Celsius Network, a crypto lending platform, said on June 12 that it was stopping withdrawals due to market conditions, claiming “severe market conditions” and the need to review its health.
This announcement comes weeks after the company revealed that it had lost its ability to pay dividends following the recent crash of the crypto market. The announcement of Celsius’ native token, CEL, was met with a negative response from the crypto community. Initial reports say that the crypto dropped by 70% in a single hour.
The next day, it was trading at a loss of more than 40%. According to CoinMarketCap data at the time of writing, the overall market capitalization has plummeted by more than $1 trillion to less than $1.7 trillion. With this steep fall comes a string of events that have become increasingly alarming, such as hacks and scams that saw crypto exchanges losing millions.
For years, Celsius has been at the forefront of revolutionising the financial industry. Its mission statement is to disrupt the financial industry and make it more transparent. So, what became of Celsius? The short answer is that no one knows for sure, although danger has been simmering for the past year.
What Is Celsius Network?
Celsius is a crypto asset that was created by the Celsius Network. It is an ERC20 token and uses a proof-of-stake consensus algorithm. It is designed to be the most energy-efficient crypto on the market and can only be mined by its network of nodes.
Celsius was created to be a more energy-efficient alternative to Bitcoin, which has been criticised for its high electricity usage. The company behind it, Celsius Network, also wants to make it easier for people to buy crypto assets.
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Users can earn attractive yields as soon as they invest money in the protocol. According to Celsius’s website, they offer a 7% return on coins like USDC and Tether, a 7.25% return on coins like Polygon and Ethereum, and even 6.25% for alternatives such as Ethereum.
How Does Celsius Network Work?
Celsius is particularly prevalent among lending systems that use decentralised finance (DeFi). Anyone can get on and lend or borrow money, with no middlemen or banks required. There are other loan platforms available, but Celsius is one of the most prominent in this market due to its user-friendly layout and ease of lending and borrowing.
This may appear contradictory to the average individual, but keep in mind that crypto is currently unregulated, thus there are no debt collectors to keep borrowers from defaulting. While this promises a new way of doing things, it also introduces new challenges. Some are related to the lack of regulatory bodies and oversight, while others are related to the lack of liquidity in this system.
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The company has opted not to use customers’ cryptos as collateral instead, it keeps the crypto assets in a separate wallet. This way, they can pay back the loan in case of default at higher rates than what they would have had if they used crypto assets as collateral.
Why Is the Celsius Network Down?
The CEL token plunged into a nose first dive on June 13th, just hours after the company announced that it was suspending withdrawals. The rest of the market has seen a similar drop in value following this announcement.
Staked Ether (stETH) by Lido is a coin that is linked to Ethereum’s ETH.It was developed to serve as an entry point for investors interested in participating in the platform’s growth. But recent market issues seem to be connected with the token and its price, which has been declining on exchanges.
StETH is frequently used as collateral to borrow ETH on DeFi services. The issue is that stETH just lost its peg to ETH, putting such positions in jeopardy. With holders selling and the Merge date still undetermined, stETH is under significant selling pressure.
The Trigger: Celsius Liquidation
With the recent enforcement action from the SEC, companies offering high-yield crypto lending products like Celsius are now required to register with the SEC and adhere to all securities laws.
Celsius had received cease-and-desist letters from four states by late September (New Jersey, Texas, Alabama, and Kentucky). The same month, Coinbase cancelled its own planned Lend programme after the SEC warned of legal action if it went live.
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Celsius had already closed its doors in the United Kingdom, citing “regulatory uncertainties.” The company then decided to move to the United States because of its strategic sprawl and increased profitability. By relocating, they planned to focus on obtaining domestic licences and registrations to “ensure the long-term viability”.
The company locked investor funds into a stETH token which was then depegged – this disrupted the market as any trade-in stETH would trigger a wave of redemptions, sparking a liquidity crisis.
Is Celsius Network Safe?
Celsius raised $400 million in a fundraising round in October 2021, valuing the company at more than $3 billion. By November, it had revealed that the funding had been increased to $750 million due to oversubscription.
A recent change in Celsius rewards offerings allowed non-accredited investors to invest for the first time. They are essentially cutting the requirements for accreditation so that the company can have a broader audience. This is a way of saying that they want to continue to grow as a company, which is what will ultimately lead them to profitability.
The collapse of Terra is a major setback for DeFi, as it signals that these types of projects are not easy to launch and manage. In the meantime, Celsius has been struggling to build its version of the project.
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The platform’s dollar-pegged stablecoin, UST, fell to zero after market volatility jeopardised its key use case–earning 20% returns on Anchor. The UST market has been in a free-fall over the past few weeks, where the only incentive to hold UST is to be able to sell it. When the peg was broken and billions of dollars were burnt in a matter of seconds, a mass exit occurred.
Meanwhile, a lot of money has been departing Celsius; in the first half of 2022, the total amount of digital assets locked on the protocol plummeted from approximately $24 billion to $12 billion.
Final Words: What Lies Ahead for Celsius?
This week, crypto exchange Celsius was forced to halt withdrawals due to the inability to process payments. The company blamed the problem on a technical glitch and has remained mum on the issue. However, what some sources have claimed, that the company is in financial trouble has turned out to be true. With this in mind, Celsius rival Nexo proposed a takeover of some of the company’s liquid assets.
