Celsius freezes withdrawals

This crypto winter is getting cold. So cold, that there was a big freeze in the celsius network.

What is Celsius?

Celsius Network is one of the biggest lenders in web3. It's a platform that allows users to buy, borrow, swap or just hold their crypto. They reported over $20 billion in assets under management.

What happened?

Celsius issued a statement early this week saying they have "paused" (i.e. frozen) all withdrawals. So those 1.7 MILLION customers who have their money or assets in celsius, can't get it out. Those with loans on celsius face an awful choice: they can either top up their collateral and sink more of their assets into the platform, or get liquidated... ouch.

It's the same story as before... unsustainable returns

One of the key factors in the UST depegging event was that Anchor Savings was offering savers a 20% return on their savings (that they stored in UST) and that keeping up this artificially high rate of return was one of the flaws that caused the crash.

Well, Celsius did a similar thing. They promised their customers a high return, and in order to earn this high return (plus their own cut) they invested customer's money into high-risk, high-return DeFi projects. In this current bear market, the high-risk strategy has caught up with them.

They had over $500 million in Anchor Savings, but managed to get it all out before the whole system collapsed and UST depegged. However they have reportedly lost $100m to hacks and rug pulls in the Defi space. As the overall market declined, it got more and more difficult to meet the returns targets that Celsius had promised its customers, and when many of them wanted to withdraw their money at the same time... it all unravelled.

Celsius' $stETH Problem

But there was one high-risk investment strategy in particular that got Celsius into a lot of trouble. That was the use of $stETH. $stETH is a product called staked ETH and it allows holders to earn staking rewards on $ETH, even though the network has not moved to proof of stake yet and even if they don't have staking infrastructure. $stETH can be used to earn more return than plain vanilla $ETH, because as well as earning a staking yield $stETH can be lent out to earn an additional return.

By using $stETH, Celsius was offering customers an incredibly high return by storing normal $ETH with them. They were offering returns of 8% whereas certain competitors were offering only 0.2%.

The big, big problem with $stETH is that it cannot be redeemed for normal $ETH until 6-12 months AFTER the merge, when the Ethereum network moves to proof of stake. So while you can trade $stETH for $ETH in the normal market, the price doesn't have to be 1:1.

And this is exactly what happened. $stETH stopped trading 1:1 with $ETH. So $1 of stETH became worth about $0.96 of $ETH. Celsius had over $500 million of $stETH, and there was no liquidity anywhere to unload this position.

Alex Mashinsky

And in another parallel to the Luna crash (where founder Do Kwon was pretty arrogant about the situation before things went south), Celsius' CEO Alex Mashinsky was on the record talking about how people were spreading FUD (fear, uncertainty & doubt) and how everyone's money was safe... hours before Celsius announced they were pausing withdrawals.

Put it all on black?

So Celsius can't pay back its loans, and it's frozen its customer's funds. But instead of using these frozen funds to pay back some of its debt, Celsius is instead topping up their own collateral. It seems that Celsius' strategy is to try and make all their money back with one incredibly high-risk trade.

Celsius is insolvent and for now, at least, it doesn't look like there is any way back.