New crypto report reveals staked ether contributed to liquidity crisis

Yahoo Finance’s David Hollerith joins the Live show to discuss a new report pointing to staked ether as a source of recent crypto chaos and the outlook for the cryptocurrency industry.

Video transcript

- Welcome back to Yahoo Finance. After the collapse of failed algorithmic Stablecoin, project Terra, USD, and Luna, many dominoes began to fall within the crypto market. And a new report revealing another major source leading to a cascading effect on the big players in crypto. Let's bring in Yahoo Finance's David Hollerith in today's Crypro Corner for more on that report. David--

DAVID HOLLERITH: Brian, so what we're looking at here is a trade involving an Ethereum derivative called Staked Ether. And this situation actually was happening after the Terra collapse, between then and around June 18th. So this is something that's in the past.

But we have more clarity from a report, and comes from the blockchain analytics firm Nansen, about just exactly what happened. Now notable, several large crypto players were involved in this trade Three Arrows Capital and the Celsius Network, the crypto lender. Both firms are currently facing risks of default.

Celsius has hired lawyers and a team of legal advisors, while Three Arrows is facing a number of liquidations, most recently the British Virgin Islands. So anyway on the trade, what exactly happened was, from what we can see based on tracking their on-chain transactions, the two firms, and a number of other players, got involved in levering up the interest they could get from holding this Ethereum derivative. Now the problem being that selling pressure due to worsening market conditions, caused that derivative to fall below the price of Ether.

Now because of that, many firms that were levered up in these positions, the value of their collateral dropped. So in addition to Ethereum falling by about 30% between May 12th and June 18th, they also got hit by this other price discount between the derivative and Ethereum's actual price. So that's the explanation.

What we've seen now, is that as far as we can tell on-chain, the firms have dissolved or unwound their positions in this asset. Now once they send their assets to an exchange, the analyst can't determine exactly what's happened. Obviously both firms have been silent about this. But the Celsius Network still holds a significant portion of funds in this derivative. Important to note, though their current collateral standing, which is a combined $1 billion for this position, would take something like a 30% drop in the price of [? Ethereum ?] right now for that to be risking a margin call.

- David Hollerith staying on top of all the dominoes to fall here in the crypto space. Thanks so much for bringing us that story.