Author: 0xergou

"Celsius Network has twice as many users as all DeFi combined...that's because we give 80% back to our community, while Maker and other projects keep 50% for themselves."

In 2019, Alex Mashinsky, the founder of the encryption lending platform Celsius, showed off on Twitter, triggering a counterattack from DeFi enthusiasts. Some people retorted,"The DeFi protocol gives us full control over our money, but at the moment you go out of business, we have no way to get our funds back..."

Well-known data website DeFiPrime chose to delist Celsius Network directly.

"We will delist Celsius Network. Opaque company, crazy CEO, this is a strong red flag, so we no longer recommend this product." AAVE founder Stani took advantage of the situation, "All CeFi should be delisted from DeFiPrime" .

Nearly three years later, Celsius Network, which has grown into an encrypted unicorn, suddenly issued an announcement to suspend all withdrawals, transactions, and transfers on the platform.

For most Chinese, Celsius Network may be a bit unfamiliar, but the story of the founder and the company has almost all the elements required by a legend:

A Ukrainian came to the United States with $100 and turned into an entrepreneurial madman. He founded 8 companies and created 3 unicorn companies; as a VC, he raised $1 billion and exited over $3 billion, with an IRR of 54%; Celsius Twice Lost Assets to Theft; Former CFO Moshe Hegog Arrested; Porn Star Engages Executive…

first level title

Madman Mashinsky

Born on October 5, 1965, in Soviet Ukraine, Mashinsky moved with his family to Israel in 1972, where he spent most of his childhood.

As a teenager, Mashinsky would trade seized items at customs auctions at the Tel Aviv airport, reselling them at high prices, showing he was a businessman.

During college, Mashinsky studied electrical engineering and economics at Israel's Open University and Tel Aviv University, respectively, but did not complete their studies.

After three years in the Israeli army, Mashinsky had the idea of ​​doing something big in Europe. He chose Paris as his first stop, and soon became frustrated with "Europeans' lack of imagination.""Why don't you fly to New York and see what's going on in America?"

With only $100 in his pocket, Mashinsky arrived in New York, then took a bus to 42nd Street, where he made the same oath as any young townsman who makes his way to the big city:Will never go back unless something is accomplished.

In the United States, Mashinsky embarked on a wild entrepreneurial journey.

In 1995, Mashinsky founded the telecommunications company Arbinet, which provides three types of international voice traffic services for operators and service providers. Today, Skype, Facetime, and Whatsapp are all its customers.

After six rounds of financing, Arbinet raised more than $300 million from 12 VCs, and finally IPO in 2004 with a valuation of more than $1 billion. In 2005, Mashinsky sold shares and completely exited.

During the decade, Mashinsky wasn't content with being just one company.

• In 1997, Mashinsky founded Comgates, a telecommunications software company, which raised $20 million and was acquired by Telco Systems.

• In 2001, Mashinsky founded Elematics, a network virtualization company, which raised $23 million and exited in 2004.

• In 2003, Mashinsky founded Transit Wireless, a telecommunications company that used distributed antenna system networks, which was later acquired.

• In 2005, Mashinsky founded the ride-sharing app GroundLink, which was later acquired.

One sentence can prove Mashinsky's entrepreneurial achievements,After 2000, New York City received venture capital, and he founded two of the top ten most successful exit companies.

In addition to being good at starting a business, Mashinsky also started a VC,Founded venture capital fund Governing Dynamics in 2004.

Don't think he's just playing around,Governing Dynamics raised more than US$1 billion, invested in more than 60 companies, exited more than US$3 billion, IRR 54%…

In addition to investing in traditional businesses, Governing Dynamics also invested in blockchain. Perhaps believing in its potential, Mashinsky started his own business again and created Celsius Network, a cryptocurrency deposit and lending platform in 2017.Its appeal comes from offering clients an annualized interest rate of up to 18%.

In October 2021, Celsius Network completed a financing of US$400 million, which was later expanded to US$750 million. WestCap and Canada’s second largest pension fund CDPQ led the investment, with a post-investment valuation of more than US$3 billion.

first level title

Celsius, the anti-bank crypto bank

In the Chinese world, Celsius may be a stranger to most people, but in Britain and the United States, CelsiusCelsius is a well-known star CeFi, with over 1.7 million users and assets under management of more than US$30 billion.

In terms of business model, Celsius is no different from a "bank". On the liability side, it absorbs "encrypted deposits" from depositors; on the asset side, it uses a large amount of deposited funds to earn income through loans and other forms. Celsius earns profits from the interest rate difference between the two ends.

