Recently, stETH de-anchoring incidents have intensified. Data shows that stETH de-anchored and its value once fell to 0.95 ETH. Many analysts believe that the price may fall due to panic, leverage and other reasons. However, LidoFinance, a liquid staking protocol, responded to the recent tilt in the exchange ratio of stETH and ETH on its social networking site, pointing out that stETH is still anchored at 1:1 with ETH. How are things going?
What is stETH and Lido Protocol?
stETH is an ETH2 pledge certificate provided by the pledge protocol Lido, allowing users to obtain liquidity while staking to obtain rewards. When the Ethereum merger is completed and the beacon chain is open to claim, users who hold stETH can exchange stETH back to ETH on a 1:1 basis.
Staked Ether, referred to as STETH coin for short, has a total supply of 189,540 STETH. The introduction states: Staking stETH, which represents your staked ETH in Lido, combines the value of the initial deposit and staking rewards. stETH tokens are minted upon deposit and burned upon redemption. The stETH token balance is pegged 1:1 to Lido-staking ether, and the token balance is updated daily to reflect earnings and rewards. The stETH token can be used just like Ethereum, allowing you to earn ETH 2.0 stakes and benefit from the benefits of decentralized financial products.
However, according to the officially introduced mechanism, stETH is provided to pledgers as a liquidity compensation scheme. As the merger date approaches, the price of stETH should be equal to ETH. However, recently, it was found that the price decoupling of the ETH-stETH liquidity pool on Curve has deteriorated. One stETH can only be exchanged for about 0.954 ETH, and the proportion of the pool has also become unbalanced, and the proportion of stETH is close to 80%.
Time difference and leverage liquidation
Why does stETH de-anchor? The first is the reason for leveraged liquidation.
According to the official Lido official statement, stETH can be rigidly redeemed one-to-one with ETH2.0 in the future. It’s just that due to the time difference, this kind of redemption cannot be redeemed now, and it can only happen after the official integration of the Ethereum mainnet in a few months. Therefore, in these months, if people need ETH, they can only exchange stETH for ETH in the market. And once there is a transaction, there must be a price, and this price will fluctuate due to market sentiment. When people dump stETH in large numbers, the price of stETH plummets.
On June 8th, according to the monitoring of Curve Whale Watching, a large household exchanged 18,398 stETH to 17,924 ETH (worth $42,705,398). According to Curve’s official data, the current stETH/ETH pool asset ratio is skewed, with ETH accounting for 27.33% and stETH accounting for 72.67%.
Paradigm researcher Hasu said that the price decline of stETH is mainly due to liquidation risk. As long as users put stETH on lending platforms (eg: Aave) as collateral, when the market falls, they may face liquidation, resulting in a large number of stETH sales and imbalances in the Curve pool.
In response to this phenomenon, Podcast program MIM host Brad Mills also said on Twitter that there are too many retail investors using Lido and Aave to make profits with excessive leverage. Deposit stETH in Aave and lend ETH; 3. Repeat the first step. Under this operation, if the price of stETH can be stably linked to ETH, retail investors will obtain more profits than simply staking. However, this method is irreversible, because stETH can only be exchanged through a decentralized exchange, so when retail investors find that the price of stETH falls unbearable, in addition to margin calls, they can only endure the high slippage of the exchange Click or watch the position get liquidated. That is to say, once the redemption pressure of stETH cannot be reduced and the price of ETH continues to fall, Celsius and investors who use excessive leverage will face significant losses.
In fact, as early as May 12, in response to the tilt of the ETH/stETH liquidity pool on Curve, the staking protocol Lido Finance stated that both stETH and Curve pool are safe (stETH can be purchased at a 1.3% discount), but still There are risks associated with leverage (such as leveraged staking), but liquidity providers are not affected by leverage risks.
On May 13, Lido official news once again stated that in the context of widespread market turmoil, the stETH:ETH exchange ratio has deviated from its 1:1 peg. stETH trades 4.2% lower than ETH on major Curve pools. There is no risk to long-term holders and liquidity providers, leveraged positions on stETH are at risk. If users have leveraged positions such as Aave, they may face the risk of being liquidated and should reduce the risk, such as increasing collateral.
Celsius Network negative news fuels panic
It can be said that the de-anchoring of stETH has long been a sign, and the reason for further aggravating the de-anchoring of stETH is the reason for panic, which is also likely to lead to further liquidation.
Mainly from the recent negative news from the crypto lending platform Celsius Network. According to an analysis by Twitter user yieldchad on June 6, from a technical point of view, Celsius Network may be insolvent. The project has a total of 1 million ETH, but only 268,000 (nearly 27%) have sufficient liquidity; the other 445,000 are Lido’s stETH, which can only be exchanged for 287,000 ETH at the current Curve exchange rate ; The last 288,000 coins were directly pledged into the Ethereum 2.0 contract, and they would not be available for a while (at least within a year). At a rate of 50,000 ETH per week, Celsius will run out of liquid ETH in five weeks. Although the conclusion is somewhat controversial, Celsius exposes far more problems than that.
When Celsius was plagued by news of “insolvency”, Dirty Bubble Media even revealed that Celsius had lost 35,000 ETH of its customers but had been hiding the fact for a year. According to Dirty Bubble Media, crypto lending platform Celsius Network lost at least 35,000 ETH in the private key loss of Eth2.0 staking solution company Stakehound.
According to CoinMarketCap data, Celsius (CEL) has fallen more than 90% from its all-time high ($8.02 on June 3, 2021).
In a series of negatives of Celsius, it is mentioned that a large part of Celsius’ ETH position is stETH. According to the current slippage of 5%, insufficient exchange depth and other problems, if stETH must be used to repay customer positions, it may cause huge losses. Controlling losses will largely depend on Celsius’ short-term liquidity and whether the Ethereum merger can go smoothly on schedule. However, from the perspective of market performance, the de-anchoring also reflects the lack of market trust in Celsius, further triggering panic selling.
Lido said on Twitter that the exchange rate between ETHs is not directly related to the underlying asset, but only reflects price fluctuations in the secondary market and creates opportunities for others to buy stETH at a steep discount. Sound like an opportunity? Is stETH de-anchored just a price-distorting behavior in the current trading market? However, it should be noted that whether stETH can be redeemed 1:1 in the future depends on whether the Ethereum main network will be successfully merged and whether Lido will rigidly redeem stETH.