Michael Bodley

<div id="highlights-block_62c8af3deee92" class="highlights">
 <ul>
 <li>A number of Three Arrows&#8217; counterparties are now facing the prospect of losing millions of dollars stuck in bankruptcy limbo</li>
 <li>Sources told Blockworks the revelation shows it’s still unclear how deeply Three Arrows was entrenched in the crypto ecosystem</li>
 </ul>
 
</div>



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 <a href="https://cms.blockworks.co/tag/three-arrows-capital/" target="_blank" rel="noreferrer noopener">Three Arrows Capital</a>. 



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 <a href="https://integral.dydx.exchange/dydx-closes-10m-series-b-investment/" target="_blank" rel="noreferrer noopener">decentralized exchange dYdX</a> and <a href="https://medium.com/orca-so/orca-raises-18m-from-polychain-placeholder-three-arrows-and-more-4e756dacf812" target="_blank" rel="noreferrer noopener">Solana-based smart contract specialist Orca</a>.



That capitalism-forged camaraderie has unraveled. Fast.&nbsp;



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.&nbsp;



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 <a href="https://cms.blockworks.co/qa-restructuring-expert-talks-voyager-bankruptcy/" target="_blank" rel="noreferrer noopener">Voyager</a>, 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.&nbsp;



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.&nbsp;



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 <a href="https://cms.blockworks.co/tag/terra/" target="_blank" rel="noreferrer noopener">collapse of Terra’s</a> stablecoin, too. But, in DeFiance’s case, the damage appears to have been minimal — other than a decent-sized stake in <a href="https://lfg.org/" target="_blank" rel="noreferrer noopener">LFG</a>, 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.&nbsp;



Cheong declined to comment. 



Su Zhu, Three Arrows&#8217; co-founder, did not immediately respond to a request via Telegram to clarify the relationship between 3AC and DeFiance.



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