Celsius Network paid USD 120 million to pay a debt with lending platform Vauld to avoid liquidating its funds. Fringe Finance and Lido Finance want to solve problems dealing with lack of liquidity, immobility, and accessibility.
Brian Passfield, CTO of Fringe Finance, has ten years of experience in blockchain, cryptocurrencies, FinTech, and DeFi. He considers that liquidity problems arise when the owners of protocols do not plan for unfavorable periods.
He thinks the conditions in the cryptocurrency market are not the best for many players, affecting lending platforms. He says that the liquidity problems of many have caused stress to their users and the crypto space in general.
Market Turmoil Increases Due to Liquidity Problems
In June, Celsius Network suspended all withdrawals due to liquidity problems, which caused great concern in the crypto community. After laying off 25% of their employees due to extreme market conditions, they filed for Chapter 11 bankruptcy of the US Bankruptcy Code.
Similarly, crypto platform Voyager Digital announced the suspension of crypto trading and withdrawals two weeks ago. Representatives of the company stated that the pending loan payment by crypto hedge fund Three Arrows Capital (3AC) led them to that.
Vauld, a Singapore-based cryptocurrency exchange, and lending platform, recently stopped its operations, arguing financial difficulties. The collapse of Terra, the problems of Celsius Network, and the loan default by Three Arrows Capital were the main reasons for that suspension.
The liquidity problems in the crypto ecosystem seem to date back to a precise moment. Although no single event is responsible for what happens, Terra has caused a ripple effect on the market.
Some Attempts to Restore Liquidity without Selling Treasury Tokens
Crypto projects usually use large debt payments to restore confidence in the solvency of platforms and allow withdrawals again. For example, Celsius Network recently paid USD 120 million to pay a debt with lending platform Vauld. That prevents the former from liquidating costs and reduces the probability of having to liquidate funds.
DAO and DeFi projects seek how to make their treasury tokens liquid without selling them. For example, Fringe Finance officially collaborated with Lido Finance to solve problems dealing with lack of liquidity, immobility, and accessibility. They want white-listed altcoins to become more liquid and usable in growing DeFi ecosystems.
The Primary Reason for Liquidity Problems to Occur in the Crypto Market
The main protagonists of the 2020-2021 crypto rally were crypto lending companies. However, they now face many problems regarding tokenomics, algorithms, and liquidity.
These problems arise due to the access to more unlicensed and unregulated complex financial instruments. The developers wanted to create platforms that would bring as much financial gain as possible.
Since the design of most platforms relies on the premise of perpetual growth, the bubble will burst when the growth stops. Due to a ripple effect, there will be destruction in the larger ecosystem.
As this happens, liquidity drains away from the market as people leave crypto or switch to long-term holding strategies. In conclusion, if builders do not consider the worst times when designing their protocols, another crisis might become their end.
By Alexander Salazar
