Introduction
Recent Updates:
June 13: Celsius has paused all withdrawals and transfers on the platform. The network's management looked to avoid filing for bankruptcy regardless of advisers and lawyers recommending to file for Chapter 11 bankruptcy.
Jul 5: Celsius paid a total of $120,000,000 on its Bitcoin backed loan, dropping its liquidation price to $4,966.
Jul 6: Celsius continued to pay off another 41M $DAI towards its Bitcoin loan, dropping its liquidation price to $2,722.
Jul 7: Celsius Network has completely paid off its Bitcoin Loan.
In this deep-dive, I will be discussing about:
Celsius - How does it work?
Why is Celsius so popular?
What happened to Celsius?
What can users expect?
Celsius Network
Celsius Network is a cryptocurrency lending platform that offers interest-bearing savings accounts, borrowing, and payments with digital and fiat assets. Essentially, storing your funds in Celsius earns you interest on your holdings each week. The interest comes from loaning out to retail and institutional borrowers.
Celsius claims to return 80% of its revenue to network users in rewards, while the other 20% funds project expansion.
At its peak, Celsius Network supports over 1.7 million users worldwide and managing more than $20 billion in assets. Additionally, the platform has facilitated nearly $5.5 billion in loan originations.
Why is Celsius Network so popular?
Sky-High Yields
One of the reasons why Celsius gained so much popularity is due to the high interest rates given as compared to traditional savings accounts.
Celsius promises customers per-annum yields of up to 18.6%. That's 360x more than what you can get from regular bank accounts today.
Celsius Network has 2 ways of receiving rewards.
First is "In-kind Reward", which means you get back the same token you deposited as interest payments. (eg. Deposit ETH, get back ETH in interest)
Second is a rather controversial one, "in-CEL Reward". Instead of receiving the same token as what you deposited as rewards, you receive Celsius's native token $CEL, but at a much higher APY. Crypto sleuths like DirtyBubbleMedia have analysed the details of $CEL trading and discovered that at least 59% of $CEL token volume is wash trading. More on that here.
Operating a lending business is a relatively stable business model, yet upon facing capital efficiency problems, not all funds are effectively allocated to generate yield. When there is low capital efficiency, it will lead to a lower APY. This inevitably led to Celsius looking for other more degen ways to sustain the sky-high APYs.
As the saying goes, "high risk, high returns". In order for Celsius to get these high returns, they need to put customer deposits into high-yield yet extremely high risk decentralized finance investments.
For example, Celsius is an enormous whale on Anchor Protocol. Just days before disaster, Celsius Network sent over 99,780 ETH ($275 million) over to Anchor Protocol in the last 2 weeks.
Furthermore, in order to fulfill their promise of 8% APY on ETH deposits, Celsius has decided to convert large amounts of ETH into Staked ETH (stETH). stETH is essentially Ethereum that has been locked up on the Ethereum 2.0 beacon chain. This foreshadowed its current liquidity crisis.
Anti-Banks
Celsius' entire narrative revolves around how traditional banks are not providing fair and transparent services.
"Banking is Broken"
"Unbank Yourself"
And the famous one, "Banks are not your friends"
Undoubtedly, Celsius Network is different from traditional banks in numerous ways, leveraging on blockchain technology to achieve no fees, fast transactions etc. Celsius also prides themselves for returning 80% of their gross revenue to their users, and only keeping 20% for company expansion (or that's what they claim).
What Exactly Happened?
All in all, this meltdown happened due to the lack of liquidity, causing a liquidity crisis. Here are the triggers:
Bad Debt
In actuality, all banks generate bad debt. What matters is the magnitude of this bad debt, which Tbmay lead to insolvency in the worst case.
Mismatch between Current Liabilities and Non-Current Assets
Generally for banks, liabilities such as customer deposits are short-term while assets such as loans are longer-term, allowing higher cash flow income. However when a black swan event occurs, there is a higher chance of liquidity shortage, which causes massive dumps and bank runs.
