Crypto Market “Battle Royale”: Liquidation, Selling, Runs

Although Bitcoin rebounded to $20,000 in the early hours of June 20, the crypto-asset market it led has been unable to reverse its decline. The total market value of crypto-assets of $900 billion has shrunk by one-third from its high in November last year. two.

Another panic occurred on June 18, when Bitcoin (BTC) fell below the support of $20,000 and reached as low as $17,500, while Ethereum (ETH), the second largest by market value, fell below $1,000 and as low as $880 , the prices of the two major crypto assets fell to new yearly lows. On that day, the total amount of liquidation in the crypto asset market exceeded $560 million.

Different from the previous bull-bear cycle, DeFi (decentralized finance), a new role in the market that appeared in this cycle, also suffered heavy losses in the market slump. On June 18, the total value of encrypted assets (TVL) locked in the DeFi market also fell to a new low for the year, at $72.9 billion, an evaporation of 71.2% from the high of $254 billion in December last year.

The traceable panic started with the collapse of TerraUSD (UST), and within a month, the sell-off and the withdrawal of funds were staged in the crypto market at the same time, triggering a series of chain reactions: Crypto asset lending platform Celsius had a liquidity crisis, suspended customers Transfers and withdrawals; crypto-asset hedge fund Three Arrows Capital suffered a large liquidation and almost went bankrupt; the centralized crypto-asset trading platform AEX suffered a run, and not long after, the similar platform Hoo suspended user withdrawals…

The collapse of a dollar stablecoin in the decentralized crypto finance (DeFi) market has impacted several centralized crypto platforms, and eventually the risk spilled over to the entire crypto market. In this “domino”-style market collapse, the giant whale’s game of speculating on DeFi has failed, and DeFi is far from its goal of “democratizing finance”.

Debt chase “Three Arrows”

After the collapse of UST and the return of LUNA to zero, the center of the storm moved to the top of the hedge fund Three Arrows Capital.

Three Arrows Capital probably didn’t expect that the stETH that had made profits for it from the DeFi revolving loan would one day break away from the anchored ETH. These crypto assets as collateral are depreciating, and its positions are facing liquidation.

The panic began on June 14, when the crypto-asset hedge fund converted more than 50,000 stETH into ETH at a discount, and exchanged 16,625 ETH of it into the stablecoin DAI worth more than $20 million. Crypto analysts have speculated that Three Arrows was designed to prevent the liquidation of its $295 million position in the DeFi lending platform.

But reckoning came mercilessly. On the afternoon of June 15th, the alarm of the blockchain security agency Paidun kept sounding on the social platform. The address suspected to be related to Three Arrows Capital was liquidated 14,538 ETH within more than an hour. Calculated at the time of ETH of 1,027 US dollars, the liquidation was Valued at over $14.9 million.

After the news of the liquidation of Three Arrows Capital came out, ETH fell from around $1,092, a drop of more than 6% in a short period of time.

Prior to that, Three Arrows Capital had sold 33,000 ETH to repay debt, worth over $33.89 million. On June 16, the fund’s selling of stETH still did not stop, and the liquidation of its positions included not only decentralized DeFi lending platforms such as Aave, but also centralized trading platforms such as FTX, Deribit and BitMEX, all three platforms. Provides financial derivatives services for crypto assets, including futures and options.

On June 17, The Block quoted people familiar with the matter as saying that three trading platforms had liquidated positions in Three Arrows over the past week after Three Arrows failed to meet margin calls. Among them, BitMEX confirmed the liquidation news, but did not respond to the statement that Three Arrows Capital owed it $6 million in debt; while Deribit publicly stated that its shareholder Three Arrows Capital did have a small number of accounts with net debt on the platform, but the platform User funds are safe.

Also among the debt collectors are Three Arrows clients. Danny, head of trading at 8 Block Capital, took to social media to defend their rights, accusing Three Arrows of embezzling $1 million from their accounts, which they suspect was used for margin calls. The founder of another DeFi project said that the whereabouts of the project’s funds deposited in TPS Capital, an OTC trading company under Three Arrows Capital, is unknown.

