Celsius Repaid $183.6M to MakerDAO in July But Crypto Lender Still in Hot Water
It has been 24 days since Celsius Network suspended account withdrawals/transfers amid “extreme market conditions”. Is there a light at the end of the investing tunnel? According to the latest on-chain data, there are some sunshine rays coming through.
The over-extended lending platform paid $183.6 million debt in DAI stablecoin since July 1st to Maker DAO. The latter is also a lending platform but decentralized, currently holding $7.82 billion TVL. Celsius not only lowered its debt but freed $40.1 million worth of 2,000 Wrapped Bitcoin (WBTC) as well.
WBTC is equal to Bitcoin (BTC) but in ERC-20 format, so it is compatible with Ethereum’s smart contract trading. Celsius used 2,000 WBTC as collateral for MakerDAO’s loan. However, the CeFi platform still owes 41.2 million DAI, collateralized by 21,962 WBTC (~$441.6 million)
Such a high over-collateralization is a function of two factors: lack of regulatory guarantee and cryptocurrency volatility. In fact, Celsius’ business model relies on over-collateralization as a lending service.
How Did Celsius Get in Trouble Then?
Let’s say you want to borrow $10,000 based on your Bitcoin holdings that are just sitting in your wallet. Celsius Network can do that without asking for rigorous credit checks as a traditional bank would. All you would need is to deposit collateral from one of a dozen cryptocurrencies.
In the case of Bitcoin, a one-year $10k loan would require 1.9859 BTC collateral, which is almost 4x the loan size. The annual interest rate would then amount to $900 if paid in the network’s native CEL tokens, or $1,200 if paid in stablecoins. This is similar to the incentive structure that Binance offers with its own BNB utility token.
However, if Celsius asks for such a high over-collateralization, how come it got to the point it had to pause withdrawals? The problem is that Celsius also acts as a traditional bank, but without having FDIC insurance for customer deposits. Meaning, that it both gives out loans and takes risky loans to offer amazingly high APY yields.
It was not uncommon for Celsius to offer an 18% APY yield, which is staggeringly higher than one would find in any traditional bank, which typically offers 0.08% on savings accounts. Of course, such a stark difference was the key incentive that unlocked the network’s rapid growth to 1.7 million clients.
The problem is, that Celsius had to resort to liquid Ethereum staking on Lido to offer such high yields. Celsius Network’s wallet (verifiable on Etherscan.io) shows it took advantage of these non-custodial yielding mechanisms, with stETH on Lido and Aave protocols making the bulk of staked assets.
Additionally, Celsius had a stake in Terra’s Anchor Protocol, which offered even higher yields, up to 19.5%. Although Celsius exited that position early on, worth $535 million, Terra’s death spiral itself suppressed the prices of both Bitcoin and Ethereum, beyond the Fed-induced market downturn.
As a cherry on top, the crypto contagion spread to Voyager Digital and Three Arrows Capital (both of which are now defunct). In the end, between mutual exposures, suppressed token prices, and inability to pay off debt obligations, Celsius had to “temporarily” close shop to attempt consolidation with the customer funds it had.
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Can Celsius Fully Repay its Debt?
As part of the consolidation process, Celsius already let go of 150 employees, which is roughly 23% of the company’s personnel. After having paid $183.6 million to Maker, and $67 million to Aave and Compound, the liquidation threshold dropped to $2,722.11.
This is over three times lower than just a couple of days ago, at $8,838.57 when Celsius paid off $50 million for the WBTC-collateralized loan. The current debt stands at $41.23 million. Given the reduced liquidation price, Celsius Network has now stabilized its collateralization risk.
In the meantime, Celsius CEO, Alex Mashinsky, hired Citigroup and Akin Gump Strauss Hauer & Feld LLP to help with further financial restructuring, much of which depends on Bitcoin’s price moves. It is also telling that FTX CEO Sam Bankman-Fried declined to help Celsius because it had too many liabilities, framed as a “$2 billion budget hole”.
With that said, FTX did offer a rescue line to Voyager Digital, via Alameda Research to the tune of a maximum of $75 million per month. Yet, the crypto broker still filed for Chapter 11 bankruptcy yesterday, following a $650 million loan to an equally defunct Three Arrows Capital hedge fund.
Considering that FTX didn’t even attempt to do the same for Celsius, it may already be too late. In the end, this mess could have been avoided if CeFi platforms settled for respectable APYs up to 5%. Instead, they relied on a temporary bull cycle to attract unsustainable growth.
While the adage “Too good to be true” has some value, do you think it was only applicable in hindsight, given such a novel blockchain frontier? Let us know in the comments below.