According to the analysis of several observers on Twitter, the Celsius Network platform may be close to defaulting on its payments to its users. While these assumptions should be treated with extreme caution, it is necessary to inform about the risks involved.
Celsius suspected of being close to default
Over the past few days on Twitter, several observers have pointed to evidence suggesting that the Celsius Network platform may default on payments to its users in the coming weeks.
The conditional tense is important in the facts presented in this article, as we may not have all the facts at our disposal. Nevertheless, it is important to keep the community informed about the possible risks of this case.
According to Twitter user yieldchad, only 27% of Celsius’ position in Ethereum (ETH) is liquid. The rest of the reserve would correspond to stETH and ETH2, i.e. tokens representing ETH, which are stored in the ETH 2.0 smart contract and which will only be released after the blockchain has gone to proof-of-stake (PoS):
Celsius $CEL is functionally insolvent on their ETH position.
Only 27% of Celsius’ ETH is liquid, the rest is either stETH or staked in ETH2, so inaccessible for at least 1 year.
If withdrawals continue at the current pace of…(1/x) https://t.co/Q1xmWeDqc9 pic.twitter.com/4OyCylBw0F
– yieldchad (@yieldchad) June 5, 2022
Thus, in the event of a massive withdrawal and according to this information, Celsius is not in a position to honour its clients’ position on ETH. While the possibility of selling stETH for ETH is possible, the liquidity pool on Curve (CRV) is slightly unbalanced at the moment.
The total locked-in value (TVL) on Curve is $1.5 billion on the stETH/ETH pair. This means that Celsius would not be able to sell its supposed 445,000 stETH in a hurry, whose value of over $785 million would cause a total imbalance between the two assets.
The use of borrowing
Another Twitter user analysed the activity of several addresses he attributes to the Celsius Network. His conclusion was that the platform was borrowing liquidity to meet its users’ withdrawals:
Over the last 30 days, Celsius borrowed at least $76.7 million $USDC and $18.3 million $USDT to pay withdrawals. This is 29% of total sent out from known Celsius hot wallets ($327 million).
Why is Celsius borrowing to pay customers back?@Bitfinexed @DoombergT @QTRResearch pic.twitter.com/REqtt8ec2Z
– . (@MikeBurgersburg) June 4, 2022
Alex Mashinsky, the platform’s founder, responded to the allegations in the tweet by saying that Celsius was taking advantage of low market rates to borrow liquidity. Conversely, the company lends liquidity when rates are favourable.
In decentralised finance (DeFi), strategies involving the lending and borrowing of liquidity are commonplace, to maximise returns. It is therefore not an alarming practice as such. However, it is true that it contributes to making said funds less liquid, resulting in a loss of agility.
What about this?
It’s not just Celsius Network that is at risk of default in the event of a massive withdrawal of liquidity. Just as it would happen with a traditional bank, it is potentially a risk faced by other centralised platforms in our ecosystem.
On the other hand, even if this alarm bell may be unfounded, due to a lack of a global vision of the situation, it is still worth taking the measure, especially after the events in Terra.
Moreover, it is quite likely that Celsius Network, like other platforms, has recorded losses on UST and has not yet fully communicated on this subject.
Moreover, in an investigation relayed by Bloomberg, we learn that an address, related to the platform, sold UST massively at the beginning of the fall. This action, which contributed to the collapse, may be attributed to the company’s risk management policy, which preferred to record its losses rather than wait.
While centralised platforms offer the comfort of easily generating returns, we can never be 100% sure of how our funds are allocated. As a result, it is important to bear in mind that this practice is not without risk and that we may lose some or all of our investment.
