The bear market into which the cryptocurrency industry has entered, as a result of the global economic recession and falling global markets, has created a wave of uncertainty around the world. Particularly in the Crypto industry, this uncertainty was initially amplified by the collapse of LUNA, which brought about a chain of negative effects, the biggest at the moment being the insolvency experienced by the $10 billion giant, Celsius.
What is Celsius?
Celcius is a centralized company that manages investor cryptocurrencies using the decentralized finance (DeFi) industry. That is, it takes its customers’ money/cryptocurrencies, promises a fixed interest rate, and then using DeFi earns a return.
Although Celsius advertises its services like those of a bank, it probably almost looks more like a hedge fund or asset manager. Consequently, its strategies involve some risk and require oversight.
How does Celsius make its money?
- It grants loans to foundations and individuals
- Retains any profits left over after executing strategies on behalf of their clients
Therefore, if they advertise that they offer a 5% interest rate on USDC deposits, they exchange that USDC for making 20% on the UST, so they can keep the 15% remaining after the 5% is returned to the customer.
Celsius did extremely well in 2020 and 2021, reaching a $10 billion valuation and recently raised $400 million.
The collapse of LUNA
The collapse of Luna shook the cryptocurrency industry and was extensively covered in the mainstream media as it was rightly described as possibly the biggest cryptocurrency wealth destruction event.
The unfortunate thing about Celsius is that it was involved in this negative event.
Luna promised a 20% interest rate on fixed currencies pegged to the USD, making it an extremely popular product that was advertised as risk-free. But when the markets began to shake, the mechanism to keep the UST at $1 failed, leading to a… death spiral and the collapse of a 40 billion dollar capitalization protocol.
The collapse of LUNA affected not only the ecosystem to which it belonged, namely Terra, but also several others that had direct or indirect connections to LUNA. And Celsius was one of them.
In order to meet its promises of a high interest rate on its customers’ deposits, it was heavily exposed to UST so that it would receive the high interest rate of Anchor Protocol of 20%. He may have even deposited as much as $500 million in UST.
This was Celsius’ customers’ money and it was gone.
However, everyone hoped that Celsius had made sure to keep a… cushion to support it in such an eventuality…
Read Also: Luna died, how long will Luna 2.0 live?
The deposits at LIDO
For ETH deposits, Celsius promises 6-8% return in interest, with much of it likely earned from staking rewards in Ethereum’s proof-of-stake chain, the Beacon Chain.
The issue in this case is the fact that the assets held in Ethereum’s Beacon Chain, Beacon Chain, are completely locked up and cannot be retrieved until the Ethereum merger is complete. The date of the merger has not yet been announced.
The protocol, Lido, came to solve this issue of Beacon Chain by creating a liquid “derivative” asset called Lido Staked ETH, or $stETH. While $stETH has often traded at a 1-to-1 ratio, it is not linked, meaning it should not trade 1-to-1. However, Celsius relies on stETH to maintain its 1-to-1 ratio because it must match its liabilities.
Read Also: How Lido Finance (LDO) can play a leading role in cryptocurrency ecosystem
In a bull market, this worked.
But with a liquidity crisis and the market in a bear market phase, the $stETH/$ETH ratio started to fade.
Conclusion
Celsius probably failed to isolate the danger: Possibly it had taken customer deposits in USDC and converted them into UST (Luna’s stablecoin) to get the high 20% interest rate it offered, or it had taken customer ETH and held it in stETH to get the LIDO rate.
So when all the cryptocurrencies went down and users wanted their money back, Celsius was unable to meet the requests for withdrawals, so they “froze” them… temporarily as he said, until they could find solutions to the liquidity problem.
Celsius is facing a liquidity crisis in which prices are moving downward making it increasingly difficult to deal with, namely to be able to match customer deposits with its assets. That is why they stopped withdrawals.
There are approximately $10 billion in customer assets at Celsius and approximately $1.5 billion matched in Celsius’ various wallets. Thus, in terms of matching customer funds with liquid assets, there is a clear mismatch.
Where the money was placed:
- There are approximately $400 million dollars that were staked on Ethereum’s Beacon Chain.
- There is another $400 million staked in the Maker protocol, which is alarmingly close to liquidation.
As for the rest of the money, no one can know for sure where it is, beyond the Celsius administrators.
How will Celsius solve the problem?
There is a possibility that the problem will not be solved and Celsius will be driven into bankruptcy, resulting in customers losing their money.
Beyond that, Celsius retains several assets, but they cannot be liquidated immediately. Therefore, it will try to negotiate with other institutions/whales to liquidate some of these assets.
If their assets are not sufficient to cover their liabilities, then they will attempt:
- External financing
- Loan
- Acquisition (Nexo has already submitted such a proposal)
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