Celsius

Celsius vows to return from bankruptcy but expert fears repeat of Mt. Gox

The company says it’s planning to continue operations throughout the restructuring process, though withdrawals will continue to be paused at this time.

Crypto lending platform Celsius confirmed on Wednesday that it has initiated Chapter 11 bankruptcy proceedings in the Southern District Court of New York.

The announcement was shared on the company’s Twitter and shared with account holders via email on Wednesday, with a vow to “emerge from Chapter 11 positioned for success in the cryptocurrency industry.”

According to Investopedia, a Chapter 11 bankruptcy allows a company to stay in business and restructure its obligations. Companies that have successfully reorganized under Chapter 11 include American Airlines, Delta, General Motors, Hertz and Marvel, according to an updated FAQ by Celsius.

Danny Talwar, head of tax at crypto accounting software firm Koinly, shared his concerns with Cointelegraph that the proceedings could mean investors and customers of Celsius may not see their funds returned for the “foreseeable future,” similar to the fallout from the Mt. Gox hack in 2014 which is still ongoing:

“This could be Mt. Gox 2.0. Court proceedings may drag out the process of Celsius customers receiving any of their deposits back well into the future.”

“For context, Mt. Gox was the largest exchange for Bitcoin from 2010 until its collapse in 2014, losing over 850,000 BTC in deposits,” explained Talwar. “Customers are still awaiting the release of funds from the exchange now (in 2022), with court proceedings in multiple jurisdictions globally and in Japan.”

Celsius, in a statement on Wednesday, said it aims to use $167 million in cash-on-hand to continue “certain operations” during the restructuring process and said it intends to eventually “restore activity across the platform” and “return value to customers.”

However, customer withdrawals are set to remain paused “at this time.”

Members of the Celsius board said the move to bankruptcy follows a “difficult but necessary” decision last month to pause withdrawals, swaps and transfers on the platform.

Celsius co-founder and CEO Alex Mashinsky added in a statement that it is the “right decision for our community and company.”

“We have a strong and experienced team in place to lead Celsius through this process. I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”

Through “first day” motions, the company said it intends to pay employees and continue their benefits. The company says it will also continue to service existing loans with maturity dates, margin calls and interest payments to continue as they have in the past.

Celsius has also appointed a new director to guide it through the restructuring process, including David Barse, a “pioneer” in distressed investing who is the founder and CEO of index company XOUT Capital.

Related: Vermont becomes the sixth US state to launch investigation against Celsius

Though some in the community have taken the news as a negative for Celsius, Talwar argues that Celsius’ bankruptcy filing could spell temporary relief for crypto markets: 

This Chapter 11 filing allows the crypto markets to breathe a collective sigh of relief, as it likely means Celsius won’t be selling their holdings onto an already depressed market.

Earlier in the day, Celsius closed off the last of its decentralized finance (DeFi) debts owed to Compound, Aave, and Maker, reducing its initial debt of $820 million to just $0.013 over the course of a month.

Talwar said repayment of its debts just ahead of filing for bankruptcy may have been required in order for “all remaining customer funds and collateral to be taken stock of.”

BREAKING: Celsius reportedly filing for bankruptcy ‘imminently’

An unnamed source told CNBC that the company plans to file the bankruptcy paperwork “imminently.”

Crypto lending platform Celsius has reportedly filed for Chapter 11 bankruptcy, with its lawyers starting to notify individual U.S. state regulators as of Wednesday, July 13.

The news was reported by CNBC and referred to an unnamed source, who asked not to be named as the proceedings were private. They said that the company planned to file the Chapter 11 paperwork “imminently.”

It comes just days after the embattled lending platform replaced its previously hired law firm Akin Gump Strauss Hauer & Feld LLP with Kirkland & Ellis LLP, the same firm that assisted Voyager Digital with its bankruptcy filing last week.

Earlier in the day, Celsius closed off the last of its DeFi debts owed to Compound, Aave, and Maker, reducing its initial debt of $820 million to just $0.013 over the course of a month.

