The crypto lending platform paused withdrawals as Bitcoin spiraled down, sending its tokens to collapse. Here’s what happened.
Amid a broader collapse in the cryptocurrency market, crypto lending platform Celsius announced on June 12 that it was suspending all withdrawals on its lending platform, citing “extreme market conditions” and the need to “stabilize liquidity.”
In the hours following the announcement, Celsius’ native token, CEL, plummeted 70% in just one hour; the following day it was trading at over 40% less. The CEL’s downward spiral came amid a gigantic selloff that saw the total market cap of cryptocurrencies plummet to less than a trillion, or more than two-thirds to its all-time high of $3 trillion, while Bitcoin fell to levels not seen since 2020.
Celsius’ mission statement states that its goal is to “disrupt the financial sector.” If the headlines of Bloomberg and the Financial Times are anything to do, it has certainly had a disruptive effect, on the cryptocurrency market itself.
So what happened? The short answer: no one really knows, but the last year the problems have fermented.
How it started
Celsius is quite typical among decentralized finance (DeFi) lending platforms. Anyone can go up, lend and borrow money, but if they are interested in the latter, the loan must be overcollateralized, which means that the borrower must deposit more than he is borrowing. This is counterintuitive for the average person, but remember, cryptocurrencies are not currently regulated, so there are no debt collectors who will prevent borrowers from defaulting.
So while DeFi offers the promise of an alternative financial system by offering more competitive returns than savings accounts, there are still capital and technology barriers to entry.
Once users have taken the plunge and put some money into the protocol, they are able to earn attractive returns. According to its website, Celsius offers over 7% returns on stablecoins such as USDC and Tether, 7.25% for Polygon, 6% for Ethereum and 6.25% for Bitcoin.
The protocol then lends its aggregate tokens at higher rates to borrowers. Celsius insists that it uses customers’ cryptocurrencies for nothing more than protocol loans and Bitcoin mining operations, and boasts testimonials about its “transparency” and “real-time audits” as a single selling point.
How it’s going
Celsius’ CEL token went into free fall shortly after the announcement that it was suspending withdrawals on June 13. The rest of the cryptocurrency market seems to have followed suit, albeit with less marked losses.
The short-term cause of the Celsius problems appears to be due to the Lido tip Etherin (stETH), a token pegged to Ethereum’s ETH. stETH represents the ETH stuck on the Ethereum 2.0 beacon chain, a chain that runs parallel to the main Ethereum blockchain that will eventually combine with the Ethereum mainnet in an event known as
On DeFi platforms, stETH is often used as collateral to borrow ETH. The problem is that stETH recently lost its anchorage against ETH, threatening those positions. With holders selling and the date of the union mired in uncertainty, there is now strong selling pressure on stETH.
So what does it have to do with Celsius? The DeFi platform had locked clients’ funds into stETH, and a stETH depegging could induce a wave of redemptions, triggering a liquidity crisis.
Celsius: feel the heat
Over the past year, several regulators have made it clear that they see high-yield crypto lending products like Celsius as unregistered securities. By last September, four states (New Jersey, Texas, Alabama and Kentucky) had sent Celsius ceasefire letters. That same month, Coinbase shut down its planned Lend product after the SEC threatened legal action if it was launched.
By this time, Celsius had already closed operations in the UK, citing “regulatory uncertainty”.” The company decided that a move to the U.S. would also eliminate strategic expansion, allowing it to focus on obtaining domestic licenses and registrations in order to “ensure the long-term viability of Celsius and its community.”
In October 2021, Celsius raised $400 million in a funding round that led it to a valuation of more than $3 billion. In November, it revealed that funding had risen to $750 million after over-subscribing to the increase.
In May 2022, Celsius changed its reward offerings to comply with regulators by phasing out high-interest accounts for unaccredited U.S. investors, essentially a fanciful way of saying that prevented people who don’t earn $200,000 a year or have $1 million in the bank from earning the highest returns.
The current problems of Celsius come just a month after the collapse of another DeFi standard-bearer, Terra. The platform’s dollar-pegged stablecoin, UST, fell to zero after its number one use case, earning 20% returns on Anchor, was compromised by market uncertainty. A mass outing followed, in which billions of FSOs were burned to mint LUNA at a rate too fast for the anchoring algorithm. An entire ecosystem has been annihilated.
Meanwhile a lot of money has moved from Celsius; in the first half of 2022, the total amount of digital assets locked on the protocol shrank from about $24 billion to $12 billion.
Nexo proposes the acquisition of Celsius assets while the crypto loan rival stops withdrawals
Digital asset manager Nexo responded to the news of its rival Celsius pausing withdrawals by submitting a proposal to buy some of the company’s liquid assets.
After the freeze on withdrawals on Sunday, rival Celsius Nexo proposed a purchase of some of the company’s liquid assets, pointing to “what appears to be the insolvency” of Celsius. With the wider cryptocurrency market in the red, it’s a tumultuous time for DeFi in particular, and cryptocurrencies in general.