When Celsius stops the picks and the mood in the cryptocurrency market drops below freezing

We are not talking about anyone but society Celsius, which has decided to bridge the alleged market gap and offer cryptocurrency loans and savings a little differently than the protocols of the world of decentralized finance seek. Celsius froze the selections on Sunday and the whole crypt market has not talked about practically anything else since then (that is, perhaps still about where the liquidation price of the leverage bitcoin position lies Michael Saylora and its MicroStrategy).

It all started quite innocently. Celsius on Sunday night announcedthat she had to temporarily resort to suspending withdrawals, but also transfers and swaps on the platform. The decision was justified by the prevailing “extreme market conditions” and – which was probably the main trigger – liquidity problems.

But were only market conditions really to blame, and therefore unmanaged risk management? Celsius was not exactly one of the services I would waste time studying, so I only got to the “whitepaper” project when I was writing this article. And I wasn’t surprised.

The whole document it is like a red thread interwoven with warning signals. “The more people join the Celsius ecosystem, the more they all benefit,” we read in the document, for example. Some pyramid would not be ashamed of this very vague idea taken out of context from Metcalf’s law. But let’s not be petty.

The problem is that the project in its white paper juggles concepts and assumptions that create an inorganic conglomerate rather than a functional protocol. In terms of these concepts, the project speaks of itself as a network, but much of the document deals with the company’s structure and management. But maybe we’re just clinging to unnecessary vocabulary again, let’s move on.

Similarly, the document refers to a kind of community, a term that makes sense for algorithmic DeFi solutions, but not for a body with corporate structure and leadership that will always primarily defend its own interests, which is happening right now. But even here, someone might argue that we are catching the word, so let’s go to an analysis of how the whole lending and yielding mechanism works here from a technical point of view.

The basic scheme is that the user saves cryptocurrencies to the company and thus becomes entitled to interest on deposits in the form of cryptocurrency, which he has made, or native CEL tokens, which offer slightly more favorable interest and which we will still get. Celsius should then offer these funds for lending to merchants and other users through various DeFi services, at a higher interest rate. Payments took place once a week.

In this form, the company offers interest on several selected cryptocurrencies and stablecoins. The offered interest rate represents a kind of middle ground between low interest rates on savings accounts in the banking sector and high but very risky interest rates in the landing protocols of DeFi services. However, as it turns out, the risk here is the same, or even higher, than in the case of the traditional services of the world of decentralized finance.

As we have already mentioned, the platform also comes with its own tokenem CEL, which is a common ERC-20, which is a bit redundant throughout the scheme. Even from the original whitepaper, it is not at all clear that the project would need it on a technical level. Although the document says that the lending mechanism requires a blockchain, among other things in order to gain more traction, there are no compelling reasons in the document.

The whole system could run much more efficiently on a centralized solution. The main reason for this probably remains the simple fact that, thanks to the token in the form of an ICO, the company was able to very easily select venture capital to start, ie to build a wallet and a platform. Their “presale” took place in 2017 at a price of 20 cents per token, the subsequent second wave then began in March 2018 at 30 cents. The company got rid of a total of 50% of all tokens.

However, the project invented at least an artificial function for the tokens. The CEL was thus given the role of a slightly redundant utility token, which unlocked, for example, preferential interest rates. A feedback incentive loop has also been built around the scheme, which seeks to generate more demand for the token.

Its dynamics assume that debtors’ fees are converted into CEL tokens, which are paid to creditors at a more favorable rate (than the fees in the native cryptocurrency itself), which should attract other investors who are willing to pledge their cryptocurrencies to obtain part of this more interesting interest rates. This should again increase the price of the CEL token and motivate other users. However, Celsius does not rely solely on this primitive mechanism and expects to use some of the funds raised for PR, advertising and marketing and other acquisitions of new sheep.

This is one chapter of the story. But then there’s the second, and that’s the mechanism Celsius used to pay such rich interest. Celsius used borrowed cryptocurrencies to provide liquidity in DeFi services and various arbitrations, of which there were more than enough during last year’s bull market. However, the situation changed radically with the advent of the bear market, which forced Celsius to take on increasing risk. One of the places where he tried to scramble capital at high interest rates was the infamous Anchor lending protocol, which formed a combined vessel with the stablecoin UST and Luna. Anchor offered a miraculous interest rate, it had only one flaw – it was actually Ponzi.

For the uninitiated, let’s recall how the whole protocol worked. The lending protocol provided all those who locked up liquidity with interest at twenty percent a year. At the same time, if you wanted to borrow, the protocol tried to motivate you with an interest rate of only eight percent. But that doesn’t make much sense, does it? The protocol thus generated a negative 12 percent margin on every dollar someone put into the system.

The above scheme has been running for over a year without anyone realizing something is wrong. The loss was further increased by a nine percent incentive in the form of a native ANC token, which the protocol generously distributed to anyone who was willing to borrow a stable UST from the system – again, it was a yield farming. Terra blockchain’s main lending protocol bleed for an average of $ 8.2 million a day. For this to continue, the inflow of money would have to be greater than what flowed out. Celsius was reportedly one of those who inadvertently contributed to the collapse of the scheme by his actions.

But that is a thing of the past. Now Celsius has a slightly different problem. Another of these risky companies was the locking of a large number of user ethers through the Lido Finance service to the Beacon Chain. Lido finance provides so-called sticky ethers (stETH). This is a service that allows a cryptocurrency locked in staking to be used further in trading (the so-called liquid staking mechanism). Celsius used this underlying collateral to further generate revenue.

Under normal circumstances, stETH is traded against ETH at a rate of 1: 1, but it is currently traded on a decentralized stock exchange. Curve Finance to liquidity problems and the anchoring of both assets fell apart. This cascaded immediately to Celsius and caused his current liquidity problems. Celsius holds approximately 409,000 stETH in its wallets. But there are about 120,000 ethers in the Curve pool for 515,000 stETH, or only about 19% of ethers. It is now virtually impossible for Celsius to convert its stETH back to liquid ethers within DeFi and thus satisfy users’ withdrawal requirements. Unless he finds a willing OTC trader.