Still unknown, however, will be the fate of depositors who still have their assets locked up on the lending platform. Neither the company nor its CEO Alex Mashinsky has made any public comments about whether depositors will receive any percentage of their funds back.

On Tuesday, Vermont’s Department of Financial Regulation (DFR) issued a warning against the troubled crypto lending firm, reminding consumers that the firm is not licensed to offer its services in the state.

The DFR also stated it believed the company was “deeply insolvent” and doesn’t possess “assets and liquidity” to fulfill its obligations toward the customers, and accused them of mismanaging customer funds by allocating them towards risky investments.

Related: Bombshell allegations of fraud as KeyFi takes Celsius to court

Vermont has become the sixth state in America to open an investigation into Celsius’s crypto interest rate accounts, joining the likes of Alabama, Kentucky, New Jersey, Texas and Washington.

Rumors of Celsius’ insolvency began circulating last month after the crypto lender was forced to halt withdrawals due to “extreme market conditions” on June 13.

Update: Celsius vows to return from bankruptcy but expert fears repeat of Mt Gox

BREAKING: Celsius reportedly filing for bankruptcy ‘imminently’

An unnamed source told CNBC that the company plans to file the bankruptcy paperwork “imminently.”

Crypto lending platform Celsius has reportedly filed for Chapter 11 bankruptcy, with its lawyers starting to notify individual United States state regulators as of Wednesday.

The news was reported by CNBC and referred to an unnamed source, who asked not to be named, as the proceedings were private. They said that the company planned to file the Chapter 11 paperwork “imminently.”

It comes just days after the embattled lending platform replaced its previously hired law firm Akin Gump Strauss Hauer & Feld LLP with Kirkland & Ellis LLP, the same firm that assisted Voyager Digital with its bankruptcy filing last week.

Earlier in the day, Celsius closed off the last of its decentralized finance (DeFi) debts owed to Compound, Aave and Maker, reducing its initial debt of $820 million to just $0.013 over the course of a month.

Still unknown, however, will be the fate of depositors who still have their assets locked up on the lending platform. Neither the company nor its CEO Alex Mashinsky has made any public comments about whether depositors will receive any percentage of their funds back.

On Tuesday, Vermont’s Department of Financial Regulation (DFR) issued a warning against the troubled crypto lending firm, reminding consumers that the firm is not licensed to offer its services in the state.

The DFR also stated it believed the company was “deeply insolvent” and doesn’t possess “assets and liquidity” to fulfill its obligations toward the customers and accused them of mismanaging customer funds by allocating them toward risky investments.

Related: Bombshell allegations of fraud as KeyFi takes Celsius to court

Vermont has become the sixth state in America to open an investigation into Celsius’s crypto interest rate accounts, joining the likes of Alabama, Kentucky, New Jersey, Texas and Washington.

Rumors of Celsius’ insolvency began circulating last month after the crypto lender was forced to halt withdrawals due to “extreme market conditions” on June 13.

Update: Celsius vows to return from bankruptcy but expert fears repeat of Mt Gox

Celsius changes legal team, pays off $20M in Aave debts

The embattled platform continues to wind down its debts to DeFi lending protocols, having just paid off 20 million USDC to Aave.

Crypto lending platform Celsius has reportedly hired lawyers from Kirkland & Ellis LLP to advise on its restructuring options — the same firm that assisted Voyager Digital with its bankruptcy filing last week. 

According to a report from the Wall Street Journal on Sunday, the company has hired lawyers to advise on options, including a bankruptcy filing in place of the previously hired law firm Akin Gump Strauss Hauer & Feld LLP.

Kirkland & Ellis LLP describes itself as an international law firm that serves clients in private equity, M&A, and other corporate transactions, having been founded in 1909.

The law firm has also been tapped as general bankruptcy counsel for Voyager Digital in its bankruptcy proceedings, which it filed in the Southern District Court of New York on July 5, days after pausing trading, withdrawals and deposits on liquidity issues.

