Celsius Network, why and how does the platform collapse?

Reality check: what happened to Celsius?

What is Celsius?

Before we get to the heart of this matter, it is important contextualize and set the scene. Celsius is one of the largest centralized platforms of the ecosystem Offers simplified access to decentralized finance (DeFi) like the loan (loan), the loan (loan) Y savings (winner) on cryptocurrencies.

Celsius quickly established himself as a giant in his field. And for good reason, it offers attractive returns of up to up to almost 19% APY. Thus, in a few years, the platform raised 864 million dollars, reached the $3 billion in assets under management and exceeded one million customers.

Specifically, Celsius is an asset manager. The platform provides regulated access to crypto loans, loans and returnsreceiving remuneration for it. The interest for the user is to take advantage of it without exposing himself to the disadvantages and risks of managing his DeFi positions himself.

In other words, Celsius does not offer its clients direct exposure to the underlying assets., but promises position buybacks in case users want to withdraw their funds. This is a fundamental aspect to take into account to understand the outcome of this matter.

Furthermore, despite the use of processes that are very reminiscent of centralized finance, Celsius wants to break away from them. That is why the platform introduced a token, the CEL. This allows to get discounts on services and reward bonuses.

Celsius suspected of non-compliance

Now that you have the basics, let’s get to the heart of the matter. In early June, several observers began to warn that Celsius could end in default towards its users.

The first rumors that circulated pointed to Celsius holdings in Ethereum (ETH) would only be 27% liquid. Generally speaking, the rest would be blocked in smart contracts linked to Ethereum 2.0 and above all stETH, a product issued by the Lido lending platform. Remarkable detail, these are inaccessible before the transition of Ethereum to the new version of it.

Quickly, users blamed the platform. mismanagement of fundsespecially following Collapse of the Terra Ecosystem (LUNA) and its stablecoin UST. Given these rumors and in a bear market context, the situation quickly became alarming.

More and more users wanted their assets back, forcing Celsius to sell their positions at a loss and causing Ether to stall further. Far from putting out the fire, Celsius, on the other hand, turned it into a real hell. when announcing the suspension of redemptions, withdrawals and transfers on the platform.

As a direct consequence, CEL fell more than 75% In a few minutes. The platform token has passed from around $0.36 to less than $0.09before beginning an amazing update.

👉 To go deeper, our complete guide on Ethereum (ETH) and how does this crypto work?

In concrete terms, why does Celsius have so many problems?

At the time of writing, there are two main reasons why Celsius and its millions of users have been thrown into chaos. At first, a rumor of misuse of client funds to effect leveraged loans it has been extended. Second, there was mismanagement of the stETH product.

Real mismanagement of client funds?

The heart of the Celsius problem has been the desire to Providing users with low loan rates and too high yields.. To do this, the platform had to use to leveraged loans on autonomous market makers, including manufacturer DAOleveraging user funds.

Very specifically, when a user buy bitcoin (BTC), Celsius converts it to Wrapped Bitcoin (wBTC) and deposits it as collateral in the Maker Protocol borrow the DAI stablecoin and generate returns with it. However, if Bitcoin loses too much of its value, the collateral is no longer sufficient insurance and the protocol must liquidate the position.

As you may have understood, while Bitcoin fell alarmingly, the positions of Celsius were threatened. As of June 13, Celsius had more than 17,000 wBTC placed leveraged on Maker and the liquidation threshold was reached if Bitcoin fell below $22,500.

However, while many users expected Celsius to liquidate their clients’ positions to pay for their own, the platform simply bailed out the coffers. As the Oasis app data shows, Celsius now has almost 24,000 wBTC in collateralwith a clearance price of $14,000.

Information about Celsius positions in Maker DAO

The storm seems to have calmed down a bit, But for how long ? The real question is whether Celsius will manage to hold his position if Bitcoin falls, without having to liquidate his own clients.

Celsius overexposed to stETH?

As you may know, Ethereum is preparing to transition to a new blockchain, operating under a Proof-of-Stake (PoS) consensus. Thus, it is already possible block your ether about Ethereum 2.0 smart contracts and generate a return of 4.2%.

In addition, Celsius offers its clients an attractive return of close to 8% on this same asset. How is it possible ? Through an extremely interesting product, the stETH of the Lido lending platform. However, you will quickly understand why this is a concern.

stETH is a token certify that a user has staked an Ether on an Ethereum 2.0 smart contract. Furthermore, these allow generate even more returns. In addition to earning staking rewards, stETH can be loaned or used to provide liquidity.

However, this product has one main drawback: although it can be redeemed for Ether on a secondary market, it cannot be used to recover the Ether initially staked. At least not until Ethereum 2.0 has been officially launched.

Furthermore, for various reasons, stETH has dropped and is currently trading at 0.95 ETH. In other words, Celsius has bought a lot of stETH, and these cannot be traded before the Ethereum merger, or at a loss.

Worse still, there not enough cash available to allow Celsius to get rid of its stETH. In fact, the liquidity pool in the Curve Finance protocol is currently unbalanced and has less than 120,000 ETHso what The Celsius position stands at 445,000 stETH.

steth curve

Information about the stETH/ETH liquidity pool on Curve

What are the current risks facing DeFi?

The repercussions of the Terra case

The collapse of the Terra ecosystem (LUNA) and its stablecoin UST impacted much deeper than we could have imagined. Many platforms suffered considerable losses, especially Celsius. Therefore, they were forced to sell your positions at a loss to reimburse their clients and secure their positions.

Also, Celsius mismanagement is not an isolated case. the investment fund Three Arrow Capital is also facing massive liquidations Y could become insolvent. All these cases directly threaten the ecosystem.

The sales volumes of these investment funds, lending platforms and other centralized exchanges led to massive drop in cryptocurrency prices that we are currently living. So much so that they defaulted many DeFi users.

At the time of writing this file, the protocol Aave faces a wall of potential liquidations. If Ether falls below $984, then $200 million in positions will be about to be liquidated.

It is important to note that this concerns Celsius, but also many common users. whose collateralization factor was still relatively high a few weeks ago. The rapid fall of the market has placed them in a complex situation, close to liquidation.

What can we predict for the future?

The question everyone is asking is: can we hope to save ourselves from this? There are three scenarios to consider:

  • The first of them is that Ether does not drop below $984.
  • the second is that users provide enough cash to re-collateralize their positions and avoid liquidation.
  • Finally, the third scenario is that the price of Ether falls below $984 and these 200 million dollars of positions will be liquidated.

However, the 5% commission offered to liquidators may not be enough to offset Ether price drop in case of liquidation of such amount.

In other words, it is unlikely that someone would activate the liquidation mechanism in one go, since they would see themselves losing. So the last solution would be make liquidations in stages, little by little. However, since the costs of gasoline in Ethereum are high, it is not certain that users will want to choose this option, which is very expensive and therefore less profitable.

👉 To go further: Nexo offers to buy Celsius assets as the latter is in trouble

Source: Figure 1 – OasisFigure 2 – curve

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About the Author : Lilian Aliaga


Freelance writer located between Paris and Toulouse. I want to share my passion for the world of cryptocurrencies with as many people as possible. I am also interested in technical analysis and trading.
All articles by Lilian Aliaga.

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