With Litigation Likely, Venture Fund DeFiance Takes Aim at Three Arrows Capital

Blockworks exclusive: The venture fund startup was incubated by Three Arrows, a then-favorable arrangement that has since soured

article-image

Three Arrows Capital

share

key takeaways

  • A number of Three Arrows’ counterparties are now facing the prospect of losing millions of dollars stuck in bankruptcy limbo
  • Sources told Blockworks the revelation shows it’s still unclear how deeply Three Arrows was entrenched in the crypto ecosystem

Yet another digital assets-focused asset manager has become entangled in the sprawling financial web, littered with bankruptcies and restructurings, emanating from the insolvent crypto hedge fund firm Three Arrows Capital

DeFiance Capital — a venture capital firm focused on Web3, decentralized finance and blockchain-based gaming startups — was incubated by Three Arrows, according to two sources familiar with the matter. The firms inked a number of co-investment deals together, including stakes in decentralized exchange dYdX and Solana-based smart contract specialist Orca.

That capitalism-forged camaraderie has unraveled. Fast. 

DeFiance is now considering legal action against Three Arrows, the sources said. That could come in the form of arbitration, a lawsuit or an amendment to the bankruptcy proceeding seeking repayment as a creditor. 

The partnership bore fruit as Three Arrows developed a reputation as a savvy dealmaker, squarely in the upper-echelon of crypto investors. The firm, which is now undergoing bankruptcy proceedings and a broad restructuring, increased its assets and delivered, by and large, an above-average performance to its limited partners. 

Access to deal flow grew in leaps and bounds, making Three Arrows an invaluable partner to DeFiance.

Now Three Arrows owes crypto lenders, including the now-bankrupt Voyager, a collective sum amounting to billions of dollars, and its limited partners are coming to grips with the prospect of their sizable investments going all the way to zero.

And its counterparties — along with Voyager, exchanges, custodians and, yes, friendly asset managers Three Arrows did business with — are essentially likewise underwater. 

Details of the exact relationship between Three Arrows and DeFiance, which is run by founder Arthur ​​Cheong, are unclear. But it appears that Three Arrows played a big role in the launch of DeFiance in September 2020, providing back- and middle-office support, as well as access to deal flow and consultations on hiring. 

It’s not known whether the firm seeded the startup or bought a slice of the general partnership, which comes with revenue sharing on investor fees. But the pair, in addition to investing alongside each other in promising projects, shared certain service providers, and it’s unclear who paid for what. The asset managers also had a number of limited partners in common.

Those investors have redeemed some capital from DeFiance amid the recent market downturn, but one source categorized it as “nothing really out of the ordinary, considering the market.” The firm’s flagship vehicle has outperformed bitcoin since inception, the source said.

Cheong’s team, like many competitors, were dinged on the collapse of Terra’s stablecoin, too. But, in DeFiance’s case, the damage appears to have been minimal — other than a decent-sized stake in LFG, the Luna Foundation Guard.

Added the source: “Obviously, with the market conditions, there will be more people who want to de-risk and lower their crypto exposure.” 

The firm still manages somewhere north of $100 million, according to a source. 

Cheong declined to comment. 

Su Zhu, Three Arrows’ co-founder, did not immediately respond to a request via Telegram to clarify the relationship between 3AC and DeFiance.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

Brooklyn, NY

TUES - THURS, JUNE 24 - 26, 2025

Permissionless IV serves as the definitive gathering for crypto’s technical founders, developers, and builders to come together and create the future.If you’re ready to shape the future of crypto, Permissionless IV is where it happens.

recent research

Unlocked Advisory-min.png

Research

This report distills Blockworks Advisory’s research on incentive programs and their analysis, offering a foundation for designing future initiatives and advancing industry-wide standards. By highlighting key lessons and methodologies, we aim to empower protocols to make informed, data-driven decisions.

article-image

The company did about 2.5 times the amount of crypto-backed collateral financing in November compared to the rest of 2024, exec says

article-image

Programmable yield, seamless swaps and decentralized control are the hallmarks of a new stablecoin model

article-image

Crypto is “really exciting,” former SEC Commissioner Paul Atkins said in a podcast interview last year

article-image

Bitcoin is now the “seventh most valuable asset in the world by market cap, just behind the likes of Google and Amazon,” GSR’s Brian Rudick said

article-image

Many analysts expected bitcoin to top $100K before year-end, though it’s been on a post-election tear

article-image

Will investors take a 10% lower return to get access to a regulated investment wrapper?