Despite ongoing concerns that the crypto lender may follow a similar path, Celsius has continued to wind down its debts to decentralized finance (DeFi) lending protocols, having just paid off 20 million in USD Coin (USDC) to Aave.

The latest loan repayment was picked up by blockchain analytics firm Peckshield on Sunday, sharing a screenshot of the 20 million USDC transfer from a Celsius wallet to Aave Protocol v2.

DeFi tracking platform Zapper shows that Celsius still owes approximately $130 million in USDC and $82,500 in Ren (REN) to Aave, along with $85.2 million in Dai (DAI) to the Compound protocol, with a total debt of $215 million.

Last week, the lending platform paid off its remaining $41.2 million debt to Maker protocol on Thursday, freeing up more than $500 million in Wrapped Bitcoin (wBTC) collateral.

Related: Tether liquidates Celsius position with ‘no losses’ to stablecoin issuer

Paying down debt has been seen as a positive for Celsius’ depositors, who have not been able to access their crypto funds since withdrawals halted on June 13 and fear a loss of their funds if the company were to go bankrupt.

Last week, crypto lawyer Joni Pirovich told Cointelegraph that Celsius’ repayment of its loan position would ultimately assist its customers, as it would free up capital which could be used to meet customer withdrawal requests.

Pirovich added that even if Celsius files for bankruptcy, repaying its loan position and withdrawing collateral could improve the situation of its customers.

Celsius moved $529M worth of wBTC to FTX exchange: Should we be worried?

The crypto community is concerned that the transfer could lead to the dumping of more than $500 million Bitcoin into the market.

Embattled lending platform Celsius has transferred nearly 25,000 Wrapped Bitcoin (wBTC), worth $528.9 million, to crypto exchange FTX, prompting concerns from some in the community about whether a dump may soon follow. 

The huge transfer to the exchange comes after the lending platform paid off its remaining $41.2 million of debt to Maker protocol, freeing up its loan’s entire wBTC collateral.

However, the community is unsure what to make of the transfer, with some fearing that a dump of the wBTC on the exchange could soon follow, pushing Bitcoin (BTC) prices down.

Others have been more hopeful that the move may be in preparation for Celsius to swap their Wrapped Bitcoin for BTC, which may be a good sign for depositors who’ve been hoping for Bitcoin withdrawals to eventually reopen on the Celsius platform. Bitcoin is up 8% in the past 24 hours to trade above $22,100, suggesting market participants are taking the news in their stride.

The 25,000 wBTC sent to FTX follows the news earlier today that 150,000 BTC may be potentially released into the market as Mt. Gox creditors get their BTC back after an eight-year wait.

So far, both Celsius and CEO Alex Mashinsky have remained radio silent about any movement of funds.

Crypto lawyer Joni Pirovich, principal of blockchain and digital assets, told Cointelegraph on Thursday that Celsius’ repayment of its loan position with Maker will ultimately assist its customers.

Related: Bombshell allegations of fraud as KeyFi takes Celsius to court

“Maker protocol relies on overcollateralized loan positions, so the loan repayment of $41 million worth of DAI released 21,962 wBTC of capital which is now available to meet customer withdrawal requests.”

Pirovich added that even if Celsius ends up filing for bankruptcy, repaying the loan position and withdrawing collateral could improve the position of customers:

“The question is what will Celsius do with the withdrawn collateral? Keep it in reserve for customers or risk it to trade and on-lend.”

Bombshell allegations of fraud as KeyFi takes Celsius to court

KeyFi Inc.’s complaint alleges that Celsius failed to honor a multi-million dollar profit-sharing agreement after deploying numerous successful staking and DeFi strategies for the firm.

Staking software and investment firm KeyFi Inc. has filed a complaint against beleaguered crypto-lending firm Celsius, alleging the company had been operating in a Ponzi-style fashion and that it failed to honor a profit-sharing agreement “worth millions of dollars.”

