I don't follow crypto, so these are actual questions, not trolling:
- If Celsius is a trading platform, how can Celsius itself owe anybody anything?
- My naive understanding is that cryptocurrency, being based on blockchain, is a log of universally agreed upon, legitimate transactions. So how can there be a liquidity crisis at all, let alone one in the billions? How is the platform allowing transactions not backed by actual funds?
Most brokers- such as coinbase- perform their transactions using off chain methods. All the bitcoin in coinbase is held and owned directly by coinbase, and what users of coinbase actually have is a database table somewhere saying how much of coinbase's coins are marked as being owned by the user.
Celsius is similar, but they also offer a loan system on top of it. So the coins you give to celsius are not only no longer owned by you, but they're also not even present in a Celsuis wallet.
You lend Celsius some coins. In return they promise to pay you some % of interest. Celsius takes those coins and sticks them in another lending system that pays them a higher % of interest. The other lending system collapses and cannot return the coins because of an exploit. Celsius customers demand their coins back and Celsius cannot return them.
Others have answered about how Celsius got into trouble, as it was not a trading platform, but I'll answer the implied question - if it's all on a blockchain, how can a trading platform have a liquidity crisis?
The answer is - it's not all on the blockchain. The vast majority of transactions involving bitcoin are nowhere near a blockchain, they're all on a database (or similar tech) that the exchange runs. Blockchain transactions only occur on deposit or withdrawl of funds into or out of the exchange. If (as in the case of an entity like Quadriga CX) somebody 'accidentally' removes and loses most of the cryptocurrency, the exchange can continue to operate for quite some time, so long as everyone doesn't try to withdraw at once.
1. Celsius was a lending platform which allowed customers to earn yield on deposited crypto. It also had exchange features, but the blow-up is primarily due to the lending aspect.
2. The liquidity crisis happened because of off-chain financing which models current lender/borrower agreements.
custodially held cryptocurrency is not on the ledger. When you own cryptocurrency custodially with someone, what that usually means that they hold all the cryptocurrency and they have their own database of IOUs.
This is why it is unsafe to keep too many funds custodially with untrustworthy parties and why it is a good idea to minimize the amount you have custudially (e.g. on exchanges see mt gox fiasco)
It wasn't a trading platform, and certainly wasn't doing the transactions on a blockchain. It was "lending" platform, where you deposited your crypto and earned interst. Apparently they loaned out your crypto to low risk individuals/companies etc. But turns out it was an outright scam.
By the way, there are legit decentralised blockchain based lending platforms like Aave.
There is no liquidity crisis in the blockchain itself. These crises always happen to custodians which is some kind of newspeak for banks.
The fact is all of these exchanges and most of these crypto corporations are actually unregulated centralized banks in disguise. They're sitting on massive amounts of money in the form of customer deposits and you better believe they're gonna be leveraging as much of it as possible. Meanwhile everybody's accounts are showing the deposits as if all their money wasn't tied up in the bank's own investments. Someone screws up, risks a little too much and gets liquidated or called or something? Money's gone, the bank owes customers more money than it has, people notice and try to withdraw all the money all at once, the bank runs start and the liquidity crises set in.
Fractional reserve banking is at the root of this problem. You literally cannot have these issues without banks.
- If Celsius is a trading platform, how can Celsius itself owe anybody anything?
- My naive understanding is that cryptocurrency, being based on blockchain, is a log of universally agreed upon, legitimate transactions. So how can there be a liquidity crisis at all, let alone one in the billions? How is the platform allowing transactions not backed by actual funds?