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Celsius (CEL) collapses by more than 60% after the death of LUNA and the market lights up a red alert about the company



Celsius (CEL) is one of the cryptocurrencies that collapsed after the collapse of the Terra cryptocurrency (LUNA) dragged down projects that had some sort of involvement with the ecosystem created by Terraform Labs.

Market fears have driven down the price of Celsius’ native cryptocurrency (CEL). The price dropped from US$1.91 on Monday to US$0.60 on Wednesday, the day Celsius withdrew its funds that it kept in the Anchor Protocol, a Terra project. The price fluctuation represents a 68% devaluation in three days.

Since then, CEL has achieved a partial recovery and is worth US$ 1.30 this Wednesday (18). Even so, it accumulates losses of 35% in the week and 58% in the month, according to CoinGecko – and raises suspicions about the risks of its operating model in the DeFi sector.

money in danger

In the case of Celsius, the initial market fear was the company’s $500 million confined to the Archor Protocol, the Terra project’s most popular DeFi project, which offered 19.5% yields on UST stablecoin deposits.

According to research by The Block Research and Hoptrail, wallets controlled by Celsius have sent at least 261,000 ETH — equivalent to BRL 2.7 billion at current currency rates — to the Anchor Protocol in the last five months.

Celsius started depositing money into Archor in December and, by March, had already sent 146,000 ETH to the protocol. Between April 6 and May 3, another 115,000 ETH was deposited.

The money invested probably belonged to the company’s own customers. Celsius Network allows investors to deposit their cryptocurrencies on the platform for them to be loaned to other clients and companies in the area.

In exchange for the time the asset is held in the system, the investor receives income. Currently, Celsius promises to pay 7% to 15.8% annual return on stablecoin loans.

A week after Celsius’s last deposit with the Archor Protocol, Earth’s ecosystem entered a death spiral that caused stablecoin UST to lose its backing with the dollar and drove the price of Luna to zero.

Running against time

The company claims to have managed to react in time and prevent billions of cryptocurrencies from evaporating. “All user funds are safe. We continue to function normally. For the avoidance of doubt, Celsius Network was not and is not involved in any rescue of Luna,” the company said in a statement. tweet.

An investigation by The Block Research appears to confirm this action. According to the portal, the company would have withdrawn about 225,000 ETH (about BRL 2.3 billion) from the Anchor Protocol last Wednesday (11).

Although the vehicle was unable to identify the withdrawal of the remaining R$350 million, a person familiar with the matter confirmed that Celsius had no more funds in the protocol.

According to the analyst Igor Igamberdievthe team at Celsius managed to get away with it because they used Bonded ETH (bETH) as collateral to borrow UST on the Archor Protocol and get the high yields.

To do this, Celsius needed to make a complex pilgrimage that involved: staking ETH on Lido to receive Stake ETH (stETH); sending stETH to Anchor vault on Ethereum to generate bETH; sending these tokens to the Wormhole Bridge to reach Earth; and finally deposit of bETH in the Anchor Protocol.

Igamberdiev explained that while the funds were withdrawn from Anchor after the crisis, they have not yet returned to Celsius’ cashier. The analyst says the amount was sent to Aave v2, another DeFi lending protocol.

Even so, the fear that rose in the market was enough to bring down the price of the CEL token. And there are concerns that go beyond the simple value of the token.

A risky business model

The drop in prices also reflects a market distrust with the current risky business model that Celsius seems to apply, defended by its creator, Alex Mashinsky.

On Twitter, Mashinsky often has heated arguments with company critics such as Cory Klippsten, advisor to Riot Blockchain.

“There wasn’t a bank run on Celsius Network this time because his team managed to take $500 million out of Ponzi Luna/UST at the last second. Celsians, you are counting on luck and active management to keep your borrowed coins safe.” tweeted Klippsten on Sunday (15).

He was answered by Mashinsky who, instead of clarifying the business his company was doing in the Archor Protocol, preferred to attack the bitcoin maximalists — a group he blames for all the lost bitcoin in the world.

“You’re afraid to have a public debate so I can debunk all your conspiracy theories. 30% of all bitcoin is lost because people listened to you and Bitcoin Maxis and kept their own keys.” countered Mashinsky, adding that Celsius hasn’t lost one of the more than 150,000 BTC it takes care of — a matter that wasn’t even up for debate.

In closing, he made a public request for people to unfollow Klippsten on Twitter.

Inside the Loan Loop

Mike Burgersburg, pseudonym of the author of the Dirty Bubble Media newsletter, stands out in Celsius’ circle of critics. Since January of this year, he has published analysis of the company’s operations.

According to him, Celsius is at the center of a complex lending loop, where the company takes possession of cryptocurrencies used as collateral by customers for their own operations.

The company’s strategies aim to increase the yields offered and, thus, increase the capture of new users.

In the current Celsius model, for example, a user who borrows $1,000 in USDC offers a guarantee of $4,000 in bitcoin to get a 1% interest rate (APR) on the loan.

In accordance with the Terms of Service agreement, Celsius immediately assumes possession of the warranty. “In other words, when you ‘borrow’ from Celsius, you are actually lending them money,” Burgersburg wrote.

One of the companies that Celsius has already confirmed has borrowed 1 billion USDT in the past is Tether, the issuer of the stablecoin in question.

Following the previous example, the $4,000 worth of bitcoin pledged by Celsius’s customer is used by the company to borrow elsewhere.

To the Financial Times, Alex Mashinsky confirmed that they “overcollateralize” these loans by 30%, to receive $3,000 USDT in exchange for the counterparty — in this case, Tether.

Celsius then borrows that money to now sit on the other side of the counter, lending it to its institutional partners such as exchanges FTX and Binance.

In this imbroglio, Celsius must generate enough income to pay customers who deposit their coins on the platform.

“At the very least, Celsius Network is a highly leveraged debt machine that is exposed to multiple counterparty risks,” says the author of Dirty Bubble Media.

“Individual account holders in this situation — depositors and borrowers — are Celsius Network’s unsecured creditors. This means that they occupy an unenviable position of being the last in line to recover losses in the event of a malfunction of the debt machine”, concludes the analyst.

suspicious strategies

The case above is limited to illustrating the company’s operations with centralized entities. But in the world of DeFi protocols, in which Celsius also acts as both a depositor and a creditor, the snowball of transactions are even larger and seem to make less sense.

According to analysis by Dirty Bubble Media, Celsius reported having $3.4 billion in total Ethereum deposits, with around 41% of that amount deposited in Compound and Aave as of February this year.

The curious thing here is that the yields offered by these two protocols are, in general, lower than those of many tradfi (traditional finance) savings accounts.

“This means that there is a significant gap between what Celsius is paying and what it is receiving as interest on these deposits. Based on a conservative estimate of the average APY that Celsius offers clients on these crypto assets, they face an annual shortfall of around $86 million in interest payments to depositors,” the analyst calculates.

In order not to lose money, Celsius should charge between 11% and 16% on loans to its institutional clients — something highly unlikely, as other competitors’ fees are much lower than that.

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