Research Report

Celsius Network – Ethereum Crisis Not Over Yet,  Protocol May Liquidate it’s Collateral: Report

Author: Sahana Vibhute

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A passionate cryptocurrency and blockchain author qualified to cover every event in the crypto space. Researching minute occurrences and bringing new insights lie within the prime focus of my task.

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The crypto space now has fallen prey to a couple of flaws or one can say a technical failure that has dragged the global crypto market capitalization below $1 trillion. Bitcoin prices have reduced to half since the previous market collapse which was fueled by the LUNA-UST crisis then. 

Therefore, dragging the entire crypto space below their respective support levels at the moment now. However, the crisis is yet to get larger as the BTC prices have not been settled as of now and hence more dreadful days may be fast approaching.

But what went wrong? Why did the fall of the CEL token fuel a massive Bitcoin price plunge? Let’s check it out!

What is the Celcius Network & How does it Work?

Celsius is among the regulated lending platform that enables users to receive interest on crypto deposits or also offers collateralized crypto loans. Celsius Network is known to offer over collateralized loans i.e. 50% of LTV(Loan-to-Value), meaning, the user needs to deposit more than what he requires as collateral. 

Whenever the user deposits any asset as collateral with Celsius, it goes directly into the pool of the same asset. This collateral is further lent to the financial institutions and in return, it collects interest from them. A part of the interest incurred from the institutions is further distributed among the users who had staked cryptos on Celsius. 

The working is pretty similar to that of a bank, wherein the user’s money deposited as FD or RD is used to offer loans. The bank earns significant interest from the users and offers interest to the users who have deposited their funds. 

Celsius Network Digital Asset Holdings

The official website of Celsius Network highlights its offering of 7% returns on Stablecoins like USD Coin(USDC) & Tether (USDT), 7.25% for Polygon, and 6% for Ethereum and 6.25% for Bitcoin. The protocol further lends the assets from a particular pool at higher rates to the borrowers. 

As of May, Celsius claims to have 1.7 million users and assets under management (AUM) of nearly $11.7 billion. It also claims to have made more than $8 billion in loans and also offered extremely high annual percentage yields (APYs) of up to 18% on cryptocurrency deposits. 

According to some reports, the Core DeFi wallet, now Celsius wallet on Aave has 409K stETH, 4.49K wBTC, 9.5K wETH in collateral and $206 million, $99.4 million DAI & $932K USDT in debt. On Compound, Celsius has 14,436 WBTC, 87,604 ETH collateral and $141.6 million DAI and $82.9 million USDC in debt. Whereas Celsius Maker Vault has 21,961 WBTC, 6.7 million LINK as collateral and $279 million DAI as debt.

Where Did the Problem Arise and How?

All it started when stETH or staked ETH which is 1:1 pegged with Ethereum, lost its peg and plunged hard. stETH, a product of Lido Finance, represents the ETH which is locked in ETH 2.0 Beacon Chain and it can be utilized as collateral to borrow more ETH on DeFi platforms. 

Therefore, when stETH lost its peg from ETH, the positions that had borrowed ETH using stETH were being liquidated. This fueled the panic selling, especially of Ethereum in the crypto markets. 

So what does this have to do with Celsius?

The popular DeFi platform had locked customer funds into stETH and when the token lost its peg, triggered a wave of redemptions that caused a liquidity crisis. Mainly because Celsius is one of Lido’s principal clients and hence one of the largest holders of stETH. As the stETH is valued less than that of ETH, the crisis arose here!

Celsius Liquidity Crisis

It is a known fact that Celsius had lost some LUNA & UST after it crashed, but at the same time, the protocol had also lost a huge amount of Ethereum. Yes! The platform had lost nearly 35,000 ETH in the Stakehound key loss debacle in May 2021 while it was holding over 42,000 ETH in verified wallets. On the other hand, the platform has also lost $50 million in the BadgerDAO hack

Celsius had 500 million client deposits in Anchor and hence it is assumed that the platform was the direct culprit of the LUNA-UST crash. Here, it lost at least $120 million of users’ funds. Apart from the large losses, the liquidity crisis began when a mismatch occurred between liquid liabilities and illiquid assets. 

