Just as the crypto-sphere was starting to recover from the drama of LUNA and Terra Labs’ downfall, another massive, seemingly safe crypto protocol (Celsius Network) appears to be in jeopardy.
So, what is happening to Celsius and what does it mean for investors?
The issues here are different from the LUNA-Terra Labs issue in a lot of ways. For starters, LUNA was a decentralised network, its vulnerability and potential to death-spiral was a part of the code that governed the protocol and was publicly viewable.
Celsius, however, is different – it’s a centralised project. The issues have come from a lack of transparency that obscures exactly where they are holding its users collateral.
What Is Celsius?
Celsius Network is a crypto lending platform that allows users to both borrow and lend cryptocurrencies. However, unlike decentralised lending platforms, Celsius is run by a team of people rather than by a smart contract. Celsius functions much like a traditional bank. Without the rigidity of smart contract deposits, there is some flexibility for Celsius in terms of how they use the crypto that is deposited on their platform.
Celsius, of course, needs to turn a profit. They need to bring in more money through lending than they pay for borrowing. This is why borrowing money from a bank has a higher rate of interest than if you deposit.
So, for example, a bank might charge 5% interest on loans but only pay 2% for deposits. This is a perfectly normal and sustainable model. It gives customers access to loans, allows depositors to earn a return on their funds, and allows the bank to turn a profit.
However, what if the bank starts borrowing money from other sources? What if it starts using deposited collateral to make investments to maximize their return? This puts their customers’ collateral at risk and threatens the bank’s existence.
How Celsius Have Been Managing Your Collateral
Celsius have been depositing its users’ collateral with other protocols to earn a bigger return. This raises the question of where exactly is all this collateral? Well here are a few places where Celsius are known to have staked funds.
- In May 2021, Stakehound lost the keys to its protocol, making cryptocurrencies held on the platform completely inaccessible. An Etherscan search verified that Celsius lost 35,000 ETH during this disaster.
- Celsius also lost $50 million in the BadgerDao hack in December.
- Celsius currently has 288,000 ETH staked in an ETH 2.0 contract. This is a relatively safe way to earn a return on ETH but the coins are inaccessible until the Ethereum Merge is completed. There is no guarantee when that will happen and, until then Celsius cannot provide everyone’s collateral if they all choose to withdraw their funds, leading to insolvency.
Celsius is now borrowing money to pay their customers back. This is a very precarious situation to be in, especially with the current unease surrounding the crypto market.
Celsius Pauses Withdrawals
This all led to Celsius implementing HODL mode. This consisted of a series of barriers designed to make withdrawing more complex, forcing users to submit documents in order to make any outgoing transfers.
Since then however, Celsius have taken the even more dramatic step of completely pausing all withdrawals, swaps, or transfers between accounts. Investors now have no access at all to their funds. The apparent reason for this is to give them time to stabilize liquidity. However, with the above information it’s difficult to see Celsius being able to find the required liquidity.
Investors looking for an explanation appeared to be in luck as CEO Mashinsky was due to attend an AMA. However, he apparently lost his voice just before his appearance, adding to investors’ mounting frustration.
If there’s one thing constructive to say about this, it’s that the solution to is already already provided by crypto – or at least, the tech and philosophy on which it was created. One of the most inherently valuable parts of cryptocurrency is the transparency that it offers. Decentralised protocols allow you to track funds you’ve deposited on the blockchain and see what they are currently being used for.
This is the problem with more centralised projects like Celsius. It has the same lack of transparency as a traditional bank, but, because it manages crypto assets rather than government issued currencies, it has none of the regulations that protect customers.
Using these platforms carries an inherent risk. Ultimately, any time you’re thinking of giving a centralised body any jurisdiction over your crypto assets, make sure you are aware of exactly how they make a profit and if it’s sustainable – if it over-promises, you should generally steer clear.
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