Barely a month after the Terra crash, crypto is facing its next big crisis because of a lack of stETH liquidity.
What is stETH?
stETH is a derivative token that is supposed to trade at a price close to ETH.
ETH can be staked on Ethereum’s Beacon Chain or on liquid staking platforms like Lido Finance. These platforms have risen in popularity because staking on the former requires 32 ETH (around USD$35,549 at time of writing), which not everyone can afford. In contrast, Lido allows for pooled staking of smaller amounts of ETH to earn staking rewards.
Credit: Lido Finance
As traders will not be able to unstake the actual ETH until Ethereum goes through The Merge (its transition to a proof-of-stake network), they get stETH tokens in return for use elsewhere to earn rewards. Most stETH are traded on the secondary market or used to generate yield.
stETH has always had a slight discount against ETH. However, On May 13, stETH token price dropped to a 5% discount against ETH. A month later on June 12, the discount shot to a record 8%. As of time of writing, the discount is about 7%.
stETH’s liquidity crisis
The growing disparity in price discount first led to fears that stETH would ‘go to zero’ like what happened to UST and the original LUNA token. This is unlikely, but stETH may face a liquidity crisis if the many industry players that hold stETH in their portfolio dump. We’re already seeing some of this.
One of the biggest crypto lenders, Celsius, made headlines on June 13 for suspending all withdrawals. It is allegedly facing insolvency due to an inability to pay back its debts from massive liquidations. While this was triggered by the wider crypto selloff after Terra’s collapse and macro factors like interest rate hikes, Celsius reportedly has nearly $500 million of Lido stETH locked up as collateral in stablecoin loans — and possibly more in their treasury — that could be dumped to pay off debts.
On June 15, another crypto giant made headlines for the same issue. Crypto fund Three Arrows Capital (3AC) reportedly faces a USD$400 million liquidation by top-tier lenders and is unable to pay back its debts. Interestingly, 3AC has been dumping its stETH since May. The firm also withdrew more than 81,000 stETH from DeFi protocol Aave on Tuesday, and converted 38,900 stETH in two transactions at a 5.6-5.9% discount rate for ETH.
As stETH is relatively illiquid, when coupled with increasing customer withdrawals, selling pressure will probably continue in the short term.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
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