With the new fall in cryptocurrencies, some companies that could face liquidity risk have found themselves in a quandary, including lending platform Celsius.
The storm in the cryptocurrency and stablecoin market that occurred a month ago continues to affect the ecosystem. Last week, many analysts warned about the liquidity risk of some companies exposed to the lido Staking eth (stETH) token, such as Celsius and Swissborg.
That was enough to send the cryptocurrency market down again this weekend (Bitcoin has lost 9% of its value since this Sunday and is around $25,000 at the time of this writing, Ether has lost about 11% of its value and is trading around $1,300) to further further weaken the ecosystem.
U.S. cryptocurrency lending and staking platform Celsius, which has 1.7 million customers and claims about $12 billion in assets under management, announced on Monday that it will no longer allow its customers to withdraw or transfer their crypto funds.
“Today, we are taking these actions to help Celsius ultimately meet its withdrawal obligations,” the company explained in a blog post. “We are taking this necessary step in the interest of our entire community to stabilize liquidity and operations while taking steps to preserve and protect assets. In addition, clients will continue to receive rewards during the pause in line with our obligations to them.”
Parity issue between stETH and ether
This decision is not the result of chance, it is part of the context of the weakening of the cryptocurrency market. After all, after the collapse of the Luna cryptocurrency and withdrawal of stablecoin terra usd (UST) which no longer lived up to its promise of parity with the dollar (1 UST = $1 in theory), some have already turned their eyes to another token: Lido put eth (stETH). It is a synthetic token created in 2020 by the decentralized platform Lido, which must have the same peg (or “peg”) as ether (i.e. 1 stETH = 1 ether). As a reminder, a peg to a currency is called a “peg”. When there is a difference between the value of the underlying asset and the value of the currency, we speak of a “de-peg” or “loss of parity”.
However, a month ago, much to the surprise of the ecosystem, this synthetic token forked from Ethereum, posting a 4.7% discount on May 12. The lead remains significant today, with a 1.45% discount at the time of writing.
In the context of the next Ethereum merger (The Merge), users can practice “staking”, that is, lending cryptocurrencies on the blockchain at interest. Specifically, they contribute ethers to the smart contracts of the Lido platform to participate in The Merge, thus receiving stETH.
“Currently, when people “stake” their 32 ETH into the mainnet (Editor’s note: Ethereum main blockchain) and spin up an Ethereum node, they are entitled to a variable percentage (which should be around 3/5%). and 32 ETH will only be released after the merge happens. To overcome this, stETH was created, which allows users to receive a liquid token that can be exchanged, sent, borrowed at any time in exchange for slightly lower interest,” explains the founder of Au Coin du Bloc.
The date for The Merge has been pushed back multiple times, increasing tensions in the decentralized finance ecosystem, already weakened by the collapse of the Terra ecosystem.
“A delay in issuing The Merge could cause panic, loss of investor confidence, sell-offs, loss of peg, etc. Everything again depends on the trust in the protocol,” continues the latter.
“Contagion Risk in Decentralized Finance”
As early as last week, many analysts warned that some companies that are at risk of stEth default could face default risk if their users withdraw a lot of ether under stress. As such, analyst Brad Mills mentioned the case of the Celsius Network being exposed to up to 44% stETH.
“If Celsius is forced to start selling its stETH, the stETH peg will be depegged by 50%,” the analyst wrote on Twitter.
“We don’t know for sure if Celsius is insolvent, but the risk of your funds being left there is very high right now. Decentralized finance (Defi) in the cryptocurrency bear market is high,” he warned.
The risk of infection could also affect centralized platforms such as Swissborg, according to an analyst at Dirty Bubble Media.
According to the data provided by the analyst, the company owns 79,597 ethers, of which 80% is stETH. The latest estimate is that after losing the peg on May 12, if Swissborg closes its position, it could lose more than 2,500 Ether, equivalent to $4.5 million.
The analysis of cryptocurrency companies points in the same direction as the analysis of the American giant Coinbase.
“In our view, the price divergence between stETH and Ethereum reflects significant liquidity, yield, credit and even associated risks. For example, ETH with liquid rates on the Ethereum blockchain represents only a small fraction of the total ETH in circulation (3.8% ) , of which roughly 90% is staked on Lido,” said David Duong, Head of Institutional Research at Coinbase, in a blog post.