Celsius Network ($CEL) Collapse – The End Of Centralized DeFi?

Celsius Network is considered one of the largest gateways to crypto, among other big players such as BlockFi and Nexo, with $864 million worth of venture capital raised and over $3 billion worth of funds custodied for 1.4 million customers. Offering attractive yields, simple to use UI, and promises of security and transparency, it was truly the perfect crypto on-ramp for less experienced crypto users, abstracting away the complexities of DeFi (Decentralized Finance), and offering only pure and straightforward DeFi yields.

However, their asset management practices have recently been brought to light. As it has recently surfaced, their risk management strategy heavily relied on continued bullish crypto narratives pushing prices upwards, leaving them unprepared for significant drawdowns. Coupled with what is colloquially known as “degenerate trading” strategies, Celsius is now running a risk of liquidation and potential bankruptcy.

Some people believe Celsius will be yet another big platform to go down during this bear market, potentially pushing crypto prices even lower than before, and likely resulting in a further liquidation cascade that could destroy protocols, VCs, investment funds, and many others. As the story is still unfolding, let’s take a look at where Celsius is at right now, and where it might end up.

For another perspective on the situation on Celsius Network and how events may unfold, check out Michael’s analysis: 

****UPDATE – Three Arrows Capital (3AC) CEO Zhu Su to sell US$34.8mil bungalow after liquidation****

CEO of Three Arrows Capital Zhu Su is apparently urgently trying to sell the US$34.8mil bungalow in Singapore after Three Arrows files for bankruptcy. The 31,854 sq ft bungalow was only purchased in December 2021 and held on trust for his 6-year-old son, and is currently undergoing renovations. However, due to recent events, it appears that the bungalow is being put up for “very urgent sale” according to text messages circulating among property agents as reported by The Straits Times.

Zhu and his wife own 3 properties between them including the bungalow which they are planning to sell, spending over US$59.5mil.

On 1st July 2022, Three Arrows Capital filed for bankruptcy. In its heyday, the fund managed a portfolio of about US$10 billion (S$14 billion)- the reason for the downfall? – Crypto crash, which was started by the collapse of the “algorithmic stablecoin” Terra in May and the failure of the crypto bank Celsius in June. 3AC had been deeply invested in several problematic projects, including Terra, as well as Axie Infinity (lost almost US$700 million (US$977 million) to a hack from North Korea), and BlockFi. 3AC has recently also transferred millions of dollars worth of Tether (USDT) & USD Coin (USDC) stablecoins to cryptocurrency exchange KuCoin.

MAS regulatory body is still looking into whether there have been more breaches by the hedge fund, 3AC. The liquidators will be opening up all of 3AC’s books to check up on their current standings. Then they might talk to creditors, pursue claims and distribute what is left in 3AC to the creditors fairly.

CEO Zhu Shu has not tweeted since June 14, 2022. However, Zhu did change his profile on Twitter as it used to say that the co-founder of 3AC was “Investing in BTC, ETH, AVAX, LUNA, SOL, NEAR, MINA, DOT, [and] KSM.” Today, Zhu’s Twitter profile does not feature the aforementioned crypto assets and simply says “bitcoin”.

Celsius Network – Then And Now

What is Celsius Network?

Celsius Network ($CEL) is a one-stop shop fintech app that offers the ease-of-use benefits of CeFi (Centralized Finance) with the best of what DeFi can offer, all under a single hood. In essence, it can be considered a centralized DeFi platform, which allows users to deposit their funds into custodial wallets on Celsius Network, and offers a range of DeFi services all in one place, available at the click of a button. They offer anything from simple token swaps to more advanced features such as amazingly high yields on stablecoins and cryptocurrencies, as well as crypto-backed lending and borrowing for individuals and institutions.

With an easy-to-use dashboard, free crypto transfers between accounts, a great selection of DeFi features, and a 6 days a week customer service, Celsius has managed to offer a truly incredible product to more than a million customers, gathering respect from the industry and attracting a lot of venture capital as a result. So what went wrong?

