Although Terra’s death spiral may have been the catalyst, the big cause for contagion has been the downfall of 3 Arrows Capital. If you’re new to this space, up until a couple of months ago, 3 Arrows Capital was one of the most prominent crypto hedge funds that oversaw billions of dollars worth capital; however on July 2nd, 3AC filed for Chapter 15 bankruptcy, and will probably be considered the biggest casualty of this current crypto winter. The contagion surrounding everything associated to 3AC is real, and it’s happening fast. As I’ll highlight in this article, even if you thought you were safe because you never got involved with Voyager (Or Celsius, Vauld, Coinflex, etc.) or even if you pulled all your assets of of exchanges, you still may not be out of the woods yet.

3AC Vesting Schedules

Being the financial powerhouse that it was, 3AC presumably has gotten in at the ground floor, or at least near enough (no pun intended) to where they will have many token unlocks through it’s vesting schedule. In the coming weeks or months, I’ll be making a point to try to keep tabs on what is to come of 3AC’s entitled token locks, but my assumption is that when these unlocks occur, they will probably be immediately sold off to try to cover 3AC’s insolvency.

If you haven’t heard of vesting schedules or token unlocks, essentially it’s a measure taken by many platforms/tokens to try to prevent from token dumping upon the initial token’s release date. Instead through a unlock/vesting schedule, only portions of tokens will be released to initial investors at different time intervals.

For a quick example, let’s take a look at the $AVAX token. 3AC was a member of the private sale which raised a total of $230 million dollars. According to Messari.io, the private seed sale for $AVAX included the following details for its participants:

“3.5% of the tokens were for participants in the private sale. The price per token was $0.5 with a one-year vesting schedule. 10% of the allocation was released on mainnet launch, with the remainder released every three months over a year."

There were a total of 360 million AVAX minted at launch, meaning that when the tokens first got released, private investors was able to obtain 1,260,000 $AVAX at launch, and then subsequently every 3 months get the remaining 90%, which comes out to about 2,835,000 $AVAX every 3 months. My main point I want to draw here is that if 2,835,000 $AVAX tokens all of a sudden were dumped today, at a current spot price of $18.86, the $AVAX marketcap could potentially take a hit worth $53,468,100. This would undoubtedly cause a dump in $AVAX’s price, hurting all $AVAX holders.

Now these numbers might seem a bit inflated and of course probably not all private investors would be dumping their token all at once (which would be foolish in hindsight considering the ATH for $AVAX was $144.96), but these figures are for only private investors. Token distribution at launch went to not only private investors, but also to other participants including seed investors, as well as multiple public sales all totaling approximately 15.97% of the initial 360 million $AVAX minted, most which had different vesting and unlocked schedules over the following 12–18 months. A second consideration is that I couldn’t find data on how much of this $230,000,000 of private sale money was due to 3AC, but my assumption is that it out of the other private sales, 3AC had the biggest slice of the pie.

Now if you’re worried about 3AC’s future unlocks of $AVAX, don’t be. $AVAX’s ICO date was July 15th, 2020 which means that as a private sale investor, 3AC would have gotten their last token unlocks on July 15th 2021. In fact, the last token unlock for anyone that was able to get in early to $AVAX was back in March 3rd, 2022 for Option A2 investors:

The main point I want to reiterate here is that the aftermath of 3AC’s downfall may cause future selloffs for different tokens as future unlocks take place. Not sure when the future unlocks for your tokens are? There are many places you can check including:

• https://unlocktokendate.com/
• https://substack.com/profile/33972922-unlocks-calendar
• Or if not listed with one of these, I would check directly on the token’s white paper because the schedule(s) can usually be found there.

No Man (or VC) is an Island

The second point I want to draw is that as you can see below, 3AC was a primary investor/stakeholder in multiple different projects, all of which you can find listed on their website:

As you can tell, this is…a lot. Although there is some public information available on some of these investments, what I think we can assume at this point is that with billions of dollars in backing, 3AC had enormous reach touching many different parts of the crypto-space, not just degen lenders like Voyager or BlockFi. Want some examples?

