“The collapse of crypto shadow banks like Celsius demonstrated just how problematic centralized, opaque finance can be,” says Sunny Aggarwal of Osmosis DEX.
Centralized finance platforms have taken a huge credibility hit due to poor risk controls, but decentralized finance protocols haven’t escaped unscathed either. So, is DeFi or CeFi likely to emerge stronger from this current period of turmoil, or is the future likely to see some sort of hybrid of the two?
In November 2021, Zhu Su, co-founder and chief investment officer of hedge fund Three Arrows Capital (3AC), was a big name within the CeFi industry. Having just closed a purchase of more than $400 million worth of Ether using the fund’s assets, together with his friend Kyle Davies, the two had become among the world’s largest crypto holders.
As a crypto bull market mesmerized the attention of return-hungry investors, funds poured into the Singaporean-based 3AC. After all, all investors had to do was to make a wire transfer, sit back, relax and enjoy the fat returns generated by the hands of “professionals,” right?
Fast forward just eight months later, both Su and Davies are in hiding after the collapse of the firm blew up the CeFi sector and wiped hundreds of billions off the overall market cap. A court in the British Virgin Islands ordered 3AC’s liquidation with an estimated $2.8-billion hole in the balance sheet.
In the battle between DeFi and CeFi who will emerge victorious?
It turned out that a series of highly leveraged directional bets made by 3AC went horribly wrong as the crypto bear market intensified in May, wiping out what’s likely to be all of its investors’ capital. 3AC had taken large loans from all the big CeFi lenders — Voyager, BlockFi and, to a lesser extent, Celsius, leaving them all exposed, too.
Crypto-brokerage Voyager Digital reportedly lent $665 million to 3AC for trading purposes. It issued a default notice to no avail, and the firm was forced to file for bankruptcy. Crypto broker Genesis recently…