The protocol had nearly 73% of its ETH locked in stETH or staked in ETH 2.0 which makes it impossible to withdraw until the merge. This made Celsius functionally insolvent on their ETH position as only 27% of ETH was open. Moreover, the market conditions led to huge ETH withdrawals that spiked to as high as 50,000 ETH per week. This could have led to bankruptcy just 5 weeks ahead. 

Therefore, the Celsius Network halted transfers, withdrawals, etc from its platform, citing the uneven market conditions. 

How it Impacted The Crypto Market

The huge Ethereum withdrawals had shaken up the ETH price for the past couple of days, however, with the announcement, the crypto market collapsed heavily. Bitcoin price which sustain above the crucial support zone above $28,700, broke down to test 18-month low level at around $20,500.

No doubt the crypto space appears to have recovered slightly, but it still seems to be not less than a ‘dead cat bounce’ trapping the bulls at slightly elevated levels. Currently, Ethereum’s price maintains strongly above $1200 after bouncing effectively from $1075 levels. However, looking into the technicals and the chart formations, more dreadful days are yet to come up ahead.

Series of Events  

2018/19

Celsius Network launches a crypto-backed lending platform and also announces a deal with Invox Finance to offer 9% APY loans to businesses. Later the network integrates TrustToken’s fiat currency-backed stablecoins. Further in 2019, the network adds up EOS to its interest-earning platform. 

2020

The protocol integrates with Simplex to offer credit card facilities to buy cryptos and selects Chainlink (LINK) to provide Blockchain Oracle service. Later it adds Tether Gold(XAUT) to its interest-earning platform and offers cash loans with 1% APY & surpasses 100,000 users. Tether invests $10 million during funding just after the protocol surpasses $1 billion in assets under management(AUM). 

2021

Major leading crypto exchanges list the native token of Celsius Network, CEL. The platform adds ApplePay as a payment option and later launches a web app too. The network confirms having 100,000 BTC deposits on its yield. Later the platform invested $200 million into bitcoin mining. It also announced the Assets under management (AUM) to have reached $20 billion and later the users on the network reached 1 million. 

2022

The SEC opens an inquiry into Celsius Network’s leading operations at the beginning of 2022. Later the platform supports Dogecoin and also invests $450 million in Polygon’s funding round. The protocol also delegates $30 million of WETH to Maple’s Finance crypto lending platform. Further, it burns 82,304 CEL tokens announcing the plan to expand its crypto hackathon series. Just before the halt on withdrawals, the platform also failed to post its regular, weekly report of its assets. 

What may be the Plan of Action

Soon after the announcement, the native token CEL plummeted more than 40% which led to the speculation of a LUNA-UST type collapse. However, some of the moves remain unexplained like Celsius exiting its DeFi positions and replacing it with stablecoins like USDC. Also, the network sent $320 million in ETH to the FTX exchange just before the announcement raising many eyebrows. 

The analyst and experts believe that the Celcius network is working hard to tackle the current situation and rise above the present liquidity crisis. In a worst-case scenario, if the platform fails to do so, then some analysts believe Celsius may sell a significant amount of stacked stETH which may cause the asset to de-peg further from WTH. 

Wrapping it Up!

Collectively, the crypto space ever since the beginning of 2022 is witnessing major turbulence. It is hindering the rally to gain bullish momentum. The recent LUNA-UST crisis ignited a notable descending trend which was fueled by the recent CEL-stETH crisis. 

Now when Bitcoin prices have slumped hard close to $21,500 crucial support levels, with just a wrong move, the crypto space may encounter the most dreadful days ahead. If Celsius Network lets off their ETH holding just like Terra did with their BTC holdings, the markets could collapse severely in the upcoming days. 

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Sahana Vibhute

A passionate cryptocurrency and blockchain author qualified to cover every event in the crypto space. Researching minute occurrences and bringing new insights lie within the prime focus of my task.

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