In the context of a further fall in cryptocurrencies, some companies that were at risk of liquidity would find themselves in turmoil, among them the Celsius lending platform.
The storm in the cryptocurrency and stablecoin market from a month ago continues to have repercussions in the ecosystem. Last week, many analysts warned of the liquidity risk of certain companies with exposure to the staked eth (stETH) lido token, such as Celsius and Swissborg.
It was enough for the cryptocurrency market to fall again this weekend (bitcoin has lost 9% of its value since this Sunday to be around 25,000 dollars at the time of writing this paper, ether has lost side 11% of its value and is trading around 1,300 dollars) to further weaken the ecosystem.
The American cryptocurrency lending and staking platform Celsius, which has 1.7 million customers and claims around $12 billion in assets under management, announced on Monday that it no longer allows its customers to withdraw or transfer their funds in cryptocurrency.
“We are taking this action today to put Celsius in a better position to eventually meet its withdrawal obligations,” the company explained in a blog post. “We are taking this necessary action in the interest of our entire community to stabilize liquidity and operations while we take steps to preserve and protect assets. Additionally, customers continue to accrue rewards during the pause, in line with our commitment to them”.
Parity issue between stETH and ether
This decision is not the result of chance, it is part of a context of weakening of the cryptocurrency market. Indeed, after the collapse of the luna cryptocurrency and the detachment of the stablecoin terra usd (UST) which no longer respected its promise of parity with the dollar (1 UST = 1 dollar in theory), some have already turned their eyes to another token: the staked lido eth (stETH). It is a synthetic token created in 2020 by the decentralized Lido platform, which is supposed to have the same peg (or “peg”) as ether (i.e. 1 stETH = 1 ether). As a reminder, an anchor to a currency is called a “peg”. When there is a difference between the value of the underlying and that of the currency, we speak of a “de-peg” or “loss of parity”.
However, a month ago, to the great surprise of the ecosystem, this synthetic token broke off from ether, endowed with a discount of 4.7% on May 12th. Today, the detachment remains significant, with a discount of 1.45% at the time of writing this paper.
In the context of the next Ethereum merger (The Merge), users can practice “staking”, i.e. a loan of cryptocurrencies made to the blockchain against interest. Concretely, they deposit ethers in smart contracts of the Lido platform to participate in the merger The Merge, thus receiving stETH.
“Currently, when people “stake” their 32 ETH on the mainnet (Editor’s note: the main Ethereum blockchain) and deploy an Ethereum node, they are likely to obtain variables of interest (which must be around 3/5% ). Except that this interest and the 32 ETH will only be released once The Merge has taken place. To overcome this, the stETH was created and allows users to obtain a liquid token that can be exchanged, sent, lent at any time in exchange for slightly lower interest”, explains the founder of Au Coin du Bloc.
The date of the merger of The Merge having been postponed many times, this has increased tensions in the ecosystem of decentralized finance, already weakened by the collapse of the Terra ecosystem.
“Delaying the release of The Merge can create panic, loss of investor confidence, sell-offs, loss of peg, etc. It all hinges again on trust in the protocol,” continues this last.
“A risk of contagion in decentralized finance”
Already last week, many analysts had warned that some companies, which expose themselves to stEth, could run the risk of defaulting if their users withdrew a lot of ether in a context of stress. Analyst Brad Mills had thus mentioned the case of Celsius Network, which is exposed up to 44% to stETH.
“If Celsius is forced to start selling its stETH, there would be a 50% unpeg on stETH,” the analyst said on Twitter.
“We don’t know for sure if Celsius is insolvent, but the risk of having your funds there is very high right now. decentralized finance (Defi) in a crypto bear market is high,” he warned.
The risk of contagion could also affect centralized platforms, such as the company Swissborg, considered for its part by the analyst Dirty Bubble Media.
According to the data provided by the analyst, the company holds 79,597 ethers, of which 80% is stETH. Since the May 12 peg loss, if Swissborg closes its position, it could lose more than 2,500 ethers, or the equivalent of $4.5 million, the latter estimates.
Analyzes of cryptocurrency companies point in the same direction, like those of the American giant Coinbase.
“In our view, the price divergence between stETH and ether reflects significant liquidity, yield, credit and even collateral risks. For example, liquid staked ETH on the Ethereum blockchain represents only a small fraction of the total supply of ETH in circulation (3.8%), of which approximately 90% is staked on Lido”, considers David Duong, head of institutional research at Coinbase in a post on their blog.