A series of debt crises have put Three Arrows Capital on the brink of bankruptcy, and the DeFi platform associated with it has also experienced a crisis. Staking revenue platform Finblox says it has a partnership with Three Arrows Capital, and in an effort to “spread risk as much as possible,” it has suspended all revenue distributions, banned the creation of new crypto addresses, and restricted user withdrawals — the amount of cash that can be withdrawn daily. There is a cap limit of $500 and a monthly cap of $1500.

On June 17, the co-founder of Three Arrows Capital, Kyle Davies, finally broke his silence. In an interview with the Wall Street Journal, he admitted that Terra’s collapse was an important reason for the company’s losses, and the rapid decline in the crypto asset market has exacerbated the company. Loss.

Three Arrows Capital, an investor in the Luna Foundation Guard, the group behind Terra , had invested about $200 million in LUNA, a reserve that helped UST be tied to the U.S. dollar. But after the UST crash in May, Three Arrows’ investment evaporated.

It is reported that Three Arrows Capital has hired legal and financial advisers to find solutions for its investors and lenders, trying to solve the debt problem through asset sales or rescue plans.

The crypto hedge fund, which once managed $10 billion, was like a stranded whale. While it was in danger, it also patted small fish on dry shores.

The assets of the giant whales were liquidated in large amounts, and panic and selling were “desperate.” On June 18, when BTC fell below $20,000, the drop was 7.34%. Ethereum, which fell below $1,000, showed a larger drop, with a drop of 8.47%. ETH exploded on the day of $190 million, and BTC exploded on the same day. 269 ​​million US dollars.

Two suspensions

Liquidity risks are being transmitted to small and medium-sized platforms. On June 16, when Three Arrows Capital encountered on-chain liquidation, the crypto asset trading platform AEX suspended the withdrawal of mainstream assets such as BTC and ETH for a period of 36 hours. Although user withdrawals have since been reinstated, AEX has imposed limits on withdrawals, currently capped at $600.

AEX’s Chinese name is Anyin. It was founded in 2013 and was first established in mainland China, and then went overseas after domestic supervision became stricter.

AEX said in the announcement that it is facing a run on the scale of more than $1 billion.

The “LUNA crash” was also regarded by the trading platform as the trigger for insufficient liquidity. “Since the crash of LUNA in mid-May, the total market value of AEX’s various assets outflows has reached 450 million USDT (including the withdrawal of cooperative institutions). It consumes AEX’s short-term liquid assets and some medium-term assets.”

AEX’s liquidity crisis isn’t just about runs.

Like Three Arrows Capital, this centralized trading platform has also carried out asset allocation in DeFi. Among its 80% of its medium and long-term allocation assets, crypto assets worth 110 million US dollars are pledged to be “mined” on the chain. . The USDT/USDC pool stored by the platform in “mining” (providing liquidity to obtain rewards) on the Curve platform was exchanged after the UST crash, resulting in a loss of short-term liquidity assets.

At the same time, AEX is also lending crypto assets, and it said that the delay in repayment of customers in the pledge loan business is also one of the reasons for the platform’s withdrawal difficulties, and the loan amount pledged to the outside world is 230 million US dollars.

It can be seen that while operating the crypto asset trading business, AEX also acts as a “bank”, which has the same function as Celsius, the crypto asset lending platform that suspended customer withdrawals on June 13. Celsius’ liquidity risk is also related to its participation in DeFi, and Terra is also one of the sources of its thunder. There are reports that the lending platform is seeking outside investment or acquisitions, but Reuters reports that securities regulators in five regions have launched investigations into Celsius.

These platforms that extract revenue from DeFi and lend externally all have a common problem: Are the funds put into DeFi and loans issued externally belong to user assets? Has the informed consent of the user been obtained? Neither AEX nor Celsius has made public statements on either issue.

Another crypto trading platform that also has difficulty withdrawing is Hoo, which started from a crypto asset wallet and was founded in mainland China in 2018, and will move its office to Dubai after 2021.

Hoo Hoo generally attributed the reason for the suspension of withdrawals to “the recent market volatility”, “some large structures in the industry have been liquidated, and liquidity has been depleted.” Hoo said that the liquidity of hot wallets has been affected as a result, and multi-signature wallet transfers need to be processed. time, resulting in a delay in user withdrawals. The platform promises to gradually return to normal after 72 hours.

