Celsius Network, what mistakes led to its downfall?

Celsius reaps the rewards of his recklessness

For several months, many observers have been warning about the Celsius Network’s Suspicious Activities and Unsustainable Yield Strategiesbut also the fact that the company could find itself in default of payment vis-à-vis its users, whose funds have also been frozen.

To go further into the ins and outs of this case, Cryptoast published a file last week explaining how and why the platform is collapsing.

In order to draw up a non-exhaustive list of the steps that led Celsius to the present situation, here we analyze the traces left by Celsius Network on the Ethereum chain by dissecting various financial operations undertaken by the platform.

Note that the “wash trading” strategies deployed via Wintermute and Uniswap, as well as the return mechanisms of Celsius’ DeFi strategies are evaded here.

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How did the platform get here?

The Stakehound Affair

One of the operations recently documented by Dirty Bubble Media reveals that Celsius Network lost at least 35,000 ETH in the Stakehound firm’s key loss case.

On June 22, 2021, the staking solution company Stakehound announces that it has lost access to a wallet holding more than 38,000 ETH, filed on behalf of its clients. Custodians found themselves aggrieved, with the only consolation being the Stakehound collateral token, STHETH, which plummeted in value to as low as $34.

What matters to us in this matter is that Celsius Network sent 35,000 Ether to Stakehound in a single transaction on February 2, 2021, as illustrated by this visualization:

Figure 1: Capital transfers from Celsius to Stakehound

Celsius’ identified wallets currently hold a total of at least 42,306 STETH, making it the largest owner of a useless token. At the current Ether price (1 ETH = $1100), this represents a loss of approximately $38.5 million.

Safe number 25977

On October 7, 2021, Celsius opens with Maker DAO Protocol a portfolio which it uses to finance many DeFi operations via the loan of DAI, guaranteed by wBTC.

First depositing 999.3 wBTC as collateral on the wallet, Celsius generates and withdraws 20 million DAI from the smart contract, repeating the operation many times until the first reimbursement of 50 million DAI on December 4, 2021.

This wallet has recently been brought to the fore as its risk of liquidation was high, given the downward volatility of the price of BTC. In response to the market drop, Celsius filed more than 6,000 wBTC collateral since June 12 and repaid nearly 42 million DAI in order to maintain a sustainable collateralization ratio.

Celsius Maker Vault 25977

Figure 2: Maker DAO #25977 Vault associated with Celsius

With a debt amounting to 224 million dollars today, this portfolio displays a liquidation price at $13,603making it a target for potential vulture funds betting down on BTC to destabilize Celsius.

Losing DeFi operations

Nowadays, Celsius holds $651 million in Compound and Aave protocol deposits. The company notably has $229 million in wBTC on Compound and $422 million in stETH on Aave, interacting frequently with the wallet 0x8aceab8167… from Celsius, known as the company’s premier DeFi wallet.

Celsius Wallet Core DeFi

Figure 3: Activity of Celsius wallet 0x8aceab8167…

These deposits, made since the year 2021, are supposed to generate interest. Nevertheless, the average annual return of these deposits is quite loweven lower than many bank savings accounts – from around 0.005% APY for wETH deposited on Aave to 0.031% APY for wBTC deposited on Compound.

There is therefore a significant gap between what Celsius pays for its loans and what it receives as interest on its deposits. Based on a conservative estimate of the average annual return Celsius offers its clients, data from DirtyBubbleMedia suggests that the platform would have faced a annual deficit of 86 million dollars for the year 2021.

Overexposure to stETH and Staking Eth2

During the year 2022, Celsius Network has again taken the gamble of exposing itself to stETH but also of staking a majority of the Ethers deposited on the platformdirectly from the Eth2 deposit contract.

Indeed, although the most important deposits of wallet 0x8aceab8167… seem to be on Compound and Aave, a number of other protocols interact with the latter. One of the most important seems to be the Lido DAO, to which Celsius sent some 70,900 Ether in exchange for Lido’s ‘Liquid Staked Ether’ (stETH)mostly from address 0xef22c14f46…

Tx Celsius LidoDAO

Figure 4: Capital transfers from Celsius to Lido

Additionally, Celsius Network has also transferred large amounts of Ether to the Eth2 deposit contract, enabling Ether to be locked up in preparation for when Ethereum will move from Proof of Work (PoW) to Proof of Stake (PoS). , via two wallets.

During the month of March, Celsius used the Figment Eth2 Depositor contract to send the funds, depositing a total of 112,352 Ethers from this portfolio. A second wallet then transferred 90,368 Ethers directly to the Eth2 deposit contract, followed by an additional transfer of 28,325 Ethers.

Today, Celsius holds closer to 324,756 ETH with the Eth2 deposit contract, blocked until merge. Celsius is therefore unable to repay 100% of the ETH deposited by its customers, in addition to being exposed to the stETH depeg with Lido.

The recent liquidation by Tether

On June 15, Tether announced that it was liquidating the collateral contracted by Celsius towards it. Indeed, Celsius Network had a claim of nearly $1 billion on Tether for months. Following the announcement, a hundred million dollars were transferred from Tether to Celsius from this address.

Tx Celsius Liq Tether

Figure 5 : Capital transfers from Bitfinex to Celsius

Tether said it liquidated Celsius without incurring losses, recalling that the position was overcollateralized. The firm took the opportunity to declare that it had no exposure to Celsius regarding its equity.

Where are the remaining funds?

Following these operations and events, all on-chain wallets identified as held by Celsius total almost two billion dollars in valuedistributed between the wallets of the firm and decentralized applications such as Coumpond, Aave, Maker, Synthetix or Notional Finance.

These funds are mostly composed of debt, wBTC, ETH and stETH, partly blocked as collateral or staked. In itself, the amount of liquidity available to date is valued at $930,000, while the total debt on these portfolios exceeds $650 million.

However, this only represents a minor part of the funds belonging to Celcius, the rest passing through centralized exchanges or unidentified portfolios to date.

You will be able to view and navigate through this Zapper dashboard

Celsius Wallet Combo

Figure 6: Accumulation of Celsius on-chain wallets

👉 To read: Nexo offers to buy assets from Celsius as the latter finds itself in difficulty

Summary and conclusions

Ultimately, this series of deleterious financial operations has only brought to light the lack of risk management shown by Celsius Networkdespite all the communication efforts made to maintain the trust of the community.

Today, Celsius finds itself bound hand and foot, paralyzed by the immobilization of part of its funds, substantial losses and exposure to unstable financial products.

All eyes are now on the liquidation threshold of Vault 25977 as well as possible future restructurings of Celsius Network. Since the tweet announcing the freezing of user funds, the platform has not posted an official statement on its Twitter account, leaving its depositories in a state of blazing uncertainty.

Other operations worthy of interest have been avoided here and will be published shortly on our Discord Channel, to go further, join the Toaster made up of experts to accompany you in the world of cryptocurrencies!

Sources – Figures 1, 3, 4, 5,: Bitquery, Figure 2: Oasis, Figure 6: Zapper

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About the Author : Teacher. Chain


On-chain analyst, fervent fighter of informational asymmetry.

My goal is to inform everyone about the state of Bitcoin (as an asset and a distributed network) through the prism of on-chain analysis.
All articles by Prof. Chain.

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