What happened to Celsius (CEL)?

15.06.2022

Advanced

#Celsius Network #Lending

Key points

On 13 June 2022, the price of crypto‑lending platform Celsius’s native token (CEL) fell by about 50% after the company said it was suspending withdrawals amid “extreme market conditions”.
Experts say the decision may have been driven by losses on high‑risk DeFi instruments, notably collateralised synthetic assets.
After freezing client funds the platform took steps to stabilise its business. Following the initial plunge, CEL quickly recovered.

How many customers does Celsius Network have?

Celsius is a centralised crypto‑lending platform whose core services are crypto deposits and crypto‑asset loans. It presents itself as a bank alternative and offers financial services tied to cryptoassets.

The founders of Celsius Network are Alex Mashinsky, Nuke Goldstein and S. Daniel Leon. The platform launched in 2017; a year later the team issued its own token, CEL.

According to Crunchbase, the company has raised more than $860m in funding.

As of December 2021 Celsius managed $24bn of user assets; by end‑May 2022, Financial Times reported, that figure had fallen to $12bn. In November 2021 the platform said it had 1.2m users.

Who can use Celsius?

The platform does not disclose the exact list of supported countries or the services available in each. It launched in the United States and was initially available to all residents, but in April 2022, under regulatory pressure, it limited access to accredited investors. US users also face specific rates for both loans and deposits. Celsius is known to operate in several European countries.

How do crypto deposits work on Celsius?

Celsius Network offers interest‑bearing deposits in various cryptocurrencies at attractive rates. For example, as of 14 June 2022 the maximum rate on USDC stablecoin deposits exceeded 9% per year; for DAI it was over 6%.

Yields depend on several factors. Clients can receive interest in the deposit currency. If they opt to be paid in CEL, the platform’s token, the rate is higher. The more CEL on the account, the higher the yield. The bonus ranges from 10% to 30%. Interest is paid weekly.

Celsius also offers loans secured by cryptoassets. Users can lock various cryptocurrencies as collateral and borrow in a chosen stablecoin.

The lending rate depends on the loan‑to‑value ratio (LTV). The higher the LTV, the more collateral a user posts, the lower the rate. In effect, Celsius uses overcollateralisation as a safeguard against changes in collateral value.

What else does Celsius Network offer?

CelPay — a crypto‑payments service. It lets users send assets to other users, including those without a crypto wallet. No transfer fees are charged.
Celsius Swap — a fee‑free trading venue supporting more than 40 cryptocurrency pairs.
CelsiusX — a Celsius division focused on integrating DeFi products into the main platform.

What went wrong?

On 13 June 2022 Celsius suddenly announced it was halting withdrawals “to protect the community” and “due to extreme market conditions”. CEL duly plunged.

Experts believe the real reason is that the platform can no longer earn enough to cover client yields. Analyst Jack Niewold called it a “liquidity crisis”.

Meanwhile, according to journalist Colin Wu, shortly before the announcement Celsius transferred around 104,000 ETH and 9,500 WBTC to the FTX exchange.

According to Ape Board, in mid‑June 2022 Celsius wallets held assorted assets worth more than $1.5bn. Roughly 30% was stETH and about 27% WBTC. The funds were deployed in decentralised protocols: 60% in Aave and another 35.5% in Compound.

Did Celsius invest in Terra?

A month before Celsius ran into trouble, another big blockchain project, Terraform, and its two flagship cryptoassets — the LUNA coin and the algorithmic stablecoin UST — collapsed. Observers have inevitably looked for links between the two events.

In late May the blockchain‑analytics service Nansen published an investigation claiming Celsius was a large holder of Terraform’s ill‑fated algorithmic stablecoin UST. The company allegedly used the coins for high‑yield farming on Aave. Celsius became one of the “whales” that rushed to pull funds from the Terra ecosystem after Anchor cut UST staking yields.

Platform founder Alex Mashinsky denied this. Even so, on 13 May Celsius publicly said it had withdrawn more than $500m worth of ether from that very Anchor.

Does Celsius use Lido?

The platform also actively deploys client funds in the Lido protocol. Lido enables liquid staking: users can stake cryptocurrencies and, without withdrawing them, receive an equivalent amount of synthetic tokens to use across other DeFi applications.

Ethereum is the most popular asset on Lido. When staking ETH via Lido, a user receives stETH and earns staking income. As of 14 June 2022 Celsius held at least $475m in stETH.

The nuance is that the “base asset”, i.e., ETH, can be withdrawn from staking only after the Ethereum 2.0 network activates The Merge. That will not happen for at least several months. stETH can be used only in DeFi protocols. And although the “derivative” token should track ETH, amid Celsius’s woes stETH had already fallen by 5%.

Where does MakerDAO come in?

Lucas Nuzzi, head of R&D at CoinMetrics, noted that Celsius manages one of the largest WBTC (“wrapped” bitcoin) vaults in MakerDAO. Using that collateral the platform mints the DAI stablecoin. As crypto markets corrected, the value of the collateral kept falling. To avoid liquidation, in June Celsius raised the WBTC in its vault from about 18,000 to around 24,000 tokens.

Is Celsius to blame for the crypto‑market slump?

As the crypto‑lending platform’s problems hit the headlines, the market kept falling: on 13 June the bitcoin price dropped below $23,000 and ether to roughly $1,300.

Although many tied the slide to the negative news flow, experts agree the real driver is macroeconomics — notably expectations of another US rate rise and further inflation.

What next?

Although Celsius’s standing took a hit, the project may yet turn the situation around. By 15 June the CEL price had returned to, and even exceeded, its pre‑crisis level.

Observers noted at least several steps the platform took to stabilise operations:

It materially increased collateral in its MakerDAO vault, lowering the WBTC liquidation price to $14,000.
It increased ETH collateral for its stETH positions on Aave and repaid a $2.4m USDC debt.
According to media reports, Celsius hired lawyers, possibly to pursue a financial restructuring. The platform is now considering ways to raise additional capital.