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Why is crypto lender C crashing and what can we learn from it?

Last Sunday (June 12), Celsius Network halted all withdrawals from its platform. The team cited extreme market conditions as the reason for the move, but it was this that triggered sell-offs of crypto assets around the world.

When C first started operating, they were adamant that they offered a better deal to people than the banks. Slogans such as “self-destructing the bank” and “banking broken” are common.

With the recent announcement, the irony is almost impossible to ignore.

So what happened to degrees Celsius?

First of all, we should understand Celsius’s business model. This is a platform that acts like a bank for crypto assets – users can deposit their crypto assets on the platform and earn interest on these deposits.

And in the crypto world, interest rates are notoriously high. Celsius promises more than 18% interest per year, and protocols like Anchor actually offer higher interest rates around 20%.

For comparison, deposits in traditional banks like DBS have interest rates around 0.4 to 1.6% per annum, while 10-year government bonds in Singapore yield around 3%.

With these funds, banks make the investment, pay interest, and pocket the difference as a profit.

Celsius seems to be doing something similar, going on to deposit user assets into higher interest protocols and earn the difference as profit.

Since Anchor offers a higher interest rate than degrees Celsius, it makes sense for C to send assets on the Anchor protocol. This means some of their properties were also involved in the UST crash that happened last month.

Additionally, Celsius also offers some of the highest interest rates in the market for Ethereum, one of the largest cryptocurrencies in the world. However, Celsius did not support these loans with their own Ethereum. Instead, they are relying on a derivative of Ethereum, called Ethereum Staking.

This derivative, called stEth, represents Ethereum coins that have been locked by validators of the Ethereum blockchain as part of their proof-of-stake consensus protocol.

Celsius used stEth to repay creditors upon withdrawal requests, but while stEth is typically traded 1:1 with Ethereum, stEth cannot be redeemed directly for Etherum. This means that when stEth starts trading below this rate, panic attacks begin.

Exchange rate between Staked Ethereum and Ethereum
Exchange Rate Between Staked Ethereum and Ethereum / Image Credit: Trustnodes

Since Celsius does not have enough funds, they have to effectively stop withdrawals as not all withdrawal requests can be fulfilled and requests may lead to the collapse of the entire Celsius platform.

Deja vu?

If this sequence of events sounds familiar, chances are you’re right. What basically happened was a bank was listing unrealized revenue as profit and marketing them in an understandable way.

Before the 2008 housing crisis, banks like Lehman Brothers and Morgan Stanley did the same – with mortgage-backed securities and derivatives of those securities known as debt obligations. mortgage.

Lehman brothers
Image credit: CNBC

Obviously, the founders of Celsius were not history students.

But Celsius is perhaps more to blame than those banks in the current crisis – it has effectively tried to cash in on a form of arbitrage economics.

Banks like Lehman Brothers and Morgan Stanley may have been unethical in not exercising accountability when lending to property buyers, but there is at least some real value in mortgage-backed securities that aren’t guaranteed. these banks sold, that is the value of the property. we.

Conversely, what drives yields on crypto lending platforms like Celsius, other than the difference in interest rates the platforms are offering?

Cryptocurrency Lending Improvements

Celsius probably won’t be the last protocol to face this outcome. The crypto space lacks institutions such as central banks and governance institutions capable of effectively protecting lenders and consumers.

This is a total oversight, which means that crypto lending platforms like Celsius wield almost limitless power when it comes to managing creditors’ funds and the terms of their debtors. . In fact, degrees Celsius has shown what this strength allows them to do.

On Monday (June 13), Celsius presented its debtors with a choice: top up their collateral, or get liquidated.

No organization is capable of telling C that, on many levels, this is inhumane and irresponsible. The reason C is effectively insolvent is not that the debtor took out more than he put in; instead, it was the bad bets Celsius made in an attempt to cash in on the inefficient market.

In terms of banking, what Celsius is doing may sound like a pre-hunt loan.

What the crypto space increasingly needs is some form of regulation, as opposed to the ethos of the crypto community as it seems. In its current state, the crypto space is an anarchist’s paradise, especially in the crypto lending space.

Bitcoin Cryptocurrency Law
Image credit: Finance Magnates

But what can be done to protect these future debtors and creditors?

First, people should understand that reinventing the wheel doesn’t really constitute innovation. Celsius and many platforms like it, the crypto equivalent of banks, with all the risk and without much oversight.

One type of organization that has not yet moved into the blockchain ecosystem are rating agencies. These organizations independently analyze banks, business models and the like, and provide expert opinions on the safety of certain securities and loans.

Such a system placed within the cryptocurrency ecosystem can serve as a source of stability to some extent – they can call out extremely risky projects like Celsius’s arbitrage and encourage real innovation.

Another innovation that the crypto world can benefit from will be like a central bank. These banks act as lenders of last resort and provide loans to banks in times of crisis when banks simply do not have the liquidity to cover withdrawals.

Of course, some caveats must be made here – central banks do not offer unconditional loans. Their loans often have conditions attached to them to ensure that the same practices that have left the bank insolvent are not allowed to replicate. In short, platforms like Celsius won’t be able to get loans because they rely solely on arbitrage.

The crypto world, as of recently, is facing increasing scrutiny – primarily because of its volatility, but also because of its governance. And I suppose this is the main flaw of the crypto ecosystem.

Without laws and protections, individuals are vulnerable and often taken advantage of by larger entities like Celsius. Unless these problems can be resolved, anyone in the crypto world must be constantly on the lookout.

When philosopher Thomas Hobbes wrote that without security, life would be lonely, poor, bad, brutal, and short, he was referring to man in a state of nature without management and protection. guard.

And while in the crypto world our lives may not be at stake, our livelihoods sometimes are. Today, the world of cryptocurrency is not particularly like Hobbes’ state of nature. And to rise above that, contrary to the ethos of the crypto world, governance may soon become necessary.

Featured image credit: Financial News London

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