How did the CeFi lending take down your BTC?

TLDR: they hunted for more yield after the yields declined and competition increased.

This is what happened:

1. CeFi lenders earned either via DeFi Yield farming or lending the depositors assets
2. CeFi lenders were using their depositor’s Bitcoin as collateral to borrow stables in #DeFi
3. Stables were invested into Yield Farming, which invested into leveraged pools. The underlying components earned either trading fees or interest.
4. Additionally, hedge funds borrowed Bitcoin against and shorted it (see details in: [
5. The general market activity started to decline in 2021, which means less returns from yield farming (because less trading fees or interest fees)
6. This resulted in less income for CeFi lenders.
7. At the same time, more CeFi lender competition emerged, and the hunt for yield started.
8. CeFi lenders started to make riskier investments. De facto, they were hedge funds themselves and primer-brokers to their hedge-fund borrowers.
9. CeFi lenders reacted with higher-risk/higher-return DeFi Yield Farming
10. CeFi lenders reacted by reducing the collateral requirements for their borrowers till under-collateralized lending.
11. Additionally, more hedge funds entered the business and did the same trade – shorting Bitcoin, repurchasing it, and earning the spread.
12. As more hedge funds borrowed with less collateral, a systemic effect emerged.
13. This shorting earned profits, but many hedge funds got margin calls on declining collateral assets.
14. Shorting and cascaded liquidations of collateral took down the market.
15. Some hedge funds earned in this process, but most did not.
16. Some CeFi lenders earned a little bit, but many went down.
17. Depositors lost the most.
18. It wasn’t just Grayscale or Celsius. It was a whole market structure that pushed down BTC price.


Let’s summarize:

πŸ‘‰ CeFi lender’s competition and declining Yield Farming returns lead to riskier strategies.

πŸ‘‰ More hedge funds entered the business with copycat Bitcoin shorting trade.

πŸ‘‰ Hunt for the yield takes down the whole market. But it wasn’t just a single player.

πŸ‘‰ It’s the market-structure of CeFi lending which pushed down BTC


Here is twitter thread too: [

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