We’re in the midst of an intriguing cryptocurrency bear market, to say the least. The past several months provided high-profile collapses such as algorithmic stablecoin TerraUSD, crypto hedge fund Three Arrows Capital and more recently, crypto lender Celsius Network. While overall macro events take some responsibility for the failure of these organizations, there’s more to it than that.
Celsius, in particular, left a gaping hole in the crypto lending industry due to their unsustainable business model and risky, off-platform practices. Now, as Celsius attends its bankruptcy trial, analysts are gathering around to see just what went wrong and how crypto lenders can improve sustainability going forward.
Why did Celsius Network collapse?
This week, crypto lending platform Celsius filed for bankruptcy. A move that came with no surprise. Ever since Celsius froze its user’s assets a few weeks ago, it was just a matter of time before the once powerful lending platform collapsed. But how did they get to that point, to begin with?
Last year, CEO Alex Mashinsky announced that Celsius has a total of $25 billion in assets under management. Now, that number is down to just $156 million. Celsius still owes around $4.7 billion to its customers plus a mysterious $1.2 billion hole found on its balance sheet. The source of this implosion is traced to leverage.
Blockchain researchers used on-chain data to theorize Celsius allegedly used DeFi protocols for yield farming strategies with its client’s funds. Celsius was famous for offering a high yield to its clients that held crypto on its platforms. Now, we’re learning this yield came from these off-platform, DeFi yield farming strategies.
Adding to the case, Nic Carter from venture capital firm Castle Island Ventures went on CNBC to suggest Celsius were “subsidizing it [the yields] and taking losses to get clients in the door. The yields on the other end were fake and subsidized. They were pulling through returns from [Ponzi schemes].
Lending funds to DeFi protocols comes with a variety of risks. For one, there is an overall protocol risk, smart contract failure risk, and of course, exposure to volatile markets. Several macroeconomic events resulted in market volatility, crashing crypto prices, and liquidating Celsius’s risky loans in the process. This resulted in a permanent loss of client funds.
How did the market react?
Financial markets are partially driven by emotion. Typically, when there is a lot of…
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