Nothing is ever priced in and the past week has validated that thesis yet again. Fears about growing inflation were rekindled as the US Labor Department announced that the Consumer Price Index (CPI) reached its highest level in May (8.6%). This outstripped several economists predictions, who forecasted a slightly more conservative value at 8.3%, according to a Wall Street Journal survey. While expectations from reality do differ by a marginal amount, May 2022 marking the highest reading since December 1981 does represent a wake-up call, reaffirming fears of an imminent global recession.
Markets Plunge on Surging Inflation
There was some hopium prior to the CPI data release that improving supply chains and rising borrowing costs could lead to deflation, leading to less drastic actions (i.e. lower bps raises) by the Fed. But any hope of that has now been quashed as many anticipate a prolonged extension of 50 BPS hikes over the next few months, possibly even a 75 bps hike.
"Together with another strong rise in core prices raises the odds that the Fed will need to extend its series of 50bp rate hikes into the fall, and even opens the door to a larger 75bp move at next week’s FOMC meeting." - Capital Economics
— Pedro da Costa (@pdacosta) June 10, 2022
With such dire consequences abound, markets proceeded to crash accordingly.
Source: FactSet (as reported by the Wall Street Journal)
Strangely enough, crypto was exhibiting some decoupling over the weekend as its dumpage was not as severe as expected compared to TradFi. However, that proved short-lived on Monday as Asian markets opened to dump it to oblivion, reaching a local bottom of $25.5k (for now). BTC is now officially in its 11th red consecutive week.
Source: CoinGecko
ETH fared markedly worse and all TA has gone out of the window as ‘macro fundamentals’ kicked in. The dream of flippening continues to die as ETH gets treated like a slightly better alt, dropping as low as $1.3k. In times of bear, it is clear that BTC is preferred over ETH, despite the Merge narrative and such. The ETH/BTC ratio continues to drop, briefly reaching 0.05.
Price of ETH and ETH/BTC Ratio
Source: CoinGecko
On top of that, throw in a bunch of FUD and some irresponsible degen stETH farming, and you have the perfect storm for a liquidation cascade (discussed more below). Some action can already be seen onchain as a MakerDAO vault sells off 65k ETH to pay off debt and decrease their risk.
A @MakerDAO Vault just sold 65k ETH to pay off debt and decrease their risk... seems this netted 150k in fees to @oasisdotapp 🤑
— mariano.eth ✨ᕙ༼ຈل͜ຈ༽ᕗ✨ | 🦇🔊 (@nanexcool) June 13, 2022
average price... 1155 USD per ETH 🥲https://t.co/tceIla0xuF pic.twitter.com/9hIaamVWI2
Celsius Pauses Withdrawals as Market Crumbles
.@CelsiusNetwork is pausing all withdrawals, Swap, and transfers between accounts. Acting in the interest of our community is our top priority. Our operations continue and we will continue to share information with the community. More here: https://t.co/CvjORUICs2
— Celsius (@CelsiusNetwork) June 13, 2022
US-based CeDeFi company Celsius Network today announced that it was pausing all withdrawals, Swap and transfers between accounts “due to extreme market conditions”. Celsius began operations in June 2018 after an ICO for its CEL tokens. It bills itself as a “democratized interest income and lending platform” that offers “fair yield, zero fees, and lightning quick transactions”. Users could essentially transfer their crypto to Celsius and start earning attractive yield with no lock-in, and no fees for withdrawals.
As of May 17th, Celsius reported that it has $11.8B+ in assets, with 2M+ community members. However, an on-chain sleuth has pegged their position as-of June 11th at $3.8B in assets and $1.18B in liabilities, following significant decrease in crypto prices and reports of significant withdrawals from Celsius.
Dirty Bubble Audit of #CelsiusNetwork holdings update: $3.8 billion in assets across multiple DeFi protocols and wallets; $1.18 billion in debt from Aave, Compound, and Maker.
— Dirty Bubble Media: 🌡⏰💣 (@MikeBurgersburg) June 4, 2022
Many previously identified DeFi positions drained to fund main DeFi wallet.https://t.co/U5bmppFbDy
IMPORTANT NOTE: These numbers have not been verified or confirmed by Celsius. It is possible that Celsius holds other wallets that have not been discovered.
How Did It Get to This?
In short, Celsius seem to have ran out of liquidity to honor the large spike in withdrawals from its service, at least without severely harming the company’s or remaining users’ positions. Central to this seems to have been Celsius’ ETH assets and yield strategy, that had a strong liquid staking component with Lido. On-chain data shows that Celsius was by far the largest holder of Lido’s stETH with a position worth ~$800M at that time.
