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Three Arrows founders break silence over collapse of crypto hedge fund


One of those trades involved an Ethereum-linked token called staked ETH, or stETH – designed to be a tradable proxy for Ether and widely used in decentralised finance.

While every stETH is meant to be redeemable for one Ether once long-awaited upgrades of the Ethereum blockchain take effect, the turmoil sparked by Terra’s collapse caused its market value to fall below that level.

This, in turn – in Zhu’s telling – caused other investors to put on trades that could benefit from the widening gap.

“Because Luna just happened, it, it was very much a contagion where people were like, okay, are there people who are also leveraged long staked Ether versus Ether who will get liquidated as the market goes down?” Mr Zhu said.

“So the whole industry kind of effectively hunted these positions, thinking that, you know, that because it could be hunted essentially.”

Still, the fund was able to continue borrowing from large digital-asset lenders and wealthy investors – until, that is, they blew themselves up.

After Luna’s implosion, Mr Zhu said lenders were “comfortable” with 3AC’s financial situation, and that they allowed them to keep trading as “as if nothing was wrong”.

As courts filings have now revealed, many of these loans had required only a very small amount of collateral.

“So I just think that, you know, throughout that period, we continued to do business as usual. But then yeah, after that day, when, you know, Bitcoin went from US$30,000 to US$20,000, you know, that, that was extremely painful for us. And that was in, that ended up being kind of the nail in the coffin.”

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Mr Zhu said that “if we were more on our game, we would’ve seen that the credit market itself can be a cycle and that, you know, we may not be able to access additional credit at the time that we need it. If, if it kind of, you know, it hits the fan.”



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