Celsius Network's unsustainable DeFi strategy could be costing them millions
$663 million borrowed, $1.7 billion deposited. To break even, they need to charge 16% APY on stablecoin loans...
Celsius Network has always touted their multi-pronged approach for generating yield, consisting of lending to institutional clients, mining for Bitcoin, and their participation in various DeFi protocols as both depositor and lender. Celsius’ terms with their institutional partners are a closely guarded secret. However, due to the transparency of DeFi, we have a window into how this component of Celsius’ strategy generates returns.
As of 2/14/22, Celsius has $1.45 billion in Ethereum deposits on the Compound and Aave protocols. The firm also has $276 million in WBTC on Compound, along with smaller amounts of MANA, UNI, COMP, BAT, and ZRX. According to recently published internal data, Celsius has $3.4 billion in total Ethereum deposits, meaning approximately 41% of Celsius’ total Ethereum is deposited to Compound and Aave.
These deposits generate some interest. However, you’ll note that the APY for these deposits is quite low; lower, in fact, than many “tradfi” savings accounts. This means there is a significant gap between what Celsius is paying and what they are receiving as interest on these deposits. Based on a conservative estimate of the average APY Celsius offers customers on these crypto assets, they face an annual deficit of ~$86 million in interest payments to depositors.
Now, this is only half of the picture. Celsius uses these deposits as collateral to borrow stablecoins, which they can then lend out to their institutional clients. Against these deposits, Celsius has borrowed $511 million USDC, $146 million DAI, and $5.8 million USDT from Aave and Compound, for a total of $663.3 million. Celsius has to pay interest on these loans, which works out to an annualized ~$20 million.
How much interest can Celsius earn by lending out borrowed stablecoins? We can estimate this by extrapolating from their advertised stablecoin interest of 8.8%.* Celsius marketing materials assert that Celsius pays out roughly 80% of net earnings as interest to depositors. Assuming this is the case, this roughly works out to Celsius charging institutional clients 11%. (Since this is a net figure, in practice Celsius would need to charge even higher rates than this to break even.)
If Celsius earns 11% APY on their lent stablecoins, and assuming all $663 million are lent out 100% of the time, Celsius would be generating approximately $73 million annually from these loans. After paying interest to Aave and Compound, Celsius would be left with ~$53 million in proceeds. This means that, if our assumptions are correct, Celsius’s DeFi strategy would lead to an annualized loss of $34 million. In order to break even with this strategy and just make the interest payments to the DeFi platforms and their customers, Celsius would need to be receiving net 16% APY on stablecoins lent to exchanges.
These data only cover 40% of Celsius’ total Ethereum deposits, if their internal app data is correct. Where are the other $2 billion? It is hard to tell. With the complex web of transfers cycling Ethereum between Celsius wallets and dozens of others, it would be a monumental task to account for all of it.
However, there are other signs that Celsius may be struggling to find ways to put its customers’ Eth to good use. We recently noted that Celsius had deposited 8100 Eth (~$24 mil) to Notional Finance, a DeFi platform that offers fixed-rate returns on lent crypto. Notional currently advertises a 2.8% fixed rate on Ethereum deposits, making this another money-losing arrangement for Celsius.
One must stretch their imagination to explain how Celsius charges somewhere between 11-16% on dollar equivalent loans to its institutional clients. With DeFi stablecoin borrowing rates at 3% for these same assets, this is 4-5x the market rate for stablecoins… unless, of course, Celsius is willing to offer under- or uncollateralized loans to their partners. It wouldn’t be the first time a crypto lending company was caught doing this.
*Celsius pays even higher rates if customers accept payment “in-CEL", i.e. in their proprietary token.
ADDENDUM: After this article was published, we examined Celsius Network’s Ethereum balances in other key wallets. As of 2/15/22, there is $769 million Ethereum sitting in three of Celsius’ wallets, equivalent to ~22% of Celsius’ total Ethereum under management. These balances earn zero yield, adding more pressure to Celsius’ bottom line: