From Celsius to three arrows: crypto dominoes for billions of giants, epic liquidity depletion

Original author: 0x137, BlockBeats

The crypto market hasn't been flat since May. In just one month, we have seen the collapse of Luna's $40 billion financial empire, the collapse of ETH 2.0's Lido derivative anchor, the suspension of Celsius withdrawals from the largest US crypto bank, and the liquidation of Sanjian Capital, which was said to have held $18 billion in crypto assets. When we string these events together, from Luna to stETH, from Celsius to Three Arrows, we can see the subtle relationship between them, and the developmental threads that intersperse them.

Two martyrs: Celsius and Three Arrows capital

After the Luna crash, crypto institutions are on edge and visible operations on the chain are more frequent. CeFi, which has 1.7 million users and more than $30 billion in assets under management, was forced to suspend all withdrawals due to a liquidity crisis, adding to the list of crypto institutions that have suffered "marooned" since 2014.

Celsius has lost a significant amount of user assets to unexpected events before: After losing about 35,000 ETH's worth over $70 million in the loss of its private key from Eth2.0 pledge company Stakehound, and about 2,100 BTC's and 151 ETH's in the BadgerDAO theft, Worth over $50 million. What is worse, Celsius deliberately hides information even after it is reported, damaging users' confidence in the platform.

As one of The largest holders of stETH, Celsius felt a shock when stETH dropped anchor. As The value of stETH declined and the platform's liquidity problems intensified, the platform encountered a severe run caused by panic and was forced to sell stETH in response to users' demand for asset redemption. Finally, the platform had to open "HODL mode" and suspend all account withdrawals and transfers. (BlockBeats notes, in the bookHow serious is the stETH risk when Lido is withdrawn?The stETH and Celsius Crises are described in detail.)

Celsius has been adding wBTC collateral to Maker over the past two days, and has repaid nearly 50 million DAI pieces. It pushed the mortgage ratio to 219%, which is barely out of liquidation risk.

When CeFi lending platform Nexo offered to buy Celsius's "remaining eligible assets", the Celsius team did not respond. The champion of the blockchain revolution, who once shouted "the banks are broke", is now relying on suspended withdrawals and restructuring lawyers to survive.

Zhu Su, its flame-filled founder, has not posted in days, deleted her Instagram account and changed Her Twitter Bio.

Soon after, Zhu Su broke his silence and wrote, "We are communicating with relevant parties and trying to solve the problem." The community exploded. Three Arrow Capital, once one of the most active and influential investment institutions in the industry with 10 billion assets, has now grabbed Celsius's spotlight and become the object of the crowd watching to eat melons, all kinds of family background, all kinds of behavior has been revealed.

According to The Block, Sanjian has at least $400 million in settlements with top lenders in The market and still needs to repay other lenders after The settlement. Sanarrow, Luna's main sponsor, suffered huge losses during the UST crash and has been one of Bitfinex's lossmaking companies for the past month. During the stETH unanchoring and selling, Sanjian was more "active" than Celsius and sold stETH in large quantities in order to repay debts.

Zhu Su has deleted the Token tag from her Twitter Bio and admitted her misjudgment of the market. Zhu Su, who was once calling for a super cycle and touting a new L1 ecosystem, has now become unusually quiet, like Celsius.

But what is even more noteworthy is that there seems to be a connection between Celsius liquidity crisis and the liquidation of Sanarrow Capital. In addition to The Block's report mentioning The "top lending platforms", KOL trader Degentrading also tweeted that sanjian is Celsius's biggest borrower and has lending positions on Genesis, BlockFi and other major CeFi lending platforms.

While being liquidated would not be beneficial to lenders, these "crypto banks" are dealing with users' liquidity needs to redeem their deposits, as Celsius exposed. And in the event of a liquidity crisis of its own, liquidating its own debtors in exchange for liquidity seems reasonable.

Maybe that's why Celsius sent Margin Call to Sanjian, turning it into a "sacrificial offering" to resolve the crisis. Other lending platforms, such as Genesis and Nexo, rushed to reassure users before they caught fire.