The Demise of Celsius Network?

The demise of Celsius can be summed up in three parts, with its problems really starting to surface during the LUNA collapse, followed by a slow unravelling of Celsius’ overleveraged and poorly planned out WBTC and ETH/stETH positions that have led them to a complete lockdown of their platform.

LUNA/UST Giga Yields

Luna, through its Anchor protocol, promised a “risk-free” 20% interest on their USD-pegged stablecoin, UST, which was a highly popular product right up until its collapse. As it turns out, Celsius was also taking advantage of these high yields, which consequently allowed them to offer high yields to their own customers while taking some profits for themselves.

Although the details of this part of the story are a bit less clear and have been denied by the founder of Celsius, on-chain investigations by firms such as The Block Research, Hoptrail, and Nansen revealed that Celsius was staking up to $535 million worth of UST on the Anchor protocol. Reportedly, prior to the full-on depeg of the UST, Celsius had managed to pull out their funds without too much damage, leaving the Terra ecosystem with a half a billion-dollar hole in their pockets. It seems that Celsius managed to get out of that situation mostly unscathed. However, this should’ve served as a red flag that indicated what kind of risk Celsius is willing to take on.

WBTC as DAI collateral

This one’s also pretty straightforward. Celsius has been using their customer’s WBTC (wrapped BTC on Ethereum) as collateral to borrow DAI on the Maker protocol in order to stake the DAI stablecoin for very favorable yields. Everything had been going great until BTC started to tumble down at an accelerated pace after UST collapsed. As the price tumbled, it was cheaper for Celsius to keep adding to the collateral instead of paying off their DAI debt, losing some capital and the DAI yields. Likely in expectation for a trend reversal or at least a short-lived BTC relief rally, they kept adding to the collateral, which itself was subsidized by their customer’s funds. 

stETH & locked ETH

Celsius offered their customers an attractive <8% yield on ETH while the best ETH staking deal one could get was by staking their ETH on the Ethereum PoS Beacon chain, which offers ~4.2% yield at best. So how could they possibly deliver such an incredible deal for their customers?

The answer was stETH – staked ETH, a liquid ETH derivative offered by Lido Finance. In essence, it’s a fully collateralized representation of ETH staked on the Ethereum PoS Beacon chain. In the post-Merge era, when staked ETH withdrawals will be enabled, 1 stETH will be redeemable for 1 ETH. This allows anyone to earn a yield on ETH offered by the Beacon chain without running the staking infrastructure. The issue arises from two interlinked facts – stETH’s dollar value is not pegged to ETH’s dollar value & stETH cannot be redeemed for ETH, only vice-versa is possible.

So Celsius was doing three things with their customer’s ETH to generate the exorbitant yields:

  1. Lending out ETH and earning interest on DeFi protocols (27% of their total ETH);
  2. Swapping them for stETH to generate ETH staking yields and at the same time lending out stETH to provide liquidity and earn interest on Curve Finance, a decentralized crypto exchange. (44%); and 
  3. Staking ETH on Beacon chain, rendering it illiquid for at least a year or whenever The Merge happens and the ETH gets unlocked. (27%).

The current issue Celsius is facing is the fact that while swapping an equivalent amount of ETH for stETH, stETH currently is not trading for the same dollar value as its ETH equivalent, due to several reasons. As a result, they’re currently in possession of roughly $0.94 for every 1 $ worth of ETH they owe to their customers. On paper. In reality, it’s much worse than that. Celsius holds ~445k stETH, which is currently valued at $540 million and cannot all be swapped for ETH on Curve Finance pool due to lack of liquidity.

So long story short, Celsius was lending 27% of their ETH on DeFi, and swapped 44% of their ETH for stETH, which is now worth less than ETH and cannot even fully be exchanged back to ETH on an exchange such as Curve Finance. As a result, most of Celsius’ ETH is illiquid.

