The next Terra? The beginning and end of the Celsius collapse

As bitcoin spiraled lower, the crypto lending platform suspended withdrawals, causing its own token to plummet. This is what happened.

Amid the broader crypto market crash, crypto lending platform Celsius announced on June 12 that it was suspending all withdrawals from its lending platform, citing "extreme market conditions" and the need for "stable liquidity."

Within hours of the announcement, Celsius’s native token, CEL, plunged 70% in a single hour; by the next day, it was trading down more than 40%. CEL's downward spiral comes amid a massive sell-off that saw the total cryptocurrency market capitalization plummet to less than $1 trillion, more than two-thirds below its all-time high of $3 trillion, and bitcoin's 2020 plunge. levels not seen in years.

Celsius’ mission statement says its goal is to “disrupt the financial industry.” If the Bloomberg and Financial Times headlines are anything to go by, it's sure to have a disruptive effect on the crypto market itself.

So what happened? The short answer is: No one really knows, but trouble has been brewing for the last year.

cause

Among decentralized finance (DeFi) lending platforms, Celsiusis fairly typical. Anyone can borrow, but if they're interested in the latter, the loans are overcollateralized, meaning the borrower has to deposit more money than they borrow. This is counterintuitive to the average person, but remember that cryptocurrencies are currently unregulated, so there are no collection firms to keep borrowers from defaulting.

So while DeFi offers the promise of an alternative financial system by offering more competitive yields than savings accounts, there are still capital and technological barriers to entry.

Once users take the risk and invest some money in the protocol, they are able to reap handsome returns. According to its website, Celsius offers returns of over 7 percent for stablecoins like USDC and Tether, 7.25 percent for Polygon, 6 percent for Ethereum, and 6.25 percent for Bitcoin.

The protocol then lends the tokens it has pooled to borrowers at a higher interest rate. Celsiusinsists that it will not use customers’ cryptocurrencies for anything other than in-protocol lending and bitcoin mining operations, and touts its “transparency” and “real-time audits” as its unique selling points.

current situation

Shortly after the suspension of withdrawals was announced on June 13, Celsius’s CEL token began to free fall. The rest of the crypto market appears to be following suit, albeit with less pronounced losses.

The short-term cause of Celsius’ problems appears to be due to Lido’s staked ethereum (stETH), a token pegged to ethereum’s ETH. stETH stands for ETH locked on the Ethereum 2.0 Beacon Chain - a chain that runs parallel to the main Ethereum blockchain and will eventually merge with the main Ethereum blockchain in an event called a Merge, shifting the network from a proof-of-work consensus mechanism It is a proof-of-stake mechanism.

On DeFi platforms, stETH is often used as collateral for borrowing ETH. The problem is that stETH has recently lost its peg to ETH, threatening those positions. stETH is now under intense selling pressure as holders sell off and the merger date is mired in uncertainty.

So what does this have to do withCelsius? The DeFi platform has locked customer funds in stETH, and the decoupling of stETH may trigger a wave of redemptions and trigger a liquidity crisis.

Over the past year, several regulators have made it clear that they consider high-yield crypto lending products such asCelsiusto be unregistered securities. By last September, four states (New Jersey, Texas, Alabama and Kentucky) had sentCelsiusdesist letters. That same month, Coinbase shut down its own planned lending product after the U.S. Securities and Exchange Commission threatened legal action if it launched.

Celsius has since closed its UK operations, citing "regulatory uncertainty". The company's decision to move to the U.S. will also eliminate strategic expansion, allowing it to focus on obtaining domestic licenses and registrations to "ensure thelong-term viability ofCelsius and its communities."

In October 2021, Celsiusraised $400 million in a funding round at a valuation of over $3 billion. By November, it disclosed that funding had grown to $750 million after an oversubscribed raise.

In May 2022, Celsius changed its rewards product to comply with regulators, phasing out high-interest accounts for unaccredited U.S. investors, essentially a fancy way of saying that it banned those earning no more than Those with $200,000 and no more than $1 million in the bank benefited the most.

Celsius’ current woes come a month afteranother DeFi standard holder, Terra, crashed. The platform’s dollar-pegged stablecoin UST fell to zero after its top-ranked use case — a 20% yield on Anchor — was hit by market uncertainty. Massive exits ensued and billions of dollars were burned to mint LUNA at a rate too fast for the peg algorithm. Entire ecosystems are wiped out.

At the same time, a lot of moneywas being diverted from Celsius . In the first half of 2022, the total amount of digital assets locked on the agreement has shrunk from about $24 billion to $12 billion.

After freezing withdrawals on Sunday, Celsius rival Nexo offered to buy some of the company's liquid assets, noting that Celsius "appears to be bankrupt." With the broader cryptocurrency market deep in the red, it's a volatile time for DeFi, and cryptocurrencies in general.