The State Of Centralised Crypto Lending Platforms (8 Analysed)
Amidst the crypto bear market that we’re currently experiencing, numerous crypto companies have started to pause withdrawals from their platform.
This has become rather common for centralised lending platforms, where you deposit your crypto and they will provide you with interest.
Here’s a deep dive into what actually happens:
Why are withdrawals being paused?
Centralised lending platforms operate by attracting you to deposit your funds with them, usually by offering attractive interest rates.
With these funds, they will aim to generate yield through various methods, including:
- Lending out to institutions
- Depositing into DeFi protocols
- Using your crypto for staking and mining
In theory, the amount of interest that you receive will be less than the yield that these platforms generate, so that the platform will earn a profit.
However, we as investors are usually attracted by high yields and can be rather disloyal to any platform.
There is a chance that we will flock to the platform that offers the highest yields.
The fine balancing act
To generate a higher yield, these platforms may be tempted to lend out a higher proportion of the funds deposited that were deposited by their users.
This is because any funds that remain on the platform will not be generating any yield!
Another issue that such platforms need to address is the ability to process customers’ withdrawals. They will need to have enough funds on their platform to ensure that whoever who wishes to withdraw their funds will be able to do so.
As such, there needs to be a balance between:
- The number of funds loaned out to generate yield
- The number of funds in the platform to process withdrawals
If there are more withdrawals than the number of funds the platform currently has, they may need to redeem the funds that they have used to generate the yield.
This may result in them incurring some penalties, resulting in profits lost!
On the other hand, these platforms need to have a high enough yield to entice us to keep their funds with them!
There is this thin balancing act, and most platforms may have left only a small proportion of funds in their platform.
Insolvency is a considerable risk
A bull market usually spells good news for crypto, and users may still leave their funds with these centralised lending platforms.
However, we are now in the midst of a bear market. Coupled with the rise in interest rates by the US Federal Reserve, investors may flock to assets that are deemed safer than crypto.
Furthermore, the recent Terra crash has led to many firms losing a significant portion of their funds.
With so much fear, uncertainty and doubt (FUD) in the crypto market, many investors may have started withdrawing their funds.
As a result, these centralised platforms may not have enough funds on hand to process these withdrawals, eventually causing them to pause withdrawals as they aim to recover enough funds.
Otherwise, they may become insolvent, where they are unable to pay back all of their debts.
Platforms that are facing issues
Let’s look at 5 platforms to discover what actually went wrong:
Celsius was the very first centralised platform that paused withdrawals, amidst rumours of the depegging between ETH and staked ETH (stETH).
To generate a high yield for users who deposited ETH on Celsius, they had staked a huge proportion of the Ethereum funds with Lido Finance, and received staked ETH in return.
In early June, this was estimated to have been $475 million worth of ETH that was staked by Celsius.
However, stETH is just a representation of the ETH that has been staked on the Beacon Chain of the Ethereum network.
It is only possible to withdraw stETH back to ETH once The Merge happens, where Ethereum transitions from Proof-of-Work to Proof-of-Stake.
You can find out more about The Merge in our article here, where we additionally explain how Lido Finance may jeopardise the decentralisation of Ethereum.
The Merge was delayed
The Merge was set to be released in Q3 or Q4 of 2022, and has been experiencing numerous delays.
Ethereum developers proposed to delay the difficulty bomb to mid-September, which further suggested that The Merge was having some issues.
All this meant that Celsius would not be able to give users back their Ethereum, since a significant amount is locked up in the Beacon Chain!
As users became impatient, many started to withdraw ETH from the platform.
This was one of the main reasons why Celsius had to pull the plug and halt all withdrawals.
It has been 3 weeks since Celsius paused withdrawals, and we will be looking out whether they will recover a reported $11.8 billion worth of assets on their platform.
However, there are reports that Celsius is slowly repaying the debts that they owe, and we can only pray that they will be able to do so.
