Celsius Pauses Withdrawals – Trustnodes

Celsius, a centralized startup that intends to defi for you, is currently undergoing a bank run situation due to significant reliance on locked staking eth.

The entity itself appears to be largely solvent, with $5.6 billion in assets tracked on the blockchain. But, some is deposited to stake on eth, making it illiquid. Some is in stETH, when people are asking to withdraw eth. So they’ve just paused withdrawals.

“Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts. We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations,” the startup said.

That’s just a day after Pete Huang, who works at Coinbase in Business Operations and Strategy, said:

“Celsius holds ~1 million ETH in the bank – that’s ~$1.6-1.8 billion depending on the day. The problem is that only 27% is in actual ETH.

The rest is locked up in ETH2 staking, which won’t unlock for at least a year, or is stored as stETH, which is a liquid staking token…

What’s the issue? In summary, people are pulling their money out of Celsius. Latest estimate is something like 50K of ETH ($80-90 million) is leaving Celsius every week. There’s only about 270K of actual ETH.”

The eth and other assets are not in the bank but in 18 wallets that have deposits in Compound, Aave, Maker, Bancor, Badger, Convex, and Yearn, from what could be tracked.

At least 288,465 eth has been deposited to the eth 2.0 staking contract. The rest is in wbtc, weth, usdt, usdc etc.

Basically, you deposit on Celsius and Celsius gives you rewards, but where do these rewards come from? Well, Celsius sends the deposits to stake or to defi, lending to the world for interest, and then gives you some of that interest.

The problem can be that although they’re receiving 4% to 5% in staking rewards on their deposited eth, they can’t access it until next summer when staking is unlocked. But they are still providing rewards currently, although they have liquid defi assets on Aave et al.

So is there actually a problem? It’s for Celsius to clarify. They shouldn’t leave it to FUD accounts to detail their blockchain addresses, they can do it themself. Then people can see and can judge what is hysteria and what is fact.

No one however, as far as we are aware, has stated they do not have the assets or they have mismanaged the assets, which is of course possible.

They’re instead pointing out people want their eth, perhaps to turn them into fiat, but a lot of this eth is locked in staking or in stETH, so they can’t have it.

If depositors to Celsius were aware of this fact, then there’s no story at all here. If instead they relied on the assumption that bears won’t circle and even Coinbase might join, if they relied on the assumption that only some of their assets would be needed for withdrawal without being fully transparent that most will be locked and illiquid, then there’s a communication problem.

With a centralized custodian there are other risks of course. Presumably there can be losses too if they’re not extremely conservative. There are no suggestions there have been any losses however.

Instead it appears we primarily have a bad management of expectations, and ineffective direct communication with customers and the wider public, and an unsynchronized system of asset management.

Regarding the later, if they were going to stake customers’ assets, they should have asked for permission, and then they could have frozen just those assets until the unlock.

That they have frozen all assets clearly suggests they didn’t ask for such permission. Instead they appear to have taken a deposit as carte blank to manage it however they please.

Coinbase here clearly has an opportunity to say they have better management, and maybe they’re not even wrong, but what we’re seeing is obviously that problem with intermediary trust – which can apply to Coinbase too – that Satoshi Nakamoto talked about, which is why defi was invented.

Still $11.8 billion in assets as of 17th of May 2022 and 1.7 million customers chose to have Celsius do defi for them, instead of stake or defi themselves.

Unless they were woods, they should have expected that the rewards come from something, unless they expected it comes from nothing in which case they should thank god they in Celsius instead of Luna.

And if the reward comes from something, it so happens some of that something is not liquid, so just wait.

But of course price is falling and no one wants to wait. Yet, more than 10 million eth is currently staking, all of them have to wait.

Celsius is not without criticism however as an easy way to avoid such a situation is to gain the customer’s consent for asset management that is likely to be illiquid. Then, there is no bank run.

In addition to gain customer’s trust they have to account for the entire $11.8 billion in assets as only half of it has been tracked on the blockchain.

Plus, they have to come clean on what proportion is liquid and which is illiquid. Then one solution here can be that for current customers, they can withdraw freely the percentage, for each individual, that is liquid but not what is illiquid. For new customers, they have the option to decide strategy, liquid or illiquid, with corresponding reward levels.

If thus the matter is simply that some eth is staking, there is a problem in as far as bad communication goes, but it appears to be an easily solvable problem with plenty of the assets on the blockchain.