Original author: 0x137, BlockBeats

first level title

Two Martyrs: Celsius and Three Arrows Capital

After the collapse of Luna, all institutions in the encryption field were panicked, and operations visible on the chain became more frequent. After the recent unanchoring of stETH, Celsius was the first to have problems. This CeFi lending platform, which is well-known in Europe and the United States, has 1.7 million users and over US$30 billion in assets under management, was eventually forced to suspend all withdrawals due to the liquidity crisis, and became the successor to LFG. Another "martyred" encryption agency.

Prior to this, Celsius had lost a large amount of user assets in various accidents: first, it lost about 35,000 ETH, worth more than 70 million US dollars, when the Eth2.0 pledge company Stakehound lost its private key, and then it was lost in BadgerDAO. About 2,100 BTC and 151 ETH were lost in the theft, worth more than $50 million. What's more serious is that Celsius has always deliberately concealed the truth, and even after the news was exposed, he still did not admit it, which directly hit users' confidence in the platform.

As one of the largest holders of stETH, Celsius was hit hard by the unanchoring event of stETH. With the decline in the value of stETH and the intensification of platform liquidity problems, the platform encountered a severe run due to panic, and was forced to sell stETH to meet the needs of users to redeem assets, and finally had to start the "HODL mode" and suspend all accounts. Withdrawal and transfer activities. (BlockBeats note, in "Just how serious is the stETH risk as institutions move away from Lido?"StETH and Celsius crisis are introduced in detail)

What's more serious is that as the market continues to fall, Celsius's hundreds of millions of dollars in DAI loans on the MakerDAO platform are also facing the risk of being liquidated. In the past two days, Celsius has been adding wBTC collateral to Maker and repaid With nearly 50 million DAI, the mortgage ratio has been pulled to 219%, which is barely out of the liquidation risk.

Facing the embattled Celsius, Nexo, also a CeFi lending platform, extended an olive branch to Celsius, expressing its willingness to acquire its "remaining qualified assets", but the Celsius team did not respond. This advocate of the blockchain revolution who once shouted that "the bank is bankrupt" can only rely on suspension of withdrawals and restructuring lawyers to survive.

On the second day after the Celsius explosion, there were rumors on Twitter that Three Arrows Capital was facing liquidation. People found that its founder Zhu Su, who has always been flamboyant, not only did not post for a few days, but also deleted his Instagram account and modified it. Tweeted Bio.

Not long after, Zhu Su broke the silence and wrote: "We are communicating with relevant parties and working hard to solve the problem", and the community immediately exploded. Three Arrows Capital, once sitting on tens of billions of assets, was the most active investment institution in the industry and had one of the most powerful voices. , All kinds of behaviors have also been planed out.

According to The Block, Three Arrows has at least $400 million in liquidations with the market’s top lenders and will still have to repay other lenders after the liquidation. You must know that Sanjian, as the main endorser of Luna, suffered huge losses during the UST crash, and Sanjian has been on the list of Bitfinex's losses in the past month. In the unanchor and sell-off of stETH this time, the "activity" of Sanjian far exceeded Celsius, and a large amount of stETH was sold in order to repay the debt.

Like Celsius, Zhu Su, who previously shouted about the super cycle and advocated the new L1 public chain ecology, has now become extremely silent, deleted the Token tag in his Twitter Bio, and admitted his misjudgment of the market.

But what is more noteworthy is that there seems to be a connection between the Celsius liquidity crisis and the liquidation of Three Arrows Capital. In addition to the "top lending platform" mentioned in The Block's report, KOL trader Degentrading also pointed out on Twitter: Three Arrows is Celsius's largest lender, and it also has lending positions on mainstream CeFi lending platforms such as Genesis and BlockFi.

Although the liquidation of the Three Arrows is not beneficial to lenders, judging from the problems exposed by Celsius, these "encrypted banks" urgently need to solve the liquidity needs of users to redeem deposits. In the case of a crisis in one's own liquidity, it seems reasonable to liquidate one's own debits in exchange for liquidity.

Perhaps because of this, Celsius sent Margin Call to Three Arrows, turning it into a "sacrifice" to solve the crisis. Genesis, Nexo and other lending platforms rushed to release news to reassure users in order to prevent getting caught up in the fire.

