3AC, Vauld, TDS effects and HTC
A rundown on the mega events in crypto
Hello friends! đ
At this point, it doesnât take an Einstein to understand that weâre in the midst of a bear market with assets across the board having plunged in value. Some of the âBig Boysâ are well under water now. Reminds me of Charlie Mungerâs saying:
You only find out who is swimming naked when the tide goes out!
Letâs get down to whatâs been happening over the last couple of weeks and why some people are comparing the fall of these centralized crypto firms to the bankruptcy of Lehman Brothers in 2008.
The 3AC đč Contagion
3AC or Three Arrows Capital is a multi-billion $$$ hedge fund that announced insolvency a couple of weeks ago. The firm had a great reputation when it came to executing arbitrage strategies and made tons of money off of it. The confidence in their ability to execute profitable trades was so high that firms like Voyager, agreed to lend over $650M+ in unsecured loans! And Voyager wasnât alone. Firms like Celsius, Babel Finance, and BlockFi all lent out capital to 3AC albeit on different terms.
Why did 3AC take loans? To generate higher returns by deploying borrowed capital. Finance bros call this leverage. Their trouble began with the implosion of the Terra-LUNA ecosystem back in May when they lost nine figures of capital or maybe more. They then locked up ETH for stETH but had to sell prematurely on secondary markets at a discount. Millions vaporized there too. In short, they owed way more than they had but the problem doesnât stop with 3AC. Since they were well connected in the crypto ecosystem, they had access to capital from a large number of players. This leads us to the contagion.
When the news of 3AC going bust circulated on CT (CryptoTwitter), treasury managers of a few protocols started talking about how they let 3AC manage their treasury to generate higher yields! 3AC apparently made investments in these protocols/companies and offered to manage their capital for additional yields and some of these companies let them do that!! This is as wild as it can get. A lot of protocols and companies are going to suffer as a consequence of their poor decisions and 3AC going bust. Weâll likely see more carnage in the coming weeks.
âThere are three ways a smart person can go broke: liquor, ladies, and leverage."
- Charlie Munger
Vauld suspends withdrawals
For starters, Vauld is a 4-year-old lending platform where users like you and me can deposit crypto to earn interest. Vauld makes money by lending it out to borrowers to earn interest and gives a cut of it to its depositors. It is essentially a bank for crypto tokens. The firm is backed by Valar Ventures (Peter Thielâs venture firm), Coinbase Ventures, and Pantera Capital among others.
A large chunk of its users is Indians who contribute over 20% to the companyâs AUM. Vauld charged a low brokerage and allowed users to trade tokens on its platform while earning interest on them. Recently they made a public statement that they had no exposure to 3AC or Celsius and will continue to offer unrestricted withdrawals to users.
On June 21st, Vauld announced they will lay off 30% of its staff citing the economic slowdown. Meanwhile, users had been withdrawing funds from the platform because of market sentiments and concerns over a potential account freeze. Just in the last 20-25 days, the platform saw withdrawals worth $200M which is big enough to put a financial strain on any company.
As July kicks in, the 1% TDS on crypto transactions (in India) goes live and traders continue withdrawing funds from the platform. This led to Vauld suspending all withdrawals, trading, and lending on its platform with immediate effect. They are now working on restructuring the company and it looks like Nexo will buy out 100% of Vauld. A statement from the founder:
Until the due diligence is complete, funds will remain frozen and it is unclear what happens to the funds once the takeover is complete. The secured and preferred creditors will be paid out first and then the unsecured creditors (users), provided there are enough assets available to pay all of them.
Weâve seen a bunch of companies struggling financially that acted as centralized holders of tokens. Even though they talk and preach decentralization and blockchain transparency, they themselves are centralized firms and their activities are not publically available for anyone to see. Only a handful of them has done well so far. Once full-fledged regulation kicks in across countries, Iâd wager most of them will struggle to stay afloat. If you can, stay away from centralized firms offering to hold your coins for a small APY. In most cases, this doesnât end well for the users.
1% TDS on crypto txns in India
All Indian exchanges such as WarizX, Coinswitch, and others will charge a 1% TDS on every transaction you make going forward. This may not be significant to long-term investors but is detrimental to traders who make multiple txns each day and coughing up 1% for each trade will reduce their pool to a tiny value. The govt is clearly trying to discourage trading by introducing such laws. The effect of this law can be seen in the drop in trading volumes of major Indian exchanges which are down YTD from their all-time highs this year:
WazirX: $195M â $4.5M đ»98%
CoinDCX: $32M â $2.1Mđ»93%
Zebpay: $19M â $1.1M đ»94%
Bitbns: $24M â $19M đ»17%
If this is the trading volume on an exchange, the company wonât be turning much profit to sustain its business or pay its staff on time. The gross income is usually in the range of 0.1% to 0.5% of the trading volume. This is scary since it means we could possibly see layoffs in the future. If depositors start withdrawing their funds, it could trigger a bank run scenario. This, in turn, will likely force the exchanges to suspend withdrawals and trading. Of course, none of this is expected to happen but better prepare for the worst-case than be surprised if/when it happens.
What does this mean for non-Indian exchanges like Coinbase or Binance? Until the foreign exchanges provide provisions for calculating the TDS on their platform, the users are expected to collect the PAN details of the seller or buyer and file the TDS themselves. This is a consumer hassle and will likely get resolved by these firms but weâll have to do it manually until the feature rolls out.
Are the traders going home now? Maybe some of them will stop trading at all and a good chunk of them will move their funds to self-custody wallets and trade on DEX. Trading on DEX doesnât mean one can/should avoid taxes but you can file all of it at the end of FY without having to lock it up on platforms before the end of the FY. This gives some leeway to traders and investors alike. Some will argue you can avoid taxes by simply routing it through tornado cash and going about your business as usual but if the IT dept or ED wants to take you down, they will find a way to do it. They are far stronger and more sophisticated than an average user.
HTC Phone
Last time, we discussed the launch of the Solana phone, and this week we had HTC launch its âmetaverseâ phone with support for Ethereum and Polygon. The phrase âmetaverse phoneâ sounds clickbaity but itâs great to see different strategies being deployed by various protocols. No idea how this is going to work out but good to see protocols working towards making this tech consumer-friendly.
Sandeep Nailwal, the co-founder of Polygon, called Solanaâs promise hopium marketing. Although I like what Polygon is doing with its tech stack, calling someoneâs effort hopium marketing doesnât look great on a founder working in the same domain.
Regardless of their personal fights, the mobile space could heat up pretty quickly, and will be interesting to watch how VR and AR evolve over the next 3-5 years to bring the promised metaverse experience to users. Thatâs all for today folks!
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