The complaint, filed on Thursday, alleges that Celsius has refused to honor a “handshake agreement” in which KeyFi would receive various percentages of the profits it made on Celsius’s behalf via a number staking and decentralized finance (DeFi) strategies.

The complaint also accuses Celsius of “negligent misrepresentation” over its risk management controls and “fraud in the inducement” via misleading information of its business operations, which were deployed to induce KeyFi to work with Celsius.

The plaintiff is Jason Stone, CEO of KeyFi. He founded the company in January 2020 and has a background as an investor/investment adviser.

According to the court documents, KeyFi served as an investment manager to Celsius between August 2020 and March 2021, during which the duo entered into a Memorandum of Understanding (MOU) which saw the KeyFi work under a special purpose vehicle to be owned by Celsius, dubbed Celsius KeyFi.

While a specific figure owed to KeyFi is not outlined in the complaint, it states the sum is worth “millions of dollars,” and that the companies had agreed on profit shares ranging from 7.5% to 20%, depending on the investment strategy.

Notably, there is also a lengthy section of the complaint alleging that Celsius was running a Ponzi-style operation by luring in new depositors with high-interest rates as a way to “repay earlier depositors and creditors.”

The complaint seeks a trial by jury and an award of damages in “an amount to be determined at trial,” along with punitive damages in the same vein, pre and post-judgment interest and an accounting of all assets/funds generated via KeyFi trading activities.

Further claims from Oxb1

A person claiming to be Stone revealed himself to be the leader of the group of pseudonymous DeFi traders behind the Oxb1 address and Twitter account on Thursday. The account provided a long rundown of Celsius’ alleged dealings with KeyFi since 2020.

Celsius was said to have struck a business partnership with KeyFi in mid-2020, which saw the creation of the Oxb1 address for KeyFi to receive, manage and invest customer deposits from Celsius. The assets under management (AUM) totaled almost $2 billion by the end of their partnership in March 2021, according to the account.

The account also stated that Celsius’ risk management team, who monitored the activity of Oxb1, assured KeyFi that “their trading teams were adequately hedging any potential” impermanent loss (IL) and fluctuations in token prices relating to KeyFi investment activities.

However, Oxb1 alleges that this was not true, and they “had not been hedging our activities, nor had they been hedging the fluctuations in crypto asset prices.”

“The entire company’s portfolio had naked exposure to the market,” he said.

Oxb1 claims that KeyFi opted to terminate the partnership as a result and gradually unwind its investment positions over the course of a few months. KeyFi was said to have increased total AUM by $800 million during the partnership.

However, when the firm exited its positions, Celsius allegedly suffered impermanent loss and blamed Stone. 

Related: Celsius pays down 143M in DAI loans since July 1

Oxb1 stated that he filed the lawsuit and took the matter public after a year of trying to privately settle the dispute with Celsius. To date, he claims KeyFi is owed a “significant amount of money,” and that Celsius has “refused” to acknowledge its lack of risk management and honor the initial profit-sharing terms of the deal:

“Despite our reasonableness, and due to what I believe was motivated by the massive hole in their balance sheet, Celsius has refused to acknowledge the truth or their failures in risk management and accounting. They have tried to deflect blame to me instead.”

BnkToTheFuture unveils 3 proposals to rescue Celsius from oblivion

BnkToTheFuture’s three proposals include two different ways to restructure and relaunch the firm or an option to co-invest in the firm with a bunch of Bitcoin whales.

Celsius’ lead investor BnkToTheFuture has outlined three proposals to save Celsius from bankruptcy while finding a good outcome for shareholders and depositors with funds stuck on the platform.

Shared on Twitter by BnkToTheFuture CEO Simon Dixon on Thursday, the three distinct proposals include either two options of restructuring and relaunching Celsius or potentially co-investing in the platform alongside wealthy Bitcoin (BTC) whales.

“Proposal #1: A restructuring to relaunch Celsius and allow depositors to benefit from any recovery through financial engineering.”

