Original Author: Jasmine

Original Author: Jasmine

Although Bitcoin rebounded to US$20,000 in the early morning of June 20, the encrypted asset market led by it has been unable to reverse the decline. The total market value of encrypted assets of US$900 billion has shrunk by one-third compared with the high point in November last year. two.

Another panic occurred on June 18. Bitcoin (BTC) fell below the support of $20,000, reaching a minimum of $17,500, and Ethereum (ETH), the second largest market value, fell below $1,000, with a minimum of $880. , the prices of both major crypto assets fell to fresh yearly lows. On that day, the total liquidation in the encrypted asset market exceeded 560 million US dollars.

Different from the previous bull-bear cycle, DeFi (decentralized finance), a new market player that emerged in this cycle, also suffered heavy losses in the market plunge. On June 18, the total value (TVL) of encrypted assets locked in the DeFi market also fell to a new low of 72.9 billion U.S. dollars this year, a 71.2% drop from the high of 254 billion U.S. dollars in December last year.

The collapse of a US dollar stablecoin in the decentralized encrypted finance (DeFi) market has impacted several centralized encrypted platforms, and eventually the risk spillover has spread to the entire encrypted market. In this "domino"-style market collapse, the giant whale's game of speculating on DeFi has failed, and DeFi is far from its goal of "financial democratization".

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Debt chasing "Three Arrows"

After UST collapsed and LUNA returned to zero, the center of the storm shifted to the hedge fund Three Arrows Capital.

Three Arrows Capital probably didn’t expect that the stETH, which earned profits for it from the DeFi revolving loan, would break away from the anchor ETH one day. These encrypted assets used as collateral are depreciating, and its positions are facing liquidation.

The panic began on June 14. The crypto asset hedge fund converted more than 50,000 stETH into ETH at a discount, and exchanged 16,625 ETH of it into the stable currency DAI worth more than 20 million US dollars. Crypto analysts have speculated that Three Arrows’ intention was to prevent its $295 million position in the DeFi lending platform from being liquidated.

But the reckoning came relentlessly. On the afternoon of June 15th, the blockchain security agency Paidun’s alarm kept ringing on social platforms. The addresses suspected to be related to Three Arrows Capital were liquidated within 1 hour. Worth over $14.9 million.

After the news of the liquidation of Three Arrows Capital came out, ETH fell from around $1092, a drop of more than 6% in a short period of time.

Before that, Three Arrows Capital had sold 33,000 ETH to repay debts, worth over $33.89 million. On June 16, the fund’s sale of stETH still did not stop, and liquidation of its positions included not only decentralized DeFi lending platforms like Aave, but also centralized trading platforms like FTX, Deribit, and BitMEX. Provide financial derivatives services of encrypted assets, including futures and options.

On June 17, The Block quoted people familiar with the matter as saying that after Sanjian Capital failed to meet the margin call requirements, three trading platforms had liquidated the positions of Sanjian Capital in the past week. Among them, BitMEX confirmed the news of the liquidation, but did not respond to the claim that Three Arrows Capital owed it $6 million in debt; while Deribit publicly stated that its shareholder Three Arrows Capital did have a small number of accounts with net debt on the platform, but the platform User's funds are safe.

Among the debt collectors are customers of Three Arrows Capital. Danny, the trading director of 8 Block Capital, directly defended his rights on social media, accusing Three Arrows Capital of embezzling $1 million from their account, and they suspected that the money was used for margin calls. The founder of another DeFi project stated that the whereabouts of the project's funds deposited in TPS Capital, an OTC trading company under Three Arrows Capital, are unknown.

A series of debt crises has put Sanjian Capital on the brink of bankruptcy, and the related DeFi platform has also experienced a crisis. Finblox, a pledged income platform, said it has a partnership with Three Arrows Capital. In order to "spread risk as much as possible", it suspended all income distributions, banned the creation of new encrypted addresses, and restricted user withdrawals - the daily withdrawal value There is a cap limit of $500 and a monthly cap of $1500.

On June 17th, Kyle Davies, the co-founder of Three Arrows Capital, finally broke his silence. In an interview with the Wall Street Journal, he admitted that the collapse of Terra was an important reason for the company’s losses, and the rapid decline in the encrypted asset market intensified the company’s losses. Loss.

As an investor in the Luna Foundation Guard, the organization behind Terra, Three Arrows Capital has invested about $200 million in LUNA, which is a reserve fund that helps UST peg to the US dollar. But after the UST crash in May, Three Arrows' investment was wiped out.

It is reported that Three Arrows Capital has hired legal and financial advisers to find solutions for its investors and lenders, trying to solve the debt problem through asset sales or rescue plans.

The assets of giant whales were liquidated in large amounts, and panic and selling were "all together". On June 18, when BTC fell below $20,000, it fell by 7.34%. Ethereum, which fell below $1,000, showed a larger decline, with a drop of 8.47%. The position is 269 million US dollars.

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Two suspensions

Liquidity risk is being transmitted to small and medium-sized platforms. On June 16, when Sanjian Capital encountered on-chain liquidation, the encrypted asset trading platform AEX suspended the withdrawal of mainstream assets such as BTC and ETH for 36 hours. Although user withdrawals were later resumed, AEX still imposed a limit on withdrawals, and the current upper limit is $600.

The Chinese name of AEX is Anyin. It was founded in 2013 and was first established in mainland China. After the domestic supervision became stricter, it went overseas.

AEX stated in the announcement that it is facing a run of over US$1 billion.

