Now Celsius is Blocking Withdrawals

Shortly after the Terra incident, another shockwave has hit the crypto market. Deposit loan company Celsius Network has suspended the withdrawal of user assets indefinitely.

Celsius Network is a project that offers up to 18.63% APR on crypto deposits. On June 13, the company announced an unprecedented measure to restrict withdrawals, swaps (exchanges between coins), and transfers between accounts, citing “extreme market conditions” tied to the recent downtrend in cryptocurrencies. Alex Mashinsky, CEO of Celsius, tweeted on June 16: “team is working non-stop. […] This is a difficult moment; your patience and support mean the world to us”.

Why did Celsius suddenly restrict withdrawals?

It is believed that lack of liquidity is the reason why Celsius took the drastic measure of suspending withdrawals. Celsius mainly paid out interest on its users’ deposits through profits from interest on the company’s decentralized finance (DeFi) service deposits. In effect, the company was operating as a kind of asset management intermediary. But exactly here lies the problem.

Celsius was investing user assets in products that cannot be withdrawn quickly to earn more interest. According to on-chain data, at the time the withdrawal freeze was announced Celsius held about 1 million Ethereum, of which only 27% is Ethereum itself, and 73% is ‘stETH’, a type of Ethereum-based transferable deposit certificate.

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stETH is a product without a clear withdrawal window. stETH is a cryptocurrency that is issued when Ethereum is placed on the Ethereum staking platform Lido and can be exchanged to Ethereum with a 1:1 ratio. In exchange for staking Ethereum, Lido pays out a monetary reward (the same concept as interest, about 4% per year).

Lido in turn puts the funds entrusted by investors into the Ethereum 2.0 deposit program. These funds cannot be recovered until Ethereum 2.0 integration is complete. Ethereum is currently upgrading the block verification method from PoW (Proof of Work) to PoS (Proof of Stake). To attract a large deposit volume, the project adopted a structure that pays out greater rewards after Ethereum 2.0 launch the more funds are staked. In other words, the Lido project used by Celsius is betting on getting a greater reward for taking on the risk and uncertainty of not knowing when Ethereum can be withdrawn (a period of at least 1 year).

The recent crypto downtrend has accelerated this issue. Currently, the price of stETH ($1,169) is about 4% lower than that of Ethereum, meaning that the two have depegged (can no longer be exchanged 1:1). To process all withdrawal requests by users seeking to convert their crypto holdings into cash during the downtrend, Celsius needs to sell stETH. This further puts negative pressure on the stETH price, which increases the damage to Celsius’ assets caused by depegging. It appears that Celsius has taken the extreme measure of suspending withdrawals to prevent this situation. Celsius depositors are said to have suffered at least $120 million in losses so far.

Celsius under fire for lack of transparency

Following its unprecedented decision to suspend withdrawals, Celsius Network continues to be mired in controversy. Following its withdrawal stop, it became known that Celsius transferred $247 million worth of wrapped Bitcoin (wBTC) to the FTX exchange, which the company had previously deposited on the DeFi deposit and loan platform Aave. Celsius did not give any reason for this transaction.

Subsequently, 54,749 ETH worth about $74.5 million were transferred to FTX in addition to the wBTC. This caused controversy within the community, but still Celsius remained silent. As Cointelegraph reported, “while such activity bodes very poorly for the transparency of Celsius until it explains the moves, the firm may be trying to ensure its liquidity is stable by replacing many of the volatile funds like WBTC and ETH it withdrew from Aave with stablecoins”.

Project in crisis – Tron stablecoin enters 3rd day of depegging

With the Celsius incident and the crypto downtrend overlapping, there is a risk of serial project failure in the market.

The Tron Stablecoin (USDD), a Tron-based algorithmic stablecoin, saw its value dip below $1 from June 13 to 16. As the depegging phenomenon continues, anxiety is increasing. Justin Sun, founder of Tron and Tron DAO (Decentralized Autonomous Organization) Reserve, which manages USDD, announced the organization’s intention to inject additional reserves to recover the USDD peg. The organization aims to inject a total of $2.5 billion. However, despite this news USDD failed to return to $1 as of the 16th.

Famed crypto investment firm Three Arrows Capital (3AC) is also thought to be in crisis. Rumors hold that the firm suffered huge losses in the current downtrend due to using leverage to purchase Bitcoin. 3AC is also known to own both Terra LUNA and stETH. On June 15, 3AC founder Zhu Su addressed the rumors on his Twitter page, saying “We are in the process of communicating with relevant parties and fully committed to working this out”. On the crypto market, serial project failure is in the air. In times like these, it is more important than ever for investors to look for projects with a sound business model.

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