What is Celsius Network?
Celsius Network is a decentralized lending protocol that provides cash loans and loans in cryptocurrency to its users. Celsius network provides 50%, 33%, and 22% loan to value accompanied by collateral protection for lenders. The Celsius Network was founded by Alex Mashinksy and Daniel Leon in 2017 when they created the plan of the company on a paper napkin. What happened next is history.
Their main objective was to provide financial freedom to the masses and wrest control from the banks and other financial institutions who, more often than not, exploit their customers solely for their own profit motives. They wanted to provide a platform that would harness blockchain technology to provide their members with equality in income as well as opportunities. The company clearly states their vision using a few words-“to act as a catalyst for financial that will bring the next 100 million people into cryptocurrency.”
The Beginners Guide to Celsius
In recent times, mainly looking at countries like the US and Canada, we find that interest rates offered by commercial banks on deposits are meager (as low as 0.01%) , to the point of being almost negligible. This leads to general dissatisfaction among consumers. If they are willing to part with their money and not hold it in the form of cash, they require proper incentives to do so. Low-interest rates are one of their prime complaints concerning the traditional banking system. All these reasons have led to the so-called cryptocurrency revolution in the world, with more and more people, even those belonging to the middle classes, are getting involved with Ethereum, Bitcoin and other forms of cryptocurrencies.
The Celsius Network has been tapping this development by providing people with incentives to move away from traditional banking and towards crypto banking. As we have already discussed, one of the main disadvantages of traditional banking is low-interest rates. Celsius Network hopes to remedy this situation by providing higher and more worthwhile rates on savings(as much as 3-10%) . Customers have to link their digital wallets to the Celsius Network, and then they carry out transactions involving bitcoins and ethereum.
If they choose to become a lender on this platform, then their money is used to give out loans to hedge funds and crypto funds, while the lenders earn high rates of interest on their cryptocurrencies. Critics may point out that since they lack government backing, there is a security concern, mainly in case of a global financial crisis. However, Celsius Network has made provisions to tackle this problem by creating a small fund, which can be used to protect their lenders in case of any financial emergency. Besides, they plan to only lend to certified financial institutions, to minimize the risk of default.
Then comes the question of borrowing. Selling bitcoins for cash is tiresome and subject to capital gain taxes. The Celsius Network attempts to do away with this problem by allowing their customers to take loans in cash against the cryptocurrency in their accounts as collateral. Once the loan is repaid, they once again gain access to their crypto coins. What’s more, there is no additional taxation involved either, because the coins aren’t sold in the financial market. “Celsius aims to be a real, viable, and community-centric alternative to profit-seeking banks that just want to take advantage of their customers.”
Celsius Network Milestones
The Celsius Network has managed, in barely a couple of years to become a force to be reckoned with in the crypto sector. Their company report for 2019 has highlighted some of the significant achievements of the company.
- They paid $5.9 million as interest payments to their depositors in 2019. They also added 17 new crypto coins to their app, bringing up the total number of supported coins to 24. According to the report, the average lender on the app earns $300 of interest per year. The Celsius Network manages more than $450 million in cryptocurrency assets. This is a massive rise from the $64 million it was managing in 2018.
- In 2019, they procured over 150 institutions as their clients, leading to large scale growth in coin loan origination. These institutions help in generating more demand for crypto loans, thus helping the Celsius Network generate higher revenue to provide high rates of interest to their depositors.
- In early 2019, the Celsius Network upgraded their app by introducing seven CEL token utilities and three CEL loyalty levels. This enables the lenders on the platform to earn up to 30% more in interest payments and also allows borrowers to pay up to 30% less on loans. According to their published data, more than 40% of the depositors choose to earn their interests in the form of CEL tokens, which in turn increases the market demand for these tokens.
- The network increased its user base by several folds in 2019, going up from over 13,000 users in 2018 to more than 62,000 members by the end of 2019. This spike in son summers may be attributed to the fact that the Celsius
Network entered into several partnerships with other industry players like Liquid, Uphold, Monarch, Amon and Litecoin, thus widening their reach.
Advantages of Celsius Network
- Higher rates of interest
One of the most intriguing characteristics of the Celsius Network is how they manage to pay their depositor’s high-interest rates from 3-10% with the average rate of interest being 7.1%. Several critics have expressed their doubts regarding the same, arguing that this is too big a jump from the less than1% interest rates that most commercial banks offer. What the Celsius Network says about this is very simple: banks don’t want to. Banks have, for years, managed to lower the payout rate as they merged with other banks, in turn reducing competition and making agreements. This love especially left depositors in the lurch because now they were being paid only yen bare minimum interest. Banks generally earn between 14-25% return on their loans and assuming they pay their customers 1% interest; it is safe to say that they keep more than 80% of the profits for themselves and their shareholders. And they are paying depositors the bare minimum in interest while keeping most of the profits for themselves.
The Celsius business model claims to do the exact opposite of what banks do—give back 80% of their profits on the form of interest payments. Now the question arises, where does this profit come from? They earn profits by lending crypto coins to hedge funds, exchanges, and institutional traders, and by issuing asset-backed loans at an average of 9% interest.
- Loan Repayment Guarantee
One of the main features of lending in the Celsius Network is that they only issue asset-backed loans, meaning that every time a borrower takes a loan in dollars, they provide the network with 100% of the loan value as security in the form of another asset, in this case, cryptocurrency. If by any chance, the borrower fails to pay back the loan amount or interest amount, then the collateral is used to pay back the loan, ensuring that the lenders never fail to receive their payments. The network prides itself in not having had a single case of loan default since its inception.
According to their website, they are currently accepting five different cryptocurrencies as collateral: ETH, BTC, LTC, XRP, and DASH. Also, the Celsius Network requires its users to deposit up to 200% of the dollar loan amount with BitGo before a loan is sanctioned. This ensures that at any given moment, the company has more assets than the amount of loan issued. This is very different from traditional banking, where banks are only allowed to lend $10 for every $1 they have as deposits. Thus banks often have ten times as many loans as the number of deposits. In case of a financial crisis, this move will help Celsius bail out its lenders.
- How are interest rates calculated?
Interest rates are revised every week depending on three factors: market conditions, demand for cryptocurrencies, and the policy of providing 80% of the company’s profits back to the depositors. This model ensures that competitive interest rates are offered while ensuring that there is additional interest for coins with higher demand. For example, if a financial institution is willing to pay a high price for certain coins with higher market demand, the Celsius Network accordingly adjusts the interest rate to ensure that the rise in profits is shared by their entire community.
It is very easy to make promises to lure in customers, but it is much harder to fulfil the same. This is where the Celsius Network differs from its peers. Ever since their launch in 2017, they have not strayed from their vision of helping the community find an alternative to traditional banking. The Celsius Network firmly believes that decentralization and disruption are the two fundamental ideas that have to be brought into play to overhaul the existing system and creating one that is in the best interest of everyone. They are focused on innovation to bring about blockchain equality that will hopefully lead to the next financial revolution and give the familiar people back the power that had been snatched from them.