Just as the market is digesting the collapse of Terra Blockchain-backed Luna and UST tokens, Celcius Network is the latest team to throw crypto markets into chaos.
Celsius Network is a peer-to-peer platform for decentralized finance (DeFi) that allows users to borrow and lend, and trade a wide range of cryptocurrencies.
The crypto lending platform supports a wide range of digital tokens, including top names like BTC, ETH, and also the meline delights of the BADGER coin.
Get returns on crypto
Refunds vary by token, but at the time of writing, the company’s website promises 18% annual fees for users who divest SNX with the crypto lender.
SNX to US dollar
Yields close to 20% are clearly tempting, though that assumes you can access your cash.
Celcius Network had previously drawn the regulator’s attention to its business and its suspicions were confirmed when the crypto lender stopped all withdrawals and transfers between accounts on Monday.
That decision created chaos that resulted in a drop in cryptocurrency prices.
But how does the Celcius Network crypto lending platform actually work?
How Celsius loans work
In theory, Celsius Network is a custodial asset manager for decentralized finance opportunities.
It provides regulated access to lending and yield, and charges a fee for that service without exposing users to the hassles and risks of crypto in custody.
The crypto lender has a white paper and a CEL token that offers loyalty rewards and discounts on the use of Celsius Network services.
CEL has experienced wild price swings since news of liquidity problems on the credit platform surfaced.
CEL to US Dollar
Like ETFs, the crypto lending platform does not offer direct exposure to underlying positions.
However, they promise withdrawals and refunds in case users want to exit their positions, but Celsius ultimately manages the positions on behalf of the investors.
Celsius positions itself as a crypto product despite providing traditional financial services.
Why is Celsius not working now?
There are two things that Celsius Network did that put it in a tough spot: the use of on-chain leverage and stETH (staking ether).
To provide users with a low lending rate, Celsius accesses leverage through permissionless on-chain DeFI money markets such as MakerDAO.
In simple terms, Celsius takes users’ BTC and ETH deposits and deposits them to borrow DAI.
Maker works in the way that you put up $1.50 of volatile collateral (ETH, for example) and borrow the DAI stablecoin.
DAI to US dollar
If the value of collateral falls below a threshold, it is liquidated to pay off the loan and avoid bad debt.
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In theory, if crypto loan collateral is falling in value, so will Celsius customer loan collateral.
In short, pay off your clients’ loans to pay off your own.
And the prices of cryptocurrencies have plunged.
What is ETH staked (stETH)?
Celsius crypto offered solid returns on ETH of 8%, and it did so using an ETH derivative known as Stake ETh or stETH.
This ETH variant is a brainchild of LidoFinanceand offers improved performance as it does not yet exist.
ETH to US dollar
ETH is transitioning to a proof-of-stake concept, a process known as Merging, and in simple terms, stETH is a token that will only be awarded once this upgrade is complete.
The problem is that the Merger hasn’t happened yet, and according to analysts Capital.com spoke to recently, it could “happen next year at best.”
breaking the money
So while stETH is supposed to trade closely to its main variant ETH, they have started to diverge since the collapse of the Terra Blockchain network with traders demanding compensation for the risk of stETH illiquidity.
According to data from Ape Board Celsius, it holds 409,260 stETH tokens, worth approximately $500 million. However, this is less than if you had ETH.
Data from Coinmarketcap shows that Lido Staked ETH is trading at $1103 vs. $1176 for ETH at the time of writing.
This means that the assets the crypto lender bought for a dollar are now worth less than a dollar and given the limited appetite for SETH in the current risk-averse crypto market.
Gloomy prospects for the Celsius Network
The stETH token can also be exchanged for ETH on the open market, but can only be exchanged for ETH when the beacon chain merges and Ethereum goes through a hard fork.
Celsius Network cannot redeem your stETH for the real product until after the Merger takes place and the lack of liquidity means that you cannot redeem your seETH supplies for the real product, even at a discount.
Celsius Network’s survival looks challenging.