Recent data revealed that a crypto wallet linked to the now-defunct Three Arrows Capital (3AC) had withdrawn $33 million worth of staked ETH (stETH) from the Curve liquidity pool.
In addition to withdrawing the stETH, 3AC reportedly removed 200 BTC, $4 million worth of wrapped ETH (wETH) and $4 million worth of USDT from Convex, a DeFi platform that increases rewards for liquidity providers and crypto stakers at Curve. Prior to the incident, the wallet had been inactive for ten days, with its latest activity being unloading $9 million worth of wrapped stETH.
3AC filed for bankruptcy in July 2022 after the collapse of the stablecoin TerraUSD. It invested $200 million in TerraUSD’s sister coin, Luna. The investment fund, totaling $1 billion, went to the Luna Basis Guard, a reserve meant to support TerraUSD’s peg against the U.S. dollars. When both stablecoins crashed, the company lost its investment.
Court filing published after the bankruptcy by Teneo, 3AC’s liquidator, revealed that the hedge fund owed creditors $2.8 billion. Later in August, U.S.-based Teneo received a permit from a Singaporean court to probe 3AC’s assets in the country. At that time, Teneo was managing $40 million worth of 3AC’s assets.
Following 3AC’s bankruptcy, high-profile companies also claimed that 3AC had borrowed funds from them. Genesis Global Trading said it lent $2.3 billion to the hedge fund. Voyager Digital, which also filed for bankruptcy in July, reported that 3AC borrowed $650 million from it. Additionally, Blockchain.com claimed that 3AC had failed to pay its $270 million loan. 3AC founders Su Zhu and Kyle Davies used to claim that the hedge fund did not have “any external investors.”
Crypto market analysts said that 3AC’s bankruptcy created a larger crypto crash this year, with the capital market valuation continuing to go down. FTX CEO Sam Bankman-Fried said AC was responsible for about 80 percent of the “total original contagion.”
“They weren’t the only people who blew out, but they did it way bigger than anyone else did,” Bankman-Fried said. “And they had way more trust from the ecosystem prior to that.”
Nansen CEO Alex Svanevik said that investors were “disappointed” and “embarrassed” after the 3AC’s case broke out. Svanevik added, “And they shouldn’t because a lot of people fell for this, and a lot of people gave them money.”
Withdrawal motive
Analysts have explained several possible reasons for 3AC’s withdrawal from the liquidity pool. Ethereum’s Merge will shift the network’s proof-of-work mechanism to a proof-of-stake one. It can prevent investors from redeeming stETH for ETH six months to a year after Ethereum completes the phase. Curve can facilitate direct trades between stETH and ETH.
7/ What will validate this theory would be seeing a trend reversal and ETH deposits back to exchanges.
— Ian Unsworth (@Ian_Unsworth) September 5, 2022
Additionally, aside from simply moving funds on-chain, we are also seeing an uptick in ETH borrowed via on-chain lending markets, specifically Aave
The experts argued that 3AC was likely preparing to borrow ETH using stETH as the collateral so that the firm would be eligible to receive a new token from Ethereum. If that does not work, 3AC can still gain ETH after the Merge has been completed.
Ethereum will start the Merge sometime in September. 3AC reportedly kept stETH in the Curve pool after the token started to trade at a lower rate against ETH.
The merge is still expected to happen around Sep 13-15. What's happening today is the Bellatrix hard fork, which *prepares* the chain for the merge. Still important though - make sure to update your clients!
— vitalik.eth (@VitalikButerin) September 6, 2022