DeFi Done Right: How SOMA.finance is Different to Celsius and BlockFi
In this article we examine two case studies, Celcius and BlockFi, in more detail to further understand their shortcomings and respective downfalls, as well as examine how SOMA.finance is changing the world of DeFi for the better.
- Celsius is a crypto-lending platform that ultimately appeared to function as a Ponzi Scheme and resulted in the loss of billions of dollars worth of users’ funds.
- BlockFi made risky bets lending to hedge funds that got caught up in the collapse of Terra, ultimately resulting in the firm filing for bankruptcy and freezing user funds.
- Depositing tokens on certain platforms relinquishes control of your assets, leaving the platform to do what it will with them while pushing all the risk onto you.
- SOMA.finance will provide a platform for users to interact with a financial system while maintaining control and custody of their own assets.
2022 was a profound year of learning for the cryptocurrency ecosystem as the unregulated nature of the asset class brought hard lessons in the form of multiple high-profile collapses that sent reverberations across the community and resulted in numerous bankruptcies and trillions of dollars worth of lost market capitalization.
From the demise of Terra Classic and its algorithmic stablecoin Terra USD, to the fall of FTX and the front page coverage of Sam Bankman-Fried’s behind-the-scenes dealings, 2022 helped many realize that like it or not, regulation was needed in the crypto space.
Two of the more high-profile bankruptcies that shocked the ecosystem were Celsius and BlockFi, projects that offered crypto trading services but primarily functioned as lending platforms.
Here’s a brief rundown of how Celsius and BlockFi came to meet their demise, and a look at how SOMA.finance is different from these platforms and will never be in the position where its user's assets will be at risk of being lost in bankruptcy.
Celsius: Crypto Ponzinomics
Celsius is a platform that billed itself as an interest-bearing and crypto-lending DeFi platform, but in reality, it appears to have been a glorified Ponzi scheme that co-opted “DeFi” and “blockchain” to do high-stakes trading and lending at its user’s expense.
Arising out of the initial coin offering (ICO) boom and bust of 2017-2018, Celsius struggled its way through the crypto winter that followed by offering high yields on certain tokens deposited by users, saying that it would, in turn, lend those tokens to larger firms for trading purposes at a hefty premium.
Following the Summer of DeFi 2020, Celsius pivoted to sell itself as a DeFi platform, expanded its list of high-yield tokens, and also started offering additional services, including a cryptocurrency exchange.
As you can already tell, this had all the necessary ingredients for baking a disaster, as highlighted by SOMA.finance co-founder William Heyn in his piece titled “Our Collective Crypto Insanity: A Look at CEXs, Asset Ownership and the Role of Regulation.”
“Without the segregation of your account and the exchange, these systems are standing conflicts of interest. Without them adhering to proper custody rules, your assets are at risk and, in reality, cease to be “yours” the moment you deposit them.”
In the case of Celsius, the fine print on the terms and conditions explicitly spelled out that users' funds became the property of the platform once deposited, but the allure of no effort, high yields was too much for many to resist.
As the cryptocurrency market began to unravel following the collapse of Terra, Celsius’ books went into the negative due to its risky lending, poor investment decisions, and the dropping value of its CEL token.
In a last-ditch effort to cover up its shortcomings, Celsius raised the yields on lending products and ultimately used the new deposits to pay out what was owed to longer-term users (Classic Ponzi), before eventually having to declare bankruptcy in July 2022, which led to a freezing of user funds.
One of the biggest lessons learned from Celsius is that when a company has access to all of the user funds on a platform, sometimes, it will risk it all rather than risk its own collapse – and it's usually the users that bear the brunt of those decisions.
BlockFi: A Cautionary Tale
While decidedly different from Celsius in many respects, BlockFi is another cryptocurrency lending platform that declared bankruptcy in 2022 after the firm spread itself thin and was impacted by the bankruptcies of hedge funds and FTX.
BlockFi made it clear that it was a centralized service that would take user deposits and lend them to hedge funds and other trading services that would then use them for trading purposes in exchange for paying a high premium.
One of the collateral effects of Terra’s collapse was the fall of Three Arrows Capital (3AC), one of the largest hedge funds in the digital asset space and a major borrower from BlockFi. While BlockFi was hard hit after the demise of 3AC, a rescue loan in the form of a revolving credit facility from FTX helped pull the company from the brink of bankruptcy and continue to offer its crypto lending services.
The good times would only last a few more months, however, and once FTX went down in a blaze of glory that was covered across all major financial outlets and even mainstream media, the writing was on the wall for BlockFi, and the company filed for Chapter 11 bankruptcy protection on Nov. 28, 2022.
To provide a little additional perspective, in June 2021, BlockFi was valued at $5 billion. Less than a year and a half later, poor decision-making led the firm to bankruptcy and billions in lost funds for its users.
SOMA.finance: We Support the Trading, You Custody the Assets
As the first regulatory-compliant, multi-asset decentralized exchange (DEX) and issuance platform for tokenized equities, digital assets, NFTs, SOMA.finance is a one-stop-shop for all your digital asset needs – and best of all, you retain complete control over your assets.
The previous examples of Celsius and BlockFi demonstrated that bad things can happen when you combine the worlds of crypto lending, DeFi, and high yields, so SOMA.finance has instead opted to focus on protecting its users and providing the best DEX experience in a regulatory-compliant way.
As seen from the lawsuits filed by the U.S. Securities and Exchange Commission against the two largest cryptocurrency exchanges in the world – Binance and Coinbase – its more than just risky bets that can put clients' funds at risk, and it’s high time that the cryptocurrency ecosystem moves past its collective insanity and accept that regulations are needed to help the asset class evolve into a robust, user-friendly marketplace.
“Without rules, there are no safety guidelines on how your assets must be treated,” Heyn wrote. “Worst case, without regulations, you are effectively abrogating your system, and your assets, to the very worst, most dishonest, lowest common denominator human within said ecosystem. That is the ultimate insanity.”
And while SOMA.finance does offer an Earn program, assets that are deposited into our Earn Pools are locked up for designated time periods in smart contracts, meaning that no one at SOMA.finance can access those funds, and only you will be able to withdraw them via the wallet used to deposit them once the time lock has expired. Since only the user can access, control or impair assets in these pools, they retain custody and can rest assured that no other party can improperly utilize their funds.
Of additional import, since SOMA.finance’s Earn programs are designed and issued in a regulatory framework, the protections afforded in TradFi remain in these pools. Specifically, since they are regulated products, they will be subject to investor protection rules and disclosure requirements. As an example, full disclosure of the Celsius or BlockFi products would have alerted investors that much of the “lending” was nothing more than circular compound impairment of assets that we lent against and re-lent against many times.
SOMA.finance is here to serve as a bridge between TradFi and DeFi, as well as a bridge between crypto and equities, providing users with all they know and love from decentralized finance combined with tokenized equities and a regulator-approved operation.