On cryptocurrency marketplaces, crypto lending has become one of the most prevalent activities. Several crypto lenders, such as Voyager and Celsius, have emerged throughout the years to accommodate the growing demand for crypto loans.
Centralised crypto lending platforms (CeFi) such as BlockFi, Celsius, and Nexo provide customers with high-yielding products. When clients put cryptocurrency into these products, they get high-interest rewards. Nevertheless, due to recent volatility in the crypto markets and issues with their business models, centralised platforms are facing challenges that emphasise the riskiness of depositing funds in crypto lending applications.
Celsius is the most recent company to begin filing for bankruptcy protection. After a month of instability marked by constant speculation and rumours, the troubled exchange has finally turned Chapter 11 rumours into reality, triggering debate in a crypto market that was already struggling.
To secure your cash, you will understand what hazards you should consider before using centralised crypto lending services.
The centralised crypto lending platform Celsius. Image: Blockchain
Celsius bankruptcy highlights risks of CeFi lenders
In light of harsh market circumstances and the necessity to balance liquidity, Celsius halted all client withdrawals, swaps, and account transfers on June 12, 2022, claiming widespread market volatility impacting crypto markets. Currently, the company is seeking bankruptcy protection.
Within twenty-four hours, the value of Celsius’ native token, CEL, plummeted by nearly 70%. This occurred during a massive crypto selloff that saw the overall market capitalisation fall below USD 1 trillion. (Since then, however, CEL has recouped all of its losses and is trading much higher than before the fall.)
Celsius is supposedly one of the biggest crypto lenders, with close to two million members worldwide. After obtaining USD 750 million in a fundraising round in November 2021, the crypto lender was valued at over USD 3 billion by November of that year.
According to reports, Celsius leverages client deposits to lend short-term financial assets to institutional investors and traders to create profits via arbitrage, shorting stocks, certain digital assets, and market-making. Additionally, Celsius utilises several DeFi protocols to secure client funds in liquidity pools and earn yield.
Customers have made returns of up to 7% on stablecoins like USDC and USDT, 7.25% on MATIC, 6% on ETH, and 6.25% on BTC. However, the current volatility in the crypto market has diminished the possible profits an investor might make on Celsius, calling its business model into doubt.
The depeg of Lido’s staked ETH (sETH), which was tied to Ethereum’s ETH, contributed to Celsius’s short-term difficulties. Celsius has locked money in stETH, and a stETH depeg implies that stETH cannot be readily traded on the open market to get the liquidity required to fulfil ETH redemptions on the Celsius platform.
Previously, some authorities have referred to crypto loan products such as Celsius as unregulated securities.
Unfortunately, Celsius is not the only crypto lender in danger, as Babel Finance has also frozen withdrawals, sparking concerns that further lenders are about to declare bankruptcy.
Risks To Consider Before Using A Crypto Lender
The Celsius scandal has highlighted some drawbacks of centralised cryptocurrency lending systems. Initially, CeFi loans are custodial, with a centralised company holding all collateral. This implies that you can only access the collateralised asset with the lender’s permission and the secret keys.
DeFi lending methods provide crypto loans devoid of centralised counterparties and governed by smart contracts for collateralisation, loan distribution, and interest payments. However, DeFi is recognised for being more centralised than its name suggests.
The following are some of the most significant hazards you must be aware of before lending your crypto assets.
Your funds may be lost in case of bankruptcy.
In conventional finance, bank deposits are insured, ensuring that a part of your money will be returned in the event of bank failure. This indicates that the danger of losing your money is minimal, and the lender is guaranteed reimbursement if the institution declares bankruptcy.
In bankruptcy, you risk losing a percentage of your crypto assets since only a tiny fraction of the overall assets are protected. In addition, since you do not have custody of your collateral, the platform provider may store the crypto assets of lenders and borrowers.
Accounts can be locked at any time.
Accounts on CeFi lending platforms are sometimes frozen for various reasons, including security breaches, anti-money laundering concerns, and platform liquidity. If your account is frozen, you cannot access your crypto assets or engage in transactions.
Account unlocking may be a lengthy and tiresome procedure that the platform provider must authorise. Compare this to non-custodial DeFi lending services, where anybody may lend and borrow assets without fear of arbitrary shutdowns.
Transaction fees are not always transparent.
Due to several counterparties in CeFi lending systems, transaction and service fees are layered. Depending on the CeFi platform you use, certain costs may be concealed or combined with transaction fees. Consequently, CeFi lending systems are often more costly than DeFi lending methods.
Customers who lend their crypto assets to CeFi lending platforms do not understand the counterparty transactions well.
For example, Celsius users have no interaction with other asset managers or DeFi protocols dealing with Celsius. This lack of transparency threatens clients with little or no control over investment methods and outcomes.
APY changes at any time without notice.
Lastly, the Annual Percentage Yield (APY) of the CeFi Lending Platform is subject to change. The platform provider can modify the APY depending on crypto market circumstances or the regulatory environment with little user notification.
This has occurred several times and demonstrates how dangerous it may be to entrust a centralised institution with your digital assets.
How to Choose the Best Crypto Lending Platform?
If you want to select the safest crypto lending platform, here are some quick tips you can take. In general, you should choose a platform that:
- Has high-level security measures which were audited/certified by independent agencies.
- Has been in existence for some years and has never experienced hacks before.
- Complies with the Australian regulations and provides users with detailed, transparent information and policy.
- Has a history of favourable customer evaluations. You can get this information by reading reviews and ratings of customers on such sites as TrustPilot and Reddit.
- Customers’ funds are rehypothecated using overcollateralized loans
In Australia, CoinSpot is among the top exchanges that meet all these requirements. The platform opened its virtual door in 2013 and has established its reputation as the most secure and trusted platform. It has Australia’s highest security certifications and is Blockchain Australia certified. This AUSTRAC-registered is the only one in Australia to have achieved ISO 27001 accreditation and the first in Australia to complete an External Statutory Financial Audit under Australian Auditing Standards.
You can read our detailed CoinSpot review to learn more about the great features of this exchange.