Sadly, it has been a turbulent ride ever since the 2021 bear market started.
And one of the unlucky outcomes has been the failure of major crypto lending platforms with billions of dollars in assets under management.
A minute of silence for investors.
In this post, I am going to be sharing with you the top crypto lending platforms that got severely hit by this bear market and the way forward.
It is going to be a great read. So, read to the end of this post.
This is what I will cover:
- What Is Crypto Lending And How Does It Work?
- The Top Lending Platforms On The Brink Of Collapse
- The Reasons Behind The Debacle
- Should You Pull Your Money Off CeFi Lending Platforms?
Click on any item above to read its details immediately.
Let’s get started!
1. What Is Crypto Lending And How Does It Work?
“Crypto lending” is the act of lending out cryptocurrencies for interest.
It typically revolves around the lender, the borrower, and a lending platform.
Lenders offer their coins to borrowers to earn passive income from their interest rate.
The interest rate that lenders earn is determined by a specified APY, which can be as high as 36% on Nexo.
Also, the interest is paid in crypto and can be redeemed at any time.
Conversely, borrowers offer their coins as collateral and agree to pay a specific interest rate to obtain a loan.
Crypto loans are often overcollateralized – which means that the asset used as collateral must greatly exceed the loan amount.
This protects lenders’ funds from possible losses since cryptos are highly volatile.
Again, how much a borrower can borrow is determined by what is called the Loan to (LTV) value ratio.
LTV indicates the maximum amount a borrower can borrow with the asset used as collateral.
For example, let’s assume BTC has an LTV ratio of 30%.
And you want to borrow USDT with $10,000 worth of BTC as collateral.
It means you can only obtain a loan of $3000 worth of USDT, i.e., 30% of $10,000.
Something to bear in mind: the amount of your loan must always match your LTV ratio.
Your loan will be liquidated if the value of your collateral falls below a certain threshold.
On the contrary, if it increases above the LTV ratio, you can either borrow more funds or withdraw part of your collateral. Amazing!
Lending platforms can either be DeFi protocols or CeFi platforms that facilitate crypto lending.
- DeFi crypto lending protocols allow users to lend and borrow funds in a completely decentralized manner. They run on smart contracts, and users are in full custody of their funds, e.g., Aave and Compound.
- CeFi (Centralized Finance) lending platforms use a centralized model and operate typically like a bank. These platforms hold complete custody of users’ funds. In addition, users must complete KYC to use them.
CeFi lending platforms have fared well over the years, with a platform like Celsius attracting millions of users and billions of dollars in deposits.
Thankfully, the same can be said about DeFi lending protocols.
But recently (June 2022), most CeFi lending platforms have taken the brunt of the 2021 bear market.
Follow me to the next section to learn more!
2. The Top Lending Platforms On The Brink Of Collapse
In this section, I explored the top CeFi lending platforms affected by the bear market.
Celsius is one of the largest CeFi lending platforms.
Sadly, it appears to be insolvent at the time of writing, having officially ceased withdrawals and other backstories.
But then, what exactly is Celsius?
Celsius is a company that enables users to lend, borrow, buy and swap their crypto.
Since its founding in 2017, it has raised $864.3 million through 8 rounds of fundraising.
Alex Mashinsky is the co-founder and CEO of Celsius. “Banks are not your friends” is his usual slogan.
He presents Celsius as a fine alternative for banks, where users earn good returns on their deposits unlike the former.
Speaking of which, the platform pays up to 18% APY to lenders. 💁♀️C’mon, you can’t find this juicy reward anywhere around the bank.
With this aggressive marketing, Celsius swiftly reached over a million users and managed up to $25 billion in assets.
CEL is the native token of Celsius, and users earn an extra yield on their deposit if they opt to be rewarded with the CEL token.
It had its first bull run in 2021, reaching over $8 in price before dipping with the bear market like other cryptocurrencies.
Well, things appeared to be going normal for Celsius until it got trapped recently.
On June 12, 2022, it officially suspended withdrawals, swaps, and transfers due to extreme market conditions.
And following that, the CEL token lost over 70% of its value in just 1 hour.
We will come back to what exactly happened in a later section.
Finblox is a relatively new crypto firm founded in 2020.
It allows users to lend their cryptocurrency for passive income as well as buy cryptocurrency.
The company holds up to $10 billion in assets under management and is valued at $3.9 million.
Furthermore, it promises to pay as high as 90% APY on AXS, and users can withdraw up to $50k daily.
Well, Finblox released a newsletter on June 16, announcing that it is making some changes around withdrawals.
As a result, old investors can only withdraw a maximum of $500 per day and $1,500 per day.
Additionally, it seems to have clamped down on other activities at the moment.
(iii) Babel Finance
Babel Finance is a China-based crypto lending platform serving around 500 users, including big institutions.
The company was founded in August 2018 and has raised around $120 million through funding rounds.
Aside from crypto lending, it also focuses on derivatives, asset management, brokerage, mining, etcetera.
But then, on June 17, 2022, it announced that it was temporarily halting withdrawals due to liquidity pressure.
However, it seems the team is working under the hood to put things right.
This is because it later issued a notice indicating an agreement with counterparts for the repayment of debts it owed.
