Macauley Peterson

<div id="highlights-block_62c81d1c5cf68" class="highlights">
 <ul>
 <li>The 0xB1 team ran a Twitter account touting itself as “champions of the people of #DeFi”, while working for Celsius</li>
 <li>The fund’s trading strategies “resulted in apparent losses of $390 million when the asset manager returned capital,” according to Arkham Intelligence</li>
 </ul>
 
</div>



If you were paying attention to DeFi in late 2020 and early 2021 you would have likely come across the name 0xB1.



The trader or group of traders ran <a href="https://etherscan.io/address/0xb1adceddb2941033a090dd166a462fe1c2029484" target="_blank" rel="noreferrer noopener">the Ethereum wallet</a> beginning with this prefix, which has sent and received between $1.33 billion and $1.95 billion over its existence, <a href="https://dappradar.com/hub/wallet/eth/0xb1adceddb2941033a090dd166a462fe1c2029484/usage-stats" target="_blank" rel="noreferrer noopener">according to DappRadar</a>.



Yesterday, Jason Stone, CEO of staking software and strategies firm KeyFi, <a href="https://twitter.com/0x_b1/status/1545153652624691200" target="_blank" rel="noreferrer noopener">outed himself</a> as the manager of the wallet’s activities from August 2020 until April 2021, in conjunction with <a href="https://cms.blockworks.co/celsius-accused-of-market-manipulation-by-ex-employee/" target="_blank" rel="noreferrer noopener">a lawsuit</a> filed against Celsius in New York State. He <a href="https://twitter.com/0x_b1/status/1545153656751853572" target="_blank" rel="noreferrer noopener">revealed Thursday, via Twitter</a>, that the 0xb1 address was one of several created to receive Celsius’ customer deposits for he and his team to manage.



In November 2020, a corresponding Twitter persona (going by @0x_b1) was created that quickly garnered a significant following, while making no mention of Celsius, or the source of its capital.



As all Ethereum transactions are public and immutable, the exploits of what was assumed to be a group of skilled proprietary traders — based on the scale and frequency of their on-chain activity — was closely followed. Nick Chong, now with ParaFi Capital, <a href="https://twitter.com/n2ckchong/status/1345640669386219522" target="_blank" rel="noreferrer noopener">called it</a> “by far one of the most interesting Ethereum addresses I’ve seen.”



Despite its notoriety, new research from Arkham Intelligence, shared with Blockworks, concludes that KeyFi lost millions of dollars of Celsius’ customer funds.



&#8220;These trading strategies resulted in apparent losses of $350 million when the asset manager returned capital compared to the value of the crypto assets Celsius originally sent at the time of return,” an Arkham spokesperson told Blockworks via email.



Arkham notes that the account’s fame took off shortly after the relationship with Celsius was put in place: “The DeFi giant soon became a crypto community folk hero.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/ Without the people, there is no DeFi. We are champions of the people of <a href="https://twitter.com/hashtag/DeFi?src=hash&amp;ref_src=twsrc%5Etfw">#DeFi</a>, announce opening the 2021 year with a celebratory series of games commemorating the true year of <a href="https://twitter.com/hashtag/DeFi?src=hash&amp;ref_src=twsrc%5Etfw">#DeFi</a>, the year of the Ox, and the year of <a href="https://twitter.com/hashtag/0x_b1?src=hash&amp;ref_src=twsrc%5Etfw">#0x_b1</a>. With gratitude, Let the games begin!&mdash; 0xb1 (@0x_b1) <a href="https://twitter.com/0x_b1/status/1349428654019895303?ref_src=twsrc%5Etfw">January 13, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Starting in August 2020, Celsius began transferring the wallet, run by Stone’s KeFi group, hundreds of millions of dollars.



Based on <a href="https://markets.businessinsider.com/news/stocks/celsius-network-partners-with-chainalysis-to-confirm-audit-of-3-31-billion-in-assets-1029878591?v=1" target="_blank" rel="noreferrer noopener">a December 2020 audit</a> by analytics firm Chainalysis, KeyFi had over 10% of all Celsius&#8217; assets under management as the year came to a close, or roughly $365 million. The company continued to send additional funds in the following months, which were deployed into a wide variety of DeFi strategies, such as using ether as collateral in Compound Finance to borrow stablecoins which were deployed into &#8220;yield farming&#8221; strategies from the <a href="https://harvest.finance/" target="_blank" rel="noreferrer noopener">Harvest Finance</a> DAO.



But the operation’s track record was much rockier than widely assumed, Arkham said, noting that on two occasions — on Thanksgiving Day, November 26, 2020, and in late February 2021 — around 85,000 ether deposited by 0xB1 in Compound Finance were liquidated.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Ultimately, it appears 0xB1 lost $61.19 million of what appears to be Celsius money in liquidations,” the researchers concluded.</blockquote>



The hole in Celsius’ accounts may be much larger when you factor in the interest owed to customers, Arkham added.



“As a result of Celsius&#8217; relationship with 0xB1, Celsius could have inadvertently ended up short of its customers&#8217; deposited assets, let alone the interest it guaranteed them. Furthermore, Celsius&#8217; business model relies on pocketing the spread between its returns and the interest it pays its users. Thus, Celsius users&#8217; account dashboards possibly informed them that they were accumulating crypto rewards that did not actually exist.”



