Reminder of the facts, what happened with Celsius?
What is Celsius?
Before plunging together into the heart of this affair, it is important to contextualize and set the scene. Celsius is one of the largest centralized platforms of the ecosystem. It offers simplified access to decentralized finance (DeFi) services such as the loan (borrowing), the loan (lending) and savings (earning) on cryptocurrencies.
Celsius quickly positioned itself as a giant in its field. And for good reason, it offers attractive returns of up to up to almost 19% APY. Thus, in the space of a few years, the platform raised 864 million dollars, reached the $3 billion in assets under management and surpassed one million customers.
Concretely, Celsius is an asset manager. The platform provides regulated access to cryptocurrency lending, borrowing and returns, while receiving remuneration for it. The interest for the user is to take advantage of it without exposing themselves to the disadvantages and risks of managing their DeFi positions themselves.
In other words, Celsius does not offer its clients direct exposure to the underlying assets, but promises position buybacks in case users want to withdraw their funds. This is a fundamental aspect to bear in mind in order to understand the outcome of this case.
Moreover, despite the use of processes strongly reminiscent of centralized finance, Celsius wishes to break away from it. This is why the platform introduced a token, the CEL. This allows to obtain discounts on services and reward bonuses.
Celsius suspected of default
Now that you have the basics, let’s get to the heart of the matter. At the beginning of June, several observers began to warn that Celsius could end up in default towards its users.
The first rumors circulating pointed to the fact that Celsius’ positions in Ethereum (ETH) would only be 27% liquid. Generally speaking, the rest would be locked in smart-contracts linked to Ethereum 2.0 and especially stETH, a product issued by the Lido lending platform. Notable detail, these are inaccessible before the transition of Ethereum to its new version.
Quickly, users blamed the platform mismanagement of their funds, especially following the collapse of the Terra (LUNA) ecosystem and its stablecoin UST. Faced with these rumors and in a bear market context, the situation quickly became alarming.
More and more users wanted their assets back, forcing Celsius to sell its positions at a loss and causing Ether to stall further. Far from extinguishing the fire, Celsius, on the contrary, turned it into a real inferno by announcing the suspension of swaps, withdrawals and transfers on the platform.
As a direct consequence, the CEL immediately dropped by more than 75% within a few minutes. The platform token has passed from around $0.36 to less than $0.09before beginning an astonishing catch-up.
👉 To go deeper, our complete guide on Ethereum (ETH) and how this crypto works?
In concrete terms, why is Celsius in so much trouble?
At the time of writing, there are two main reasons why Celsius, and its million users, have found themselves in turmoil. Firstly, a rumor of misuse of client funds to effect leveraged loans. Secondly, it is poor management of the stETH product.
Real mismanagement of client funds?
The crux of Celsius’s problem has been the desire to provide users with low borrowing rates and overly high returns. To do this, the platform had to use to leveraged loans on autonomous market makers, including Maker DAOleveraging user funds.
Very concretely, when a user buys Bitcoin (BTC), Celsius converts it into Wrapped Bitcoin (wBTC) and deposits it as collateral on the Maker protocol to borrow DAI stablecoin and generate returns with it. However, if Bitcoin loses too much of its value, the collateral is no longer sufficient insurance and the protocol must liquidate the position.
As you will have understood, as Bitcoin tumbled alarmingly, Celsius’s positions found themselves under threat. As of June 13, Celsius had over 17,000 wBTC placed in leverage on Maker and the liquidation threshold was reached if Bitcoin fell below $22,500.
However, while many users expected Celsius to liquidate its clients’ positions to repay its own, the platform simply bailed out the coffers. As data from the Oasis app shows, Celsius now has almost 24,000 wBTC in collateralwith a clearance price of $14,000.
Information about Celsius positions on Maker DAO
The storm seems to have calmed down slightly, But for how long ? The real question is whether Celsius will manage to continue to hold its position if Bitcoin falls, without having to liquidate its own clients.
Celsius overexposed to stETH?
As you most certainly know, Ethereum is preparing to make its transition to a new blockchain, operating under a Proof-Of-Stake (PoS) type consensus. Thus, it is already possible to lock your Ether on the smart-contracts of Ethereum 2.0 and generate a return of 4.2%.
Furthermore, Celsius offers its clients an attractive return of nearly 8% on this same asset. How is it possible ? Through an extremely interesting product, the stETH of the Lido lending platform. However, you will quickly understand why this is a concern.
stETH is a token attesting that a user has staked an Ether in an Ethereum 2.0 smart contract. Moreover, these allow generate even more returns. In addition to earning staking rewards, stETH can be lent or used to provide liquidity.
However, this product has one main drawback: although it can be exchanged for Ether on a secondary market, it cannot be used to recover the initially staked Ether. At least not until Ethereum 2.0 has officially launched.
Moreover, for various reasons, stETH has depeg and is currently trading at 0.95 ETH. In other words, Celsius has bought a lot of stETH, and these cannot be traded before the Ethereum Merge, or else with losses.
Worse still, there is not enough cash available to allow Celsius to get rid of its stETH. Indeed, the liquidity pool on the Curve Finance protocol is currently unbalanced and has less than 120,000 ETHwhereas Celsius position stands at 445,000 stETH.
Information on the stETH / ETH liquidity pool on Curve
What are the current risks facing DeFi?
The repercussions of the Terra case
The collapse of the Terra (LUNA) ecosystem and its stablecoin UST impacted much deeper than we could have imagined. Many platforms have suffered considerable losses, especially Celsius. They therefore found themselves obliged to sell their positions at a loss to reimburse their clients and secure their positions.
In addition, Celsius’ mismanagement is not an isolated case. The investment fund Three Arrow Capital is also facing massive liquidations and could become insolvent. All of these cases directly threaten the ecosystem.
The sales volumes of these investment funds, lending platforms and other centralized exchanges led to the massive fall in cryptocurrency prices that we are currently living. So much so that they defaulted many DeFi users.
At the time of writing this file, the protocol Aave faces a wall of potential liquidations. If Ether drops below $984, then $200 million in positions will be on the verge of being liquidated.
It is important to note that this concerns Celsius, but also many ordinary users whose collateralisation factor was still relatively high a few weeks ago. The rapid fall in the market has placed them in a complex situation, close to liquidation.
What can we predict for the future?
The question everyone asks is: can we hope to save ourselves from this? There are three scenarios to consider:
- The first of these is that Ether does not drop below $984.
- The second is that users provide sufficient cash to re-collateralize their positions and avoid liquidation.
- Finally, the third scenario is that the Ether price drops below $984 and these 200 million dollars of positions will be liquidated.
However, the 5% fee that is offered to liquidators may not be enough to compensate for the fall in the price of Ether in the event of liquidation of such an amount.
In other words, it is unlikely that someone triggers the mechanism of liquidation in one go, since he would see himself losing. So the last solution would be to carry out liquidations in stages, little by little. However, the gas costs on Ethereum being high, it is not certain that users will want to choose this option, which is very expensive and therefore less profitable.
$200 million being liquidated in decentralized finance
“We have a record day, if not THE record day in terms of difficulties and pressures for decentralized finance”
—BFM Crypto (@BfmCrypto) June 15, 2022
👉 To go further: Nexo offers to buy assets from Celsius while the latter is in difficulty
Sources: Fig 1 – Oasis, Fig 2 – Curve
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