(Bloomberg) -- Crypto lending platform Celsius Network may have limited options in its efforts to stay solvent after its decision to freeze withdrawals helped set off one of the biggest digital token meltdowns in years.

So says crypto research firm Kaiko, which pointed to a combination of “poor risk management, bearish market conditions, and a derivative of Ethereum” known as stETH as the reasons Celsius now finds itself in a “Lehman-esque” position. 

As for what comes next, the firm’s only choice may be to use its significant stETH holdings as collateral in an over-the-counter agreement to generate liquidity, according to Kaiko’s Conor Ryder. But even then, it’s prospects don’t look good.

“Even if they do survive this onslaught, I don’t see how anyone can trust the likes of Celsius to keep their assets safe going forward,” Ryder wrote in a June 15 report. Given such a high profile failure of a centralized lender, “perhaps in a few years’ time we will look back on this as a watershed moment for decentralized finance adoption, but that’s probably just the optimist in me.”

Celsius didn’t respond to requests seeking comment.

Celsius’s fall from grace was swift, even by the breakneck standards of the cryptocurrency world.

Since its debut in 2018, it had billed itself as a way for retail investors to gain access to the kind of returns once reserved for hedge funds and other big-time investors. People could lend their coins and earn an annualized rate of more than 18%, paid out weekly. There were bonuses for those who took their earnings in Celsius’s own token, known as CEL.

Generous refer-a-friend incentives helped the platform explode to more than 1.7 million users, according to the company’s website. It managed more than $20 billion in assets at one point.

Celsius had to make risky bets to pay out sky-high yields, including in TerraUSD, the stablecoin that collapsed just a few weeks prior. Before that, Celsius lost money in the BadgerDAO hack.

“The DeFi world got ahead of its skis,” billionaire Tim Draper said in an emailed response to questions on Celsius, in which he said he was not an investor. “It will certainly recover.”

stETH Mess

But the primary culprit for its solvency issues may be tied to its involvement in stETH, a token created by Lido designed to eventually be redeemable on a 1-for-1 basis with Ethereum once planned upgrades of the blockchain are finished.

StETH’s price deviated from Ethereum in recent days, and Celsius was forced to freeze withdrawals “partially due to stETH losses and the lack of liquidity, which turned them into forced sellers of other assets to meet redemptions,” crypto investment firm Arca wrote in a blog post.

Celsius’s recovery options are limited, according to Kaiko’s Ryder. It may have about $500 million trapped in stETH, and selling large amounts in the open market to pay off redemptions would be impossible “without nuking the price.”

A more feasible option: Celsius could use stETH or other reserves as collateral or payment for an over-the-counter agreement with an exchange or a market maker, Kaiko said. It could try to use or swap its stETH and enter into short Ether positions on the perpetual futures market, hoping to profit if Ether fell lower. Or an exchange or market maker could take stETH from Celsius at a discount, Kaiko said.

Celsius appointed Citigroup to advise on potential financial options, the Block reported Wednesday. It also hired law firm Akin Gump Strauss Hauer & Feld to advise on possible solutions to its financial problems, Dow Jones reported. 

Akin Gump didn’t respond to a request seeking comment, while Citigroup declined to comment.

“Celsius was ambitious, but not sure to collapse,” said Aaron Brown, a crypto investor who writes for Bloomberg Opinion. “The test was a major drawdown in crypto, and it seems to have failed.”

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