Voyager is a cryptocurrency firm based in the United States.
Since its inception in 2017, it has raised a total of $360.1 million through fundraising.
It enables users to trade 100 cryptocurrencies and earn monthly interest on their coins, offering up to 9% APY on USDC. Pretty cool.
In addition, Voyager is a publicly-traded company that is listed on different stock exchanges under the ticker VYGVF.
It also has its cryptocurrency, VGX, which reached its all-time high of $12.54 in 2018.
However, the news now is that Voyager has fallen into big trouble.
And the reason is that it granted a $666 million loan to 3AC, a company that is now mired in a debt fiasco after a massive collapse. (More about this later).
To salvage the company, the team disclosed on June 22, 2022, that they had borrowed $500 million in funds from Alameda Venture.
However, that appeared to be the start of a bad patch, as VYGVF plummeted by over 60% on June 23.
Also, withdrawal on Voyager was reduced to a minimum of $10,000 per day and 20 withdrawals per day.
BlockFi is another big player in the CeFi lending space.
It allows users to trade crypto, borrow and earn yields on their deposits. Yield can be as high as 15% on DOT.
Now, BlockFi was established in 2017 and, as of 2021, had succeeded in raising $3 billion in total through various fundraising rounds.
Recently (2022), there have been rumors flying around concerning Blockfi’s insolvency.
To start with, BlockFi’s valuation fell from $3 billion to $1 billion, raising eyebrows.
Again, It had faced serious scrutiny from the SEC, which ended with a fine of $100 million for compliance.
Thirdly, BlockFi, like other crypto firms such as Coinbase, has laid off 20% of its staff, citing extreme market conditions.
To top it off, it announced on June 21, 2022, that it received a $250 million revolving credit from FTX to bolster its platform.
Again, this raised eyebrows. I mean, if the platform is actually in good shape, why do they need these funds? You can find out more details here.
Although these recent events are casting FUD on BlockFi, the company is still operating firmly at the time of writing (June 2020).
Continue to the next section!
3. The Reasons Behind The Debacle
There are no entirely obvious reasons, but we can cite these two:
– The FUD around stETH
stETH is a token issued on Lido finance for staking ETH.
Ethereum’s switch to Proof-of-Stake and the ability of holders to stake their ETH to maintain the network is not new.
stETH was supposed to be pegged to the price of ETH (just like USDT is pegged to $1) and also earn staking rewards. Holders can also trade it if they like.
Unfortunately, stETH lost its peg as a result of a massive sell-off caused by FUD.
Celsius holds 409,260 ETH tokens, nearly $470 million of user funds in stETH.
This caused panic, aka FUD, and as a result, users raced to withdraw their ETH at a rate as high as 50,000 ETH per week.
Sadly, this led Celsius to sell off its stETH holdings at a loss to satisfy its users’ demand until it started scrambling for liquidity.
Now recall, that as of July 2021, Celsius was reported to have lost most of its ETH as a result of its investment in StakeHound. Another thing to keep in mind!
StakeHound is a liquidity staking protocol. It lost access to keys to users’ 38,178 ETH held in its wallet.
So, this might have also contributed to Celsius’s insolvency at the moment.
Three Arrows Capital (3AC) is one of the biggest crypto hedge funds based in Singapore.
But as of this writing, it is bankrupt, most likely because of its exposure to LUNA, GBTC, stETH, and massive liquidations from different crypto lenders.
Unfortunately, Finblox and Voyager were gravely affected by the 3AC calamities.
These are the reasons I was able to dig up.
But then, I think the “Bear Season” might have also contributed to the lapses.
Continue to the next section!
4. Should You Pull Your Money Off CeFi Lending Platforms?
You see, CeFi platforms, regardless of the APY they offer, are never a good option for lending your assets.
This is because they contradict the main purpose of cryptocurrency, which is self-custody.
When you lend your crypto to these platforms they hold full custody of it.
Otherwise, there wouldn’t have been issues around restricting withdrawals. Recall this saying, “Not your keys, not your bitcoins.”
Now, you may argue that there is an insurance fund in place. Well, the thing is that it may not be enough to recompensate half of the users.
Imagine using $750 million in insurance funds to cover billions of losses.
Secondly, we do not know what these platforms do under the hood.
While it seems obvious that Celsius keeps investing in yield farming protocols to meet up with its high yield promises, what about the rest?
About two years ago, a report surfaced that Babel Finance was recklessly speculating with customer funds. Hmm!
But, from where I stand, I do believe that all hope is not lost.
It is possible that these firms will recover. I am also anticipating that another big firm may acquire them if situations get worse.
So, if you are one of the investors who can’t gain access to their funds, be hopeful at least.
And just so you know, Nexo, one of the CeFi lending platforms, is still surviving strong despite this fiasco from its counterparts.
Please scroll down and let’s conclude.
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This is the end of this article. I hope you enjoyed it.
Now it’s time to get your thoughts.
What do you think about depositing your cryptos into CeFi for high yields?
Do you think they are risky?
Do you think Celsius, Finblox, and Babel Finance have crashed, or do you think they will eventually recover?
Please leave your comments in the box provided.
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