Source: Nansen.ai, via Vance Spencer (@pythianism) Twitter
While stETH is technically redeemable 1:1 for ETH, that only happens post-Merge once the protocol unlocks the Eth2 staking pools. Also, stETH is a valuable source of ETH yield for Celsius, paying ~4% APR. Hence to service withdrawals from its platform, Celsius has been forced to stake its stETH to borrow stablecoins on protocols such as Aave and other DeFi lending protocols (debt position as mentioned in tweet above). With growing withdrawal pressures, on-chain data suggest that Celsius seem to have amassed a significant debt position, which it needs to maintain in order to not have its stETH (and other collateral e.g. ETH, WBTC, etc) liquidated.
All this came to a head over the weekend, as a sharp plunge in the prices of ETH (and correspondingly stETH) forced Celsius into a difficult situation where it had to either top up its collateral, or risk being liquidated. The stETH-ETH Curve Pool, which had been imbalanced since the Terra / UST collapse, likely added to fears that the price of stETH could fall even further. It seems a deal was reached between Celsius and Alameda to rescue its position by selling stETH for stables to start paying down its debt positions.
The rumors about Celsius’ ability to support withdrawals a month from now are swirling around crypto OTC desks
— Frank Chaparro (@fintechfrank) June 12, 2022
The silence here is deafening pic.twitter.com/lxycbDFh83
Rumors started circulating that Celsius only has weeks left in runway to service withdrawals, likely leading to more panic withdrawals and compounding Celsius’ problems, which led to the current freeze in withdrawals that we see now.
And Down We Go
The most visible impact of this has been on the stETH-ETH curve pool, where the relative price of stETH:ETH has continued to deviate from 1:1.
This situation is frightening for other stETH holders, as many also had leveraged stETH to borrow ETH, who may also be in the same boat as Celsius of having to maintain their collateral. However, most of these positions seem to be at the 0.85~ ratio mark.
Luckily things don't really get nasty there until about 0.85~ as the ratio. pic.twitter.com/toA9vYkwyv
— Adam Cochran (adamscochran.eth) (@adamscochran) June 13, 2022
If the stETH-ETH ratio falls to that point, it would likely lead to a scary scenario of cascade liquidations across DeFi protocols. While the Lido team had stepped in earlier during the Terra / UST crisis to provide an additional liquidity pool for stETH-ETH, it remains to be seen if this will be the case this round, as the 1:1 ratio worsens. Lido does not have unlimited funds to support the 1:1 ratio, and may allow the pair to find its level during these volatile times. Without support from Lido, it will be up to longer-term ETH bulls to step in to buy stETH on the cheap.
The price of CEL predictably plunged through out this saga, losing >60% of its value in the last 12 hours or so.
Freezing withdrawals is a prudent self-preserving move by Celsius for now to prevent a complete bank run. Still, it remains to be seen if it can recover without significantly paring down returns, implementing certain locks / limited withdrawals, or praying for a strong market recovery. It also remains to be seen whether there will be a further bank run once withdrawals are re-enabled. Two other things to watch out for - 1. Price action of other assets being offered on Celsius, and 2. Other similar CeDeFi platforms, such as BlockFi and Nexo and whether they’re about to go the same way.
Ethereum Delays Difficulty Bomb
At the latest June 10th Ethereum All Core Dev’s Call, the devs have collectively agreed to a proposal (EIP-5133) to delay the difficulty bomb by ~500,000 blocks, or roughly 2.5 months. This is intended to push back the difficulty bomb to activate only in mid-August 2022 (based on current block times). There’s no point sugarcoating the obvious - this means that the timeline for the Merge is (at least slightly) delayed to end-August earliest.
The Ethereum difficulty bomb is meant to encourage Ethereum nodes and miners to migrate to the Proof-of-Stake fork once it has been deployed. This is done by making it exponentially harder over time to mine new blocks on the old Proof-of-Work Ethereum chain. The bomb had actually started activating earlier this month (predicting exact activation time was always more of an art), causing Ethereum’s block difficulty to spike and block times to lengthen.
Source: Etherscan.io
This actually has very tangible impacts on users of the Ethereum chain, which would see transactions taking longer to be confirmed, and for transaction fees to rise as users compete for their transactions to be included in blocks. If left unchecked, block times would ramp up pretty drastically when seen from earlier occurrences.
Source: Etherscan.io
A delay relieves some of the pressure on the Ethereum Core Devs to implement the Merge before they’re comfortable (Ropsten Merge went pretty well, with Sepolia and Goerli testnet Merge still to come). However the devs are still fully committed to get the Merge done. We’ll have more definitive details on the delay by the end of next week.
What else are we paying attention to
This article was produced in collaboration with Benjamin Hor. You can follow him on Twitter here.
Zhong is CoinGecko's Head of Research. Prior to CoinGecko, he led the Innovation Department at the Securities Commission Malaysia and was a key driver in the formation of policies regarding cryptocurrencies, the classification of cryptocurrency as securities, and the implementation of crypto-related regulations. Follow the author on Twitter @zhongychan
Or check it out in the app stores
