Celsius is making headlines with its plans to suspend withdrawals, but the root of the problem may lie elsewhere.
Photographer: Benjamin Girette/BloombergEmily Nicolle
Welcome to Bloomberg Crypto, our twice-weekly look at Bitcoin, blockchain and more. If someone forwarded this to you, sign up here. In today’s edition, Emily Nicolle explores the roots of Celsius’s precarious predicament and explains the potentially wide-ranging implications:
A stake in the heart?
Crypto lender Celsius’s decision to suspend customer withdrawals has hit the market hard: Prices are tumbling and traders are braced for further pain as they search for hints of a repeat of last month’s Terra wipeout. Dig a little deeper, though, and the situation has the makings of being even more of an existential threat to DeFi than the market swings suggest.
While Celsius is in the headlines, it’s the Ethereum network’s planned upgrade, known as the Merge, that’s the issue. And it means a run on Celsius could impact far more than just the lender itself. To understand why, we have to explore what’s going on behind the scenes.
A key trigger for Celsius’s suspension begins with the de-peg of staked Ether (stETH), a token offered by crypto startup Lido Finance that promises to be redeemable for exactly 1 ETH, only after Ethereum upgrades. Users lock up their Ether in exchange for stETH, which they can then lend or trade on other platforms while they wait for the protocol to finish upgrading. Celsius makes its money by doing this on users’ behalf: They give Celsius some Ether for a (relatively) small yield, it takes those coins to Lido where interest rates are higher, and stakes them to get stETH in return.
Though Celsius’ crypto holdings are fairly opaque, one wallet identified as theirs by researcher Nansen shows it holds more than $400 million in stETH at present. And it’s not just Ether that’s impacted by the lender’s inactivity: CoinMetrics, another researcher, said Celsius had been rapidly adding a similarly “wrapped” version of Bitcoin to stop its holdings from getting liquidated as the token’s price fell this week.
StETH was trading at roughly a 5% discount to the value of Ether as of midday Tuesday in New York — and the longer it stays that way, the more panic it creates among investors wanting to exit those positions. But because Celsius halted withdrawals, or even internal transfers within the platform for other tokens, all its clients can do is watch as their portfolios crash.
The fall of stETH isn’t only a problem for Celsius, either, given the broader market’s dependence on the token for DeFi lending. When the value of collateral in such loans falls below a certain threshold, those positions are automatically liquidated. This is “likely to drive the price of stETH even lower,” said Genesis Trading’s Noelle Acheson, “triggering more liquidations and potentially impacting a range of protocols and investors.”
And if the above catalysts weren’t enough to cause concern, repeated delays to the Merge means there’s no feasible time frame for when the toxic cycle could end. Analysts predict anywhere from three to nine months before the upgrade might be completed, and it could be more months after the Merge is over before stETH can be efficiently redeemed for ETH 2.0.
Whether there’s a near-term solution for any of these problems is unclear. Unfortunately for Ether stakers, Celsius and anyone else in crypto, pain is the name of the game right now.
Charting it out
Underwater Bet
Bitcoin plunge leaves MicroStrategy with paper loss of roughly $1 billion
Source: Bloomberg
Hearing them out
What we’re reading (and writing)
- Crypto Billionaire Fortunes Vanish as Quickly as They Were Made
- A Billion-Dollar Crypto Gaming Startup Promised Riches and Delivered Disaster
- Who Pays for Crypto’s Collapse? (Wall Street Journal)
- UK’s Finance Cop Cracks Down With City of London at a Crossroad
- Crypto Winter Hasn’t Stopped Billionaire Steven Cohen’s Firm From Investing In DeFi (Forbes)
- Celsius Crypto FOMO Proved Irresistible to Finance Pros Too: Lionel Laurent (Bloomberg Opinion)
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— With assistance by Joanna Ossinger, Allyson Versprille, and Matt Turner
