Stablecoin Watch: The Celsius Debacle and What It Means for Crypto
- By Bilal Hafeez and Dalvir Mandara
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- 3 min read
Summary
- We investigate the Celsius debacle and assess its implications for crypto.
- USDD shows weakness – it broke its peg and continues to trade below $1.
- Fei (FEI) and Magic Internet Money (MIM) have again seen the largest drop in market cap over the past seven days.
- Yields on stablecoins are mixed across DeFi protocols.
What Does the Celsius Exodus Mean for Crypto?
Celsius network has been making headlines recently after it stopped all withdrawals, swaps, and transfers between accounts. The platform is at the forefront of the current crypto crash and not without reason. This week, we dive deeper into what has happened and what it could mean for crypto.
What Is Celsius Network?
Celsius network is a leading retail savings platform that facilitates lending and borrowing of cryptocurrencies and stablecoins. It was founded in 2017 by Alex Mashinksk and Daniel Leon with a goal of providing a ‘community-first’ replacement to TradFi services.
It is one of the biggest players in the space. It recently expanded its series B funding round from $400mn to an oversubscribed $750mn – bringing its valuation to over $3bn. It has had impressive user growth, and its website claims ‘1.7 million people call Celsius their home for crypto.’
So, what went wrong? To answer that, let us first look at how Celsius network generates revenue.
How Does it Make Money?
If you want to borrow on Celsius, you need to over-collateralise your loan. That means depositing collateral onto Celsius that is worth more than the amount you want to borrow. Once a borrower pays back their loan, they are supposed to get back their collateral in full.
When you deposit funds onto Celsius, they will use those deposits to generate extra yield. That is, they use deposited collateral to make money. For example, they will stake deposits on a platform like Aave to earn extra yield. That is not all; they also lend deposits and coins to CeFi institutions including hedge funds and large institutional traders.
Celsius is also active across the broader DeFi space in general. They stake, yield farm, provide liquidity etc. So, there are several ways they generate revenue, and they all have their own inherent risks.
The cracks started to show as the crypto crash unfolded. On Monday, Celsius shared that it was pausing all withdrawals, swaps, and transfers between accounts. They cited ‘extreme market conditions’ as the reason, preventing all users from accessing any of their funds. Their website still states that withdrawals are paused, and it is unclear when this will change. Liquidity concerns linked to staked ether (stETH) are one of the possible reasons for the move.
What is stETH?
Staked ether (stETH) is a token that is supposed to be pegged 1:1 against ethereum. When ethereum transitions to proof-of-stake (PoS), miners will be replaced by validators. To become a validator, you need to stake at least 32 ETH. This stake is locked up. Validators are rewarded for maintaining the blockchain in the form of passive yield on their staked ETH.
Lido is a staking platform that allows users to stake their ETH and receive stETH in return. After the merge, you can redeem stETH 1:1 for ETH. However, users can also use stETH just as they would ETH – they can spend it, sell it, and use it as collateral for a loan etc. Lido therefore bridges some of the barriers to entry to the ethereum merge. That is, it removes liquidity constraints on locked up capital (you can use stETH like you can use ETH). It provides exposure to ethereum staking without having to deposit 32 ETH. And it removes the need to run validating software and the risks that come along with that (e.g., software failures).
What Are the Implications?
Crypto markets have been in turmoil recently, and the DeFi space has come under fire ever since the collapse of TerraUSD. Celsius has deposits locked in stETH, and problems arose when the stETH:ETH peg broke (Chart 1).
For perspective, the stETH:ETH liquidity pool on Curve (a DeFi protocol) currently has around 81% of its supply in stETH vs just 19% in ETH. So as redemptions increase, it is much harder for Celsius to meet those obligations due to lack of liquidity, and they have ultimately halted withdrawals altogether. The native token for Celsius (CEL) also saw an aggressive move down after withdrawals were paused (Chart 2).
The implications could be huge for crypto and DeFi in general:
- If Celsius were to sell stETH on the open markets to satisfy redemptions, the liquidity crisis would be exacerbated.
- Outside stETH, they are a large holder of BTC and have deposits locked up in wBTC (wrapped bitcoin) as well. If they were to start liquidating assets to pay off redemptions, it would have a knock-on effect to crypto markets in general.
- Regulators may use this as an opportunity to clamp down on platforms like Celsius to prevent the same thing happening again. This could be a good thing as it provides more protection, but on the other, side over-regulation could stifle innovation.
