Why Is Celsius Token Crashing? Ethereum's DeFi vs. CeFi Lending, Explained

Celsius Token CEL/USD has plunged over 60%, as Celsius Network pauses withdrawals, given turbulent market conditions.

What Happened: Given extreme market instability, in an endeavor to “stabilize liquidity”, Celsius announced that it would be halting user transfers, withdrawals, and swaps. This effectuated a steep price fall from $0.49 to $0.15 on Monday for the network's token.

Investors across the world took to Twitter and other platforms to draw parallels to Terra LUNA/USD, highlighting the murky nature of this occurrence. 

See Also: More Pain Ahead For Ethereum? Celsius Crashes 55% As It Halts Withdrawals Over 'Extreme Market Conditions'

Why It’s Important: The Celsius Network works on funding projects, protocols, and facilitating loans, via the funds deployed on the network. Similar to its kin Terra, this network promises interest payments, of up to 30% weekly, to depositors.

While this model may work smoothly under regular market conditions, in a bleeding and bearish market there is a major risk posed to liquidity. While it was done to “protect” investors, freezing withdrawals poses a significant counterparty risk. Furthermore, current market conditions, merged with halting withdrawals and transfers, doubles down the assumed borrower risk and creates uncertainty amongst users of the network.

"I believe time will tell with regard to Celsius network but that we are living through a period of evolution and maturation of the markets," said Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association. "As these continue to grow and develop DeFi products, services and education / training will continue to build and grow to advance consumer protection." 

Another significant point to consider is that Celsius Network works at the intersection of DeFi and CeFi. In other words, DeFi, constituting KYC-free services, on-chain transactions, and noncustodial wallets, acting as the counterpart to CeFi, comprising KYC services, liquidity, and custodian wallets.

The Celsius Network, functioning at the convergence of the two, distributes assets across DeFi, institutions, and retail investors, endeavoring to ensure high returns. 

Therefore, given current circumstances and yesterday’s happenings, the store-of-value and promised yields of the network is threatened. Thus, as Celsius must move to ensure regulated liquidity and investor protection, an urgent need for coordinated regulation arises.

As Kusz further commented "Ultimately what we are seeing with Celsius is yet another case advancing the need for industry coordination and self-regulation: what are the standards / best practices, what is the education and training needed to advance responsible innovation, and how can we collaborate with legislators and regulators to promote balanced regulation."