“Proposal #2: A pool of the most influential whales in Bitcoin to co-invest with the community.”

“Proposal #3: An operational plan that allows a new entity and team to rebuild and make depositors whole.” 

Dixon previously referred to “financial innovation” being needed to be applied to Celsius, similar to the issuance of equity debt tokens like in the case of Bitfinex in 2016, which were designed to represent $1.00 of debt per token.

“We believe all attempts should be made to make depositors whole in order to maintain shareholder value,” the team wrote, adding it will be calling for a shareholder meeting that “legally cannot be ignored by the Celsius board:”

“Bnk To The Future Capital SPC holds over 5% of Celsius shares and therefore we believe that this allows us to call a shareholder meeting as part of our statutory shareholder rights that legally cannot be ignored by the Celsius board.”

BnkToTheFuture also suggested that after first submitting these proposals to Celsius and its advisers, it is now looking to “apply pressure” on the firm after getting “worried that time was running out” with its lack of a distinct plan of action. These sentiments were also echoed by Dixon in a Digital Assets News Interview on the same day:

“You have to move really fast, because the longer you go on, the more FUD comes out, bad PR comes out, more predatory offers come out, the more the community stops believing in what they originally believed in.”

Celsius’ users have been unable to withdraw assets from the platform since June 13 amid the firm’s ongoing liquidity issues. Meanwhile, there are fears that users may never get their funds back if the company were to go bankrupt.

Celsius may have its own solution

In a blog post on Friday, Celsius stated that it is working as fast as it can to stabilize its liquidity problems so that it can be “positioned to share more information with the community.”

While the firm did not reveal much about what this entails, Celsius stated that it is exploring options to protect its assets such as pursuing strategic transactions as well as a restructuring of our liabilities, among other avenues.

“These exhaustive explorations are complex and take time, but we want the community to know that our teams are working with experts from many different disciplines,” the blog post read.

FTX walked away from Celsius deal over bad financials

Related: Contagion: Genesis faces huge losses, BlockFi’s $1B loan, Celsius’s risky model

Reports surfaced on Thursday that Sam Bankman-Fried’s crypto exchange FTX recently walked away from a deal to purchase Celsius after finding a $2 billion hole in the company’s finances.

According to two unnamed sources close to the matter, FTX had entered talks with Celsius to either provide financial support or acquire the firm outright. However, apart from having $2 billion, an account for Celsius was said to be difficult to deal with.

Contagion: Genesis faces huge losses, BlockFi’s $1B loan, Celsius’s risky model

A leaked investor call from Morgan Creek Digital suggests BlockFi liquidated 3AC for $1 billion, while Celsius reportedly maintained a highly risky assets-to-equity ratio last year that may have caused its recent liquidity woes.

It’s been another day of watching the ripples of contagion spread through the crypto market.

With Three Arrows Capital (3AC) being ordered into liquidation by a British court, details have also emerged on Thursday of BlockFi liquidating a $1 billion loan to 3AC, and the fallout from the insolvency was partly to blame for lending firm and market maker Genesis Trading facing losses of “a few hundred million dollars.”

Withdrawals remain suspended at the possibly insolvent lending and borrowing platform Celsius, which was revealed to have had a highly risky 19 to 1 assets-to-equity ratio before it ran into liquidity troubles this year.

Celsius’ risky business

According to documents reviewed and reported on by the Wall Street Journal (WSJ) on Wednesday, Celsius was operating on very fine and risky margins as it ballooned in value over 2021.

According to documents prepared before the last equity raise, Celsius, which claimed to be a less risky alternative to a bank, had an assets-to-equity ratio of $19 billion to $1 billion midway through last year while also issuing out many loans that were undercollateralized.

The assets-to-equity ratio refers to the proportion of a firm’s assets that have been funded by shareholders. The ratio generally represents an indicator of how much debt a firm has leveraged to finance its operations, with higher ratios often suggesting a firm has utilized substantial financing and debt to remain afloat.