How does Celsius attract customers to "save money"?

Narratively, Celsius uses the bank's business model to tell a set of "anti-bank" stories.

"Traditional banks are going bankrupt, blockchain will overturn Wall Street!"

- Banking is Broken

- Unbank Yourself

- Replacing Wall Street with Blockchain

- 99% vs. 1%

In terms of publicity, Celsius’ words remain the same, but they are effective:Deposit cryptocurrency to get the highest annualized rate of return of 18%, with weekly dividends.

Celsius interest calculation is divided into two methods, in-kind Reward, deposit a Crypto asset and choose to use this asset to calculate interest, such as depositing in SNX, and using SNX to collect interest.

in-Cel Reward, deposit a Crypto asset and choose to use the Celsius platform currency CEL to calculate the interest, and the overall APY is higher.

In terms of overall yield, on Celsius, Bitcoin is about 3% to 8%, Ethereum is 4% to 8%, and USDT is 9% to 11%. Then the problem comes,Where does the risk-free high rate of return come from?

The lending business is of course a relatively safe business model, but facing the problem of capital efficiency, not all funds are matched to generate income. Low capital efficiency will lead to low APY, which will affect the expansion of the liability side (deposit storage).

Therefore, an unspoken rule in the industry is that in addition to lending, lending platforms such as Celsius and BlockFi often look for income elsewhere.

In the bull market of music carnival, it is not difficult to obtain "risk-free income" through a variety of arbitrage strategies, such as GBTC arbitrage and futures market futures premium arbitrage, and even nested layers, increasing leverage in DeFi to obtain income...In a bull market, this is a common behavior. After all, peers are doing this, rapidly expanding the scale of assets. If you don’t do this, you will fall behind others.

However, there will always be a day when the bull market music stops.

When the opportunity for stable arbitrage disappears, Celsius has to use increasingly exotic and riskier financial instruments in order to generate high returns for depositors.

For example, the Anchor Protocol of the Terra ecology,Celsius is a super giant whale on Anchor, sending hundreds of millions of dollars in encrypted assets to Anchor before the thunderstorm, and became one of the last straws that finally crushed UST.

What happened to Celsius?

What happened to Celsius?

Whether it is Celsius or BlockFi, or the hot mutual funds in China many years ago,The bankruptcy of all types of banking business model companies comes from a liquidity crisis, which can be divided into several situations:

1. Bad debt losses.

In fact, all banks will have bad debts, but as long as they do not hurt their bones, it is not a particularly serious problem. The key depends on the scale of bad debts. The worst case is a huge deficit and insolvency.

Generally speaking, the term of the liability side is short, such as demand deposits; while the term of the asset side is relatively long, such as long-term loans, so as to obtain higher cash flow returns, but once a black swan event occurs, liquidity shortages are prone to occur. And lead to asset sell-offs and runs.

Generally speaking, the term of the liability side is short, such as demand deposits; while the term of the asset side is relatively long, such as long-term loans, so as to obtain higher cash flow returns, but once a black swan event occurs, liquidity shortages are prone to occur. And lead to asset sell-offs and runs.

The interest rate spread is actually the compensation for the "bank" to bear the liquidity risk.

3. Withdrawal demand increases and liquidity decreases.

Regardless of whether it is on-chain or off-chain, the financial market needs confidence most. Even traditional large banks are afraid of a run, because any bank will have a liquidity mismatch problem.

Unfortunately for Celsius,It has all these major problems.

If you have to talk about the fuse, first of allUST depeg。

Celsius once had $535 million in assets in Anchor Protocol,Nansen’s on-chain data analysis has since confirmed that Celsius was one of the seven whale wallets that contributed to the UST depeg.

In other words, Celsius escaped before the UST was completely thunderstormed, perhaps without much loss of assets,But this has dealt a severe blow to market confidence and sparked distrust of Celsius.

Since the de-anchoring of UST, funds began to withdraw from Celsius at an accelerated rate. From May 6th to May 14th, more than 750 million US dollars were lost.

Then, the previous two thefts of Celsius were exposed and fermented.

1. Lost 35,000 ETH on Stakehound

On June 22, 2021, Stakehound, an Eth2.0 pledge solution company, announced that it had lost the private keys of more than 38,000 ETH deposited on behalf of customers.Among them, 35,000 pieces belong to Celsius, but Celsius has been concealing the incident and has not admitted it so far.

2. BadgerDAO hacker lost $50 million

In December 2021, BadgerDAO was hacked and the loss amounted to US$120.3 million, of which more than US$50 million came from Celsius, including about 2,100 BTC and 151 ETH.