Stone <a href="https://twitter.com/0x_b1/status/1545153669586468867" target="_blank" rel="noreferrer noopener">claims</a> that Celsius owes his firm money and that he “tried for over a year to quietly settle this dispute with Celsius.”



The report details other losses Celsius allegedly incurred through its use of DeFi protocols that ran into difficulties in 2021. Among them, the company lost around $70 million in June 2021 after <a href="https://stakehound.com/blog-post/fireblocks-eth-2-key-management-incident/" target="_blank" rel="noreferrer noopener">a key management mishap</a> by ether staking provider Stakehound and $50 million in December 2021, as a result of an <a href="https://cms.blockworks.co/?s=BadgerDAO" target="_blank" rel="noreferrer noopener">exploit of BadgerDAO</a>.



The report states that “Arkham was not compensated to publish this report, nor did Arkham or its leadership ever have any financial positions in CEL.”



Jason Stone could not be reached for comment. Requests to Celsius for comment have gone unreturned.



This story was updated on July 8, 2022 at 9:40 am ET, to reflect Arkham&#8217;s updated loss estimate for KeyFi&#8217;s activities.



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Arkham Intelligence

Celsius Farmed Out Funds to DeFi Degen

Sebastian Sinclair

<div id="highlights-block_62c76521e7862" class="highlights">
 <ul>
 <li>Jason Stone, CEO of KeyFi, is accusing Celsius of misappropriating user funds to cover its shortfalls in its lending business</li>
 <li>Stone also alleges Celsius failed to pay him and repeatedly lied to him about the lender&#8217;s risk management strategies for cryptoassets</li>
 </ul>
 
</div>



Embattled crypto lender Celsius is staring down accusations of fraud by a former employee over its alleged manipulation of crypto markets and a failure to implement basic account controls last year.



Jason Stone, CEO of staking software and strategies firm KeyFi, <a href="https://iapps.courts.state.ny.us/nyscef/ViewDocument?docIndex=RvF30Mz2IZW63s1mjjau2Q==" target="_blank" rel="noreferrer noopener">filed a lawsuit</a> in the Supreme Court of the State of New York on Wednesday accusing Celsius of market manipulation. 



Stone is also accusing Celsius of refusing to honor its contractual obligations to pay him &#8220;the millions of dollars it is owed pursuant to a profit-sharing agreement,&#8221; the filing reads. 



It&#8217;s the latest development for the beleaguered lender, which halted account withdrawals last month citing &#8220;<a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">extreme market conditions</a>.&#8221; Celsius has resisted calls from its lawyers to file for <a href="https://cms.blockworks.co/celsius-clashes-with-lawyers-over-chapter-11-bankruptcy-report/" target="_blank" rel="noreferrer noopener">Chapter 11 bankruptcy</a> and has instead implemented a &#8220;HODL&#8221; mode feature for users to demonstrate their support by opting not to withdraw their funds for an extended period of time.



KeyFi, whose assets and team were acquired by Celsius in mid-2020, set about managing hundreds of millions of dollars of customer deposits, Stone said in a <a href="https://twitter.com/0x_b1/status/1545153652624691200?s=20&amp;t=_-tcBBtk66jY1fonj0YqEw" target="_blank" rel="noreferrer noopener">statement</a> on Twitter under his pseudonymous handle 0x_b1.



Celsius’ risk management team monitored KeyFi&#8217;s investment strategies and performance through portfolio management platform HedgeGuard and decentralized finance dashboard DeBank.



&#8220;[Celsius] assured me that as part of this monitoring, their trading teams were adequately hedging any potential impermanent loss from our activities in liquidity pools,&#8221; Stone said in his statement. &#8220;They also assured me they had risk management and hedging in place to account for fluctuations in token prices.&#8221;



Impermanent loss occurs when a liquidity provider&#8217;s locked up deposited assets in a liquidity pool shift in spot value when compared to the time they deposited them.



Read more: <a href="https://cms.blockworks.co/the-investors-guide-to-navigating-impermanent-loss/">The Investor’s Guide to Impermanent Loss</a>



Celsius executives repeatedly assured Stone the lender had entered necessary hedging transactions to ensure that price fluctuations in certain cryptos would not materially and negatively impact the company or its ability to repay depositors, the filing reads.



Though according to the allegations laid out in the lawsuit and in Stone&#8217;s statement, Celsius was lying. Stone and his team relied on Celsius&#8217; representations of facts when deploying certain trading strategies.



&#8220;Celsius failed to implement basic risk management strategies to protect against the risks of price fluctuation that were inherent in many of the deployed investment strategies,&#8221; the filing reads.



As alleged evidence of mismanagement and fraud grew, Stone concluded he could no longer work with Celsius and moved to terminate his business relationship with the lender.



By the time Celsius and KeyFi parted ways in March of last year, the firm was managing close to $2 billion worth of assets on behalf of the lender, Stone said.



&#8220;The unfortunate events that have publicly unfolded in recent weeks show that Plaintiff was right — Celsius grossly mismanaged its customer funds, failed to perform basic internal auditing to account for its obligations and manipulated crypto-assets to the benefit of itself and its principals,&#8221; the filing reads.



Stone, who is demanding a trial by jury, is seeking an award of damages in an amount to be determined at trial and recuperation of money owed as well as pre- and post-judgment interest. Celsius has 20 days to answer the complaint. Failure to appear before the court or to provide an answer to the complaint will lead to judgment being taken against the lender by default, the filing states.



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