Celsius Network’s collapse into bankruptcy
Updated: Sep 22, 2022
In this article, we will analyze what happened to one of the most important platforms of CeFi and fintech as well as the most famous loan company in the crypto industry, which has caused, in recent months, a lot of scandals that have led to inspections by the U.S Department of the Treasury.
What is Celsius Network?
Celsius Network is a CeFi platform that acts as an intermediary, allowing its users to deposit liquidity by becoming creditors, receiving annual interest as a reward, and applying for a cryptocurrency loan. The application can be accessed from both smartphones and computers. Unlike its competitors, it has many currencies on which to receive interest and compensation in the native CEL token.
Another interesting feature is Celpay, the cryptocurrency transfer service. Thanks to this function, you can transfer coins to anyone you want by simply sending them a link.
All other competitors identify the transfer of coins to different addresses as a withdrawal of their currencies and only later as a transfer to another address. Celsius, on the other hand, saves its users unnecessary commissions for transfers within its servers.
A crucial role is played by its token, CEL; its holders have a lot of benefits such as
Decrease in the required rate of interest to obtain a loan
Higher interest above crypto, and stablecoins’ deposit
Interest of 4.86% on CEL token.
In a few words: “More Cel, more rewards. It’s not rocket science”
Take a loan in a CeFi platform
First of all, to take a loan in a CeFi platform like Celsius, it’s essential to provide collateral, a determined quantity of tokens that has an equivalent value, in this case, our coins itself, above which we obtain an interest. When we take out a loan, our coins do not generate interest but are used as collateral.
The platform will charge us interest for this loan, paid monthly or annually, and will not allow us to unlock the collateral-bound coins until we have settled the debt.
Why did Celsius Network crash?
“Celsius is a sort-of bank in that it borrows crypto from its customers and then lends it to market makers, or investors taking short positions.” Financial Times
The case of Celsius is just the latest episode of default of the chain reaction triggered by the Terra Luna crash by an operating company in the world of cryptocurrencies. On 13th July 2022, Celsius Network LCC filed for bankruptcy protection (the so-called Chapter 11) only one month after having taken the decision to stop the possibility for its users to make withdrawals, swaps, and transfers between accounts on the deposited sums.
The wrong shape in which Celsius lived was known for a long time, and some former company employees had revealed that Celsius could not overcome the market turbulence, having a budget gap of about $2B. This was followed by the collapse of its token CEL, which in 2021 came close to $8, while in this period (August 2022), it did not reach $2.50. Moreover, Celsius invested and deposited its money into multiple DeFi projects that ran into difficulties, like Terra (LUNA), losing a significant portion of its assets.
After Celsius filed for Chapter 11, it admitted only to a $1.2B hole in its finances, including the paid-off debt to DeFi protocols and other assets.
In addition, its users lose a lot of money using this platform. Celsius owes its customers around $4.7 billion. That filing also shows that Celsius has more than 100,000 creditors, some of whom lent the platform cash without collateral to back up the arrangement.
According to CoinDesk and CoinmarketCap, Celsius has a probability of cash for another trimester and will run into negative liquidity by the end of October. The projections reach a hole of more than $33M in its balance sheet at the end of the month.
What did the case of Celsius Network teach us?
The cases of Terra-LUNA and Celsius Network have taught us that in an unregulated crypto market, where there is no guarantor, decentralization cannot be said to be resilient enough to stop economic shocks.
This episode makes us understand the importance of more efficient regulation at a global level and how CeFi solutions are, in truth, still so obscure.
Hybrid finance (HyFi) offers an exciting alternative, also known by the term CeDeFi which combines different elements and aspects of two financial systems, centralized and decentralized, facilitating both characteristics.
Yanda is a protocol that leverages CEX infrastructure to bridge CeFi and DeFi, aiming to enhance the transparency of off-chain transactions. You can learn more about the project and its functioning by reading the documentation.