Voyager, BlockFi, and Celsius were all well-known names in the crypto lending space. However, all three centralized lenders met with a swift collapse, leaving many investors and asset managers scratching their heads in confusion. How can crypto businesses avoid making the same mistakes? Let’s take a closer look at what went wrong for these three centralized lenders and how the lessons learned can be applied to other crypto businesses.
The collapse of centralized crypto lenders like Voyager, BlockFi, and Celsius is a cautionary tale that asset managers and investors should take to heart. These three companies, which were once considered to be some of the most promising startups in the crypto space, have all experienced major losses due to their lack of liquidity and over-leveraging. In this case study, we'll explore what went wrong with these companies and how asset managers and investors can learn from their mistakes.
The Promise & The Reality of Centralized Crypto Lending
The concept behind centralized crypto lending was an attractive one; offer users easy access to loans on their digital assets without any complications or delays. This would allow users to leverage their assets for quick cash, helping them to capitalize on market opportunities more quickly than ever before. Unfortunately, this promise turned out to be too good to be true.
Centralized lending platforms had two major flaws that caused them to fail. Firstly, they required users to part with control of their digital assets in order for the loan process to take place. This meant that all risks associated with any volatility in the crypto markets were born by the user, not the lender. Secondly, centralized lenders were dependent on a single entity or platform for providing liquidity - meaning that if that provider went down or ran into trouble then all loan operations would grind to a halt.
Voyager was founded in 2018 as a platform for facilitating cryptocurrency exchanges between USD and various digital assets (such as Bitcoin and Ethereum). To fund these transactions, Voyager offered a loan program which allowed customers to borrow money from their own accounts in order to increase their trading power. This loan program was intended to be a low-risk option for traders looking for more capital without taking on additional debt or incurring high fees. Unfortunately, this strategy ultimately became the downfall of Voyager.
The primary issue with Voyager's loan program was that it lacked sufficient risk management protocols. As a result, many borrowers were able to take out larger loans than they should have been able to under normal circumstances; this led to an excessive amount of risk being taken on by the company without any real oversight or safeguards against potential losses. Furthermore, when the market began to decline in 2020, many borrowers defaulted on their loans—leaving Voyager unable to cover its expenses or pay back its customers.
In addition, there were other issues with Voyager’s business model which likely contributed to its collapse as well. For example, the company relied heavily on external funding sources such as venture capitalists rather than generating profits from its own services; this meant that once those funds dried up (as they did during the pandemic), there was no other source of income for the company aside from loan repayments—which it had already overextended itself by relying too heavily on risky borrowing practices. Finally, the lack of transparency regarding fees associated with trading on their platform likely turned away many potential customers who may have otherwise been willing to use their services if they had known all of the details upfront.
BlockFi’s business model was based on offering crypto-backed loans and other financial services to its customers. It allowed users to borrow against their cryptocurrency holdings at an annual interest rate of up to 20%. This loan provided customers with instant liquidity without having to sell their cryptocurrency holdings, which would have resulted in tax implications. Furthermore, BlockFi also offered savings accounts with high-yield returns for users who were willing to take on more risk. These accounts could be used as collateral for additional loans or as a way to generate passive income with little effort required from the user.
There were several factors that contributed to the downfall of BlockFi. First, there was a lack of proper oversight on the part of the company’s leadership team when it came to risk management and compliance issues. Additionally, due to the nature of cryptocurrencies, there is always an inherent risk associated with them that cannot be mitigated by traditional banking practices or regulations. This lack of oversight created an atmosphere where risky investments were made without proper consideration for the potential repercussions.
Moreover, despite offering high-yield returns and low-risk investments for its customers, these same products were not adequately capitalized by BlockFi itself which led to losses when market conditions shifted unexpectedly or loans defaulted unexpectedly. Finally, there were reports that customer funds were mismanaged which further exacerbated losses and eroded consumer confidence in the company’s ability to manage their finances safely and securely.
Celsius Network was founded in 2017 as a peer-to-peer lending platform with the aim of providing access to cryptocurrency services for everyday users. On the surface, it seemed like a good idea; however, there were several problems with its underlying business model.
First, the company lacked sufficient capitalization. As a result, it was unable to meet customer demand or fulfill its obligations in times of high volatility. This lack of liquidity led to an inability to pay out customer deposits or issue new loans when needed. Additionally, due to its limited financial resources, Celsius was unable to adequately invest in security measures or hire experienced personnel necessary for running a successful crypto lending platform.
Second, there were issues with regulatory compliance and transparency. Despite claiming that it followed all applicable laws and regulations, questions have been raised about whether or not Celsius had adequate procedures in place for preventing fraud and money laundering activities on its platform. By failing to adhere to proper legal requirements, the company put itself at risk for costly fines and criminal charges that could have further weakened its already precarious financial position.
Finally, there was a serious lack of oversight at Celsius Network which allowed fraudulent activities to go unchecked for years before they were discovered by authorities. There is evidence that some employees were aware of these issues but failed to take appropriate action due to pressure from higher ups within the organization or ignorance of their duties as corporate officers.
What Can We Learn?
The failure of centralized crypto lenders highlights an important lesson; when it comes to building successful products in the blockchain space, decentralization is key! Decentralized protocols are better able to handle sudden spikes in demand and reduce risk by distributing it across many different nodes rather than relying on a single point of failure (like with centralized platforms). Additionally, decentralized protocols allow users to retain complete control over their funds while still taking advantage of services like lending and borrowing - a key factor which is critical for mass adoption in this space.
Lack of Liquidity
One of the biggest issues that doomed these centralized crypto lenders was their lack of liquidity. All three companies had extended large loans against cryptocurrencies that they held as collateral without having an adequate amount of liquidity on hand to cover defaults or other issues. This caused the companies to become stuck in a cycle where they could not pay out withdrawals or honor loan contracts when customers began defaulting on their payments.
Another key mistake made by these centralized lenders was over-leveraging their positions. By taking on too much risk with too little capital, they left themselves vulnerable to larger than expected losses if things went south. For example, BlockFi had more than $3 billion in total liabilities compared to just $150 million in total assets at the time of its collapse—a ratio that would have been unsustainable even under normal market conditions.
Finally, it's important for asset managers and investors to remember the importance of protecting investor funds in any situation. All three companies failed to adhere to basic standards when it comes to investor protection—such as offering transparent accounting practices and keeping customer funds separate from operating funds—which resulted in major losses for their customers when it came time for them to withdraw their money or seek repayment of loans.
At the end of the day, centralized crypto lenders were simply unable to live up deliver on their original promises due to fundamental flaws in their underlying architecture.
While this may seem like a setback for those looking for alternative ways of leveraging their digital assets for short-term gains, it also serves as an important reminder that decentralized protocols are often best-suited for delivering reliable services in this space - something that we should all keep top-of-mind when designing new products or services going forward!
Furthermore, decentralized protocols provide users with greater control over their funds while simultaneously reducing overall risk - something which is essential if we want blockchain technology and its accompanying services (lending/borrowing included) to thrive in the long run!