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After weeks of suspense and widespread allegations of running a Ponzi scheme, Celsius Network has finally given up the pretense of a going concern entity by initiating the Chapter 11 bankruptcy proceedings, paving the way for the stalled capitulation process across the Decentralized Finance (DeFi) space to play out to its natural conclusion.
Celsius Network’s liquidity status had a direct bearing on Bitcoin and the rest of the crypto sphere via its sizable repository of Wrapped Bitcoin on Ethereum (wBTC) held in a dedicated vault. Bear in mind that wBTC is an ERC-20 token that is fully backed by Bitcoin and managed by the wBTC Decentralized Autonomous Organization (DAO), and which grants its holders access to the Ethereum ecosystem.
In our last post on this subject, we had noted that Celsius Network held around 23,962 wBTC in a dedicated vault and that it was ferociously contributing additional collateral in tandem with the plunge in Bitcoin’s price so as to reduce the risk of a margin call on its wBTC holdings – an eventuality which would have cascaded across the Bitcoin ecosystem. Well, Celsius did manage to pay off all of its liabilities on this count, thereby preventing the worst-case scenario.
JUST IN: Celsius Network pays off $113,105,000 towards its loan from Aave & Compound in the last 24 hours, dropping its debt to $123 million.
— Watcher.Guru (@WatcherGuru) July 11, 2022
Of course, Celsius Network had additional vulnerabilities as well. The crypto lender was forced to halt all withdrawals when Lido-staked Ethereum (stETH) – a DeFi variant of Ethereum that is issued against staked Ethereum coins and which is redeemable for Ether on a 1:1 basis but only after the Ethereum 2 transition takes place following the upcoming merge event – de-pegged from its theoretical parity with Ether a few weeks back, leading to a flood of redemption requests. Given the limited liquidity available to buy Ether using stETH, Celsius had no other choice but to stop all withdrawals, thereby maintaining an artificial veneer of solvency.
Celsius Network’s modus operandi was quite simple – collect funds from retail clients and then lend these funds to crypto companies. The company also invested in risky ventures to provide exorbitant yields – as high as 18 percent – to its retail clients in order to attract more funding.
In another eyebrow-raising practice, Celsius Network often directed liquidity to prop up its native token CEL, leading to allegations of a Ponzi scheme.
While not officially confirmed, it is rumored that Celsius Network took a sizable loss when Terra’s algorithmic stablecoin, TerraUSD, collapsed alongside its sister coin, LUNA. In fact, as per the word on the street, Celsius faces a $2 billion hole in its balance sheet.
Arkham Intelligence has compiled a damning dossier on Celsius Network’s shortcomings. The following snippet summarizes these findings:
It is hardly surprising, therefore, that Celsius Network was compelled to file for bankruptcy. To wit, the company declared in its press release a few hours back:
“Today’s filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, swaps, and transfers on its platform to stabilize its business and protect its customers. Without a pause, the acceleration of withdrawals would have allowed certain customers—those who were first to act—to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities before they receive a recovery.”
Bear in mind that Celsius Network still has $167 million in cash, which it plans to use to continue its operations.
Celsius Network’s CEL token is currently trading at around $0.7 vs. the $4.3 price level toward the start of the year.
Now for the good news. Despite outsized fears, the contagion from Celsius Network’s woes has not spread, with Bitcoin even recording a modest gain of 0.16 percent over the past 24 hours. With the bankruptcy of the 3AC hedge fund and now Celsius, the DeFi space is being rid of its ailing players, leading to brighter prospects for the players that have survived.
The silver lining here is that, in contrast to the doom and gloom predictions, the DeFi space has survived. Moreover, the Bitcoin network has continued to perform flawlessly even as frothy speculation evaporated. These developments bode well for the long-term viability of the entire crypto sector.
Update: Celsius Network has Revealed a $1.19 Billion Hole in its Balance Sheet
In a closely watched filing following the initiation of Chapter 11 bankruptcy proceedings, Celsius Network has now revealed a $1.19 billion deficit on its balance sheet. While still significant, this deficit is nearly half of the bandied about $2 billion figure.