There is no detailed disclosure of AEX, and the recovery time of withdrawal is longer than that of other companies. The suspension of Hoo Hofu has been questioned by users. It is suspected that the platform also has the problem of putting assets into the DeFi market for profit and causing losses, but users’ doubts Sheng received no response from Hu Fu.

DeFi not “De”

A centralized crypto asset institution is caught in the dilemma of depletion of liquidity. If it weren’t for the frequent occurrence of thunderstorms, the outside world might not dig deep into their on-chain dynamics. “Encrypted whales participating in DeFi” are at most one person in the industry well-known phenomenon.

In June 2020, since the decentralized lending platform Compound on the Ethereum chain brought DeFi to the fire with “liquidity mining”, users’ encrypted assets began to flow into the decentralized DeFi market from the centralized trading platform , to provide liquidity for decentralized trading platforms, lending platforms, and stablecoin protocols in order to obtain token rewards issued by these platforms. These rewards quickly generate transaction prices due to the existence of the liquidity exchange pool, and the tokens become “real money”.

The wealth effect began to brew in the early days of the bull market in the crypto asset market, and reached a climax at the peak of the bull market. The total value of crypto assets locked in various DeFi protocols jumped from less than $100,000 to nearly $3,000 in more than a year. billion dollar highs.

During this process, users who injected encrypted assets into the DeFi platform and contributed liquidity have been upgraded from ordinary retail investors to professional players (commonly known as scientists) who can operate robots. However, with the decrease in APY, some scientists have also been eliminated. Only Only big capital who has money and understands smart contract technology can make profits in DeFi, especially with the help of DeFi products that can revolve lending.

Taking stETH as an example, this voucher token originally generated through the Lido protocol in order to release the ETH2.0 pledge was introduced by some lending platforms as collateral for borrowing. Pledge ETH2.0 itself will generate 4% of income, and deposit stETH into the lending platform, and you can get interest income; more profitable is to pledge stETH as collateral on the lending platform, loan out stablecoins, and then exchange For ETH, re-pledge into Lido for stETH… Behind the revolving loan is the continuous increase in leverage.

But when the collateral depreciates to a certain extent, liquidation begins to knock on the door of risk.

On June 14, the Bank for International Settlements (BIS) issued an announcement on DeFi lending after Celsius suspended its withdrawal. BIS pointed out that DeFi uses anonymity to overcome the problem of information asymmetry that has always existed in the financial market, but relies heavily on the characteristics of on-chain collateral (encrypted assets), which not only cannot make the field immune to the market “boom-bust” cycle, but also will fall into a liquidation spiral. 

Throughout history, financial intermediaries have been working on improving information processing, and current DeFi loans want to change this approach, trying to replace information collection with borrowers providing collateral, so as to play the role of financial intermediaries.

To ensure lenders are protected, DeFi platforms set a liquidation ratio relative to the borrowed amount, BIS explained . For example, a collateralization rate of 120% may be accompanied by a liquidation rate of 110%, if collateral falls below this threshold, it will depreciate in value. The smart contract stipulates that at this point anyone can act as a liquidator, confiscate the collateral, repay the lender, and pocket a portion of the remaining collateral. The profit drive ensures adequate supply for liquidators and mitigates potential credit losses for lenders. 

“Overcollateralization is prevalent in DeFi loans due to the anonymity of borrowers…” BIS pointed out that, in order to avoid forced liquidation, borrowers often submit crypto assets above the minimum required, resulting in higher effective collateralization ratios . Considering the “boom-bust” cycle of the crypto market, in fact, “over-collateralization and liquidation ratios do not eliminate the risk of credit losses. In some cases, the value of the collateral dropped rapidly and borrowers did not have time to unwind before they depreciated. Loans, causing lenders to suffer losses.”

BIS believes that the current DeFi is mainly to “promote crypto-asset speculation” rather than “real economy lending”, which goes against its goal of “financial democratization” because the mortgage-based lending model only serves those with sufficient assets. People, excluding those with little wealth, have not only failed to achieve financial inclusion, but have instead moved towards centralization.

In this bull-bear cycle of encrypted assets, DeFi was born, describing a utopia that replaces traditional finance for the outside world, but it became a “toy” for giant whales in the bull market, and it also turned against firemen in the bear market. hit. And that goal of “democratization of finance” is blurring in the gloom of the market.

Posted by:CoinYuppie,Reprinted with attribution to:
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