The government steps in to top up your deposit, you take home $1,000, and the bank stops trading. In a typical bank, the bank’s insolvency is discovered fairly quickly, retail depositors are protected through deposit insurance, and everyone else takes a haircut. īut how much money do you have if you have a $1,000 bank balance, along with 99 other people, and the bank only has $50,000? Then you don’t have a liquidity crisis: you have an insolvency one. Of course, if they all withdraw their money at once, because you froze withdrawals and they lost faith in the bank, you might very quickly find yourself back at square one. If you have the luxury to freeze withdrawals, a liquidity crisis can go away: eventually, the stETH turns into ETH, and Celsius can let its depositors withdraw their money. On Monday, the company said: “Our objective continues to be stabilizing our liquidity and operations.” The stETH still has value the money is still there but Celsius cannot access it.Ī few days later, it froze withdrawals. Each withdrawal required Celsius to sell a little more stETH to a rapidly declining pool of people who were willing to buy it, until, in early June, it ran out of buyers on the main exchange: you could not sell stETH at any price. The not-bank had already taken a hit on the collapse of the Terra/Luna stablecoin, and as the crypto market fell, depositors began withdrawing their ETH. That seems to be the situation Celsius found itself in in early June. Until you can’t find buyers for your stETH, at which point bad things happen.Ī physical representation of the Bitcoin cryptocurrency. And, unlike deposits in a bank, if you need to get some ETH back, you can just sell the stETH to someone else. Owning stETH should be great: it reflects not only the ETH you have locked up, but also the gains that ETH will have made by the time the merge happens. (Like self-driving cars, augmented reality and Linux on the desktop, the date of this merge is months away, and has been months away for about three years.) So Lido gives users a new token, called stETH or staked ETH, to represent their ETH2 claims. But there’s a problem: you can’t turn ETH2 back into ETH until the two networks merge at some point in the future. So Celsius used an intermediary, called Lido, to take ETH invested by customers, and stake it on the ETH2 network, earning interest in turn. The result is similar to earning interest at a bank, if doing so also gave you a vote on how the bank is operated. In proof of stake, people “stake” their cryptocurrency – locking it up for a period of time – in order to generate raffle tickets from verifying transactions. At the same time, there is a parallel project, ETH2, which is run as a test network for a new type of blockchain called “ proof of stake”. Ethereum (ETH), is one of the most popular cryptocurrencies, but investment opportunities for the currency are slim. The crypto bank has a lot of money locked up in a convoluted crypto derivative called stETH, and can’t get it out. This problem isn’t affecting only depositors, it is also the main problem for Celsius itself. It’s easy to treat money you can’t access right now as the same as money you can while the times are good, but when things get tricky, the difference becomes stark, and you have entered a liquidity crisis. Neither of those answers are satisfying, because valuing illiquid holdings is genuinely hard. Another possible answer is that the money is just resting in your account and, though you can’t reach it, you definitely have it. You may, in the future, have $1,000 again, but right now you have lost it all. What about now, with Celsius having blocked users from withdrawing or transferring funds for seven days and counting? How much money do you have? One answer is nothing: you can’t access the money, so you don’t have it.
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