🤔 Is web3 really decentralized after all?!
Case of Celsius, a crypto lending platform as well as Finblox and BlockFi
gm frens 🤒
Lot of stuff happening in the market. Not many good news. We have BTC currently sitting at $20k and ETH at $1k and a $.9 trillion crypto market cap.
I came across an interview from Ian Harnett that he gave for CNBC and he said that “It really is a liquidity play. What we’ve found is it’s neither a currency, nor a commodity and certainly not a store of value.:” and couldn’t agree more. The way it is being used currently is mainly for speculative purposes. The actual value of BTC is still the same, nothing has changed if you remove the part where people want to speculate with it.
We have seen the massive sell-off lately, especially with the liquidation issues that many crypto companies are facing. Btw, if you want to learn more about margin calls and what happens to those who traded on leverage, check out our newsletter from the other day.
🤔 Is web3 really decentralized after all?!
I know, title might sound click-bait title but it is not this time. This is a question I have been asking myself over and over lately.
The case of Celsius
We wrote about Celsius case in our previous newsletter. For those of you who are not familiar with the platform, Celsius is a crypto lending platform. It is one of the largest crypto lending companies in the world with well over $20 billion in assets. Almost two weeks ago, they came out with an announcement, where they have stated that they will be pausing withdrawals, swaps and transfers between accounts. They claim that this decision is done in order to protect assets to meet obligations to their customers.
Celsius itself is having issues with liquidity. The issue is that they have a lot of money locked up in stETH (staked ETH). They used Lido (a tool for staking), to take the ETH invested from customers and staked it on ETH 2.0. The issue is that Celsius now won’t be able to sell this as it is locked until the merge of ETH and ETH 2.0 happens. This might happen by the end of August.
Until then, Lido, the platform used for the staking, issues stETH which is basically a token that proves that you are eligible to claim ETH 2.0 when merge happens.
Considering their issues with liquidity, Celsius is transferring the burden to their investors. They have paused the withdrawal ability for their investors. There are people who got loans from Celsius and they locked their crypto as a collateral for their loan. There is no way to withdraw that money now. Considering that crypto prices are going down, they risk of being margin called. When this happens, you have the option to add more crypto as collateral or your position will be liquidated (meaning sold at the current market price) whether you like it or not.
This brings us to a really important question as stated in the title of today’s newsletter. Is it really decentralized?! The whole point of web3 is being fully decentralized, meaning that a platform should not be able to stop withdrawals like it happened with the case of Celsius.
Hopefully, this will serve as a learning lesson for everyone whenever we decide to trust web2 companies wearing web3 clothes!
Something similar happened with Finblox. Finblox is a platform that helps crypto investors buy and earn high yield on their crypto assets (at least this is what they say about themselves). Apparently they changed their withdrawal limits to $1.5k a month (max 500USD equivalent per day). They are having issues with liquidity themselves as one of their partners got out of business, Three Arrows Capital for which we wrote in our previous newsletter where we talked about the risk of 3AC getting margin called.
Same thing was about to happen with BlockFi. In fact, BlockFi was one of the biggest crypto lenders for 3AC, but luckily they liquidated some of their positions and reduced their exposure before 3AC went down to sh*t.
However, BlockFi got bailed out from Sam Bankman-Fried (founder and CEO of FTX). This was confirmed by BlockFi CEO.
This should help BlockFi with the liquidity issues in short-run. If there will be another massive sell off that will bring down BTC prices, then there might be additional margin calls happening and that will definitely cause more troubles.