Aztec Network’s Jon Wu Says Celsius’ Meltdown Partly Due to Unrealistic Promises
By Kathy Chu, TruthDAO
Lending platform Celsius Network led the crypto markets into a meltdown this week when it froze withdrawals and transfers between the accounts of its 1.7 million customers.
Celsius — which advertises yields as high as 18.63% on its website as of Wednesday, June 15 — said that suspending withdrawals puts it in a “better position” to meet its obligations. The company didn’t immediately respond to a request for further comment.
Adding to this week’s turmoil in the crypto industry, the Tether stablecoin lost its dollar peg, and crypto exchange Coinbase said it was laying off 18% of its employees. Cryptocurrencies saw more than $1 billion in liquidations a day after Celsius’ Monday announcement, according to Coinglass.com.
Jon Wu, head of growth at Aztec Network, which enables privacy on the Ethereum blockchain, has been one of the leading voices analyzing the fast-moving developments with Celsius.
On a special edition of TruthDAO's "Crypto DeFined", available on YouTube, Wu spoke about how Celsius’ troubles compare to the collapse a month ago of the TerraUSD stablecoin, and how to think about a potential crypto winter looming ahead.
Five key points Wu made:
Celsius didn’t necessarily make bad investments, but it made unrealistic promises. Celsius promised users they could withdraw their Ether at any time, said Wu, yet invested depositors’ funds into liquid staked Ether (stEth), a token that can’t be converted to Ether immediately.
“I want to be clear that this was not a failure of stEth,” emphasized Wu. “This was not a failure of the Ethereum network. This was not a failure of the Ether token. It was a decision made by a broker dealer, made by an asset manager, to invest in an illiquid asset.”
Meltdown of Terra Stablecoin Vs. Celsius Network. Celsius’ meltdown comes a month after the TerraUSD algorithmic stablecoin depegged from the U.S. dollar, dragging down sister coin Luna and raising fears that other stablecoins could lose their peg.
“It’s very hard to draw parallels between the two because Terra was a nominally decentralized stablecoin built on a layer one network, and Celsius is a centralized fintech app that looks much more like a Web2 wrapper for DeFi,” said Wu.
Wu said that Celsius made “some poor decisions around risk management and the amount of liquidity they had on hand.” Meanwhile, TerraUSD was an algorithmic stablecoin with a “highly circular design by nature” because maintaining its peg relied on its link to sister cryptocurrency Luna.
One similarity between both meltdowns: “Both were centralized entities purporting to be decentralized in some way,” said Wu.
Will investors get their money back? While it’s hard to know at this point, Wu says that “all indications seem to point to the fact that, at least for some proportion of depositors, they will not necessarily receive what they put into the system in the short to medium term.”
Wu believes there is “sufficient evidence that (Celsius) placed user deposits in highly illiquid investments … that cannot be returned in their original state for some period of time.”
Tough times lead to crypto innovation. Wu believes that a bright spot of the turbulent crypto markets is that companies will think about ways to design better technology.
“The thing that drives us out of the crypto bear market, whenever that happens, is the next wave of innovation,” said Wu. “In a bull market, lots of bad ideas get funded. And so, during a bear market, it’s very much a survivor bias game. Anyone who can stick it out will make it to the next bull market and fight another day."
Lesson from Celsius’ troubles. “It really is not crypto unless you have self sovereignty. That is one of the core values of bitcoiners. That is one of the core values of the Ethereum community. This is a perfect example of what happens when you trust someone else with your crypto holdings."
You can watch a replay of the full interview here.