There was a collective shaking of heads…

The same old crypto naysayers leapt onto the story: “DeFi is dead! Crypto’s a scam!”

And the headline figures looked bleak…

1.7 million users and $2 billion in funds at risk.

Today I want to talk about the great Celsius debacle.

Just one of a number of insanely high risk, high profile projects which imploded in the 2022 bear market.

It’s a tale of greed, delusion and misdirection but one with a bright ending.

We’ll look at exactly what happened and why this was one of the best things to happen in the crypto space.

(Except, of course, for those poor souls who stand to lose funds).

At the height of the madness Celsius were offering 10X – 15X more interest than a bank

Celsius is a US cryptocurrency lending company that formed in 2017.

In 2021 they grew their assets under management from $1 billion to a whopping $20 billion in less than a year…

… and then in July 2022 they filed for bankruptcy.

So what went wrong?

Let’s jump right in at their manic growth phase.

Celsius offered ordinary investors enormous interest rates on their holdings. As much as 18% on certain crypto stablecoins.

(Remember the major stablecoins are pegged to the US dollar so 1 USDT stable coin = $1, for example).

Contrast that with the 1 – 2% a high street bank might give you on your savings account and the appeal is obvious…

Especially as Celsius were posturing as a DeFi champions. Modern day Robin Hoods in digital pantaloons.

This is a crucial point and one which confused vast swathes of the media.

To the casual user it might have seemed like depositing money with Celsius meant you were investing in and getting all the benefits of DeFi…

… a fairer, more open source, secure, rules based system. No dastardly banks dipping in their mucky fingers into the mix.

And a fantastically straightforward interface to boot (much simpler than the true DeFi protocols platforms of the time).

Under this guise it’s no surprise they quickly hit exponential growth.

At their peak they were taking money from over 1.7 million users.

But this wasn’t real DeFi.

You weren’t investing directly in DeFi… you were investing in a centralised finance company…

One the was pooling yours and other people’s money and using it to make high risk investments, all the while borrowing from traditional finance and riding by the seat of their pants on the assumption that things would keep going up.

The real scandal is that centralised finance failed… yet again

They played on the hype.

People saw the word “crypto” and “DeFi”… and the enormous % returns quoted on the Celsius website and jumped in headfirst.

And guess what? Everything worked for a time.

In the bull market when everything was going up, the value of Celsius’s holdings kept going up as well.

They could keep making payment on their loans… keep borrowing more… keep taking on new customers. Which in turn meant their users got their sky high interest payments, withdrawal requests were honoured and the merry-go-round kept going round and round.

Until it didn’t…

You see true DeFi investing – where you personally invest directly into reputable DeFi protocols (no centralised entity like Celsius acting as middleman) – is transparent, clear and rules based.

These principles are at the very core of any genuine DeFi project.

One of the more unsavoury elements of this debacle was that Celsius were touting themselves to the casual observer as great champions of crypto and DeFi.

As if they were shunning the traditional banking system and giving us ordinary folk incredible rates from the land of milk and honey.

But the reality was this…

They were just another a centralised finance company (CeFi) trying to get rich quick on the crest of the crypto wave.

While they were interacting with DeFi as part of their strategy – in the sense they were borrowing from DeFi protocols and investing in different crypto assets – they were essentially borrowing from Peter to pay Paul.

They were over leveraging themselves with other people’s money: their customers’ money, money borrowed from DeFi and money from traditional finance to keep the wheels in motion.

Not transparent or rules based.

As the FT reports…

“Celsius relied on a stream of deposits from retail investors that it lent to large crypto companies and used for risky bets on untested ventures.

It promised exceptionally high interest rates while also claiming the risks were small. In 2021, as demand for loans from institutional investors waned, Celsius began taking greater risks to generate yield. Today people with knowledge of the company say it has a sizeable hole in its balance sheet — as big as $2bn, according to one person.”

