Crypto hedge fund Three Arrows Capital faces liquidation

Crypto hedge fund Three Arrows Capital (3AC) is liquidating assets and in the process of figuring out how to repay lenders, according to reports.

Why it matters: The dominoes are starting to fall, as some companies and investors who made risky bets on unregulated crypto markets are having their bills come due.

Driving the news: Several top-tier lending firms have liquidated at least $400 million from 3AC, The Block reports.

• The liquidation comes as 3AC has seen the price of several investments — including avalanche, polkadot, and ether — fall dramatically over the last several weeks.

What they’re saying: "We are in the process of communicating with relevant parties and fully committed to working this out," 3AC founder Zhu Su tweeted Tuesday evening.

Flashback: 3AC was one of the more prominent investors in Luna and TerraUSD (UST) before their collapse.

• In February, it was part of a group of investors that swapped bitcoin for $1 billion worth of Luna tokens to act as a backstop for UST in case it lost its peg.
• In May, it swapped another $500 million worth of bitcoin for UST in an over-the-counter transaction.
• The latter deal was announced just one week before UST was knocked off its dollar peg and entered its death spiral.

Yes, but: What really appears to have done 3AC in was a massive exposure to staked ether (stETH), a token issued by DeFi lender Lido Finance.

• In theory, stETH is meant to be redeemable for the same amount of ETH; however, due to a lack of liquidity in the market, 3AC was forced to sell at a discount to cover some of its other liabilities.
• On Tuesday, it withdrew more than 80,000 stETH from decentralized lender Aave and then swapped 38,900 of the stETH for 36,700 ether, according to industry tracker Nansen.