Impermanent Loss Mining Exposed! Celsius Network Criticized for Lack of Transparency and Ponzi Scheme

The cryptocurrency lending platform Celsius Network recently sparked controversy, with the CEO of the decentralized lending protocol Compound pointing out on Twitter that Celsius was misusing customer assets under custody to participate in the recent trend of liquidity mining to earn additional income in the form of governance token COMP. He referred to Celsius as a "zero transparency" Ponzi scheme.

Compound Founder Criticizes Celsius Network

Compound founder Leshner criticized Celsius on Twitter, stating that Celsius is actively mining liquidity from users with on-chain evidence here, and believes that the institution's mechanism is completely opaque, possibly in a debt situation, or simply a Ponzi scheme.

What is a farmer? Liquidity mining? Please explain: [Explanation] What is Yield farming? Liquidity mining, Yield farming

Furthermore, Leshner mentioned that Celsius started experiencing "withdrawal difficulties" from June 21st. Interestingly, this timeline roughly aligns with a significant increase in locked assets in Compound.

In response, Celsius founder Alex Mashinsky countered: "Celsius has assets and user records, and we have not had any withdrawals since Compound launched COMP." He also criticized Compound for allowing "flash loans" arbitrage activities, believing that through Yield Farming, it is no longer over-collateralized. He also highlighted the near collapse of the DeFi system on March 12th due to the Ethereum crash.

The Block's research director Larry joined the fray in a tweet:

There is a reason Celsius had issues last month. We have many signs indicating they are close to insolvency. I completely agree with your "opaque" statement, and I will be extra cautious in using it.

Mashinsky argued that the suspicions being raised are intentionally creating panic. He pointed out: "Celsius's treasury has 360 million CEL tokens, worth over $150 million. If you think even Tether is doing risky things, then I have nothing to say to you."

Note: Tether invested $10 million in Celsius at the end of June.

In response, Larry stated: "You raised rates using money from most ICOs, and ultimately had to return to the retail market to sell equity. Tether is just a bailout. CEL's treasury is a worthless virtual asset because it has no liquidity, is not listed anywhere, and even trying to list on Binance failed." He criticized:

Celsius is one of the most opaque companies I have seen. You should publicly display deposits, loans, and inventory. If you don't, I won't trust the lending platform. Frankly, calling Compound a "fractional reserve banking system" shows that you don't understand economics at all. All its debts are fully collateralized and verifiable on the chain. But Celsius has none of that.

Celsius Mechanism Never Transparent

Celsius Network, established in 2017, is one of the fastest-growing encrypted lending companies, and was once recognized by Forbes in 2018 as a disruptor of traditional banking. However, in a review of the topic "Cryptocurrency Fixed Deposit Commodities," centralized lending platforms like BlockFi, Celsius Network, etc., have major disadvantages such as "limited asset selection" and "opaque interest mechanisms."

Based on the interest rates currently offered by Celsius Network, USDT still has an interest rate of 8.69%, which is almost twice that of all DeFi protocols. The company emphasizes on its website:

This is not a "Ponzi scheme." Celsius lends deposits to hedge funds, institutional traders, and exchanges to generate interest. In addition to large institutions, it can also provide dollar loans to users with encrypted assets as collateral and earn interest from these loans.

The application scenarios of the CEL token include establishing user loyalty levels. If users accept CEL as payment for interest, holding more CEL tokens in their wallets will yield higher returns (green text in the image above).

Since mid-June, the CEL token has been continuously surging, with a growth rate of over 300% this year. However, it seems to be affected by the negative news mentioned above, as the 24-hour decline has reached 14.13% at the time of writing.

In fact, Celsius's announcement on the website indicates that users' assets can be moved arbitrarily. Based on the website data, the borrower's interest rate is 7.95%, while the supplier's interest rate is over 8%.

It is evident that the interest earned by depositing assets in Celsius is not generated by the interest rate difference between borrowers and lenders, but is being used for arbitrage elsewhere. This is also a flaw of entrusting assets to centralized institutions, as seen in the debate between the founders in this article, where Mashinsky ultimately cannot deny the fact that customer assets are being used for liquidity mining.