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Is Celsius Network collapsing like Terra's LUNA?

  • Celsius Network token plunged nearly 40% overnight after the project locked away over $12 billion in crypto assets.  
  • Due to extreme market conditions, Celsius has paused all withdrawals, swaps, and transfers between accounts. 
  • Experts note that Celsius Network has consistently withdrawn from its DeFi positions to stake stablecoins and recover from the liquidity crisis. 

Celsius, a leading crypto lending platform, is suffering a liquidity crisis as the crypto market continues to plummet. The project has unstacked $247 million worth of Wrapped Bitcoin from AAVE and sent it to the FTX exchange. The consistent withdrawals from DeFi positions and restaking on protocols has raised red flags in the crypto community. 

Celsius halts withdrawals citing extreme market conditions

Celsius Network announced on June 13, 2022, that all withdrawals, swaps and transfers between accounts have been paused. Celsius cited this action as a step to put the project in a better position to honor its withdrawal obligations. 

The project informed users that this action was taken in the community's best interest, to stabilize liquidity and operations while protecting assets. The project confirmed that customers would also accrue rewards during the pause period. 

Experts on crypto Twitter have pointed out that Celsius is going through a rumored liquidity crisis. 

Celsius paid users 30% interest weekly

Users stake capital on Celsius, the network uses capital on its platform to fund its own investment and cover loans it makes to other users. Celsius Network pays users up to 30% interest weekly. But the recent liquidity crisis faced by the network has diminished the potential returns for users. 

The network has confirmed that users will continue to receive interest during the period of pause. 

Why Celsius could collapse like Terraform Labs' LUNA and UST 

Crypto lender Celsius Network could follow Terraform Labs’ sister tokens LUNA and UST and collapse after recent announcements of paused withdrawals. 

The Celsius Network’s CEL price plummeted nearly 40% in response to the announcement. The crypto community identified red flags in Celsius Network’s main DeFi wallet, transactions that the project is yet to explain to its users. 

Celsius Networks’ two key moves that remain unexplained:

  • Celsius exited its DeFi positions (WBTC staked on AAVE) and replaced it with stablecoins like USDC. 
  • Celsius Network sent $320 million in Ethereum to the FTX exchange. 

Experts and crypto analysts argue that Celsius Network is working hard to tackle the current liquidity crisis facing the project. The argument is that if Celsius fails, the project could sell a 

significant stack of staked ETH (stETH provided by Lido DeFi lending platform), which would cause the token to depeg further from ETH.

$247 million in WBTC was sent to FTX exchange

On June 4, 2022, Celsius Network held $3.8 billion in assets across multiple DeFi protocols and wallets, and $1.18 billion in debt from AAVE, Compound and Maker. The project drained previously identified DeFi positions to fund their main DeFi wallet. 

The balance of the main DeFi wallet of Celsius Network went from $5.6 billion in Ethereum, WBTC and other tokens to $10,514, with massive withdrawals of WBTC from AAVE and $247 million was transferred to FTX exchange. 

@MikeBurgersBurg, expert and crypto proponent investigated the withdrawals and shared insights in a recent tweet:

@yieldchad, a crypto analyst, argues,

Celsius lost client money, and need to mark down the value of all deposits, or else they are liable to a bank run.

The debate on whether Celsius is technically insolvent or not has raged since the first week of June 2022. 

While withdrawals from the leading DeFi wallets can be likened to a bank run, Celsius is yet to explain the move and the purpose of replacing WBTC and ETH withdrawn from AAVE with stablecoins like USDC. 

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Author

Ekta Mourya

Ekta Mourya

FXStreet

Ekta Mourya has extensive experience in fundamental and on-chain analysis, particularly focused on impact of macroeconomics and central bank policies on cryptocurrencies.

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