“It’s as if the entire industry was built around an over-geared ‘hedge fund’,” FxMacro wrote on its Twitter account when crypto broker Genesis announced its exposure to the Three Arrows Capital fund. (3AC), which was put into liquidation by a court in the British Virgin Islands in late June. Since then, the list of actors exposed to 3AC has continued to grow.
Terra’s decline showed that many players had been attracted by the return, which fluctuated between 18% and 20%, of its decentralized financial protocol (DeFi), Anchor Protocol. Feeling the tide turn, with an increasingly tense macroeconomic situation, was one of the first to emerge, the Celsius Network, according to a report from Nansen. He withdrew the equivalent of $ 420 million and launched the fatal bank run for Do Kwon’s ecosystem, the ancestor of Terra. Since then, Celsius has been forced to block its users’ funds. Another player heavily involved in the Terra: Three Arrows Capital fund, now put into liquidation.
“Normally, the fall for a player like Terra should have been almost painless for the industry,” said Charlie Meraud, co-founder of cryptocurrency broker Woorton. For him, “this fall has highlighted risk management strategies that are worthy of amateurs.” It now seems incredible to see that the two founders of the Three Arrows Capital Fund – Zhu Su and Kyle Davies – openly claimed to base their strategy on a constant bullish crypto-asset market … with the price of bitcoin reaching $ 2.5 million. !
The Singapore-based fund managed between $ 3 billion and $ 18 billion in assets and was able to bring in the wake of many major players who promised returns to their clients. Like the US broker Voyager, exposed to 670 million dollars, Blockchain.com, to 270 million dollars, Genesis, which according to the medium CoinDesk would be exposed to “several hundred million dollars”. “The players who are currently suffering are essentially centralized financiers [CeFi]. We observe the same excesses as in traditional finance, with opaque practices and strategies, ”notes Charlie Meraud, who insists on the“ extravagant ”returns. “There is no secret, whether in crypto or traditional financing, the return offered is proportional to the risk,” he adds.
DeFi transparency as a whistleblower
“The value of DeFi is precisely total transparency with the promise of financing outside the traditional banking system. If you do not respect these principles, you do not really have any added value, ”says Paul Frambot, co-founder of the decentralized financial protocol Morpho.
By definition, everything is visible in DeFi. It is also thanks to this transparency that the first doubts about Celsius’ financial difficulties arose in mid-June, through the analysis of its positions within an exchange protocol such as Curve, a kind of market, through smart contracts, these computer programs implemented on a blockchain system.
Although DeFi is completely transparent, practice on platforms like Celsius is not. “Nothing prevents these players from lending to each other outside the DeFi system and putting cryptocurrencies there as collateral,” notes Artem Sinyakin, commercial for Just Mining and founder of OAKinvest Media. Since the beginning of the “crypto-crack”, there have been many questions about the use of client funds, who may never see their efforts again.
Activate from millions of users in the game
Platforms like Voyager, Celsius or Genesis, on the other hand, are valuable because they acted as intermediaries to place crypto in the markets, enabling other players to offer returns to their customers.
It remains to be seen what legal protection platform customers will have if they go bankrupt. “Obviously, if you are a European with funds at Celsius, it will be almost impossible to get your money back. You will quickly drop the lawsuits because of the procedural costs, which are too high,” analyzes William O’Rorke. lawyer specializing in crypto-enabled and founder of the firm ORWL.
Fighting platforms, like Celsius, will struggle to recover. At present, the latter has not yet gone bankrupt and continues to struggle and repay part of its debt. Others, such as Voyager, filed for bankruptcy (Chapter 11). “Even if Celsius manages to get out of it, they will have a trust issue from their users, just like most platforms elsewhere,” Charlie Meraud concludes.