The ratios differ from sector to sector, as do the assets held by the specific entities. However, Celsius’s already high 19-to-1 ratio is seen as extra risky due to the firm’s exposure to crypto, leverage and lending.

Eric Budish, an crypto-versed economist at the University of Chicago’s business school, stated that “It’s just a risky structure,” as he likened Celsius’ operations to that of financial firms in the lead-up to the 2008 housing bubble:

“It strikes me as diversified as the same way that portfolios of mortgages were diversified in 2006. It was all housing— here it’s all crypto.“

Reports also surfaced that Voyager Digital has sent more than $174 million to Celsius over the past few months. The transactions were confirmed by analytics platform Nansen this week. However, the nature of the funding or whether it is a loan is unclear.

Genesis facing hundreds of millions in losses

Digital Currency Group’s market maker and lending firm Genesis Trading is reportedly facing losses in the hundreds of millions, according to sources reported by DCG publication Coin Desk.

The losses relate in part to the company’s exposure to 3AC and the crypto lender Babel Finance. Genesis is putting a brave face on the losses and still has hope of receiving partial repayments, with other losses offset by hedging. CEO Michael Moro said the firm had mitigated losses with “a large counterparty who failed to meet a margin call to us:”

“We sold collateral, hedged our downside, and moved on. Our business continues to operate normally and we are meeting all of our clients’ needs.”

Battle for BlockFi

A leaked investor call from hedge fund Morgan Creek Digital confirmed the liquidation of a large unnamed client by BlockFi on June 16 was 3AC.

During the call, Morgan Creek’s managing partner Mark Yusko and co-founder Anthony “Pomp” Pompliano stated that BlockFi had “reported” to the firm the loan was worth $1 billion and overcollateralized by 30%.

Pomp went on to state that roughly two-thirds of $1.33 billion collateralization was in Bitcoin (BTC) and was immediately liquidated once 3AC was unable to make repayments. The other third was said to be in Grayscale Bitcoin Trust (GBTC) shares worth around $400 million.

Grayscale’s BTC trust is designed to be pegged to the spot value of BTC, however, it often trades for either a premium or a discount.

Related: British Virgin Islands court reportedly orders to liquidate 3AC

According to Pomp, BlockFi ran into troubles liquidating the position as the GBTC discount dropped to around 34%, and the price went down as the firm went to sell the holdings.

With FTX reportedly planning to purchase a stake in BlockFi following the issuance of a $250 million revolving credit facility to the firm, the call also discusses how Morgan Creek was looking to raise $250 million to purchase 51% of the firm. Such a sum would give BlockFi a valuation of just $500 million, well below its reported valuation of $5 billion in June 2021.

Mark Cuban says crypto crash highlights Warren Buffett’s wisdom

The billionaire crypto investor admits there are still hard times ahead for most financial markets but says that as long as the crypto space produces new tech, it will be fine.

Billionaire crypto investor and owner of the Dallas Mavericks Mark Cuban says the current market downturn reminds him of a well-known adage uttered by Warren Buffett.

Cuban sees a parallel between the rise and fall of cryptocurrency markets and projects, and the 91-year-old Oracle of Omaha’s aphorism states that, “Only when the tide goes out do you discover who’s been swimming naked.”

Cuban’s observation was revealed during a Thursday interview with Fortune in which he discussed what he sees as flawed business models of some crypto projects that have fallen on hard times over the past two months.

“In stocks and crypto, you will see companies that were sustained by cheap, easy money — but didn’t have valid business prospects — will disappear,” the Shark Tank investor said:

“Like [Warren] Buffett says, ‘When the tide goes out, you get to see who is swimming naked.’”

Some of the companies that appear to have been swimming naked included Terra, Celsius and Three Arrows Capital.

The Terra ecosystem, now known as Terra Classic, completely collapsed by the middle of May. The fallout from that collapse has seen tens of billions in losses to investors, while a manhunt has ensued for the founder and CEO Do Kwon by several regulatory bodies.