Increased Withdrawal Requests, Decreased Liquidity
As ironic as it sounds, a blockchain-powered company like Celsius still requires lots of trust from their customers. Bank runs will be the last thing Celsius wants to see happening.
Everything went downhill after the LUNA/UST debacle.
As mentioned, Celsius was one of Anchor Protocol's whales, owning over $530 million. Just right before UST's crash on May 10th, Celsius managed to exit from their UST positions. Even though they might not have lost much funds, customers have already started expressing distrust towards Celsius.
In a short span of time from 6th May - 14th May, Celsius lost over $750 million as customers started to withdraw their funds.
Loss of Funds
To make matters worse, Celsius lost large amounts of funds due to hacks and negligence, further impacting customers' trust.
Losing 35,000 ETH from Stakehound
Stakehound, an ETH 2.0 pledge solution, announced on June 22 2021 that it had lost over 38,000 ETH of private keys. Upon analysis, 35,000ETH belonged to Celsius wallets. However, Celsius refused to acknowledge this even till today.
Lost $54 Million in BadgerDAO
During the month of December 2021, hacking into the high yield protocol BadgerDao led to the loss of $115 million worth of digital assets. On-chain data has revealed that Celsius Network lost $54 Million worth of Bitcoin during this hack.
Mining Industry
Celsius also headed into the mining industry to scale their business, investing lots of money in mining companies.
Around June 2021, Celsius confirmed a $54 million investment in Bitcoin mining leader Core Scientific.
This investment was part of an over $200 million expenditure in North American Bitcoin mining, positioning Celsius as one of the largest U.S. investors in the Bitcoin mining industry.
The mining industry is one that requires a huge sum of capital but receives slow returns. It is also very susceptible to market conditions, specifically Bitcoin's price. During periods of high volatility, Celsius once again experienced liquidity issues.
Bear Market Conditions
Celsius once allowed for instant withdrawals anytime. However, when prices of cryptocurrencies started to drop, users started to withdraw their funds at a rate that Celsius could not keep up with due to their lack of liquidity. For example, Celsius had about 73% of their ETH holdings locked up in stETH, and only 27% of ETH were liquid.
According to Zapper.fi, Celsius had $594 million in collateral on AAVE, of which $400 million was in stETH, and $306 million in debt.
Over at Compound, Celsius had more than $441 million in collateral, with $225 million in debt.
On Maker, Celsius had $546 million in collateral, and $279 million in debt.
These collateralization ratios seem decent, but they are extremely dangerous. As Bitcoin’s price continues to decline, and stETH / ETH depegs, Celsius needs to deploy more capital in order to maintain the collateral. However, the incessant withdrawal of funds by users only continues to exacerbate the liquidity crisis.
This ultimately led to the cessation of withdrawals, swaps and transfers from all Celsius accounts.
What Now?
Fun Fact: Taking a trip back to find out who was "right" about Celsius, DefiPrime, a recognized analytical services provider for the DeFi community, had actually decided to delist Celsius Network from their list WAY BACK in 2019.
Upon reading Celsius's Terms of Use, you will realize that the funds that you deposit with Celsius actually grants them "all right and title to such Eligible Digital Assets, including ownership rights". Furthermore, the document also calls out bankruptcy explicitly, stating that "In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable".
Unlike banks, which are FDIC insured, crypto lenders like Celsius lack the legal protection that are built into the traditional financial system. In the event of a bankruptcy, customers who deposited cryptocurrencies may not be able to get their money as they are considered unsecured creditors.
Even though they may go ahead and sue Celsius, there is a low chance that they will be able to win the case and get their money back.
One thing to note is how Celsius refused to file for Chapter 11 bankruptcy, and as mentioned on top, they have been consistently repaying their loans. Hopefully in the near future, withdrawals will be resumed.
Without a doubt, regulations are bound to come. Fischer, a partner at the New York-based law firm Moses & Singer, said with the Celsius debacle, the SEC will be looking at market integrity, investor protection and transparency. Regulations will definitely legitimize a lot of these companies as if they were more standard financial institutions.
To end of, I will leave you with this: