The risks behind centralised yields

Following the continued fallout from the collapse of the Terra ecosystem, a new threat has emerged that could affect over $11 billion in assets and add further misery to recent negative price action.

Celsius Network, an institutional lending and borrowing service operating under the ‘Centralised Finance’ (CeFi) umbrella, has recently halted deposits and withdrawals from its platform.

This is due to a supposed insolvency crisis that revolves around honouring redemptions and withdrawals for assets held on its platform – a crisis that means users cannot access assets deposited to their Celsius accounts.

A popular crypto lending service, Celsius has attracted over $11bn in assets under management (AUM) to its platform since its 2018 launch due to offering attractive yields on cryptocurrency assets and an easier way to start earning. Now, due to its recent issues, questions are being raised about how Celsius uses the assets deposited to its platform to reward its investors.

Most CeFi platforms offer their yields by either depositing funds into Decentralised Finance (DeFi) platforms that provide lending and borrowing – the most popular being Aave or Compound – to earn yields on more popular assets like Bitcoin (BTC) and Ethereum (ETH). 

By depositing user funds into these services, yields are earned on their deposited assets and returned to investors on the platform in either the base asset or Celsius’ native asset, CEL. There’s even an additional option offered on DeFi platforms to borrow more using the original assets as collateral.

Celsius can also earn by providing asset liquidity to institutional providers, who then use this liquidity to bolster the supplies of exchanges and platforms that trade cryptocurrencies.

Despite the obvious benefits of providing users with yields on their latent assets, a real danger emerges when the crypto market suddenly declines sharply due to macroeconomic factors and an influx of FUD (fear and doubt).

A precarious position

The troubles started for Celsius following recent market sell-offs, which lead to Celsius being in the precarious position of facing large-scale liquidations on these platforms if the price of Bitcoin reaches a certain marker. 

Serving over 1.7 million customers, Celsius Network moved swiftly to immediately pause all withdrawals on June 13th due to “extreme market conditions” – with no reinstatement date for users to withdraw funds mentioned since the announcement.

Celsius has since worked with regulators and restructuring firms to avoid a complete collapse amid credible rumours of insolvency.  Having taken “important steps to preserve and protect assets” and explore its options, the crypto lender still has an estimated $82 million in outstanding debt owed to a DeFi platform- with its estimated losses currently sitting at $660 million.

Further issues arise when you consider that the assets lost to any liquidations that take place may be lost and not returned to users by Celsius. 

It also raised the question of both accountability and transparency within the CeFi space, with many asking how this could have happened in the era of mass blockchain analysis. Despite offering high yields, Celsius and other competitors in the space haven’t always been clear and transparent with how their yields are provided. 

The default messaging outlines that the assets may be used externally but never clearly specifies where the assets are deployed to earn yields. Whilst the average investor may not be too worried about where the yields are coming from, when deposits and withdrawals are halted and their positions are at risk of liquidation, investors are likely to seek clarity on how their assets are being used.

The old saying “not your keys, not your crypto” is often touted when referring to CeFi platforms, and as evidenced with Celsius and similar platforms, it rings true when customers cannot access, withdraw or even add collateral to their positions to avoid costly liquidations due to their centralised nature.

What Kinesis does differently

With the risks of using CeFi platforms and their associated yields evident, a different kind of yield – one based solely on network effect and platform usage – stands out as a clear frontrunner.

Yields on Kinesis, a monetary system offering fully-backed digital gold and silver as cryptocurrencies, are earned solely through platform usage – more precisely, the transaction fees generated daily by the over 150,000 users using Kinesis to trade, buy, sell and spend their metals.

Unlike risky DeFi platforms, yields are offered without your assets being used in risky strategies – meaning users retain ownership of their assets at all times. These yields also don’t require any locked or fixed period deposits of your assets and can be tracked at any time – leaving investors free to come and go as they please.

Yields on Kinesis are earned by holding either Kinesis Gold (KAU) or Kinesis Silver (KAG) – blockchain-based assets backed on a 1:1 basis by physical bullion. Working similarly to stablecoins, they can provide a historically-proven ‘safe-haven’ type asset when markets react negatively whilst enabling ownership of a fully-backed, yield-bearing asset.

One of the most well-known and documented ‘hedges’ against inflation and market uncertainty, gold ownership enables investors to diversify their portfolios with a less volatile asset whilst earning non-debt-based yields on their holdings.

By avoiding less-transparent yields that are unsustainable and platforms that use your assets in increasingly dangerous ways, yield-earners on Kinesis don’t face any hidden surprises and provide the security and investor protection the market sorely needs.

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This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.