Leading crypto exchange Celsius paused all transactions and withdrawals across its DeFi network on June 13, locking up around $12 billion in customer funds as crypto markets plunged this past weekend again. Controversially, Celsius triggered a clause in its Terms of Use that allows for this process to take place without any customer consultation required and at writing, has not given a timeline for reactivation.
The move comes as the crypto market sank further into depression over the last few days. ETH was down more than 36% in the previous seven days, while BTC declined 28%. At the same time, other assets such as the token of the Bored Ape Yacht Club Metaverse, APECOIN, and DeFi and lending behemoth Aave’s AAVE, are both down more than 43% at writing. On the flip side, many DeFi and exchange dapps have increased their user numbers as investors started to make moves amidst the fire sale.
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A tweet delivered through the platform’s official Twitter account announced the bad news, which fundamentally left customers high and dry and unable to move funds. The tweet gathered pace quickly, and comments were not complimentary of an exchange that raised $864 million in venture capital and at one time held over $28 billion in funds for more than one million customers.
What is Celsius?
Celsius operates similarly to centralized finance powerhouse Vanguard in that they offer Exchange Traded Funds (ETF), but for decentralized finance opportunities. Celsius takes a fee for providing customers with baskets of cryptos without exposing users to the difficulties and risks of self-custody. Additionally, Celsius offers users token swaps and trading, high-yield deposits on stablecoins and cryptocurrency, and crypto-backed lending services.
Like an ETF provider, Celsius doesn’t offer direct exposure to the underlying positions. They promise withdrawals if users want to exit positions, but Celsius ultimately manages the positions on investors’ behalf.
What went wrong at Celsius?
The official letter to the community is relatively thin on details. Instead, it cites difficult market conditions and states they are acting in the best interests and safety of users as the main drivers for the move to pausing all withdrawals, token swaps, and transfers between accounts with no timeline for reactivation.
On the face of it, Celsius sells the promise of high yields alongside a regulated fiat onramp and bonus features for wealthier users. Similar to Crypto.com and Nexo, these services are exactly what new entrants to the crypto space look for, and Celcius made its mark.
Problems with stETH
After the recent Terra UST debacle, all eyes have been locked on stablecoins. While leaders like USDC, DAI, and USDT remain strong and bound to their dollar pegs, others felt the push. Celsius was heavily engaged with an innovative stablecoin by Lido Finance built to peg ETH, called stETH.
Staked Ether, or stETH is a cryptocurrency pegged to ETH at a 1:1 value. I.e., they should be pegged together and have a similar consistent value. There are plausible reasons for deviations, but these are not the norm. stETH represents the ETH that is locked on the Ethereum 2.0 beacon chain and acts as collateral to borrow more ETH on DeFi platforms.
As you can see below, stETH hasn’t kept its peg for quite some time which is a considerable cause for concern. Additionally, there is a tradeoff to earning high yields with stETH. While it can be traded for ETH on the open market, it cannot be redeemed for ETH until the beacon chain merge happens and Ethereum goes through a hard fork. Celsius is sitting on a considerable amount of stETH, which it cannot redeem until at least six months after the fork, which hasn’t happened yet. A perfect storm was brewing, and Celsius needed to act.
With big question marks hanging over the stability of stETH it’s not great that Celsius is sitting on 445k of stETH, or more than half a billion dollars of it, especially as there’s only 143,000 in ETH liquidity in the stETH/ETH Curve pool.
The other issue is that Celcius uses on-chain leverage through platforms like Aave and Maker to deliver juicy rewards and low-rate borrowing to its customers without exposing them to the same risks. To do this, Celsius accesses leverage through permissionless on-chain money markets like MakerDAO and Oasis. That means taking user deposits in assets like WBTC and depositing them to borrow the DAI stablecoin.
Maker is a collateralized lending protocol or in more human language. Users can deposit $1 of a volatile asset like ETH and borrow some DAI stablecoin. If the value of the collateral, in this case, ETH, falls below a liquidation threshold, it is liquidated to repay the loan and prevent bad debt. If Celsius’s lending collateral is falling in value, then so is Celsius customers’ lending collateral so they will need to liquidate the customer’s loans and repay their own.
In a nutshell, Celsius has opened far too many loans plus taken user deposits and traded them for stETH. They now owe a massive amount of money, don’t have reserves to pay, and can’t cash the stETH out. Celsius is fundamentally insolvent.
It gets worse
Celsius customers are now faced with two pretty terrible options. Top up their collateral to save their loans or get liquidated. At the same time, Celsius had decisions to make these last few days, but rather than repaying their loans, on June 14 Celsius began topping up their collateral.
Celsius uses Maker as their lender, which has a minimum 150% collateral ratio on loans. To borrow $1.00, you must place $1.50 of collateral. In this situation, where Celsius already has a massive outstanding loan, they could simply repay it, or, the second option is to put in more collateral and roll the dice.
The second option should only be done if the loan cannot be repaid, hence why Celsius has chosen to do that. It’s akin to a last throw of the dice, where a gambler thinks they can double or nothing. In short, it could prove a pretty dumbass move with funds that dont belong to them. On the other hand, it could prove to be a stroke of genius.
As news broke of this unusual move, the prices of ETH and BTC fell accordingly as investors and the markets got spooked. Moreover, the falling prices of BTC and ETH mean Celsius now holds even less capital. The vultures were quick to circle with competitor platforms NEXO and Almeda Research, making offers to buy up assets to save yet another crypto calamity in a few months.
Its also been reported that Celsius Transferred $320 million worth of Crypto to the FTX Exchange hours before freezing accounts. The team unstaked hundreds of millions of dollars in crypto from Aave and transferred them to FTX. At writing, the project has not provided a reason why, but the crypto-verse jury is out.
On-chain data shows that Celsius sent over 100,000 ETH to FTX in the past few days and 9,500 WBTC. However, the staking and lending platform has also transferred other tokens, including FTT, MATIC, UNI, USDP, and TUSD, to the exchange. Overall, the total amount sent now is around $320 million.
What now?
Despite the moves described the latest development is that Celsius looks like it will finally start paying back the debt after buying just enough time by upping its collateral to lower liquidity. Over $30 million in loans has been repaid at writing and as one Twitter observer put it “Celsius become hyper-efficient at their job the moment their solvency is threatened lmao.” We will continue to monitor and report on the story as it develops further.
Celsius is one of the crypto industry’s largest lenders, with billions of dollars in assets. At the same time, its business model works fine in a strong market when demand is high. The entire system becomes unstable when prices drop hard and fast, as they have been doing lately.
The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in various cryptocurrencies, including BTC, ETH, and RADAR.