Celsius, the staking and lending platform, is fighting to stay solvent if its recent pausing of withdrawals is any indicator. Investment firm Three Arrows Capital is reported to have faced a liquidation to the tune of $400 million and has been unable to meet margin calls.

Despite the gloomy short-term outlook for crypto, Cuban said that these downturns tend to have a cleansing effect on a market and that it would likely be the same for crypto this time around. But, he said you should always back innovation:

“Disruptive applications and technology released during a bear market, whether stocks or crypto or any business, will always find a market and succeed.”

CEO of Avenue Capital Group Marc Lasry has an even more gloomy assessment of the financial markets. He predicted on Bloomberg TV that the pain across the economy, in general, would continue through the end of 2022 as equity indexes could fall up to another 10%. However, Lasry believes that the United States economy is strong enough to keep the current downturn relatively abbreviated.

Lasry has been a crypto bull since 2018. In 2021, Cointelegraph reported that he lamented that he hadn’t bought enough Bitcoin (BTC). But, he told Bloomberg TV that BTC and Ether (ETH) have already dipped more than expected and that “Nobody knows what the bottom is for that.”

He added that even for professional investors it is hard to time a bottom, “so you want to get invested when you can.”

Related: 72 of the top 100 coins have fallen 90% or more: Here are the holdouts

Maker cuts off Aave’s Dai supply as fallout from Celsius continues

The MakerDAO decided to cut off Aave from its direct deposit module as a safeguard in light of the possibility that Celsius folds and crashes the price of stETH.

MakerDAO has voted to cut off lending platform Aave’s ability to generate Dai for its lending pool without collateral as the risks of Celsius’s liquidity crisis loom large over the entire crypto ecosystem.

The decentralized autonomous organization (DAO) made the decision as a means of mitigating the Maker protocol’s exposure to the beleaguered staking and lending platform in case Celsius goes belly up and implodes the staked Ether (stETH) peg as well.

stETH is a token representing an amount of ETH that is staked on the Lido staking platform. Its peg to Ether (ETH) has been wavering for several weeks, and it’s currently trading about 6% below the price of ETH. Celsius invested a significant amount of user funds into stETH, which is reportedly one of the reasons it paused withdrawals.

A Tuesday governance proposal from DAO member prose11 suggested that the Maker protocol should temporarily disable the DAI Direct Deposit Module (D3M) for Aave because Celsius borrowed 100 million in Dai collateralized by stETH, which would be at risk of liquidation if Celsius fails:

“The reason we believe this is risky is because out of 200M DAI borrowed on Aave Ethereum v2, 100M DAI is being borrowed by Celsius and collateralized mostly by stETH.”

The D3M allows Aave to stabilize the Dai loan interest rates by providing access to liquidity when needed. Aave’s D3M consists of 200 million Dai, 100 million of which have been borrowed by Celsius.

If Celsius does collapse, it might sell off its stETH to honor retail responsibilities and get liquidated on Aave, which would likely force stETH to depeg even further. This would put the Maker protocol at the risk of not being able to retrieve all the Dai Celsius borrowed.

Around 58% of the 83 voters on the proposal felt that the tail risk presented by Celsius was greater than the loss of revenue from Aave by passing the proposal. The pause will come into effect at 5:03 pm EST on Friday.

Related: BitBoy founder threatens class action lawsuit against Celsius

A separate Tuesday governance proposal was put forth on Aave itself to determine whether it should freeze stETH, pause ETH borrowing and increase the liquidation threshold for stETH borrowers. However, opponents have a steep edge on this proposal, with nearly 90% of the vote at the time of writing.

Maker’s move is an example of decentralized finance (DeFi) protocols observing contagion in the ecosystem and attempting to protect themselves from getting tagged. In addition to Celsius, crypto investment firm Three Arrows Capital is now suffering the effects of contagion and threatening to spread it further, with reports of a $400 million liquidation and its inability to meet margin calls.