The liquidation of Three Arrows has also forced more institutions into collateral damage. Early yesterday, a trading office under Sanjian's account posted a report that sanjian had taken $1 million from its own trading account, apparently to cover funding gaps elsewhere. And this morning, DeFiance capital, which has a close relationship with Three Arrows, appeared to have its own problems, with founder Arthur tweeting a tearful emoji.

From the decline of Celsius and Three Arrows, we can see that Luna crash and stETH decoupling had a significant impact. Taking Luna event as a watershed, the situation of cryptographic agencies has changed a lot before and after.

Two mistakes: Luna and stETH

Following this market cycle, words like 'faith', 'fundamentalism', and 'All In' are being used more frequently than ever, and investment is being talked about more In terms of narrative than fact. For a while, 'Irmanna Long' is a meme to be enjoyed by forward-looking investors.

This atmosphere is particularly evident among institutions, where an "unshakable" consensus has been established on hot narratives. The Lunatic army led by Delphi Digital and Galaxy Digital can be seen everywhere on Twitter. 20% APY of Anchor has become the recognized "best harbor of bear market". Bankless and other OG communities often post articles to recharge ethereum 2.0 beliefs, and liquidity pledge has become a perfect solution for ethereum 2.0 node verification.

But it was this same strong consensus that led institutions to make fatal mistakes with Luna and Lido. As with the 2008 credit crisis, the problem stemmed from excessive optimism and confidence. Before lehman Brothers imploded, the market was too optimistic about "house price inflation" and no one wanted to believe that almost "risk-free" mortgage securities could go wrong. Irmanna is nothing to be lost in any way. It is nothing to be lost in any way. It is nothing to be lost in any way. It is nothing to be lost in any way.

For Luna, UST's success made institutions forget basic economics. The continuous and stable APY has brought strong enough Lindy effect to UST, which makes people forget the terrible lock-in ratio of Anchor and the amazing market value of Luna. More and more funds keep entering, and even there are agreements specially for UST Looping leverage, so that the majority of the market value of UST finally, Both are used to overlay levers in anchors.

Celsius is also a large holder of UST and takes advantage of the high APY provided by UST to realize income arbitrage. The platform first provides about 10% APY for stablecoin such as USDT and USDC to absorb users' assets, and then converts them into UST and stores them in Anchor to achieve 10% income arbitrage. Users are unaware of this, and people only find out after UST runs. Celsius is a user of UST and loses a large amount of user assets during the UST crash.

However, VC and market makers such as Sanarrow, Galaxy Digital and Jump Trading selectively ignored Luna's strong financial attribute, and put the Terra ecology dominated by Anchor into the public chain narrative, keeping up with ecology such as Solana and Avalanche. Keep trumpeting "Solunavax." According to FatMan, a member of the Terra Research forum, Sanarrow bought 10.9 million LUNA for $559.6 million. Right now, they're worth $670.45.

After a $40 billion financial empire evaporated overnight, the UST collapse had a ripple effect, with several small staboins dropping anchor. Panic continued to climb, and finally even a short run on USDT, the liquidity of one of the crypto assets unexpectedly due to the liquidity of the temporary anchor.

In part, USDT's brief unanchoring was a strong signal from the market that liquidity was rapidly shrinking after tens of billions of dollars were wiped out. In response to this, many stablesoin projects and ecology have also responded. The stablesoIN USN and USDD launched by NEAR and TRON have adopted the mode of full or even excess mortgage. But the UST event had more than that: because UST had developed into a cross-chain asset, its collapse would trigger varying degrees of liquidation in each ecosystem. In other words, Luna's collapse ignited the liquidity contraction fuse.

But the institutions were too optimistic about the liquidity and demand of stETH, and no one would have thought that the liquidity lead would burn stETH, which had nothing to do with stablecoin. As stETH's "collateral" is ETH 2.0, which cannot be taken out before the completion of ethereum merger, unlike other liquid pledge certificates, stETH is ETH 2.0 futures certificate, which may not be 1:1 anchored with ETH, and its price is entirely determined by market demand.

A few months ago, there was no liquidity problem in the market and Lido's Steth-ETH pool, prepared by Curve, was able to cope with demand, so stETH was simply understood as an ETH linked asset. At this time, one of the most popular strategies among institutions is to borrow ETH at a low interest rate of about 2%, and to pledge the income of stETH production of about 4% on Lido. Then, stETH is used as collateral and ETH is circularly lent out on Aave to increase leverage in this seemingly low-risk way.

