After one week of suspending withdrawals, swaps and user transfers, the firm said it maintains an open dialogue with regulators and officials and plans to continue working with them regarding this pause. Celsius has not yet commented on when the company is going to stabilize its operations. Celsius also suspended Twitter Spaces and “Ask Me Anything” (AMA) sessions “to focus on overcoming these unprecedented challenges.”

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Although Celsius refrains from communicating, the media and social media are full of news and speculation about the past, present and future of the company. One of the most interesting innovations is the community-led Gamestop-style short squeeze.

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The dust from the Terra fiasco has not settled yet, but another crisis is rocking the cryptocurrency markets. Multi-billion dollar crypto lending and staking platform Celsius is the latest crypto company to face controversy.

Early anomalies

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Celsius slogan: “An economy where financial freedom has no price.” This marketing slogan, while unbelievable to some, was actually effective for a while. Since opening its doors in 2017, the company has invested more than $25 billion in crypto over five years until things came to a head on June 12, 2022 when the company suspended user withdrawals.

However, signs of mismanagement of Celsius funds were visible even before this incident. In December 2020, during the $120 million BadgerDAO hack, Celsius reportedly lost over $50 million worth of cryptocurrencies, making them the biggest victim of the action. To compensate victims for their losses, BadgerDAO implemented a restitution plan by creating the remBADGER token.

Token holders were certified payment in remBADGER over the next two years to cover the remainder of the loss. This guarantee came with only one requirement: remBADGER must remain in the Badger repository. If the token is withdrawn, all future payouts will be cancelled. However, March 18, 2022 Celsius stripped off the entire remBADGER allotted to him, worth approximately $2.1 million at the time of the deal.

When Celsius Network realized their mistake, they tried to convince the Badger team to allow re-deposit in violation of the rules set by BIP-80. Unfortunately for Celsius, BadgerDAO took the ethics of the code as law seriously and the proposal was rejected.

Many users were also concerned about the firm’s management. Celsius CFO Yaron Shalem and CFO Rony Cohen-Pavon were both arrested for money laundering in November 2021

On May 11, 2022, as the Terra disaster was just beginning to unfold, Celsius was being looked at by some. Cryptooshala then reported that Celsius Network had begun to refute rumors of significant losses for the company. Celsius CFO Rod Bolger said: “Our front office teams […] think and act like risk managers to make sure we are not exposed to any significant market fluctuations.”

Investors have accused the Celsius team of sitting idly by while the price of the token plunged as a result of the Terra fiasco. On May 20, 2022, Celsius (CEL) fell from an all-time high of $8.05 to $0.82, a 90% drop. Some Celsius users claimed that the platform liquidated their assets when CEL fell. They assumed the trade was illiquid as the price dropped, compounding their losses. When Cryptooshala contacted the Celsius CEO, Mashinsky attributed it to the “Wall Street shark”, stating:

“They filmed the MOON. Tried Tether, Maker and many other companies. It’s not just us. I don’t think they have a particular hatred or focus on Celsius. They are all looking for any weakness to short and destroy. The thing is, Wall Street sharks are now swimming in cryptocurrency waters.”

The Problem with High Yield APY Projects

Celsius has been one of the fastest growing institutions in the crypto market. Before the crash, Celsius employed 800 people, with an increase of more than 200% in the last year alone. The problem is that cryptocurrency is in a bear market right now and in order to continue to function normally, companies need to continue to have liquidity. Now that most retail investors and institutions are ditching their cryptocurrency, liquidity is becoming a major concern for them.

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One of the main reasons for the collapse of Terra was also illiquid assets. However, most projects, when asked about how their individual projects are doing, claim that they are running a different business model than the project that is currently in trouble. Cryptooshala reached out to Synthetix to explain why their lucrative high annual percentage yield (APY) business model made more sense than failed ones like Terra and Celsius. Their representative replied:

“Several accounts have tried to draw parallels between Synthetix and LUNA. And while there may be superficial similarities, ultimately Synthetix’s tokenomics and collateral mechanics are much more robust and battle-tested than LUNA. Also, while the top line of APY seems high, this number comes from two different sources.”

“USD trading fees, which are transaction revenue generated by our ecosystem partners such as Kwenta, Lyra, 1Inch, Popcorn Finance, and others, are part of and, depending on the volume of the previous week, range from 5% to 25 % weekly staking. awards. The inflation supply is the second source of the weekly APY and contributes the remaining amount of APY and is currently at an annual growth rate of approximately 50%. This inflation amount is minted on a weekly basis and is currently shared between mainnet members ETH and Optimism,” they added.

Crypto Liquidity Crisis Reflects Traditional Markets

What we see now in the crypto ecosystem are all the lessons learned in the last 100 years in the traditional financial system. As the ecosystem develops, crypto markets will inevitably become cyclical, just like traditional markets. To survive the downturn, projects must learn from the past. This does not mean that the cryptocurrency is losing its edge, just that there are smart sustainability principles that apply to any emerging market. Lauren Mahler, CEO of Jupiter Exchange, stressed that most financial markets are fundamentally similar and tend to become illiquid during an inevitable bear run. She told Cryptooshala:

“One of the most important is the issue of liquidity. The emphasis on rapid user growth at any cost is not a sustainable philosophy. Offering outrageous rewards for the most mundane of activities will naturally trigger a run in the system, be it cryptocurrencies or traditional banking. Projects that innovatively apply these traditional financial lessons will be best positioned to capture new growth opportunities when the cycle changes again.”

Failed giant projects like Terra and Celsius tend to have a cascading effect on the broader market, as can be clearly seen from the plummeting prices of most cryptocurrencies. The mood of retail and institutional investors will inevitably become extremely negative. Although Lilly Zhang, CFO of Huobi Global, saw a way out of the domino effect in liquidation. She told Cryptooshala:

“The market could see further declines as more liquidations occur and players are forced to sell, and companies and investors who have made the wrong decisions will suffer the most. The problems with Celsius, in turn, also made traders worried about Staked Ether. Fortunately, as stETH selling pressure continues to rise, demand will seep into the used asset markets and create lower stETH prices that can be attractive to new investors, which in turn will boost demand and bring prices back. to the normal level. ”

Not your keys, not your coins

“Not your keys, not your coins” is a popular expression in the world of cryptocurrencies that refers to the need to own the private keys associated with your funds. The person who owns the private keys decides how the associated cryptoassets will be spent. Failure to do so means that we trust a third party to safely store our coins for us. Stories like that of Celsius are a chilling reminder that these third parties are often not acting in the best interests of their clients.

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While the popular takeaway from this story is that people should hold the keys to their cryptocurrency, there have been people like Sung Hoon Kim, CEO of Metaverse World, who have pointed out that centralized projects like Celsius are the problem. In an interview with Cryptooshala, Sun said:

“When discussing security issues, it is not so much about how, but about why. Both centralized and decentralized structures are not invulnerable, but the closedness of the Celsius system inherently affects the right of the customer to assess the growing risk. It’s not about who holds the keys, but about the level of transparency that the project is willing to provide.”