After a relatively quiet period, markets have crashed and the crypto space is experiencing significant turmoil. There had been a hiatus after the Terra/UST meltdown, but it now appears that contagion is spreading, and all this is occurring during a period of substantial financial uncertainty.
Celsius and 3AC
Celsius is a comprehensive crypto platform that, among other services, facilitates borrowing and lending in cryptocurrencies. Users could also deposit crypto on the platform, and receive interest at high rates in return. Additionally, Celsius utilizes its own token, CEL. Of note is that although Celsius operates for the most part as a decentralized finance application, it is at its core a centralized entity with full control over user accounts.
The current drama comes as Celsius appears to have become hazardously illiquid. Part of the problem is that it utilized the kinds of methods that may be ordinary among individual DeFi users, but which might not be expected from a secure and stable financial service.
These include using user deposits as collateral for loans on MakerDAO (a decentralized lending protocol, and the creator of the DAI stabletoken), and trading user funds into stETH.
The stETH token is issued in exchange for staked Ether by the Lido platform. stETH is pegged to ETH, but recently the peg slipped, creating selling pressure. What’s more, stETH cannot be redeemed back for ETH until after the Ethereum merge takes place, and there is uncertainty about when that will happen.
In a bearish, price-drop situation, if too many users want their funds back then Celsius, lacking sufficient liquidity, is in trouble. In fact, the platform has had to resort to restricting user withdrawals and transactions as it tries to find a way to survive. Remarkably, it currently looks as though it may have navigated a path out of the woods, posting the collateral necessary to outrun liquidation, and starting to pay back loans.
Celsius pulling off an escape, if that were to happen, looked as though it would prevent further tremors, until currently unsubstantiated rumors, at the time of writing, began to appear speculating that influential crypto fund Three Arrows Capital might be facing insolvency, causing further concerns while BTC and ETH prices dip lower again.
One might…
