Not everyone is feeling it yet, but the global economy is in pretty bad shape at the moment. In some countries prices are skyrocketing. Fuel and energy in general have become terribly expensive. Financial markets are also impacted significantly. So, the readers living in an oil and gas rich country with good domestic production like Oman, might find this article somehow hard to fully relate.
However, the readers from Europe, the US, and other countries in Asia, understand perfectly what I am trying to convey. We have seen crisis playing out several times in our generation. The most recent was in 2008. I recall the feeling when the financial system was collapsing, but my business was doing relatively well in Singapore.
I did not perceive the degree of catastrophic impact that the crisis was having around me. But this time is different. Especially when I look at the crypto market. When Terra - Luna crashed the market a couple of months ago, set in motion a domino effect. Last week, Three Arrows Capital (3AC) became insolvent, threatening a tsunami that could have tremendous repercussions.
Three Arrows Capital’s implemented an aggressive investment strategies, but with poor risk management. This is probably the simplest summary of its failure to maintain short-term liquid assets to cover the liabilities. Over US$300 million of assets were liquidated since the middle of June. 3AC’s collapse highlighted the risks linked to speculative leveraged positions with major lending protocols in Decentralised Finance (DeFi). US$ 1 billion in uncollateralized crypto loans, are now at serious risk if borrowers run out of liquidity to repay. This brought the spotlight onto Wintermute Trading and the Amber Group, the two biggest borrowers in the uncollateralized lending market, with total loan value of US$ 160 million each.
The ecosystem partners of 3AC are “bleeding” badly. Celsius blocked withdrawals on its platform since the liquidity struggle started in mid June. Finblox reported that its multiple demands for 3AC’s full loan repayment were unsuccessful. Investor and crypto lender BlockFi liquidated some of 3AC’s positions. Genesis apparently also liquidated 3AC when failed to meet a margin call.
Towards the end of June, Voyager Digital issued a loan default notice to 3AC for $670 million.
Now the eyes are all on the biggest crypto lenders in decentralised finance: AAVE, Compound, and MakerDAO. Collectively they hold billions of crypto assets available for borrowing. They played a critical role in facilitating speculation by allowing big position leveraging when liquidity was abundant. They were offering very attractive interest rates to encourage large funds and institutional investors like 3AC to borrow for trading and investing. But now these large lenders feel the pinch of a potential domino effect on their liquidity.
When the average crypto enthusiast talks about his or her holding in Bitcoin or Ethereum, might not really grasp the magnitude of the ramifications when large investors fail to repay their borrowings. This crypto crisis seems to have no end. Since 2019 - circa when the DeFi movement started - billions upon billions were piled up in risky speculative investment instruments. As it often happens, when making money seems too easy, there is something that does not adds up, and the repercussions could be behind the corner. Calls for stricter regulations always follow big losses.
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