As one of the largest holders of stETH, Celsius converted a large number of user assets into stETH that could not be easily accessed through the liquidity pool. As you can see from the figure below, Celsius had nearly 450,000 stETH at its peak. The platform deposits these stETH into Aave as collateral and lends stablecoins or ETH to meet users' redemption needs. If the liquidity problem were to explode, the consequences would be severe, as any fall in stETH would be considered Celsius insolvent.

When Celsius realized the problem, it was discovered that the liquidity on Curve could not meet the platform's demand. Selling Curve would cause panic and a run on the platform. Without selling Curve, users would not be able to redeem Curve. And sanjian is no exception, at the beginning of this year, a large-scale warehouse ETH, and in Lido specifically for stETH pledge. Under Celsius's liquidation pressure, Three Arrows changed a number of stETH discount to wETH, and then all sold into DAI to repay debts.

Of course, the same mistake that "ruined" Celsius and Sanarrow has happened to countless retail investors, and Luna and stETH's Revelations shed light on two strands that have been swirling around the crypto market for the past few months.

Two clues: high leverage and liquidity exhaustion

Yesterday afternoon, Payshield has released information about the liquidation of ETH assets of Sanjian Capital. According to the Aave platform, the suspected wallet address of Sanjian Capital (beginning with 0x7160) has nearly 200 million dollars of loans facing liquidation at any time, and the address in order to avoid large-scale liquidation, also constantly repay debts on the chain.

At that time, when the three arrows liquidation rumor hot, we regard it as three arrows "self-defense counterattack" onlookers. However, KOL revealed on Twitter that the address may actually be the address of the wallet related to Longrong Capital, and the market liquidation can be seen as a "spectacular scene" of the collective diving of whales.

Besides stETH, Sanarrow also has a large amount of loans to purchase GBTC positions. Since last year, the GBTC spread has been deteriorating and is currently -30%, which also makes this part of assets of Sanarrow seriously shrink and also face liquidation risks.

How much leverage was there in last year's wild second rally? From the overall TVL of DeFi in the figure below, we can get a sense of it. The red box on the left is the Luna crash in early May, during which the entire DeFi TVL dropped from $200 billion to around $120 billion, losing $80 billion. The red box on the right shows the liquidation of Celsius and Sanjian caused by stETH. TVL lost $45 billion again.

It is not hard to see that the prevailing ecology and institutional liquidation has led to a rapid contraction of overall credit volumes in the market and may lead to continued deleveraging. Like Celsius withdrawing capital, many other lending platforms will protect themselves by withdrawing credit from the market, further reducing the flow of capital and drying up liquidity. For example, the TRON ecostabilization coin USDD, with hundreds of millions of DOLLARS of support from the Federal Reserve Bank of Poland, failed to escape the fate of the anchor, yesterday as low as around $0.96.

There is no doubt that the crypto market is having its Lehman moment, often needing outside capital to stop the liquidation from getting worse, but unfortunately we have been caught in a wave of rate hikes rarely seen in history: last night's FOMC meeting saw the Fed raise its benchmark rate by another 75 basis points to a range of 1.50% to 1.75%; In Europe, Italian bond yields continued to rise and the European Central Bank called an emergency extraordinary meeting yesterday to discuss strategy and an early interest rate rise.

Recently, the YIELD of U.S. Treasury bonds has also been rising, and the U.S. stock market has continued the downward trend, obviously out of the "Correlation of One" situation: When the economy as a whole faces severe liquidity contraction, people tend to be in a state of "selling what they can" rather than "selling what they want to". As a volatile market, Crypto will undoubtedly be one of the areas with the most rapid liquidity contraction. Raoul Pal, a famous macroeconomist and founder of Real Vision, also pointed out that Margin Call will be everywhere when us Treasury bonds, an important collateral, are experiencing unprecedented volatility.

Today's crypto market is facing a double squeeze on both internal and external liquidity, and the bloodshed may continue. Celsius and Three Arrow Capital are not the first institutions to fall, and they won't be the last.

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