The Celsius debacle reveals 3 things with great clarity

1. The mainstream media still doesn’t have a clue about crypto (for the most part)

Let’s be generous. They have to cover thousands of different stories every day.

They have limited resources and grounding in what, to many, can seem like an extremely complicated field to begin with. One which is muddied by the get rich quick investors who sully any new market.

They know that screaming crypto is bad, wizardy nonsense will always get eyes on a page so it’s often their default fallback.

But for media outlets to suggest that Celsius was part of “DeFi” is like saying Amazon is part of the Women’s Institute on the basis that they both sell jam. It’s marketing fluff.

Celsius is just another centralised financial institution. And like so many others before them they got greedy.

They took advantage of all the tricks and loopholes of the old financial game to raise funds they couldn’t afford to pay back.

They’re part of the broken system true DeFi offers us protection against.

People may lose money in the Celsius fallout and that’s a terrible thing. But for the wider ecosystem and for DeFi and crypto there is one piece of very good news.

2. DeFi worked great. It was centralised finance (CeFi) that failed… again

It’s worth explaining the mechanics of this.

In order to borrow from the various DeFi protocols (which is what Celsius were doing) they first had to put up collateral.

Those are the rules of engagement.

And the DeFi protocols who were lending to them won’t give them back any of their collateral until they pay back what they’ve borrowed.

So when the market turned against them and Celsius realised they were massively overexposed excuses were irrelevant.

Who you are and whether or not you’re having a bad day on the superyacht doesn’t matter to the protocol.

The ONLY way they could get back any of their collateral from the DeFi protocols was to pay off their debts.

All that matters is the deal you made and signed.

You want your collateral back? You pay your debt.

It keeps the players in the DeFi protocols honest and focused.

No excuses, no bureaucracy, no way to cheat the system.

So that’s what Celsius did.

They paid back their debts to the DeFi protocols so they could release their collateral because there was no other way.

Moreover, they prioritised these debts – over all others – and paid them back in full.

Celsius got into this mess because of the old, broken system. An old system allowed them to over collateralise, to keep borrowing more and more from traditional finance.

A world where handshakes, expensive dinners and slick presentations in the right quarters might convince someone to lend you a few more million in spite of the insane levels of risk…

But this fuzzy backslapping can backfire in more ways than one.

Because when it comes to paying back debts to your lenders there’s less incentive to play fair.

When your collateral is your word, your reputation or your projected figures all they can do is chase you with lawyers.

That’s the only way they can compel you to pay what you owe. And that gives them the option to default the loan and buy more time. Because as we know the legal process can be pain stakingly slow, expensive, bureaucratic and fraught with human intervention.

Which is why DeFi emerged from this debacle looking very robust.

3. DeFi kept Celsius to their word (because they didn’t need it)

If you want your DeFi collateral back you’ve got to pay back your debt. The code doesn’t care if you’ve overstretched yourself.

As Dan Morehead from Pantera Capital puts it:

Unlike traditional finance there are no get outs. No schmoozing. No old boys’ club.

If you sign a digital contract saying you are going to pay X by date X, you have pay X or your funds won’t be released. They can bitch and whine as much as they want to but it won’t do any good.

You have to stick to the rules because there’s no other option.

(Note: With some DeFi protocols there is the possibility (theoretically) that you could talk to the governors of these protocols and ask them to make an exception. It’s highly improbable they would ever agree, and this option doesn’t even exist in many protocol set ups, but it still could in theory. Not every protocol is the same).

The Key Takeaway

True DeFi works beautifully.

It keeps people honest and focused.

No one entity, no matter how slick or powerful, can break the rules.

And remember this is just ONE use case for crypto.

In a space so relentlessly smeared with confusing, negative and misleading media reporting it was fantastic to see how DeFi emerged from this crisis. And given that DeFi is still very much in its infancy this is incredible progress indeed.

Each iteration will just get better and better and it’s thrilling to see.