Cake DeFi confirm no connection to Celsius contagion

The press release from Cake DeFi was interesting to read yesterday, and one that got me thinking. Released in the wake of the Celsius meltdown, the crypto-lending platform that has suspended withdrawals and may or may not be entirely insolvent, the release from Cake DeFi dropped at a time of complete and utter chaos in the markets, sparked by the brief but damning below tweet from Celsius.

.@CelsiusNetwork is pausing all withdrawals, Swap, and transfers between accounts. Acting in the interest of our community is our top priority. Our operations continue and we will continue to share information with the community. More here: https://t.co/CvjORUICs2

— Celsius (@CelsiusNetwork) June 13, 2022

Contagion

Titled “What Sets Us Apart From Our Competitors: Why Cake DeFi Is Built On Transparency”, Cake DeFi’s post confirms that the Celsius spiral will cause no harm to Cake. It also outlines the differences between the two models. It’s a smart move by Cake, and one that I think a lot of firms would benefit from imitating.

The contagion of the Celsius debacle could be huge, and that will send fear through any crypto investor, regardless of what protocol or tokens they are exposed to. Celsius had $12 billion of customer funds and is currently clinging (desperately) onto a position on MakerDAO with half a billion worth of Bitcoin. At time of writing, a 25% drop in Bitcoin’s price would mean a total liquidation of the position and all that Bitcoin flooding the market, only adding to the contagion.

Of course, Bitcoin itself has plunged from up around $30,000 to $22,300 amid this crisis, and the very crisis itself was likely caused by contagion effects from the UST spiral last month, as Celsius were invested in the Anchor Protocol via the now-collapsed UST. So, with Cake DeFi coming out and confirming that “first and foremost, we want to reassure our customers that the current market conditions have little or no impact on Cake’s daily business. As usual, we are processing 99% of all withdrawals within 24 hours” is a very smart and reassuring move.

This will assuage any fear that Cake is caught up in the cascading contagion across the industry and allow customers to keep their liquidity in the protocol with a more calm state of mind.

Different Business Models

The post did more than reassure. It confirmed that the style of business is completely distinct from Celsius.

“As a Singapore-based fintech company, we have to ensure clear asset segregation whereby customers’ assets are kept separate from the company’s operating accounts. Simply put, our users have full control, full ownership and full authority over their funds”, the post confirmed. 

This is a far cry from Celsius, where the model was built upon the centralised company investing the assets at will in the market, a strategy which worked wonderfully in 2020 and 2021 as the bull market ripped upwards, but has since come tumbling down. And with withdrawals increasing, Celsius is facing a crisis in that its liquid assets are not matching its liabilities.

Cake DeFi is completely different. To use their own words, it offers “users a “safe passage” or access to decentralized finance (DeFi) services: these services are all on the blockchain and are fully accessible to anyone and fully transparent. Technically, customers can make such transactions on the blockchain themselves. What Cake DeFi offers is a one-stop-platform where people can access all these services at a single point with customer and community support”.

Transparency

Cake hammers home the difference by criticising the “limited transparency and / or control” of centralised platforms such as Celsius. “As such, users wouldn’t have clarity or information on things like where the yields are being derived from or – worse – if their funds are being commingled with operational funds”, the post continues.

In summary, it’s a release which hammers home two things: first, the transparency, and second, the communication – both factors which customers of Celsius will now appreciate are absolutely vital. It comes down to understanding what you are investing in, and for many who took the plunge with Celsius, they will appreciate that it was impossible to have any sort of knowledge over what Celsius were using customer funds for.

Celsius had a fatal flaw, which is what happens when the market turns and there is a mass run for the exit all at once. This has been exposed, and Cake DeFi are clarifying that they are completely different from this model. It’s a smart move and one that other firms unaffected by the crisis would be wise to follow. And hopefully in the future, customers will be more focused on transparency.