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The Celsius Story: From Promise to Peril

What is Celsius?


Per CoinMarketCap, Celsius originally came into being as the product of creators Alex Mashinsky and Daniel Leon in 2017.


Mashinsky has a long-running history in the internet development sphere, having worked on the Voice Over Internet Protocol (VOIP) in the 1990s and other technologies since. Celsius is far from Mashinsky’s first corporate venture, with seven startups and 35 patents to his name, the project’s official website states.


Co-founder and COO Daniel Leon meanwhile has experience focusing on growing early-stage startups. His previous roles include being CEO of Atlis Labs, a social recommendation and discovery app which used real-time user referrals.


Celsius now has a large team of core employees, technical developers and advisors with experience in various spheres


Celsius Network


Celsius claims to and aims to outperform banks at their own game by offering financial services on the kind of terms which traditional financial institutions no longer offer.


These include much higher rates of returns on savings and deposits, much easier and fairer loan requirements and automated rewards computed for each user algorithmically. Penalties and bank-style fees are also waived.


The platform also functions as a wallet via its CelPay feature, and hosts its own CEL token which users can leverage to increase payout value among other things.


Over the last month, Celsius has tumbled following a serious downturn in the cryptocurrency market that led it to pause withdrawals and transfers between accounts last month, blaming extreme market conditions. State securities regulators in New Jersey, Texas and Washington had stepped in to investigate the crypto lender’s decision.


Yesterday Celsius had filed for Chapter 11 protection, members of the special committee of the board of directors said on Wednesday: “Today’s filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, swaps, and transfers on its platform to stabilise its business and protect its customers”. 


Where did it all go wrong?


As the cryptocurrency downturn continues to spiral, many cryptocurrency companies are starting to go under, such as 3AC and Voyager which we released an article on. 


Celsius indeed falls into this category.


Another case of over leveraging, per Sales Wallet, at its peak, Celsius held over $30 billion of cryptocurrency, which had been deposited by the more than 1.7 million users, earning an estimated $3 million of interest per day on their coins and tokens. Now this far-fetched statistic included Celsius CEO Alex machine ski who mentioned in many interviews that he had deposited $300 million of his own money into the platform. Now it looks like Celsius troubles began in earnest last July when liquid staking protocols stake hand lost access to the keys to its Ethereum wallet, resulting in $74 million of ETH being locked forever.


The cracks started to appear in late 2021, when in November, Celsius’ CFO was arrested in connection with an alleged cryptocurrency laundering scheme in Israel.


The bad news continued into December, when Tao, a DeFi Protocol badger, was exploited for $120 million in various cryptocurrencies. An attacker drained funds from the wallets of dozens of users of the Badger DAO yield vault protocol using malicious contract permissions. Blockchain data and security analytics company PeckShield has concluded that the total loss amounted to about 2,100 BTC and 151 ETH. Some of which was in the form of wrapped BTC believed to have belonged to Celsius.


It was then in January, where the SEC began investigating Celsius, Voyager Digital, and Gemini over their ridiculously, and lucrative high interest rate offerings. At this same time, competitor BlockFi was fined $100 million by the SEC. It is assumed that Celsius also struck a deal which would see it avoid additional scrutiny… for the meantime. 


As we endured 2022, the cryptocurrency market began to collapse, as Celsius started to see outflows of hundreds of millions of dollars as investors ran to greener pastures, or cashing out of the market completely out of fear of what lay ahead.


It began aggressively promoting its loan products, including sub zero interest rates on stablecoin loans in May this year, as well as even filing its own cryptocurrency mining as public in May this year, clearly pointing to its desperate struggle for yields that had been crushed by the market conditions.


Then the Luna situation unfolded. TerraUSD (UST), a digital token with a once $16 billion market capitalisation that is designed to maintain a 1:1 peg with the dollar, known as a stablecoin, completely nosedived and sent the market into turmoil. 


These had been added to Celsius in the months prior. However, according to Sales Wallet, contrary to what the critics have claimed, there’s little to no evidence that Celsius was directly affected by Terra UST collapse. That’s because Celsius immediately cashed out when UST lost its peg, as per a follow up interview with CEO Alex Manhisky, something later confirmed Binance onc-hain analysis. 


Although, evidently they weren’t directly affected by the collapse of UST, critics still claimed that it was heavily affected and influenced by the Terra crash and the associated FUD created rumours that Celsius was becoming secretly insolvent. 


