Celsius rapidly became more reckless in its attempt to create yields, using decentralised lending protocols to juggle clients’ funds for the highest returns.
Celsius Users Worried they May Lose Personal Property to Cater to CEL Token
Celsius, which closely resembles a bank because it serves as a lending and interest-earning platform, is rumoured to be insolvent after freezing withdrawals. The platform was started back in 2018 and has hit USD8 billion already lent out to clients and USD12 billion more in assets under management by May 2022.
Following the Freeze, BlockFi, Coinbase, and Crypto.com have announced major job cuts. Apart from short-term impacts, the overall trust in the crypto niche has fallen significantly following the LUNA crisis and now, the troubles at Celsius.
Users of the Celsius platform have been raising concerns that their homes might get liquidated by the company to cater to the CEL token. Alex Mashinskym, the Celsius CEO, only indicated that they are “working non-stop” to address the issues.
Using DeFi to Generate Yields
While the decision to cut down withdrawals and transfers might be a surprise for many investors, the truth is that the ambitious attempt to generate high returns for clients at Celsius was mounting over time.
According to on-chain data, Celsius was busy using different DeFi protocols, from Curve to Terra’s Anchor, to leverage clients’ funds to pay 17% APY in yields.
According to Mashinsky, there is a lot of confusion about the source of yields. “Celsius generates a certain amount of profit by lending assets, similar to what banks do. We lend them out on a short-term basis. These are not loans. We lend financial assets to players that can transact and generate income..,” he added.
The Pressure that Forced Celsius to Its Knees
In June 2021, Ethereum staking service StakeHoud indicated that it had misplaced private keys for more than 38,000 ETH. In the case of Celsius, On-Chain data from Nansen shows that it lost at least 35,000 ETH as a result, implying that it was left with worthless Stakehoud ETH tokens. However, Celsius did not confirm this.
By 7th June 2022, crypto investor Brad Mills indicates that the liability of Celsius was over a million ETH. Since May, when the terra ecosystem collapsed, and its stablecoin de-pegged from USD, the outflows have surpassed inflows. For example, the first week of May saw outflows reaching about USD1 billion.
As investors pulled out liquidity, Celsius found itself in a very tight position because it needed to grow its revenue stream to continue delivering revenue streams for high ambitious yield clients. They were totally unprepared for the market drop.
According to Cory Klippsten, the CEO of Swan Bitcoin, the red flags started emerging when Mashinsky claims failed to add up with the background. “He didn’t have $3 billion in exits, and he didn’t have the most successful IPO of 2004,” expressed Klippsten.
When explaining the decision to halt withdrawals, the company said it was in the best interest of its clients. However, the brand is now broken down, with the CEL token trading at 60 cents, which is 93% lower than its all-time high of $8 about one year ago. The big task is regaining the reputation it had built over time.