Justin Hartzman: Unveiling the Celsius and 3 Arrows Capital implosions

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Justin Hartzman on Medium | Jun 22, 2022

broken pieces - Justin Hartzman: Unveiling the Celsius and 3 Arrows Capital implosions

The markets have been absolutely brutal. Over the last month, we have seen a stablecoin provider, a leading lending provider, and one of the biggest crypto hedge funds implode entirely. We have discussed Terra’s implosion in the past. Today, let’s focus on Celsius and 3 Arrows Capital (3AC). The truly remarkable thing here is that we are in entirely uncharted waters as far as crypto is concerned.

We have never seen so many institutes implode at the same time. Strangely enough, I believe this could be good for the market in the long term. We will get to that later. However, first a quick intro.

What are Celsius and 3AC?

So let’s start with Celsius. Founded in 2018, Celsius was one of the biggest lending platforms in crypto. In May 2022, they had more than $8 billion lent out to clients and $12 billion in assets under management. What made them truly attractive was the incredible APR they offered on collateral. Celsius has been using client funds on various DeFi protocols like Lido, Curve, and — wait for it — Terra’s Anchor Protocol — to generate this yield. On-chain analytics platform Nansen has already identified the wallets that made these trades. When Terra imploded, Celsius CEO Alex Mashinsky quickly pointed out that they had pulled their position safely out of Terra.

See: Terra’s crash shakes confidence leaving some other stablecoins on shaky ground

On the other hand, 3AC is one of the most well-known venture capitals in the crypto space, founded by Su Zhu and Kyle Davies. 3AC is known for being one of the biggest borrowers in DeFi. During the market’s peak, 3AC had holdings worth $10 billion, including Lido, DYDX, Bitcoin, Ethereum, and….yup… Terra. 3AC borrows from every major lender out there, like — BlockFi, Genesis, Nexo, and Celsius. Inevitably, they are all going to suffer due to 3AC’s implosion.

There is one more interesting thing happening in the background that we need to look into before proceeding.

What is stETH?

As you know, you can stake your ETH in the beacon chain to be a validator. Each entity must stake at least 32 ETH to become a validator in Ethereum PoS. There are two ways that you can do this. Buy 32 ETH and stake it. Or create a pool and stake 32 ETH.

The DeFi protocol, Lido Finance did something super smart. They took ETH from their users to stake on the beacon chain. In return, they issued a new token called stETH (staked Ether), pegged 1:1 with ETH, and gave it to the user. This strategy worked very well for Lido, making it the most dominant entity in PoS Ethereum. stETH is a popular token in DeFi applications. Both Celsius and 3AC had significant exposure to stETH.

However, just a few weeks back, the stETH:ETH peg broke.

See: Vitalik: Designing Principles-based Stablecoins that (may not) collapse

The reason this peg broke is because of stETH relative liquidity when compared to ETH. The max addresses holding stETH never exceeded 65,000. Obviously, this is a low number when compared to addresses holding Ethereum.

As such, the daily trading volume for stETH is significantly lesser than ETH, making it a more illiquid asset. Now, if some whales decide to dump their stETH, the lack of liquidity could bring the asset’s price down. This is precisely what happened when some players chose to sell off their stETH. For example, Alameda — a major trading firm with close ties to FTX and SBF — dumped $88 million worth of stETH.

Alameda selling stETH - Justin Hartzman: Unveiling the Celsius and 3 Arrows Capital implosions

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