Lido’s Staked Ether (StETH) Trading at 6% Discount as ETH Down 77% From ATH
Lido’s staked Ethereum (stETH), a derivative token representing Ethereum locked in the Eth2 deposit contract, has lost its parity with ETH, currently trading at around a 6% discount. Historically, stETH has been traded roughly at par with Ether.
However, the recent market crash and liquidity crunch that forced some companies to unload large amounts of their stETH tokens has caused its price to drop. One of such companies is Celsius Finance which halted withdrawals on its protocol.
stETH Backed 1:1 with ETH but Price Determined by Secondary Market
StETH is a tokenized form of staked Ether locked inside staking protocol Lido. The token essentially represents staked ETH and can be redeemed for ETH in the future, after Ethereum’s migration to the proof-of-stake consensus mechanism is completed and withdrawals are enabled on the updated network.
Generally, users would need to stake a minimum of 32 ETH (worth roughly $40,000) to become an Ethereum 2.0 validator and earn rewards. However, Lido Finance, the largest provider of staking services for Ethereum, uses the concept of stETH to enable users to stake any amount of ETH.
The protocol gives Ethereum owners stETH tokens in return for their staked coins and distributes associated staking rewards to the users based on the amount of their staked ETH. StETH tokens are minted when ETH is deposited and burned upon redemption.
Since stETH can be lent, staked, and traded for other tokens, its peg is subject to fluctuations based on market conditions despite the fact that it is backed by actual ETH. A sell-off pressure can also affect the token’s peg.
During the current market volatility, as users and companies are rushing to exchange their stETH tokens for liquid ETH, the token has distanced from its peg. At the time of writing, one stETH is trading for 0.948 ETH, a discount of around 6%, according to CoinMarketCap.
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Celsius Suffers as stETH Deviates from Peg
Major crypto lender Celsius is one of the largest holders of stETH. The company has invested millions worth of its clients’ funds in the protocol and currently holds at least $475 million worth of stETH in a public wallet, according to blockchain research firm Nansen Research. And stETH losing its parity with ETH spells trouble for the company.
That is because Celsius is already struggling with liquidity issues as clients want to withdraw their funds and the company doesn’t appear to have enough liquid ETH to meet all of its obligations. The company even paused withdrawals, swaps, and transfers earlier this week, claiming that this would “put Celsius in a better position to honor, over time, its withdrawal obligations.”
Jack Niewold, the founder of crypto newsletter Crypto Pragmatist, wrote in a Twitter thread:
“Celsius has likely failed to isolate risk: they might have taken USDC and held it in UST (Luna’s stablecoin), or taken ETH and held it in stETH. So, when ALL of crypto drops and ALL users want their funds back, ALL Celsius users feel the pinch.”
Niewold added that Celsius shut down withdrawal because it “is facing a liquidity crisis, one in which prices that are spiraling downwards make it harder and harder to match liabilities (the deposits) with assets (whatever they hold on chain).”
It is worth noting that stETH would be equal to ETH over the long haul. However, in the interim, stETH’s value cannot truly maintain its peg with ETH due to the extreme market volatility as well as associated risks with the impending Ethereum merge.
Do you think Celsius is heading toward insolvency? Let us know in the comments below.