The Celsius Liquidity Crisis And Its Lido Connection: What We Know

DeFi protocol Celsius' reputation might be on the verge of collapse as the platform's liquidity crisis seems to be far from over. An integral part of the protocol relies heavily on the parity between Staked ETH (stETH) and Ethereum (ETH). This parity was lost following the collapse of the Terra ecosystem.

A majority of Celsius users' funds are staked in Lido Finance, a DeFi protocol that allows owners of the Ether cryptocurrency to earn passive income without having to sell their tokens.

In return, Celsius receives stETH -- Ethereum staked on the beacon chain, which will be merged with the mainnet by August, as per Ethereum co-founder Vitalik Buterin. Normally, in order to stake ETH, an investor would need 32 ETH, but with Lido, any amount of Ether can be staked and rewards can be received in the form of stETH.

With time, Celsius became one of the biggest holders of stETH and a major client of Lido Finance. As of 12:51 am ET, 1 stETH amounts to 0.9523 ETH, according to data from CoinMarketCap (CMC). As per wallet data from blockchain research firm Nansen Research, Celsius currently has $464 million worth stETH tokens.

Celsius made a profit by staking its customers' funds in Lido or Terra, and keeping a part of the rewards they got in return. After the DeFi protocol stopped withdrawals, a widespread fear in the market was seen and following the announcement, the CEL token dropped 40 percent.

As more and more people decided to withdraw their ETH, Celsius was unable to meet the demands. This was on top of the firm's already low liquidity. The issue here was that following the crash of Terra, the stETH was not in parity with ETH, and that further expanded the liquidity crisis.

"They have also sent thousands of stETH to FTX in recent days, presumably to sell,” Andrew Thurman, content lead at Nansen, told Decrypt. "Though we can't verify that because it's off-chain. They have likely been especially hard-hit by stETH losing its peg to ETH," he added.

Now by selling stETH for ETH and selling ETH, the prices of the world's second-biggest cryptocurrency will drop further and as a result, Celsius' liquidity will only be aggravated.

"Celsius has likely failed to isolate risk: they might have taken USDC and held it in UST (Luna's stablecoin), or taken ETH and held it in stETH. So, when ALL of crypto drops and ALL users want their funds back, ALL Celsius users feel the pinch. It's all the same pool of money," said Jack Niewold, founder of crypto newsletter Crypto Pragmatist, via a Twitter thread.

Additionally, Celsius Network has 17,919 WBTC leveraged in Maker protocol that faces risks of liquidation at $16800.

Meanwhile, Dylan LeClair, the founder of 21stParadigm, a firm committed to helping individuals and businesses understand Bitcoin, said that the situation will likely end "with Celsius liquidated."