Liquidity Problems in Crypto Lending Firms: What caused it and How to fix it?

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The bitcoin lending platform Vauld is the most recent participant in the market to halt all withdrawals, trading, and deposits. Two weeks after cutting its personnel by almost 30%, Vauld made the statement on July 4.

Darshan Bathija, co-founder and CEO of the Singapore-based cryptocurrency lending platform Vauld, wrote about the company’s key business partners’ financial struggles in a blog post on the company’s website. He also discussed customer withdrawals totaling more than $197.7 million since June 12, when the cryptocurrency market crashed as a result of Terraform Lab’s UST stablecoin’s demise, crypto hedge fund Three Arrow Capital defaulting on loans, and cryptocurrency lending platform Celsius network.

Vauld has joined the list of cryptocurrency players who have halted trading and withdrawals, including Celsius Network and cryptocurrency broker Voyager Digital.

The withdrawals caused Vauld to halt operations. The collapse of Terraform Lab’s UST stablecoin, Three Arrows Capital’s debt failure, and the suspension of withdrawals on the Celsius network all contributed to the downturn in the cryptocurrency market. All cryptocurrency players who temporarily halted user withdrawals cited liquidity constraints as the cause and gave this as their justification.

Celsius made headlines in every business publication when it halted all withdrawals due to liquidity difficulties. In accordance with U.S. Chapter 11, Celsius filed for Bankruptcy Code after declaring it will fire a fourth of its staff due to “severe market conditions.”

According to the Voyager Digital platform, the cryptocurrency trading and withdrawal services for its users have been suspended. The cause for this, according to firm representatives, is an unpaid loan from the cryptocurrency hedge fund Three Arrows Capital (3AC). Additionally, Voyager Digital is currently facing bankruptcy procedures. Vauld continues to suffer as a result of the recent market declines.

Issues with liquidity: Increasing market turbulence

One of the key factors affecting the liquidity of the cryptocurrency market is trading volumes. Visit any website that displays the market capitalization of cryptocurrencies to keep track of daily volumes. A higher volume indicates that more people are purchasing and reselling coins. Due to a lack of information and special government rules, only enthusiasts have been able to participate in these activities up until now. However, as interest in bitcoin trading and cryptocurrency trading in general increases, more and more people are starting to do so.

One of the key factors affecting the liquidity of the cryptocurrency market is trading volumes.

There are now more cryptocurrency exchanges than before, which means that people have more possibilities for trading their coins. Increased transaction volume and frequency boost liquidity.

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Usability is a factor that also has an impact on liquidity. When more people use cryptocurrencies as a payment method, their liquidity increases. To increase the usage of cryptocurrencies in commerce, it is crucial that companies accept cryptocurrencies as a form of payment.

Liquidity Problems in Crypto Lending Firms: What caused it and How to fix it?

Regulations have a big impact as well. Various countries have adopted varied stances on cryptocurrencies, with some outright prohibiting them, others permitting them, and still, other countries questioning their legality. A clear stance by the government on issues like consumer protection and taxation should encourage more people to participate, which will affect the market’s liquidity. Despite the circumstances, the market for cryptocurrencies is growing swiftly.

To locate the finest liquidity provider, brokers must assess their own particular needs and make a well-informed choice based on a multitude of considerations.

The Cause of Liquidity Issues

The cryptocurrency rise of 2020–2021 was led by crypto lending companies. However, they face multiple pressing problems with tokenomics, algorithms, and liquidity today.

We currently have more sophisticated financial tools at our disposal than ever before, which is the source of these issues. These are also unregulated and permissionless at the same time. The goal of platform builders was to create systems that would generate as much money as they could.

We currently have more sophisticated financial tools at our disposal than ever before, which is the source of these issues. These are also unregulated and permissionless at the same time.

The main issue is that most platforms are created with the presumption of unending development. When expansion stops, the bubble will pop. The wider crypto ecosystem can suffer greater damage from the explosion as the platform grows in size, which might have a cascading effect.

Attempts to restore liquidity

Two methods are frequently used by crypto projects to restore liquidity. Large debt repayments can aid in restoring confidence in the platforms’ solvency and reopening withdrawals. The recently assumed Celsius payment of $120 million to the multi-party vault Dai No. 25977 serves as an illustration of debt repayment. By doing so, vault liquidation expenses are avoided, and the possibility of forced fund liquidation is decreased.

Aside from selling them, the DAO and DeFi initiatives are exploring ways to make their treasury tokens liquid. Platforms for DeFi lending in the new wave are providing solutions. For starters, Lido Finance, another crypto-lending business, and Fringe Finance have formally joined to address the issues with the initial staking of ETH 2.0. Illiquidity, immovability, and accessibility are issues. The goal is to increase the usability and liquidity of the whitelisted altcoins in the expanding DeFi ecosystems.

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The liquidity crisis these corporations are experiencing is the most important part of this trend. Given its significant stakes in Luna, Three Arrows Capital (3AC), a Singapore-based hedge fund, had its assets under management fall by over 70% following the collapse of TerraUSD and Luna. As a result, 3AC missed payments on $670 million in loans provided to it by Voyager Digital. Due to the knock-on effects of this, Voyager Digital had to halt trading, deposits, and withdrawals. Similar to Celsius Network, another lender, all withdrawals, swaps, and transfers between accounts for its 1.7 million clients were halted last month. Significantly, 3AC has declared bankruptcy.

In conclusion, if designers of protocols don’t take into account the conditions of future adverse times, another crisis very likely could be their demise.


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