The "LUNA crash" is also regarded as the fuse of insufficient liquidity by the trading platform. "Since the LUNA crash in mid-May, the total market value of AEX's various asset outflows has reached 450 million USDT (including the withdrawal of cooperative institutions). It consumes AEX's short-term liquidity assets and some medium-term assets."

The liquidity crisis of AEX is not only related to the run.

Like Three Arrows Capital, this centralized trading platform also conducts asset allocation in DeFi. In 80% of its mid-to-long-term allocated assets, $110 million worth of encrypted assets are pledged on the chain for “mining” . The platform is stored in the USDT/USDC pool of the Curve platform "mining" (providing liquidity acquisition rewards), and was exchanged after the UST crash, resulting in short-term liquidity asset losses.

At the same time, AEX is also lending encrypted assets. It said that the delay in the repayment speed of customers in the pledged loan business is also one of the reasons for the platform's cash withdrawal difficulties, and the amount of externally pledged loans is 230 million US dollars.

It can be seen that AEX also acts as a "bank" while operating encrypted asset trading business, which has the same function as Celsius, an encrypted asset lending platform that suspended customer withdrawals on June 13. The liquidity risk of Celsius is also related to its participation in DeFi, and Terra is also one of the root causes of its thunderstorm. There are currently reports that the lending platform is seeking outside investment or acquisitions, but Reuters reports that securities regulators in five regions have launched investigations into Celsius.

These platforms that capture income from DeFi and lend to others all have a common problem: Do the funds put into DeFi and the loans issued to the outside world belong to user assets? Has the user's informed consent been obtained? Neither AEX nor Celsius has commented publicly on either issue.

An encrypted trading platform that also has difficulties in withdrawing cash is Hoo Hufu. The platform started from an encrypted asset wallet and was founded in mainland China in 2018. After 2021, the office will be moved to Dubai.

There is no detailed disclosure of AEX, and the withdrawal recovery time is longer than other companies. The suspension of Hoo Hufu has been questioned by users. People suspect that the platform also has the problem of putting assets into the DeFi market to make profits and lead to losses, but users doubt The voice did not get a response from Tiger Talisman.

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DeFi is not "De"

A centralized encrypted asset institution is in the predicament of liquidity depletion. If it is not for the frequent thunderstorms, the outside world may not dig into their chain dynamics. "Crypto whales participating in DeFi" are at most one person in the industry well-known phenomenon.

In June 2020, since Compound, a decentralized lending platform on the Ethereum chain, used "liquidity mining" to bring DeFi into flames, users' encrypted assets began to flow from the centralized trading platform to the decentralized DeFi market , to provide liquidity for decentralized trading platforms, lending platforms, and stablecoin protocols, in order to obtain token rewards issued by these platforms. These rewards quickly generated transaction prices due to the existence of the liquidity exchange pool, and the tokens became "real money".

The wealth effect began to brew in the early days of the bull market in the crypto asset market, and reached its climax at the peak of the bull market. The total value of crypto assets locked in various DeFi protocols jumped from less than $100,000 to nearly $3,000 in more than a year. billion-dollar highs.

During this process, users who inject encrypted assets into the DeFi platform and contribute liquidity have upgraded from ordinary retail investors to professional players (commonly known as scientists) who can operate robots. However, with the reduction of APY, some scientists have also been eliminated. Only Only big capital with money and smart contract technology can make profits in DeFi, especially with the help of DeFi products that can recycle loans.

Taking stETH as an example, this certificate token originally generated through the Lido protocol to release the ETH2.0 pledge was introduced by some lending platforms as collateral for loans. Pledging ETH2.0 itself will generate a 4% return, and depositing stETH on the lending platform can also earn interest income; what is more profitable is to pledge stETH as collateral on the lending platform, loan out stable coins, and then exchange For ETH, and then pledged into Lido to exchange for stETH... Behind the revolving loan is the continuous increase of leverage.

But when the collateral depreciates to a certain extent, liquidation begins to knock on the door of risk.

On June 14, the Bank for International Settlements (BIS) issued an announcement on DeFi lending after the suspension of Celsius. BIS pointed out that DeFi uses anonymization to overcome the information asymmetry problem that has always existed in the financial market, but it relies heavily on the characteristics of on-chain collateral (encrypted assets). Will be caught in a liquidation spiral.

Throughout history, financial intermediaries have been committed to improving information processing, but the current DeFi loans want to change this way, trying to replace information collection with borrowers providing collateral, so as to play the role of financial intermediaries.

BIS explained that in order to ensure that lenders are protected, DeFi platforms set a liquidation ratio relative to the amount borrowed. For example, a collateralization rate of 120% may be accompanied by a liquidation rate of 110%, if the collateral depreciates below this threshold. The smart contract stipulates that at this point anyone can act as a liquidator, forfeit the collateral, repay the lender, and pocket a portion of the remaining collateral. The profit drive ensures an adequate supply of liquidators, mitigating potential credit losses for lenders.

"Due to the anonymity of the borrower, over-collateralization is common in DeFi loans..." BIS pointed out that in order to avoid being forced to liquidate, borrowers often submit encrypted assets higher than the minimum requirements, resulting in a higher effective mortgage rate . Given the "boom-bust" cycle in the crypto market, the fact that "over-collateralization and liquidation ratios do not eliminate the risk of credit loss. In some cases, collateral values ​​fell rapidly, and borrowers did not have time to unwind before they depreciated." loans, causing losses to the lending institution.”

BIS believes that the current DeFi is mainly to "promote encrypted asset speculation" rather than "real economy lending", which violates its goal of "financial democratization", because the mortgage-based lending model only serves those with sufficient assets. People, excluding those with little wealth, have not only failed to achieve financial inclusion, but have moved toward centralization.