The liquidation of Sanjian also forced more organizations to become "incidental victims." Yesterday morning, a trading agency under Sanjian’s account issued a document stating that Sanjian had taken $1 million from its own trading account, apparently to fill the funding gap elsewhere. And this morning, DeFiance, a capital closely related to Sanjian, also seemed to have problems. Its founder, Arthur, made a tearful emoji on Twitter.

first level title

Two Wrong Things: Luna and stETH

After the start of this round of market cycle, words such as "faith", "fundamentalism" and "All In" appear more frequently than ever before, and people talk more about narratives than facts when investing. Over time, the meme "Irresponsibly Long" has even become a condition for far-sighted investors to show off.

This kind of atmosphere is also particularly obvious among institutions, and everyone has established an "unshakable" consensus on hot narratives. The Lunatic army led by Delphi Digital and Galaxy Digital can be seen everywhere on Twitter. Anchor's 20% APY has become recognized as "the best safe haven in the bear market"; OG communities such as Bankless often post articles to recharge their faith in Ethereum 2.0, and liquidity staking has also become The perfect solution for Ethereum 2.0 node verification.

But it is precisely these strong consensuses that made organizations make fatal mistakes on Luna and Lido. Like the sub-credit crisis in 2008, the problem stems from excessive optimism and confidence. Before Lehman Brothers exploded, the market was too optimistic about "rising housing prices". No one wanted to believe that almost "risk-free" mortgage securities would appear question. Perhaps because they were convinced by their own words, the institutions did their own work and really achieved "Irresponsibly Long". Before the Luna crash and the de-anchor of stETH, no one believed that these DeFi leaders who already had brand effects would still have fatal risks.

For Luna, UST's success has made the institution forget about basic economics. The sustained and stable APY has brought a strong enough Lindy effect to UST, making people forget about Anchor's terrible lock-up ratio and Luna's amazing market value. The leverage service agreement, and finally most of the market value of UST, is used to superimpose leverage in Anchor.

Celsius is also a large UST position holder, using the high APY provided by UST to realize income arbitrage. The platform first provides about 10% APY for USDT, USDC and other stable coins, absorbs the user's assets, and then converts them into UST and deposits them in Anchor to achieve a 10% profit arbitrage, but users do not know about this until UST occurs After the run, it was discovered that Celsius was the "big smasher" of UST, and lost a large amount of user assets during the collapse of UST.

However, VCs and market makers such as Three Arrows, Galaxy Digital, and Jump Trading selectively ignored Luna’s strong financial attributes, and put the Terra ecology dominated by Anchor into the public chain narrative, keeping pace with Solana, Avalanche, and other ecology. Advocate "Solunavax". According to Terra Research Forum member FatMan, Three Arrows purchased 10.9 million LUNAs for $559.6 million. Right now, they're only worth $670.45.

After a $40 billion financial empire evaporated overnight, the collapse of UST had a ripple effect, and several small stablecoins were de-anchored one after another. The panic continued to rise, and finally even USDT experienced a short-term run. This encrypted asset with the highest liquidity unexpectedly temporarily broke its anchor due to liquidity.

To a certain extent, the short-term unanchoring of USDT is already a strong signal from the market: after tens of billions of dollars evaporated, liquidity is shrinking rapidly. Many stablecoin projects and ecosystems have also responded to this. The USN and USDD launched by NEAR and TRON have adopted a full or even over-collateralized model. But the impact of the UST incident is far more than that: since UST has developed into a cross-chain asset, its collapse will trigger different degrees of liquidation in each ecology. In other words, the collapse of Luna ignited the lead of liquidity contraction.

However, institutions are too optimistic about the liquidity and demand of stETH. No one would have thought that the liquidity lead would be burned to stETH, which has nothing to do with stablecoins. Since the "collateral" of stETH is ETH 2.0, it cannot be taken out before the merger of Ethereum is completed. Therefore, unlike other liquid mortgage certificates, stETH is a futures certificate of ETH 2.0, which does not necessarily maintain a 1:1 anchor with ETH. The price is completely determined by market demand.