The Unwinding – Liquidity Crisis

The situation is getting more dire by the day for Celsius. At the same time as BTC and ETH prices are tumbling, their ETH liquidity is drying up and they’ve had to top up their WBTC collateral several times from 22k all the way down to 14k to keep margin calls at bay.

To do this, they’ve had to put all withdrawals, swaps and transfers between accounts on hold, thus completely locking users out of their assets. This move was done to prevent a bank run, which would’ve completely drained Celsius of their holdings without being able to allow their clients to fully redeem their deposits for whatever Celsius was holding on-chain due to their liquidity crisis, leaving many of them empty-handed. In addition, Celsius would not have had any spare capital left to top up their WBTC collateral on Maker and avoid liquidation, making things that much worse than they already were. Although shutting down withdrawals was probably a prudent move, given how much worse it would’ve been both for Celsius and the customers had they not done that, Celsius is now stuck between a rock and a hard place.

Going Forward

Celsius is currently at a standstill – they’ve added enough additional collateral to keep the LTV (Loan-To-Value), i.e. margin call threshold above 150%, which currently sits at $14k per BTC. They got very close, but luckily the market kept BTC’s price above 20k. Their stETH and ETH liquidity issues are unlikely to be solved any time soon, and, in the case of stETH, they are likely to get even worse if stETH’s market value keeps dropping lower than ETH’s. With withdrawals, swaps and transfers still halted, Celsius seems to be trying to wait it out in hopes of BTC at least offering a relief bounce somewhat higher.

There are several options on the table for Celsius, none of which look particularly appealing, but some are certainly worse than others. They could subsidize their liquidity gap by raising more external funding and acquiring a loan. An acquisition offer has also been advertised by one of their competitors, Nexo, who have publicly made an offer to acquire their assets in order to provide immediate liquidity to Celsius clients. And there is the bankruptcy option, which could also offer a relatively easy way out for the company.

Regardless of the outcome, customer trust has been damaged. If they manage to secure a loan or get additional funding, that might get them out of short-term liquidity crisis and possibly allow them to fully reimburse their earners and custodial holders. The question then becomes- who would be willing to extend them a loan? 

UPDATE: Voyager Digital issues Three Arrows Capital with Default Notice

Voyager Digital– a publicly listed crypto brokerage firm, issued a notice of default to Three Arrows Capital (“3AC”) on 27th June 2022 whilst simultaneously reducing its withdrawal limit to US$10k per day. This has clearly spooked shareholders and users of Voyager Digital, as the Company saw its share prices plunge more than 60% in the last week after it disclosed its ties with 3AC and its poor performance during the crypto downturn.

The Notice of Default issued by Voyager Digital against 3AC was for the their failure to make timely repayments on its loan of 15,250 BTC and US$350 million USDC. However, Voyager Digital has reassured its users that its platform is still fully functional and as of 24th June 2022, had approximately US$137 cash and crypto assets on hand. The Company has also taken a US$200 milllon cash and USDC, and a 15,000 BTC revolving loan from Alameda Ventures Limited.


What becomes of Celsius going forward is unclear. However, what is clear is that time and time again we get to witness the extreme importance of the age-old rules of crypto – be wary if something seems to good to be true, and never put in more than what you can afford to lose. 

Doing your own research is incredibly important, as it’s easy to get swept up in the hype. Thinking critically and understanding the fundamentals can help you avoid a lot of heartache in the future.

The information provided in this article is intended for general guidance and information purposes only. Contents of this article are under no circumstances intended to be considered as investment, business, legal or tax advice. We do not accept any responsibility for individual decisions made based on this article and we strongly encourage you to do your own research before taking any action. Although best efforts are made to ensure that all information provided herein is accurate and up to date, omissions, errors, or mistakes may occur. 
Disclosure: Authors are invested in cryptocurrency projects and have cryptocurrency holdings - including those covered on this website. 

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