What caused Celsius to plunge? The Ecoinomic

Amid the collapse of the cryptocurrency market, cryptocurrency lending platform Celsius on June 12 announced the suspension of all withdrawal activities on its lending platform, citing "harsh market conditions" and the need for "liquidity stability."

Within hours of the announcement, Celsius' original token, CEL, plummeted by 70%, and on the next trading day, the token dropped by more than 40 percent. CEL's plunge comes as the cryptocurrency market has seen a massive sell-off that has seen its market value drop below a trillion, more than two-thirds of the $3 trillion ATH level. Bitcoin has fallen to levels not seen since 2020.

So what happened to Celsius? The short answer is that no one really knows, but the trouble started last year.

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Celsius is one of the typical decentralized financial lending (DeFi) platforms. Anyone can take part in loans and loans. But the loan needs to be overly decentralized, meaning borrowers have to deposit more than they are borrowing. This is contrary to normal, but because cryptocurrencies are currently unregulated, there is no guarantor for borrowers not to lose money.

So while DeFi offers the promise of an alternative financial system by providing more competitive returns than savings accounts, it still faces capital and technology barriers.

After the user makes and deposits money into the protocol, they can earn attractive yields. Celsius offers returns of more than 7% on stablecoins such as USDC and Tether; 7.25% for Polygon; 6% for Ethereum and 6.25% for Bitcoin.

Then Celsius' protocol lends tokens from the pool at a higher interest rate. Celsius insists it does not use the client's cryptocurrency for any activity other than lending in the bitcoin protocol and mining. Transparency and real-time auditing are points of pride for Celsius.

Performance

CEL fell sharply shortly after Celsius announced the suspension of withdrawals on June 13.

The cause of the Celsius problem appears to be due to Lido Staked Ether (stETH), a token tied to Ethereum's ETH. stETH is a token that represents the amount of ETH that people stake in Lido Finance, allowing you to retain Ethereum 1.0 capital when betting on Ethereum 2.0. The value of stETH is converted 1:1 to ETH after The Merge event is held – an important event for the Ethereum network with the transition from Proof of Work to proof of stake.

On the DeFi platform, stETH is often used as collateral to Borrow ETH. The problem is, stETH recently lost its peg to ETH. With holders selling and The Merge's date uncertain, selling pressure is now weighing on stETH.

So what does that have to do with Celsius? The DeFi platform has locked customers' money into stETH, and stETH depeg's move could create a wave of in return on ETH, causing a liquidity crisis.

Depeg: the term refers to the fact that a token no longer holds the previously fixed fixed exchange rate on one currency or another type of reference. Over the past year, a number of regulators have clearly delineated that they view high-yielding cryptocurrency lending products such as Celsius as unregistered securities. In September last year, four U.S. states – New Jersey, Texas, Alabama and Kentucky – sent letters opposing Celsius. That same month, Coinbase also stopped lending products after the SEC threatened legal action.

By this time, Celsius had suspended operations in the United Kingdom, citing regulatory uncertainty. The company decided to move to the United States with the aim of focusing on applying for licenses and registering in the country to ensure the long-term viability of Celsius and the community.

In October 2021, Celsius raised $400 million and raised its valuation to more than $3 billion. By November, Celsius revealed that the amount of funding had increased to $750 million after registrations increased in excess.

In May 2022, Celsius changed its rewards to comply with the regulator's rules by phasing out high-interest accounts for unrecognized investors in the United States, essentially, which meant it banned those who did not earn $200,000 annually as well as without $100,000. millions of dollars in the bank from earning the highest income.

The current decline of Celsius occurs just a month after the fall of Terra. The stablecoin is anchored in the dollar of the platform, the UST has fallen to zero. Billions of USTs were burned to cast LUNA at too fast a rate for the anchor algorithm, destroying the entire ecosystem.

Meanwhile, a lot of money has been moved out of Celsius. In the first half of 2022, the total number of assets locked in the protocol fell from about $24 billion to $12 billion.

After announcing the suspension of Celsius' withdrawals on Sunday, Nexo, Celsius' rival, offered to buy certain of the company's liquid assets. Given the current fire-red cryptocurrency market landscape, it's a difficult and volatile time for DeFi in particular and cryptocurrencies in general.