The Rise and Fall of Three Arrows Capital: Excessive Leverage and Alleged Asset Management for Investee Projects
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The Rise and Fall of Three Arrows Capital: Excessive Leverage and Alleged Asset Management for Investee Projects
What is happening with Three Arrows Capital and the potential consequences it may bring.
Navigating Web3 tides with focused insightsWritten by: The DeFi Edge
Translated by: TechFlow intern
This is the worst situation I’ve seen since entering crypto—recession, failed risk management, loan defaults, bank runs, and VCs dumping—all happening in the same quarter.
One of the largest crypto venture capital firms: Three Arrows Capital. They are insolvent, and given they may have managed up to $18 billion, this is catastrophic for Crypto. Below is a timeline of what’s happening and the potential consequences:
Who Is Three Arrows Capital?
We usually refer to them as 3AC—one of the world’s largest venture capital firms focused on cryptocurrency. Founders Zhu Su and Kyle Davies were high school classmates, launching the firm in 2012. Originally headquartered in Singapore, they recently relocated to Dubai.
Their notable investments include:
• Avax
• Near
• Aave
• Derabit
• Starkware
• Terra Luna
• Axie Infinity
They are estimated to have managed between $10–18 billion in assets. As a top-five VC firm, they wielded significant influence and reputation within the industry.
The Power of Influence
Founder Zhu Su also holds considerable influence, with 560K followers on Twitter. He frequently interacts with his audience, indirectly impacting prices through his statements. For example, he once published a malicious article criticizing ETH, causing its price to drop—after which he bought large amounts at a low price. Therefore, whenever Zhu Su makes a statement on social media, we can’t tell whether he’s serious or simply trying to profit from his own influence.
He was also a strong proponent of the Supercycle theory. In February 2021, on an UpOnly podcast, he predicted BTC would reach $2.5 million. Just weeks ago, he admitted that his Supercycle view was wrong.
3AC backed Terra Luna. Before Terra’s collapse last month, 3AC invested $559.6 million into locked Luna tokens, now worth about $670. Some speculate that the massive losses from Luna led them to take on even more leverage to recoup profits—an emotionally driven, subjective form of “over-trading.”
The Danger of Leverage
Charlie Munger once said: “There are three ways to make a smart man go broke: liquor, ladies, and leverage.” This quote remains timeless. Over the past few weeks, token prices have plummeted. If your collateral value drops, you face liquidation risk.
What About 3AC's Liquidity?
We know 3AC made some excellent investments, but many tokens have been locked for years and lack liquidity. So if they needed to post additional margin, they might not have accessible liquidity to repay loans.
Early Signs of Collapse
Degen Trading claimed 3AC had borrowed from every major lender, and many of their positions were at risk of liquidation. Rumors then spread that 3AC was about to have its $264 million ETH position liquidated. However, Nansen confirmed the wallet wasn't tagged as 3AC—the UI had an error, leading the poster to mistakenly identify it as such.
Suddenly, confusion set in. Was 3AC actually in trouble, or were people spreading FUD? Fortunately, Zhu posted a cryptic tweet about crypto a few days ago, hinting that 3AC indeed had problems.
The stETH price has shown persistent instability. Everyone assumed Celsius was selling off their stETH—but now it appears 3AC is behind the sales.
Eventually, the truth surfaced. Danny, who worked closely with 3AC, noticed $1 million missing from their account. Clearly, the founders were manipulating funds—3AC was being liquidated. Miles advised watching unlock schedules closely. If 3AC has financial issues, assume they’ll sell their tokens immediately upon unlocking.
Further Consequences
Unfortunately, we don’t have full visibility into 3AC’s wallets and positions. We don’t know the full extent of damage if they go bankrupt. Given their AUM (Assets Under Management), the ripple effects could be catastrophic.
VCs aren’t gods. People are biased by the “halo effect” around VCs. Many believed Terra was too big to fail, thinking firms like Jump and 3AC would step in and fix things. But that didn’t happen. They’re not always right.
Risk Management
3AC invested in seed rounds of some of the most prominent crypto projects. Yet today, they’re on the brink of collapse—proof that risk management was severely underestimated. Remember:
1. Don’t fight the Fed
2. Leverage is dangerous
Key Takeaways:
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3AC lost significant liquidity in Terra Luna
-
3AC received margin calls and is being liquidated
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This could trigger severe cascading effects across the industry
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Without solid risk management, growing your returns 100x won’t save you
Additional Information
A protocol invested in by 3AC reached out to me. They wish to remain anonymous while considering legal options:
1. It has been confirmed that 3AC led their seed round
2. I am currently speaking with the founders
3AC participated in various seed rounds across numerous companies. Since protocols typically raise funds in USDC/USDT, their treasuries often sit idle. A common arrangement between 3AC and these protocols was for 3AC to “manage” their treasury.
In return, 3AC offered an 8% APR, so projects deposited both their raised funds from 3AC and other treasury holdings with them. Everyone felt safe… because it was 3AC.
Note: Terra researcher FatMan tweeted that according to verifiable sources, Three Arrows Capital previously borrowed from multiple funds and counterparties, funneling those loans into Anchor to generate yield without most lenders’ knowledge. Before LUNA’s sharp decline, 3AC held at least hundreds of millions of UST. Additionally, 3AC previously held some USDD, and minor de-pegging of USDD may have been linked to their sell-off. Furthermore, 3AC still owes a substantial debt to BitMEX.
Project X confirmed that liquidations are real—they’ve spoken with two other projects who said they were similarly misled by 3AC. 3AC currently holds portions of their funds, but they have no clarity on their actual cash position.
Me: “Can’t you track your funds on-chain?”
Project team: “They mixed our funds with large investments and other assets—we can’t easily trace them.”
So here’s where we stand: project funding and treasuries may already be gone... I’ve also confirmed with another protocol that 3AC provided treasury management services.
Regardless, I’m not trying to pour gasoline on the fire, but we need to untangle this chaotic situation—and then begin rebuilding.
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