Why crypto platforms are falling like flies

Celsius, BlockFi, Voyager, Coinflex, Finblox, Babelfi are all in delicate financial positions, between probable insolvency at best and bankruptcy at worst. Five reasons explain this.

Following the layoff of 150 employees and the cessation of transfers and withdrawals on its platform on June 12, Celsius Network filed for bankruptcy on July 13, 2022. Another installment in a bad series for crypto-currency financing and credit platforms, started at the beginning of summer in the wake of the fall of the Anchor Protocol: on June 16, it was the first Finblox to announce a series of restrictive measures to its users, imitated by Babel Finance the next day, before Coinflex temporarily suspended transfers and buybacks on June 24, after which Vauld stopped withdrawals on July 4, and finally Voyager announced bankruptcy on July 5. A hecatomb that is not due to chance. The proof in five statements.

#1 Millions lent too easily

Crypto platforms allow investors to take out loans in cryptocurrencies equal to millions of dollars. However, the risks of insolvency have been underestimated by many of them. They are now paying the consequences. An example ? February 2022: Three Arrows Capital (3AC) crypto hedge fund invests nearly $200 million in Luna. Three months later, the Terra Luna blockchain collapses. The fund suffered so significant losses that it was declared in liquidation on June 27, 2022. However, to make its investments, it borrowed 15,250 bitcoins and 350 million USDC from the cryptocurrency lender Voyager in March 2022, a whopping $650 million. The hedge fund takes its creditor down: Voyager goes bankrupt on July 5. The same scenario for Coinflex, an exchange that suspended withdrawals on its platform on June 24, 2022 after the $87 million default by investor Roger Ver, nicknamed Bitcoin Jesus. No one is a prophet in his own country…

#2 Collapsed Warranties

To borrow on a credit protocol, an investor must provide cryptocurrencies as collateral. Problem, the assets deposited as collateral may lose value after the fluctuation of their price. In order not to reach the margin call, the point where the guarantees are insufficient for the value of the debt contracted, the borrower must inject new funds to cover his loan with the risk that the protocol liquidates the assets to proceed with a prepayment . Notably, BlockFi has liquidated its $80 million loan from 3AC, following the hedge fund’s liquidity issues. This operation caused losses, forcing the lending platform to lay off 170 of its employees in mid-June. It was narrowly saved from bankruptcy by the FTX platform, which granted it a $400 million credit facility in early July. A loan between protocols is not without risk as we will see immediately.

#3 Inbred loans

Lending platforms lend themselves to each other. However, the more the links are forged, the greater the chance of contagion in the event of bankruptcy. Celsius’ bankruptcy filing could have been the starting point of a systemic crisis. Fortunately, the protocol honored a $61 million debt owed to Aave (20 million USDC) and MakerDAO (41 million Dai), two decentralized financial protocols. While the platforms are out of the woods, the fate of Celsius’ customers is more than uncertain.

#4 Platforms with structural shortages

Annual returns of 10, 20, 30% are impossible to maintain over time, they only allow the protocols they display to attract liquidity. Unsurprisingly, some crypto credit platform balance sheets are in short supply. According to The Block, Vauld disclosed a $70 million deficit in a letter to his creditors. according to his operating result posted on TwitterBlockFi has accumulated $63.9 million in losses in 2020 and $221.5 million in 2021. The bearish context in the crypto market is therefore only exacerbating the structural problems of certain platforms.

#5 General mistrust

Since Anchor Protocol went bankrupt in May 2022, distrust of cryptocurrency lending platforms has spread. Protocols have tried to limit bank runs, with no success for some. Finblox, which offers an annual return of 5% for bitcoin and 90% for Axie Infinity, has implemented a series of measures limiting withdrawals from its 15,000 users. Following “unusual liquidity pressures” in his words, Babel Finance temporarily suspended repayments and withdrawals on June 17, having just closed an $80 million fundraising round in May. The Vauld platform suspended trading on July 4 due to massive withdrawals.

From incestuous to save who can

The crypto ecosystem has been incestuous for years: the platforms are linked by loans and by regular customers, who borrow from one to lend to another. But in the event of a systemic crisis, everyone is playing it safe: Babel Finance, suspected of insolvency, strongly denies any exposure to 3AC with The Block, while Coinflex rushes in a press release to clear up uncertainties about a counterparty. Arrows Capital or “any loan company”. One for all and one for one…

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