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The Crypto Winter Completely Froze the Celsius Network

Celsius Network said last month that withdrawals, swaps, and transfers between accounts on its network
will be halted, owing to “extreme market circumstances.” Then last week, Celsius had a cold
wave of layoffs, spawning a liquidity crisis.

Celsius Network logo.

What exactly is Celsius Network?

Celsius Network is one of the largest web3 lenders. It is a platform that enables users to
purchase, borrow, exchange, or hold their crypto-currency. They have claimed to manage more
than $20 billion in assets.

What Happened With The “Pause”?

On June 12th, Celsius Network published a statement stating that all withdrawals had been “paused”.
Because of this, 1.7 MILLION clients with cash and assets in Celsius cannot withdraw, and
those who have loans with Celsius face a terrible choice – either boost up their collateral and
invest more of their assets further into the system or be liquidated.

The Same Old Narrative Of Unsustainable Returns

One of the significant elements in the UST de-pegging incident was Anchor Savings’ offer of a
20% return on savings (stored in UST). Maintaining such unreasonably good returns is one of
the main defects that triggered this crash.
Celsius, it seems, did something very similar. They guaranteed a high return to their consumers
and to obtain that high return (plus their share), they invested their customers’ money in high-
risk, high-reward DeFi initiatives. This high-risk approach has caught up with them in an already
weak market.
They had almost $500 million in Anchor Savings, but they were able to withdraw it all before the
entire system crashed and the UST de-pegged. However, they are said to have lost $100 million
due to hackers and rug pulls in the DeFi market. As the broader market fell, it became
increasingly impossible to reach the returns objectives that Celsius had guaranteed its
customers. When several of them tried to withdraw their funds at the exact same moment,
everything fell apart.

Celsius Network’s stETH Issue

Additionally, one particular high-risk investing technique that landed Celsius in hot water was the
application of stETH. stETH is a staked ETH product that allows holders to receive staking
rewards on ETH even if the network has not yet migrated to proof of stake and they do not have
a staking infrastructure. Because stETH may be leased out to earn an extra return in addition to
earning a staking yield, it can be utilized to generate a higher return than a simple ETH. Celsius
gave consumers a very high return by storing regular ETH with them by utilizing stETH. They
provided 8% returns, while some competitors paid 0.20%.
The primary issue with stETH is that it cannot be exchanged for regular ETH until 6-12 months,
after merging, and the Ethereum network switches to proof of stake. Moreover, while you can
trade $stETH for $ETH on the regular market, the exchange rate does not have to be 1:1. And
this is precisely what happened – stETH ceased trading at a 1:1 ratio with ETH and as a result,
$1 of stETH is now worth about $0.96 of ETH. Celsius has approximately $500 million in stETH
and no liquidity to dump its position. As a result, Celsius cannot repay its debts and has frozen
its customers’ cash. Instead of utilizing the frozen money to repay part of its debt, Celsius is
using it to supplement its collateral.

July Layoffs

When it paused withdrawals and transfers on its platform on June 12, Celsius Network sparked fears of a
liquidity crisis. Celsius has joined a series of cryptocurrency firms to lay off employees as
plunging prices and market contagion hits hard. Last week, the troubled lender let go of 150
employees, an estimated 23% of its staff. The firm has also reportedly resisted advice from its
own lawyers to file for bankruptcy and seems to be relying on a show of support from users.

Words from Alex Mashinsky

The CEO of Celsius Network, Alex Mashinsky, was quoted on the record saying that individuals were
spreading FUD (fear, uncertainty, and doubt) and that everyone’s money was secure just hours
before Celsius announced they were suspending access to accounts. This draws yet another
connection to the Luna disaster, when founder Do Kwon spoke very dismissively about the severity
of their situation, just moments before things went very south.
Celsius posted in their blog on June 30 that the firm was working on stabilizing liquidity and
operations: “We continue to take important steps to preserve and protect assets and explore
options available to us,” the firm wrote. “These options include pursuing strategic transactions
as well as a restructuring of our liabilities, among other avenues.”
It seems Celsius’ plan is to try to make all of their money back in one extremely high-risk deal.
For now, they join the ever-growing list of troubled crypto companies bearing many questionable
decisions.