Celsius Tops Up More Collateral to Avoid Loan Liquidation, Faces ETH Squeeze

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Source: AdobeStock / Mat Hayward

The troubled crypto lending and borrowing company Celsius (CEL), which on Monday halted withdrawals due to “extreme market conditions,” is adding more collateral for a loan on the MakerDAO (MKR) decentralized finance (DeFi) protocol to avoid liquidation. At the same time, the company is facing a growing problem with ETH tokens it has staked on Ethereum 2.0.

The addition of more collateral to the on-chain position has become an urgent necessity for the company, as the falling bitcoin (BTC) price means that more and more coins are needed to prevent the protocol from liquidating the loan.

MakerDAO lends out the stablecoin DAI to borrowers in exchange for collateral worth at least 150%. The 150% collateralization ratio must be maintained at all times to avoid liquidation.

The efforts to keep the loan afloat have attracted the attention of many in the crypto community, given that everything can be viewed in real-time in an on-chain vault.

At 10:51 UTC, the vault shows that Celsius’ loan currently has a collateralization ratio of 195.93%, with a bitcoin liquidation price of USD 16,852.58.

Still, the problem with such a public liquidation price is a known phenomenon in markets where the price tends to fall until major liquidation levels are reached. According to some, this is caused by institutions and ‘whales’ that are “hunting” for major liquidation levels.

“Firms will actively try to push price down to get these big positions liquidated, then make money on the trade when the forced liquidation goes through,” warned Jack Niewold, a popular crypto Twitter user and founder of the Crypto Pragmatist newsletter.

A similar take was also expressed by others, with one popular community member and author, Nik Patel, suggesting that the company will eventually “accept the inevitable” and close the loan.

ETH liquidity crunch

Meanwhile, Celsius is currently also under pressure from a liquidity crunch on its ETH position, where a large amount is locked up for staking on the Ethereum Beacon chain (Ethereum 2.0).

ETH staked on Ethereum’s Beacon chain are inaccessible for now, and the company has therefore used the staking provider Lido which gives stETH tokens in return for staked ETH. The stETH tokens can then be traded on the secondary market, freeing up cash for Celsius customers who request withdrawals.

The problem, however, is that the rate between stETH and ETH in recent weeks has begun to slide. And since the actual ETH that backs each stETH is locked away and inaccessible, Lido users like Celsius have no choice other than to sell stETH at their current market price when they need to raise cash.

And while the stETH price is doing its own thing in the secondary market, Celsius’ liabilities to ETH depositors is – naturally – denominated in ETH.

The problem facing Celsius was highlighted by several leading voices in the crypto community:

At the time of writing (09:30 UTC), ETH is trading at USD 1,188, versus USD 1,118 for Lido’s stETH, a discount on Lido’s token of nearly 6%. In other words, Celsius’ strategy of paying back users who have staked ETH falls apart if a 1:1 price relationship between ETH and stETH cannot be maintained.

According to crypto researcher Nansen, Celsius holds stETH 409,215 – worth around USD 457.5m – in one of its wallets. That is significantly less than the USD 486.1m that the same amount of ETH is worth.

Celsius issues warning on ‘CEL2.0 token’

Lastly, Celsius on Monday warned about a creation of a CEL2.0 token, saying that the company has nothing to do with it. “Our Security team is on alert, as you all should be. Please be vigilant,” the team tweeted.

The warning was largely met with confusion by Twitter users, who wondered why the company is not focused on helping customers get their money back and answering customer service emails.

“Not exactly the tweet we’ve been waiting for from you today…,” one user replied.

At the time of writing, no token called CEL2.0 could be found by searching on Etherscan and the two major coin tracking sites CoinGecko and CoinMarketCap.

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