CeFi platform Celsius conceals the loss of over ten thousand ETH! Will the credibility issue lead to a run on the platform?

The well-known CeFi platform Celsius in the United States was recently exposed for losing over 40,000 ETH in last year's Stakehound private key loss incident. Celsius chose to conceal such a significant loss, which has damaged its reputation and some believe it may lead to severe run-on losses for the platform.

Celsius Suffers Massive ETH Loss

According to a report by Dirty Bubble Media, ETH custodian service provider Stakehound announced at the end of June 2021 that due to the loss of private keys, a large amount of ETH held on behalf of users can no longer be withdrawn, totaling over 38,000 ETH. Following this incident, the price of Stakehound stETH plummeted as users who staked ETH with Stakehound faced liquidity issues in the market.

However, in a transaction in February last year, Celsius sent 35,000 ETH to Stakehound and received a significant amount of stETH in return. By examining the wallet address holding stETH here, it is evident that Celsius holds over 42,000 stETH, equivalent to around $73.6 million, making them the largest holder currently and incurring substantial losses.

Regarding the resolution of this issue, Stakehound attributes the loss to their custodian service provider Fireblocks and has filed a lawsuit against the company in an Israeli court. However, the problem remains unresolved, and stETH remains virtually worthless.

Is Celsius Facing a Run Risk?

Over the past year, Celsius did not disclose this matter to its customers until yesterday when the issue came to light. This lack of transparency may lead to a loss of trust among users, prompting them to redeem their ETH. If a redemption process faces liquidity issues, it could potentially trigger a run risk.

Twitter user yieldchad analyzed the situation and based on Celsius's current ETH holdings, only about 27%, approximately 260,000 ETH, is liquid, with 44% staked as stETH on Lido and 29% staked in ETH 2.0.

Note: The stETH in the two paragraphs refers to different currencies.

This means that the staked ETH will be locked and unusable for at least six months to a year, and the liquidity of stETH depends on the secondary market. Observing the liquidity pool on Curve, converting all 445,000 stETH to ETH would incur approximately a 55% slippage. To keep the slippage within 5%, the exchange amount should not exceed around 130,000 stETH.

yieldchad is pessimistic about the future development, assuming a weekly redemption of 50,000 ETH would deplete the liquid ETH in about 5 weeks. If there is still a high demand for exchanges and considering stETH's liquidity issues, Celsius may face significant losses.

However, this scenario is based on Celsius causing market panic due to poor reputation, and no one willing to step in after stETH is discounted. Additionally, for a large CeFi platform like Celsius, creating liquidity is not a challenge, and it is possible to address temporary liquidity shortages through other assets and lending platforms.