Fireblocks — the digital custodian of “1,300 of the largest institutional players leverage Fireblocks”

NEAR Protocol — Backed not only by 3AC, but many others including Tiger Global, Republic Capital, FTX Ventures, Hashed, Dragonfly Capital, ParaFi Capital, Blockchange Ventures, and MetaWeb Ventures, Alameda, Jump Capital, Pantera Capital, and the likes of 20 others

The fall of 3AC was not quick and calamitous in itself, but it was compounded by the ripple effects that it had on multiple different platforms, both directly and indirectly. Directly by the loans it defaulted on with the likes of Voyager (15,250 $BTC) and BlockFi ($1 Billion) who are now bankrupt and/or in financial straits, but also indirectly because it has caused a lot of people to take their holdings off of exchanges for fear of frozen withdrawals. Just take a look at the overall Bitcoin balance on exchanges from just the last two months:

This fear and contagion has put many platforms/protocols at risk of liquidity shortages, or at the very least, a ton of FUD which causes even more FUD and possible price volatility. This unfortunate combination can and will effect the price of your token, regardless of whether or not it’s frozen from withdrawals or not. If you read my previous article about the FUD surrounding KuCoin, you’ll remember that there was misinformed panic because of some massive cold to hot wallet transfers. Despite there appearing to be nothing substantiated to the rumors, $KCS, KuCoin’s native token still saw some significant price action:

This type of price action can give strong incentives for bad actors to easily manipulate the market to make significant gains or to give others significant losses. This leads me to my next and final point:

Continued 2nd, 3rd, and 4th order Chain Effects

Problems will continue to grow due to the fact that 3AC’s exact liquidity troubles are not public, and until they are made known, we will not know how much money needs to be repaid to who, and also to what effect some of these invested projects will be hurt by the withdrawal/liquidation of 3AC’s funds.

I’m willing to bet that until then we will continue to see a domino effect of different projects that weren’t even directly related will continue to receive FUD or liquidity shortages that put even more platforms/exchanges or tokens at risk. I’m currently working on another article where I’ll go into this a bit further detail, but an easy example for this is the current FUD around $USDC. If you connect the dots…

1. 3AC goes bankrupt
2. Genesis loses “Hundreds of Millions” due to 3AC exposure
3. Genesis is partnered with Circle, the company behind $USDC
4. FUD surrounds $USDC

I personally don’t believe that there’s anything wrong with $USDC, but I would also argue that FUD will make people do very irrational things, so we only have yet to imagine what dominoes have yet to fall, or at a very basic level what rumors are to be spread next. And this might be a very pessimistic outlook, but I believe that we will continue to see these unfortunate events for as long as the bear market lasts. Despite my losses in exposure to the terra ecosystem, this is why I was much more worried about the downfall of 3AC than I was with the LFG — 3AC had far more many hands in far more many pots.

The incestuous nature of some of these projects is what has caused this contagion to be more of like a wildfire — a wildfire that’s burning nearly everything in crypto.

Conclusion; Light in the aftermath

Aside from all the doom and gloom projections with 3AC’s downfall, I believe that the pain experienced now and in the months to come will help the cryptomarket as a whole become stronger and more resilient in the long run. Hopefully the projects that are able to survive will be able to build contingency plans and smart contracts to ensure that they can survive any doomsday scenario that occurs in the future. It’s at the height of bull markets where everyone seems to fall asleep at the money-making wheel, but it’s at the depths of the bear market when we figure out what the hell is needed and what the hell we’re doing.

Once again, thanks for reading, and if you have any opinions/facts to the contrary, I would be very interested in hearing about them in the comments below. Also please be sure to follow me on twitter if you want to receive all my latest updates: https://twitter.com/CryptosWith

Disclaimer: None of this is financial advise and is suited for entertainment and educational purposes only. Please as always, do your own research and find what investment(s) might be best for you.