1/ the daisy chain of borrow lending.
to earn yields; users send BTC and/or USDC to gemini earn. gemini earn loans these funds to @GenesisTrading.">@GenesisTrading @GenesisTrading loans the BTC to 3AC. 3AC pledged these BTC as collateral with grayscale to mint GBTC.
btc bitcoin crypto
2/ but @GenesisTrading is the only one with the power to create and destroy GBTC at @Grayscale so you can say that 3AC pledged the BTC they took as loan from @GenesisTrading as collateral with genesis's sister company @Grayscale but in reality,...
since there's more demand for GBTC than supply (as it's delivered every 6 months), GBTC trades at a premium.
4/ in the end, 3AC would take delivery of their GBTC (after 6 months), sell it in the secondary market, and capture the spread.
but since GBTC trades at a premium, it makes little sense to sell it today, when it could be worth more in the future.
5/ recall, that @GenesisTrading still has usdc they took from users of gemini earn, so they must loan it out to earn yields.
they loan this USDC to 3AC which pledges GBTC as collateral (because 3AC doesn't want to sell it just yet, as it could be worth more in the future).
GBTC underpins everything here. also, for these trades to keep working, GBTC must continue trading at a premium. early 2021, GBTC begins to trade at a discount to NAV.
7/ recall, that GBTC is the collateral against all the shitcoin longs. if the collateral isn't good for the loan anymore, genesis would have to liquidate 3AC's position, or 3AC would have to post more collateral, but 3AC is long some bunch of shitcoins that's down 80+%...
8/...and hence can't post more collateral, as there's no money to.
genesis doesn't want to liquidate 3AC either, because it'd be bad business for them, as 3AC wouldn't be able to pay the initial loan of BTC taken out (that was used to mint GBTC), talk more of the USDC loan.
9/ @DCGco (the parent company of genesis steps in to bail genesis out. they buy up shares of GBTC so it stops trading at a discount, but that didn't work. what's worse? @DCGco took out a loan of 575m from @GenesisTrading,">@GenesisTrading to buy up shares of GBTC to save @GenesisTrading.">@GenesisTrading
10/ where are we today?
3AC finally went belly up as GBTC continued trading at a discount, and genesis had a 2.2b exposure to 3AC.
other hedge funds conducted the same GBTC arbitrage trade, only that 3AC was the biggest.
12/ @GenesisTrading is possibly facing the same issue they had with 3AC (but on a much smaller scale i guess). they are currently looking to raise 500m, i'm pretty confident that @DCGco would find ways to bail out genesis again, one way or the other.This post is based on this twitter thread.