Latest Developments
Market Cap and Peg Risk
Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) still lead in terms of market cap. However, Binance is the only one of the three to have registered an increase in market cap over the past 24 hours (Table 1).
USDD has been showing signs of weakness. It broke its peg to the dollar and continues to trade below $1 – it registered its all-time low of around $0.96 on Monday (Table 1). This comes despite founder Justin Sun announcing that Tron DAO will deploy $2bn to fight off TRX short sellers. We wrote about the risks around USDD and its parallels to the now-defunct TerraUSD (UST) stablecoin on 1 June.
Fei (FEI) and Magic Internet Money (MIM) have again seen the largest drop in market cap over the past seven days (Chart 3). Between the two, around $166bn has been wiped from their market cap. USD Coin (USDC) and USDD are the only two stablecoins to have registered an increase in market cap at 1% each.
Volatility
The one-month annualised volatility of USDD is now the highest at 5% (Chart 4). Binance USD (BUSD) and True USD (TUSD) come in second and third, respectively. Notably, this means two of the three most volatile stablecoins on an annualised monthly basis are fiat-backed this week.
Longer term, Fei USD (FEI) and Magic Internet Money (MIM) lead in terms of annualised volatility over the past three months and year with values between 7% and 10% across the two.
Yields
Turning to yields, on Compound, average lending rates are below 2% for all stablecoins except Pax Dollar (USDP) (Chart 5). Notably, average lending rates are all down on the week except for Pax Dollar (USDP). Similarly, average borrowing rates on Compound are all down on the week except Pax Dollar (USDP) (Chart 6).
Looking across other decentralized finance (DeFi) protocols, we find that lending and borrowing rates are mixed across the stablecoins (Tables 2 and 3).
Appendix
USDT: Tether is a fiat-collateralised stablecoin primarily issued on the ethereum and bitcoin blockchains. It aims to be pegged 1:1 against the US dollar. Tether’s reserves are not backed 100% by US dollar deposits. Instead, they are backed by reserves that include cash, cash equivalents, short-term deposits, commercial paper, corporate bonds, funds, precious metals, secured loans, and other investments including digital tokens.
USDC: USD Coin is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is 100% backed by cash and short-dated US treasuries. USDC publishes a monthly public attestation of 100% reserves.
BUSD: Binance USD is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is backed 100% by USD held in Paxos-owned US bank accounts and US treasury bills (including through repurchase agreements and/or money-market funds invested in US treasury bills). Paxos is a New-York-regulated financial institution and publishes a monthly public attestation of 100% reserves.
TUSD: TrueUSD is a fiat-collateralised stablecoin issued by the TrustToken platform that is issued as ERC-20 tokens on the ethereum blockchain. It aims to maintain its 1:1 peg against the US dollar by being fully collateralised by US dollars using multiple escrow accounts to reduce counterparty risk.
USDP: Pax Dollar is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It aims to be pegged 1:1 against the US dollar by holding USD reserves in Paxos owned US bank accounts.
DAI: Dai is a crypto-collateralised stablecoin that attempts to maintain a 1:1 peg against the US dollar by depositing other crypto assets into smart contracts on the ethereum blockchain every time a new DAI token is issued. DAI is maintained by a decentralised autonomous organisation (DAO) called MakerDAO. And since the mechanism is maintained by a system of smart contracts, it has higher decentralisation than the centralised entities controlling USDT, USDC, or BUSD.
MIM: Magic Internet Money is a crypto-collateralised stablecoin launched by the DeFi platform Abracadabra. MIM is backed by interest-bearing tokens (ibTKN).
UST: TerraUSD is a crypto-collateralised hybrid stablecoin native to the Terra blockchain. To mint 1 UST, $1 worth of UST’s reserve asset, LUNA, must be burned. The idea was to try and ensure LUNA’s long-term growth. More people buying into UST means more LUNA gets burned, which should make the remaining LUNA supply more valuable. However, the system collapsed recently when UST de-pegged from the US dollar.
FRAX: Frax Finance is a fractional-algorithmic stablecoin that uses both collateralisation and an algorithmic process to create its decentralised stablecoin that is pegged 1:1 to the US dollar. Only stablecoins (currently, USDC) are accepted as collateral by the protocol.
FEI: FEI is an algorithmic stablecoin that aims to be pegged 1:1 against the U.S dollar that is backed mostly by ETH.
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.