Voyager was the second company after Celsius to make the decision to pause withdrawals from their platform.
Similar to Celsius, Voyager is an app where you can deposit your funds and earn interest.
One of the ways that they generated yield was by lending their funds to Three Arrows Capital (3AC), a crypto hedge fund in Singapore.
However, 3AC was recently ordered to liquidate its funds, as they were unable to pay back their loans.
Voyager loaned out a significant portion of their funds to 3AC, which was reported to be $665 million.
This is roughly 28% of Voyager’s entire assets that users had deposited onto their platform!
Voyager has filed for bankruptcy, and it remains to be seen what will happen to the funds of the users who deposited into the platform.
Crypto platform Vauld announced on Monday (4th July) that they too will be suspending withdrawals.
Vauld cited challenging market conditions which made them decide to pause withdrawals,
even after they posted on the 16th of June that they will operate as per normal.
The main reason cited was due to a huge outflow of capital from the platform, amounting to about $198 million,
and Vauld will be looking to restructure their company.
Restructuring means that the company will be modifying their debt or operations in attempts to improve the business.
Nexo, who previously offered to acquire Celsius,
provided an offer to acquire 100% of Vauld, which is on the brink of being accepted.
Finblox is another platform that had some exposure to 3AC. While it did not entirely halt withdrawals, it still lowered the withdrawal limits from its platform.
After further assessment, they started to increase withdrawal limits and re-enable rewards generation.
Finblox is one of the newer lending platforms on the list, so they may not have been that severely affected.
Instead of lending out to a firm, CoinFLEX provided Roger Ver (you may know him as ‘Bitcoin Jesus’) with a $47 million USDC loan, and he failed to meet a margin call.
This was confirmed by CoinFLEX’s CEO, Mark Lamb.
Roger has denied this claim, and CoinFLEX proceeded to halt withdrawals.
Interestingly, they have used a different approach to solving the issue:
To fix this $47 million debt, CoinFLEX has launched a new token, called Recovery Value USD (rvUSD), to pay off this debt.
They are offering a 20% interest rate on the token, in hopes of attracting investors to write off their debt.
This is a different strategy compared to other platforms, and it will be interesting to see if CoinFLEX is able to resume withdrawals soon.
What about other lending platforms?
Some platforms may have gotten ‘lucky’ and they did not see the need to suspend withdrawals. Here’s what happened to them:
While BlockFi has not paused any withdrawals yet,
They managed to liquidate an over-collateralised loan with a “large client”.
While things seem to be going more smoothly for BlockFi, they have signed a $250 million revolving credit facility with FTX, so that they will have enough funds to navigate tough times like we are currently facing.
Despite the bear market, BlockFi has increased interest rates for certain cryptocurrencies on their platform.
BlockFi seems to have a better risk management system compared to other platforms, so in theory, they should still be able to thrive.
The Singaporean crypto lending platform did not halt withdrawals.
Moreover, due to their requirements for collateralised loans, they were not exposed to 3AC.
Due to the non-disclosure agreements they have with their counterparties, they are unable to disclose who their borrowers are.
Nevertheless, the incidents with other lending platforms have also encouraged Hodlnaut to become more transparent in the near future.
Amongst all of the lending platforms, it seems that Nexo has ridden the tide well, and is even poised to gain control of different lending platforms.
Similar to Hodlnaut, Nexo did not have any exposure to 3AC.
With the acquisition offers to both Celsius and Vauld, Nexo has hired Citigroup to advise on how they can acquire these firms.
Moreover, Nexo has emphasised that they operate based on core fundamentals, including over-collateralisation,
and prudent risk management.
Nexo seems to be doing well despite the market turmoil, and they even have a live audit to show if their customers’ assets are fully backed or not!
The landscape for centralised crypto platforms will never be the same, with the bear market separating the prudent companies from those who mismanage their funds.
Lending crypto can be risky, and we need more transparency in ensuring that we know who these platforms are lending our funds to!
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