Given the spiral of the market throughout May, Celsius users began heavily withdrawing their funds from Celsius, see the image below:



Then there was stETH. Concerns around Ethereum transition from Proof-Of-Work to Proof-Of-Stake and the implications this could have on liquid staking tokens like Lido Finance’s stETH.


The stETH token has been at the epicentre of the liquidity crunch in crypto markets after its price deviated from the supposed 1-to-1 peg to ether. At press time, stETH trades at about 3% discount compared with ETH.


Celsius is one of the largest single holders of stETH, with at least $426 million of the tokens, according to blockchain data firm Nansen’s portfolio tracker. The stake represents almost a tenth of stETH’s total market capitalisation, at $4.4 billion.


CoinDesk reported that 70% of Celsius users had their ETH converted into stETH. 


As Sales Wallet states, there’s only one small problem and that’s that converting ETH into stETH is a one way trip for the time being it’s not possible to claim the staked ETH backing the stETH on the beacon chain until the merge is complete. And even then it could be months before it’s possible to undertake any action, so this means that if you have stETH-ETH and want to get the actual ETH back, you must go to a centralised or decentralised exchange and sell your stETH for ETH.


If too many people do this at once, then the sell pressure has the potential to push stETH below its peg. And that’s exactly what happened.


Some believe that bad actors took advantage of the chaos to push stETH down as much as possible to liquidate the hundreds of millions of dollars of loans Celsius had taken on DeFi Protocols using stETH as collateral. Regardless, over-leveraged individuals and institutions like 3AC began selling off their stETH to meet their own debt obligations and protect profits.


It’s suspected that Celsius couldn’t acquire the right amount of ETH it needed to honour user withdrawals. As a result, Celsius paused all withdrawals, swaps and transfers on the 12th of June, seemingly confirming that the critics and competitors were right this time around Celsius had in fact become functionally insolvent, i.e. it didn’t have enough cash on hand to pay out withdrawals.


At this point, Celsius was selling off hundreds of millions of dollars of cryptocurrency, causing many different tokens to crash, including CEL and urging its users to stay calm, while they wonder whether the collateral for their loans has been liquidated and whether they’ll ever get their leveraged positions back. 


This exact action of spreading themselves very thin, being blindsided by Terra UST’s collapse and withdrawing large amounts of USD, the stETH situation depegging and unfolding, as well as the general notion that the cryptocurrency market was experiencing carnage, is pretty good reason for an over-leveraged DeFi protocol to go under. 


Since it froze funds in June, Celsius has been largely silent. It has stated it is trying to “stabilise liquidity and operations” and is exploring “strategic transactions as well as a restructuring of our liabilities”.


Per The Big Read, Simon Dixon (a heavy investor in Celsius) says Mashinsky has resisted advice to file for bankruptcy. “Alex is trying to avoid bankruptcy at all costs,” he says. He sees the story as a cautionary tale about how “innocent people” were drawn in by “incredibly misleading” marketing. The former Celsius trader puts it another way: Mashinsky had “wanted to look like a Robin Hood”, but the company he built was “just a bank in the wild west”.


The avoidance of bankruptcy was until yesterday when the company entered the Chapter 11 process. 


The Celsius crisis has been labelled the crypto community’s “Lehman Brothers moment”.


What happens next?


Celsius is yet to make a statement regarding reimbursement of customers’ assets, if and when this might happen. The company has a reported $167 million cash on hand which it intends to use as liquidity in a company restructuring.


Since the bankruptcy claim was filed, $CEL has lost approximately 40% of its total market cap and is currently trading at $0.74 per token.


It remains to be seen whether or not Celsius does get taken over. What’s of utmost importance is that Celsius users get their coins, liquidity and tokens back, which is definitely still within the realms of possibility. As overstretched and overleveraged that Celsius was, it has made moves in paying off a lot of integral loans, and the required capital to compensate users, it may just take a fair bit of time. 


Stay optimistic, there may be a similar scheme like Voyager’s in which customers will see a proposed reorganisation plan, in which customers may receive a combination of cryptocurrency and common equity. 


For those involved in the Celsius debacle, there is still reason to be hopeful. We’re currently nearing a bottom in the cryptocurrency break market, and if the worst is over, this means those users have time to accumulate positions that they’ve lost at much lower prices.


Here’s to hoping that you are all able to recover any financial loss, hold in there!



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