June 16, 2022 · 6 min read

Celsius Halts Withdrawals - Causing Market Chaos

Markets have once again tanked over the weekend with ETH down more than 30% over the past week. BTC too has fallen by almost 20% over the same period. The Federal Reserve announced on Friday that in order to curb rising inflation rates,  it will be raising the central bank rate faster and to a higher point than previously forecast. This caused market sentiment to plummet - bringing crypto valuations with it. 

Over the weekend however, matters were made even worse when DeFi network Celsius announced that it would be freezing withdrawals as a result of “extreme market conditions”. The news caused the platform's native token CEL to drop by more than 60% and has caused wider selloffs of yield-related tokens such as NEAR and CRO amongst many others. The announcement also compounded problems for the crypto market as a whole - prolonging current ‘bear market’ conditions. Let’s take a look at what happened and why this announcement had such significant implications for the market.       

What Happened?

On Monday the 13th of June, Celsius network released a tweet stating that all withdrawals, swaps and transfers would be halted. 

A statement was then released which described that this had been done as a result of “extreme market conditions”. It went on to state that this action was necessary in order to stabilise its liquidity pools, and place the platform in a better position to honour its obligations over time.

Users of the network have expressed concern over the similarities to the crash of Terra just weeks ago. Furthermore, ‘whale-watching’ accounts have reported that $320M worth of assets was transferred from the Celsius treasury to centralised exchange FTX just moments before the announcement. The assets transferred were primarily wBTC (wrapped BTC) redeemed from Aave, in addition to ETH and FTX tokens. This has caused some to believe that the protocol might be using these assets to protect their own positions as opposed to those of its customers.

On Tuesday, the protocol raced to top up its MakerDAO collateral to avoid the automatic liquidation process being triggered. 2000 wBTC of collateral was added to its collateral, as BTC fell below $21,000 the following day (Wednesday). If this topup had not been made, a mass liquidation of the protocols assets would have occurred which would have had a catastrophic effect on markets. This strategy will not work forever, as the root of the protocol’s issue lies in plummeting crypto markets. In some ways this might be  considered an irresponsible move, as the protocol has effectively spent its remaining solvency on a little extra time in the hope that markets recover.    

An additional concern is that if the platform were to completely fail, it would likely sell its entire reserve of stETH (Lido’s staked ETH token), which would cause it to become further de-pegged from ETH. As it stands, the token is already trading around 4% lower than its intended ETH peg. As a result of the platform’s withdrawal freeze, London-based DeFi crypto lending protocol Nexo has proposed a buy-offer for some of the platform’s assets to rectify the platform’s apparent insolvency and honour its obligations to its user base.

Nexo has stated that its more sustainable business model had allowed it to remain stable despite current market conditions. However the platform has not been entirely unaffected. Decrypt reports that its native token NEXO had fallen by 25% the day after the Celsius announcement. 

Where Do We Go From Here?

Regardless of whether Celsius eventually recovers or is indeed acquired, cracks have been beginning to show in DeFi protocols with more ‘optimistic’ business models. Price drops over the past few months have put immense pressure on such platforms, and only those with contingency plans for such conditions will be able to weather the storm. As it stands, the crypto ‘bear’ market shows few signs of stopping in the near future. 

One might see this phase as a ‘wheat from the chaff’ moment, where the weakest products are removed allowing the more soundly built solutions to survive and ultimately prosper.  It could be argued that many of the failing innovations/solutions (such as Terra and Celsius) were ‘designed in summer’ but never ‘stress tested for winter’. It is undoubtedly winter. The question is, when will it end?

What might transpire is more protocols facing a similar decision. Either cease operation and cash out, or continue to leverage positions using the assets of a diminishing treasury as a sort of ‘gamble’ that markets will come back stronger and make the risk worth it. The optimistic outlook for the current situation is this: for those certain of blockchain and DeFi’s future of mass-adoption, this represents a prime opportunity to lay the foundations of an excellent future position and acquire assets at extremely low prices. 

Digital asset prices are the lowest they have been in years, but this is not a repeat of Ethereum’s 2018 plunge. We now have a different perspective on the industry as a whole. The mainstream adoption of NFTs and floods of institutional investment which entered the space during the heights of Q4 2021 have shown that the crypto industry is capable of reaching such heights even if they were (thus far) short-lived. Veterans of the space will be less concerned with current valuations than novices, as they have been on this rollercoaster ride before. And only those who buckle up for the drops get to enjoy the views at the top.      

Written by Rob Henderson for Novum Insights

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