A total loss of 120 million US dollars will not destroy Celsius's balance sheet. As a unicorn that has completed financing of 750 million US dollars in 2021 and enjoyed the dividends of the bull market, its cash flow situation should be relatively healthy, but in fact it is not so optimism.

During the bull market, Celsius chose to expand into the mining industry and sprint to go public.

• In June 2021, Celsius Network announced a $200 million investment in Bitcoin mining, including the purchase of equipment and a stake in Core Scientific.

• In November 2021, Celsius will invest another US$300 million in the Bitcoin mining business, bringing the total investment to US$500 million.

• The mining industry is an investment project with heavy assets, high expenditures, and slow returns. It is difficult to withdraw funds quickly when the funds are trapped. Of course, the harsh market environment does not support high-valued IPOs.

The mining industry is an investment project with heavy assets, high expenditures, and slow returns. It is difficult to withdraw funds quickly when the funds are trapped. Of course, the harsh market environment does not support high-valued IPOs.

In the current volatile market environment,Celsius suffered another liquidity mismatch.

Celsius allows assets to be redeemed at any time, but many assets are not liquid. If a large number of depositors run out, Celsius cannot meet the redemption demand.For example, Celsius has 73% of ETH locked in stETH or ETH2, and only 27% of ETH is liquid.

Under the shock of a run, Celsius’s “scrolling operations” continue to develop the “HODL Mode”, which prohibits users from withdrawing cash, and needs to submit more documents and applications to cancel this mode. This seems to tell investors:We were almost overwhelmed and panicked.

In order to cope with cash withdrawals and obtain liquidity, on the one hand, Celsius dumped assets such as BTC\ETH on a large scale, and on the other hand mortgaged assets through DeFi agreements such as AAVE and Compound, and lent stable coins such as USDC.

As of June 14, Celsius had $594 million in collateral in AAVE, of which more than $400 million was stETH, and had lent a total of $306 million in assets.

Celsius has over $441 million in collateral on Compound and $225 million in liabilities.

It seems that the mortgage rate is acceptable, but it is actually dangerous.

It seems that the mortgage rate is acceptable, but it is actually dangerous.

StETH unanchored and the prices of ETH and BTC continued to fall, so that it had to increase asset collateral, and at the same time, the continuous demand for withdrawals would reduce its current assets, so Celsius took the ultimate measure——Withdrawals, transactions and transfers are prohibited.

In the dark forest of DeFi, Celsius has become the target of public criticism, a transparent target, hunters lurking in the dark, ready to pull the trigger, snipe at its assets and liquidation lines, and pick up corpses.

It's a horrible vicious cycle.

Unable to obtain high returns-fund shortage-liquidity mismatch-runs-mortgage assets-prices fall-cover positions-continue to fall-continue to run...

At present, Celsius’s balance sheet is still a black box, which may be urgently rescued by the white knight. The encrypted lending platform Nexo tweeted that it can acquire any remaining qualified assets of Celsius at any time, and Celsius’s response was lukewarm.

Some people also pin their hopes on Tether, an early investor of Celsius, the USDT issuer. However, Tether seems to just want to get rid of the relationship, and said:The ongoing crisis in Celsius has nothing to do with Tether and will not affect its USDT reserves.

Every round of bull-bear cycle transition will always experience the pain of deleveraging, and there will always be people or institutions that become the "price" of being sacrificed.After LUNA's stable DeFi narrative was shattered, CeFi also ushered in a moment of narrative disillusionment.

Entrepreneurial madman Mashinsky has not had too many ups and downs in his life, and he is rebellious. Now, in the face of the cycle, he may have to bow his head and admit defeat to the market.

postscript

postscript

There is nothing new in the world, and today's Celsius, looking at the past, is full of shadows of former Chinese mutual fund companies.

Growing wildly in the era of flooding liquidity, using high yields as bait, frantically marketing and absorbing savings, expanding the liability side, when the lending business cannot meet the use of huge accumulated funds,Started crazy foreign investment, real estate, listed company debt, VC LP...

In order to pursue higher returns, assets are sinking into the secondary market, and bad debts and capital mismatches have become the emperor's new clothes. Everyone turns a blind eye to it and rushes to go public and ring the bell, writing life legends.

Liquid music will always stop one day, Buffett's famous saying will never go out of style,You don't know who's been swimming naked until the tide goes out.

Self-knowledge is the most important thing to be a human being. Whether it is US stocks or Crypto, the winners will enjoy the Beta bonus after all.Most people's wealth comes from cycles, not strength.

But do good and awe the cycle!