Celsius Network is a popular crypto lending platform founded in 2017. Celsius is a centralized lending platform that allows users to open deposits with interest on them and take crypto-collateralized loans. Celsius provides favorable conditions for depositors. All you need to do is download the official Celsius App, verify your account, make a deposit in cryptocurrency (you can buy crypto directly in the app), and receive interest payments every Monday. At the time of publication, more than 30 crypto assets are available for users to deposit, including BTC, ETH, many stablecoins, and other popular cryptocurrencies. The user can receive up to 18.63% APY depending on a particular cryptocurrency.
Depositors have two earning options. For example, if you have deposited BTC, you can receive more BTC (up to 6.50% APY) or earn in the internal CEL currency (up to 8.53%). In addition, Celsius has implemented a loyalty program to encourage CEL holders. So, depending on the percentage of CEL on your balance, you get one of four levels. Naturally, the higher the level, the higher the interest rate. Thus, the exact interest depends on the following factors:
- the specific coin;
- deposit amount;
- deposit period;
- the percentage of CEL tokens at the balance.
As for borrowers, Celsius provides the lowest loan rates starting from 0.1% APR. Users can borrow popular stablecoins (USDT, USDC, PAX, TUSD, GUSD, MCDAI) or USD using more than 30 cryptocurrencies as collateral. The minimum loan amount is $100 for stablecoins and $1000 for USD. The interest rate depends on the loan amount, period, and the repayment method (if paid in CEL, the rate is reduced).
In addition to deposits and loans, the Celsius platform provides users with the possibility of direct fiat-to-crypto purchases. A distinctive feature of Celsius is that the service does not charge fees for purchasing cryptocurrencies.
Moreover, the developers of Celsius are planning to issue a crypto credit card. With the help of a crypto card, users will be able to spend their cryptocurrency and receive cashback, as well as receive passive income for holding cryptocurrency on balance. Users can now join the waiting list to receive a notification when the card becomes available. Another exciting feature is CelPay, an application that combines the functions of a wallet and a payment system. CelPay allows users to make peer-to-peer fee-free transactions and add payment notes.
The native CEL token is an ERC20 token with a limited maximum supply of 695 million tokens. According to the CoinMarketCap version, the circulating supply is just over 238 million tokens. However, according to the project team, their circulating supply is about 510 million tokens. The CEL token gives holders the following advantages:
- deposit rates are 30% higher;
- loan rates are 25% lower;
- additional earnings in 6.65% APY (at the platinum level).
Depending on the CEL balance held, users are divided into four levels:
- bronze from 5% to 10% CEL (of the user’s total balance);
- silver from 10% to 15%;
- gold from 15% to 25%;
- platinum from 25% to 100%.
Depending on the level, the loan discount for borrowers or bonus remuneration for depositors increases.
The maximum price of CEL was fixed on June 3, 2021, and amounted to about $8. Now the price of the token is about $0.5. The reason for this was the official announcement of the Celsius team about the suspension of withdrawals, transfers, and swaps on the platform.
What’s Wrong with Celsius?
On June 13, Celsius suspended the withdrawal of funds, as well as swaps operations and transfers of assets between user accounts. According to the representatives of the project, they made this decision to protect customers from a liquidity crisis in light of “extreme market conditions”.
The suspension of transactions led to the locking of all users’ funds. According to “The Block” analyst Larry Cermak, there is about $1.5 billion in users’ wallets. The Celsius team called their actions an attempt to take a better position to fulfill their withdrawal obligations over time.
The problems began in December 2021. A hacker stole $120 million worth of wBTC from the BadgerDAO protocol. Celsius was the biggest victim as 40% of the stolen funds belonged to Celsius. In February 2022, Celsius suffered losses of another 35,000 $ETH due to an incident with the StakeHound protocol.
In addition, Nansen analysts drew attention to the possible connection between the problems of Terra and Celsius. They wrote that Celsius was withdrawing approximately $500 million from the Anchor protocol on May 13, which could be one of the reasons for the collapse of Terra. However, the main reason that became the trigger is the high volatility of the market and the general fall of the market, and in particular, the stETH-ETH de-peg.
A Bit of Theory
To date, Ethereum operates based on a Proof of Work consensus mechanism and has a so-called Beacon Chain (Proof of Stake). In Q4 2022, Ethereum developers are planning to merge networks, after which Ethereum will become a PoS network. As we know, in PoW networks, miners are responsible for security and project management and use computing power to solve complex mathematical problems and mine coins. In the case of PoS, the stakeholders are responsible for the security and validation of the network.
While “The Merge” has not occurred, stakers can use platforms such as Lido to stake their ETH in exchange for stETH. The latter confirms the existence of a stake and, at the same time, allows you to use coins in trading and as collateral for obtaining or providing a crypto loan on DeFi platforms.
Let’s Get Back to the Essence of the Problem
So, for a while, everything was debugged and functioned at the highest level. Users staked their ETH and received stETH in a 1:1 ratio. Next, the stakers used stETH to generate additional passive income and expected the launch of Ethereum 2.0. However, at some point, stETH de-pegged from ETH. At the time of writing, the current price of stETH is about $1,045, while the ETH price is approximately $1,100. This incident caused panic among users, as there are considerable liquidity risks. Here lies the key danger for platforms that accept users’ coins for staking — and one of them is Celsius.
If people want to withdraw crypto from such a platform, the company will be forced to pledge its funds because people want to receive real ETH coins, not “synthetic” ones. However, simultaneously, the platform’s ETHs are locked in the smart contract. That is, the platform cannot access them. Accordingly, the company’s representatives are forced to pawn their cryptocurrencies, which may not be available, especially with a great demand from users.
In this regard, the company paused the withdrawal of coins for users. This means that it simply cannot satisfy the demand of users for withdrawal. Because of this, the native CE: token collapsed. It is curious that since we are still in the crypto space if Celsius goes bankrupt, it reserves the right not to return depositors’ funds. So far, the company is trying to cope with the situation, and pausing user transactions is one of the ways to maintain liquidity.
If Celsius cannot cope with the current challenge and increase the reserve of available funds, it will begin to liquidate its assets in stETH, which will only aggravate the de-pegging from ETH. So all crypto users froze in anticipation of the outcome, and some are actively selling their cryptocurrency with thoughts that the bubble is about to burst, which causes a further decline in prices.
What is happening in Celsius should be a lesson for all crypto users and DeFi investors. Unfortunately, most experts agree that if Celsius does not cope with the current difficulties, it will entail an avalanche of problems both for other DeFi lending protocols and for the entire crypto market as a whole. The crypto market is going through hard times. The panic caused by the fall of the market and the liquidation of such a project as TerraUSD is deepened, given the problems faced by Celsius. Hopefully, the developers will be able to find the right solution, and everything will get better soon.
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