A few months ago, there was no liquidity problem in the market, and the stETH-ETH pool prepared by Lido on Curve was fully able to meet the demand, so people simply understood stETH as an asset linked to ETH. One of the most popular strategies among institutions at this time is to borrow ETH at a low interest rate of about 2%, and pledge it on Lido to obtain about 4% of the income from stETH, and then use stETH as collateral to recycle loans on Aave Withdraw ETH and increase leverage in this seemingly low-risk way.

As one of the largest holders of stETH, Celsius has converted a large number of user assets into stETH that cannot easily enter and exit the market through the liquidity pool. As can be seen in the figure below, Celsius has nearly 450,000 stETH at its peak. The platform will These stETH are deposited into Aave as collateral, and the stablecoin or ETH is lent out to meet the redemption needs of users. Once the liquidity problem is detonated, the consequences will be very serious, because any decline in stETH will, strictly speaking, put Celsius in an insolvency situation.

But when Celsius realized this problem, he found that the liquidity on Curve could not meet the needs of the platform at all. Selling would cause panic and runs, and not selling would not meet the redemption needs of users, and he was caught in a dilemma. Sanjian is no exception. It built a large-scale ETH position at the beginning of this year and pledged it exclusively for stETH on Lido. Under the liquidation pressure of Celsius, Three Arrows exchanged a number of stETH for wETH at a discount, and then sold all of them for DAI to repay the debt.

first level title

Two Leads: High Leverage Crisis and Liquidity Exhaustion

Yesterday afternoon, Paidun successively released news about the liquidation of Three Arrows Capital’s ETH assets. According to the Aave platform, the suspected Three Arrows Capital’s wallet address (starting with 0x7160) has a loan of nearly 200 million US dollars facing liquidation at any time, and this address In order to avoid large-scale liquidation, debts are also continuously repaid on the chain.

At that time, when the rumors of Sanjian's liquidation were hot, everyone regarded it as Sanjian's "self-defense counterattack". However, according to the disclosure of KOL on Twitter, this address may actually be the wallet address related to Longling Capital. This market liquidation can be regarded as a "spectacular scene" of whales diving collectively.

In addition to stETH, Sanjian itself also has a large amount of loans to buy GBTC positions. Since last year, the price difference of GBTC has continued to deteriorate, and it is currently -30%. .

We can't help but wonder, how much leverage was there in the second crazy upcycle last year? From the overall TVL of DeFi in the figure below, we can get a little perception. The red box on the left is the Luna crash in early May, during which the TVL of the entire DeFi dropped from $200 billion to around $120 billion, losing $80 billion; the red box on the right is the liquidation of institutions such as Celsius and Three Arrows triggered by stETH. TVL loses another $45 billion.

It is not difficult to see that the liquidation of mainstream ecology and institutions has caused the overall credit scale of the market to shrink rapidly, and may lead to continuous deleveraging. Just like Celsius withdrew capital, many other lending platforms will protect themselves by draining credit from the market, further reducing capital flowing in the market and further drying up liquidity. For example, the TRON ecological stablecoin USDD, with the support of hundreds of millions of dollars from the Federal Reserve Bank, failed to escape the fate of unanchoring, and fell as low as around $0.96 yesterday.

There is no doubt that the encryption market is experiencing its own Lehman moment. In order to prevent further deterioration of the liquidation, external funds are often needed to rescue the market, but unfortunately, we have caught up with a historically rare wave of interest rate hikes: last night's FOMC meeting, The Federal Reserve once again raised the benchmark interest rate by 75 basis points to a range of 1.50% to 1.75%. In Europe, Italian government bond yields continued to rise. The European Central Bank held an emergency special meeting yesterday to discuss coping strategies and raise interest rates in advance.

Recently, U.S. bond yields have also continued to rise, and U.S. stocks have continued to decline, clearly out of the "Correlation of One" situation: when the economy as a whole is facing severe liquidity shrinkage, people are often in the position of "selling what they can sell" rather than "selling what they can" As a highly volatile market, crypto will undoubtedly be one of the areas where liquidity is shrinking most rapidly. Raoul Pal, a well-known macroeconomist and founder of Real Vision, also pointed out that when the important collateral of US Treasury bonds is experiencing unprecedented volatility, Margin Call will be everywhere.

Today's encryption market is facing the dilemma of double tightening of internal and external liquidity, and the bloodshed may continue. Celsius and Three Arrows are not the first institutions to fall, nor will they be the last.