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In my article USCoin: How to Safely Earn 6-12% Interest with Stablecoins, I recommended considering high-interest stablecoins to avoid the melting ice cube problem – optimizing wallets for fight against inflation, even for cash reserves. My thesis was about hold high-interest stablecoins on reputable exchanges to offset the destruction of dollar value.

And for me, the best stablecoin for crypto yield is still USD Coin (USDC-USD). USDC is fully backed by cash and short-term US government bonds, and always redeemable 1:1 in US dollars.

But since that article, the entire crypto industry has seen upheaval around specific coins and institutions, resulting in cascading liquidations, huge sell-offs, and the destruction of nearly a trillion coins. dollars from global cryptocurrency market capitalization. Companies offering crypto interests have been deeply affected and several have gone bankrupt due to reckless and risky investments.

This update will trace the events that brought us to this point and revisit the financial health of the platforms reviewed in my first article.

The triggering event: the Terra disaster

In May this year, the algorithmic stablecoin Terra (UST-USD) broke its peg to the dollar; the value quickly fell to zero for UST and its companion token (LUNC-USD). Between the two coins, approximately $60 billion in value disappeared in breathtaking fashion.

In my article on stablecoins, I warned my readers to stay away from UST. No algorithmic stablecoin has been successful in the long term and attempts are far too risky for the cautious investor. But incredibly, some of the biggest names in crypto lending and investment funds had significant exposure to UST or LUNA and suffered.

As shocking as Terra’s explosion was, analysts were rightly concerned about collateral damage, called contagionappearing elsewhere.

The next domino: the capital of the three arrows

Three Arrows Capital Ltd. is a hedge fund established in 2012 and focused on providing superior risk-adjusted returns, founded by Su Zhu and Kyle Davies. 3AC lost over $200 million in LUNA when the Terra ecosystem imploded in mid-May. “The Terra-Luna situation caught us off guard,” Davies told the WSJ.

3AC was also one of the largest holders of Grayscale Bitcoin Trust (GBTC) tokens and staked Ethereum (stETH) tokens. When both of these assets experienced steep declines, their loans began to be liquidated by lenders.

A New York bankruptcy court froze all of 3AC’s remaining assets. According to the lawyers representing the creditors, the whereabouts of Zu and Davies are unknown.

The panic of the CeFi bank

Due to the Terra Luna disaster and the 3AC explosion, doubts began to mount about the solvency of Centralized Finance (CeFi) banks. These are crypto lenders that take client assets, lend them to hedge funds and other institutions, and pay a portion of the interest they receive back to individual clients.

The biggest potential issues with CeFi platforms have always been cybersecurity (avoiding losses through hacking) and risk management (loss of funds due to poor investment choices). The problem for investors was a lack of transparency about what these companies were doing to generate returns.

People began to openly question the risk management strategies of these platforms, whether they were affected by the Three Arrows Capital debacle and whether they had sufficient liquidity to cover a bank-like event where customers attempted to withdraw all their assets.

CeFi health check

Here is the current status of the platforms I listed in my previous article.

Abra Status: Normal operations

Abra boasted of their sound risk management practices and so far they don’t seem to be affected by the bank runs that are happening on other platforms. Personally, I recently withdrew a substantial amount of coins from Abra because my assets were stuck on two other platforms and I couldn’t take any more risks during this turbulent time. Withdrawals were processed smoothly.

In a Twitter message exchange with Bill Barhyde, CEO of Abra, I expressed the need for CeFi platforms to publish a proof of reserves certificate to give depositors the assurance that the funds are present. He agreed and said that Abra has started this process and they are fully committed to releasing it when their listener is ready.

BlockFi Status: Normal operations

BlockFi was hit by a “bank run” panic after Celsius suspended withdrawals, but never wavered in its operations. This was partly because they had better risk management procedures, but perhaps more importantly, they were given a $250 million credit facility from FTX.

Celsius Network Status: Withdrawals closed, filing for bankruptcy

Celsius has suspended all withdrawalsswaps and transfers between accounts on June 12 and hired outside legal and financial teams to advise them on how to restructure the business.

Over the following weeks, analysts watched a series of moves in Celsius-associated crypto wallets as the beleaguered company began repaying DeFi loans to free up capital once used as collateral.

Although some loyal Celsius users had hoped the company could unwind enough assets to resume normal operations, the other shoe dropped on July 14 when the company filed petitions for Chapter 11 reorganization.

Bankruptcy document signed by CEO Alex Mashinsky shows that the company stands around $4.3 billion in assets versus $5.5 billion in liabilitiesa deficit of $1.2 billion.

With the huge hole in the balance sheet and no white knights appearing to save Celsius, the outlook for depositors looks bleak.

Crypto.com Status: Normal operations

As far as I know, Crypto.com has not been affected by recent events.

Hodlnaut Status: Normal operations

As far as I know, Hodlnaut has not been affected by recent events.

Vault Status: Withdrawals closed, signed 60-day letter with Nexo

July 4, Vault suspended all withdrawals, transactions and deposits and, as with Celsius, hired legal and financial advisers to consider restructuring the business. Vauld has disclosed assets worth about $330 million and liabilities worth about $400 million at present.

Vauld has signed a term sheet with Nexo for an exclusive 60 day period. This allows a:

exploratory period related to its proposed acquisition of Vauld, pending a satisfactory outcome of the due diligence process initiated. Upon successful completion of the transaction, Nexo plans to acquire up to 100% of Vauld and revamp its future operations with the aim of accelerating its deeper presence in Asia.

Traveler (OTCPK: VYGVQ) Status: Withdrawals closed, filing for bankruptcy

Travel “temporarily suspended” exchanges, deposits, withdrawals and rewards on July 1, 2022 and voluntarily filed for Chapter 11 bankruptcy to reorganize its financial obligations and hopefully resume normal operations in the future.

Voyager has inexplicably made a $670 million unsecured loan to 3AC which is now in default. This extremely risky transaction was either based on 3AC’s previous stellar reputation in the industry or misleading financial information. From Bloomberg:

On June 30, the Monetary Authority of Singapore reprimanded 3AC, without fines or other penalties, for providing false information and exceeding its assets under management limit.

skin in game

Had I known of any CeFi lenders having exposure to Terra, making unsecured loans, or engaging in other risky investments, I would have eliminated them from consideration for a high interest yield. Unfortunately, we don’t know who is swimming naked until the tide goes out.

It’s a hard lesson learned for both me and other content creators. Bitboy creator Ben Armstrong (1.45 million YouTube subscribers) promoted Celsius Network with referral links, and many millions are now stuck there. Scott Melker, also known as “The Wolf of All Streets”, said he was among the top 50 depositors on Voyager, a sum he described as “millions.”

I had a few assets in Celsius and Vauld which totaled a very small percentage of my overall holdings. But Simon Dixon, a Celsius depositor, shareholder and director of Bank to the Future, told stories of people who staked their life savings on Celsius and are now in desperate need of help. The Celsius situation is particularly tangled and may have additional twists before the full story is revealed.

I still believe that the return generated by institutional lending is possible with crypto, just like with traditional financial institutions such as JP Morgan (JMP). However, CeFi banks must ensure a higher level of transparency to restore the confidence of depositors. Congress will certainly jump on these events as an opportunity to regulate the industry – which can be a good thing.

As mentioned above, I also had coins on Abra, which I successfully removed just to be safe. Going forward, Abra is the only platform that I will thoroughly test with re-deposits, but only after publishing the promised attestations.