors to gain exposure to Bitcoin without buying it directly (with an initial lockup period of six months).
Why buy GBTC at all when you can buy BTC directly? Because it’s a legal way for mainstream investors to gain exposure to crypto.
But it’s also terribly market-inefficient. In theory, GBTC is meant to mirror Bitcoin in value. In reality it trades at a premium or discount depending on market sentiment. This opens an arbitrage opportunity that transforms GBTC from a “Buy this if you like Bitcoin” financial product into a hybrid speculative futures-based product.
That lured institutions like 3AC into scooping huge stakes in GBTC when numbers were going up, and we’ve seen how that ended up.
Of course, modern finance has an easy fix to this like: an ETF which trades at a 1:1 parity with the underlying asset.
But access to crypto ETFs are still blocked up as the SEC continues to drag its feet on regulatory approvals. But that’s not stopping institutions from pursuing the license, as VanEck files another application this week.
* * *
DeFi DAO governance dynamism
Two big DAO governance items dominated this week. The first was a contentious Maker DAO proposal to centralize the protocol’s governance in a “core unit.” It failed to pass. The proposal saw an unprecedented ~30% of MKR tokens participating.
The most controversial governance vote of @MakerDAO...perhaps of all DAOs just finished.— GFX Labs (@labsGFX) June 27, 2022
~30% of the token supply participated. Voting has been neck and neck until the last 2 hours when a series of redelegations brought the final tally to NOs 176k, YESs 112K, and Abstains 4k.
The second big governance proposal is a Lido initiative to self-limit the amount of ETH deposits into the liquid staking protocol. The context of this proposal lies in the potential risks that a concentration of ETH in Lido might pose to the underlying Ethereum protocol.
It’s hardly a surprise that the proposal was overwhelmingly shot down by LDO holders - that’s a little bit like asking an investor if you’d like to see a company you own a part of to stop growing.
* * *
Web3 News Roundup
Arbitrum Odyssey paused, Optimism numbers go up
The Arbitrum Odyssey campaign was paused this week due to blockchain congestion from the overwhelming success of Odyssey.
📳🧑🚀 𝘈𝘙𝘉𝘐𝘕𝘈𝘜𝘛𝘚, 𝘍𝘈𝘓𝘓 𝘐𝘕 !— Arbitrum (@arbitrum) June 29, 2022
The first week or so of the Arbitrum Odyssey has been very exciting to say the least!
But we’ve decided to pause the Arbitrum Odyssey as of now, to be resumed after Nitro is released. ⏸️
More info below. 👇
Meanwhile, Arbitrum’s closest L2 competitor Optimism is also booming, with a big uptick in DEX trading volume.
Horizon bridge gets hacked
The Horizon bridge by L1 blockchain Harmony endured a $100M exploit this week, allegedly by the North-Korean hackers Lazarus Group. Those are the same guys that hit the Axie Infinity Ronin bridge in March.
1/ The Harmony team has identified a theft occurring this morning on the Horizon bridge amounting to approx. $100MM. We have begun working with national authorities and forensic specialists to identify the culprit and retrieve the stolen funds.— Harmony 💙 (@harmonyprotocol) June 23, 2022
Microstrategy goes Bitcoin shopping
Microstrategy is a small software company, but it has come a long way from doing small software things. CEO Michael Saylor shut down market rumors of any potential insolvency in perhaps the most demonstrative way possible: a $10M purchase of another 480 Bitcoins.
MicroStrategy has purchased an additional 480 bitcoins for ~$10.0 million at an average price of ~$20,817 per #bitcoin. As of 6/28/22 @MicroStrategy holds ~129,699 bitcoins acquired for ~$3.98 billion at an average price of ~$30,664 per bitcoin. $MSTRhttps://t.co/leQYTXn817— Michael Saylor⚡️ (@saylor) June 29, 2022
El Salvador too checks out another purchase of 80 Bitcoin.