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Nansen: Ill-timed stETH sell-off contributes to woes of Three Arrows


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Troubled hedge fund Three Arrows contributed to its woes with an ill-timed sell, says a new report. - Photo: Getty Images

Troubled crypto hedge fund operator Three Arrows Capital exacerbated its woes with an ill-timed sell-off of its staked ether (stETH) holdings, say analysts from blockchain analytics firm Nansen.

Due to a British Virgin Islands court order, Three Arrows, also known as 3AC, has entered liquidation after massive debts piled up, according to reports published Wednesday by Sky News, CNBC, Bloomberg and other media outlets. Three Arrows did not respond to a request for comment from Capital.com.

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Companies took large hits

The court order came after crypto lender Voyager Digital issued a notice of default on a $675m loan Three Arrows on Monday. The clock started ticking on Three Arrows late last week when it appeared that the company could not repay its debt.

Three Arrows was among companies that took large hits when stETH effectively depegged from ether (ETH), the main cryptocurrency of the Ethereum blockchain network, according to a Nansen report released Wednesday and provided by the company to Capital.com.

Many investors had used stETH as collateral against ETH loans and risked having to liquidate their assets and suffer large losses. Large investors, known as whales, including Three Arrows, tried to derisk by unloading their stETH and paying down their debts. The sell-off included swaps of stETH for ETH, but problems resulted when stETH became less valuable than ETH.

“We don’t know the extent of 3AC’s off-chain holdings and obligations, so we cannot provide an outlook on the state of their firm,” the Nansen analysts told Capital.com in response to emailed questions. “However, [3AC] made some poorly-timed plays during the depeg, doubling down on stETH a few days before capitulating and selling roughly 112,000 stETH for 106,000 ETH – a massive haircut in a single day.”

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Whales unload

Technically, stETH and ETH were not pegged to each other, but their values were essentially on par with one another, creating a peg-like effect. (In its report, Nansen described the relationship between stETH and ETH as a peg, and a later disparity between their prices as a depeg, for the sake of simplicity.) In May, the collapses of the luna and terraUSD coins, prompted whales to sell off stETH and the coin’s peg was “never restored,” according to the Nansen report.

Although terraUSD’s collapse was not a direct cause of the stETH sell-off, it “exacerbated the liquidity problems of the stETH-ETH peg and was a key event heading into the June crisis,” the Nansen analysts told Capital.com. This month, many crypto companies, particularly the Celsius Network and many digital coins, have suffered large losses. While stETH and ETH were depegging, Celsius and Three Arrows were among the “biggest withdrawers” of the two coins from a liquidity pool on the Curve cryptocurrency exchange.

On May 12 alone, Three Arrows and Celsius removed about $800m (£660.14m) worth of stETH and ETH from Curve, according to the Nansen report. Three Arrows withdrew $400m in one transaction.

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'Most consequental'

“Other participants were also observed withdrawing liquidity, but [Three Arrows and Celsuis] were most consequential to the pool’s health,” said the Nansen report. “These [Three Arrows and Celsius] transactions were most impactful to the initial deviation from the ETH price, which led to the vulnerability of the pool and peg.”

What can retail traders learn?

Whart can retail traders learn from the Nansen report findings?

"Many of the entities that are struggling are opaque, centralized off-chain businesses," said the Nansen analysts. "Often, users of such platforms are not aware of where their funds ultimately end up and in some cases have no control over their funds in case something goes wrong. See many platform pausing withdrawals, for instance."

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