Why Celsius Crypto Platform Pause All Withdrawals?

 Recently, the crypto lending platform Celsius has fallen into a serious financial crisis and suspended withdrawals, locking billions of users' funds. It caused violent turmoil in the crypto market after Luna. People even regarded it as a "Lehman moment", indicating that the event may, be like the Lehman company that caused the global financial crisis in 2008. That may lead to a more damaging and series of crises in the crypto world. The article will explain how the Celsius platform works and why they suspend withdrawals.

What Is Celsius Network?

Celsius Network is one of the world's top crypto lending and interest-earning yield platform that was founded in 2018. Celsius claims they are a democratized interest income and lending platform just like a bank that is built on blockchain. Celsius has had a great time, raising $750 million funds in November last year, moreover, the asset management scale used to be more than 30 billion US dollars. According to its official website, Celsius had more than $8 billion in loans processed, 2 million community members, and 11 billion in assets under management by 17, May. However, On 13, June, Celsius announced that it is pausing all withdrawals, Swap, and transfers between accounts.

How Does Celsius Crypto Loan and Yield Work?

Traditional financial institutions, for example, banks, generate interest for depositors by lending. Unlike traditional financial institutions, crypto financial platforms, such as Celsius, may use more aggressive and risky ways to generate high yields for deposits. Celsius uses liquidity deposited on its platform to fund its own investments and to cover loans it makes to other users. They have built enormous positions across plenty of DeFi protocols, such as Anchor Protocol, Ethereum stalwarts Lido, Curve, and so on. With the help of Defi, Celsius offers up to 17% APY for lenders(sometimes up to 30% and pay weekly). However, the recent crypto market situation has largely diminished the potential returns that Celsius can earn on its investments, affecting the liquidity of the Celsius platform.

What Happen to Celsius Crypto Platform?

It is well-known that Celsius has been using a multitude of DeFi protocols including Terra's Anchor and Ethereum stalwarts Lido and Curve to make sure high yields. However, the following events can be said to be the trigger for Celsius' financial crisis:

  • In June last year, Ethereum staking service Stakehound disclosed that it had "misplaced" private keys for over 38,000 ETH. As a result, On-chain data provided by Nansen suggests that Celsius lost at least 35,000 ETH, being left with the now-worthless Stakehound ETH tokens.
  • Stablecoin on Luna blockchain, UST, is unpegged from the U.S. dollar and precipitated a $60 billion crash in the ecosystem cryptocurrency--Luna, in May. Then Celsius hastily pulled $500 million out of the Anchor Protocol during the chaos. This issue has throttled investor confidence in the crypto market. Every week since early May, the time of the Terra implosion, Celsius platform outflows have exceeded inflows, in the first week of May, outflows topped $1 billion.
  • Celsius made a big investment in staking stETH token, which was locked for 6-12 months until after the beacon chain merges. Unfortunately, the recent crypto market has made stETH price drop and the merge delay. As a result, the token became more illiquid and depegged from Ether.

Celsius also lost $22 million after it mistakenly forfeited restitution payments from the Badger DAO hack. Even worse, according to the Financial Times, the value of assets deposited on Celsius's platform declined 50% between December and May, plummeting to $12 billion from $24 billion. Now Celsius has liabilities of 1 million ETH, according to Brad Mills, a crypto analysis. If customers start withdrawing from Celsius, they will have to sell their stETH. So if investors withdrew assets out faster than others were willing to risk putting it in, Celsius found itself in a difficult position to continue paying out its yield to customers, which push them to expand their income source and face more risk. With all these situations above, it is hard for Celsius to provide the money for its members that would like to withdraw their assets.

What Lessons Can We Learn from Celsius Crypto Platform?

For Celsius, in conclusion, the fundamental reason is that the risk control of Celsius is out of balance. In addition, there are a lot of problems that exist in the management of the Celsius platform, many negative news has been reported before. In the crypto market, both big whales and retail investors do not only exist as individuals but are interconnected and intersected with each other. In this case, the occurrence of a negative event often involves a series of other participants. The Celsius storm not only put itself on the verge of bankruptcy but also put other crypto companies into crisis. That is to say, it will cause the "domino" effect. Moreover, these events have aggravated the spread of panic in the crypto market, the selling intention is obvious, which will cause the crypto price to drop. The lessons we can learn from Celsius can be as follow:

  1. Celsius is a crypto company, but its business is actually not "real" DeFi, and its projects are centralized. This means that the company's operations and business development are not transparent, and the company has the opportunity to operate in the dark and tamper with it. The information asymmetry will naturally lead to the recipient of the information falling into a passive acceptance situation. How to supervise a crypto loan company will be a great problem.
  2. Celsius fell to control the risk which leads to a serious lack of liquidity. So a crypto company should not only pursue high profits but ignore risk control.
  3. The core business of Celsius is to provide members with the "Earn" service, that is, users can deposit any cryptocurrencies supported by the platform, earn interest up to 17% APY, and withdraw the principal at any time. A large number of investors are incentive to invest their assets to earn high profits. However, the platform now pauses all withdrawal. So when making investment decisions, it is always true that high returns are inevitably accompanied by high risks. Therefore, in the future investment process, retail investors need to keep their eyes open at all times, and cannot ignore the hidden risks behind a high-profit project.

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