Why is stETH not the next UST?

stETH may continue to be discounted, but under the balancing effect of arbitrage funds, it is not expected to deviate too much.

In the past few days, the cryptocurrency market has ushered in a new round of waterfall market. As the "vanguard" of this round of decline, ETH has successively lost important barriers such as 1700, 1500, and 1200 US dollars. On the weekly chart, ETH has closed negative for 10 consecutive weeks, which also means that ETH has been almost unilaterally downward in the past three months.

Data source: FTX

Under extreme market conditions, the collateral effects also followed. In the contract market, the total amount of funds liquidated on the entire network exceeded US$500 million for two consecutive days; in DeFi, the total value of assets locked in major ecosystems has fallen below the US$100 billion mark; the NFT market is also unlikely to be "immune", with both transaction volume and project floor prices falling.

Where does FUD come from?

There are many theories in the market about the trigger for ETH's recent plunge. Putting aside the well-known impact of macro interest rate hikes and the overall financial environment, the increasingly severe discount of stETH is undoubtedly the most potential black swan that affects short-term market sentiment.

Regarding this point, Odaily Planet Daily published an article a few days ago titled " stETH's decoupling is getting worse, can 'discounted ETH' still be bought at a bargain price? " The article details the mechanism of stETH, the reasons for the discount, the impact of Celsius, potential arbitrage space, etc. Combined with the optimistic expectations for the development progress of ETH 2.0, we finally concluded that stETH may continue to be discounted, but under the balancing effect of arbitrage funds, its quotation relative to ETH is unlikely to deviate too much, and it is even less likely to collapse completely like UST.

However, with the sharp drop in ETH in the past few days, the FUD sentiment about stETH in the market has become increasingly strong. Phrases such as "the next UST", "death spiral", and "Celsius is completely blown up" have appeared frequently in discussions on social media... Given that the market environment is so bad, we can no longer afford too much unnecessary trouble. As media practitioners, it is necessary to do our best to "separate the true from the false" and sort out the latest situation of stETH in combination with market dynamics.

First of all, we need to clarify the source of panic. Why does the decline of ETH exacerbate the market's panic about stETH? There are two main reasons. First, as ETH continues to fall, the market judges that Celsius will face greater withdrawal pressure, so it has to sell its stETH in exchange for ETH to repay debts; second, considering that there are quite large-scale stETH lending positions on lending platforms such as Aave, the rapid decline in prices may cause these stETH to fall into liquidation risks. Both will further amplify the discount of stETH compared to ETH, thereby exacerbating the panic of the entire market.

Celsius: To survive, I had to take strong medicine

So, what is the current situation of these two lines? Let’s talk about Celsius first. The platform has two very important news today.

The first is that Celsius has announced the suspension of all withdrawals, transactions, and transfers. Before the announcement, Celsius also transferred 9,500 wBTC and 50,000 ETH to the exchange.

This series of events has put Celsius directly at the center of controversy. It is not yet clear what Celsius’ subsequent actions after selling this part of the assets will be (personally, I speculate that it may be to reduce the leverage of on-chain lending, and we will have to wait and see the subsequent on-chain developments). The move to suspend withdrawals is like a "strong medicine with more than three points of poison". Such an operation will obviously have a very negative impact on the reputation and future development of the platform. However, facing the potential possibility of a run, stopping withdrawals can prevent a short-term systemic collapse, which is also a helpless move.

As for the so-called "Celsius is completely bankrupt", the author personally disagrees because most of Celsius's positions have not been moved, and there are still more than 409,000 stETH in its main address 0x8aceab8167c80cb8b3de7fa6228b889bb1130ee8, which has a net value of 616 million US dollars even after deducting the loan debt. Although closing withdrawals will inevitably cause a certain market panic, it is much better than 409,000 stETH directly hitting the market.

The second key development is that CeFi giant Nexo has announced that it is ready to make an acquisition proposal to Celsius, which may put an end to the Celsius incident.

In general, whether it is acquired by Nexo or continues to hold on until the redemption of stETH chain is opened, Celsius no longer needs to be forced to sell hundreds of thousands of stETH in its hands after the suspension of withdrawals (active and slow redemption is not ruled out), and the potential selling pressure on this line seems to be alleviated in the short term.

Will stETH be liquidated on a large scale?

Let’s talk about the second line, whether the stETH collateral assets in lending will encounter large-scale liquidation. According to the different types of loaned assets, this should actually be divided into two parts. One is the circular lending leverage position of mortgaging stETH to lend ETH (exchange the loaned ETH for stETH, then mortgage and lend again, cycle operation...), and the other is to directly lend stablecoins such as USDC by mortgaging stETH (this is how Celsius’s main address operates).

Regarding these two parts alone, what is obviously related to the discount of stETH and will have a further impact on it is the situation of lending ETH by pledging stETH. As for the situation of directly lending stablecoins by pledging stETH, the liquidation is mainly driven by the drop in the price of ETH, and the liquidations of the two often occur simultaneously.

CryptoScott.eth, a researcher at RealResearchDao, did a very detailed data analysis (if you are interested, you can directly read CryptoScott.eth's series of tweets ), and gave a very clear data calculation on the liquidation price of stETH and the institutional arbitrage window. The following will excerpt some of the views in the tweet.

Based on the data of stETH deposits (about 1.45 million) and ETH loans (about 447,000) in the Aave lending market, it is estimated that the actual position ratio of stETH deposits and stablecoin loans is higher than that of ETH loans. This also means that the situation of pledging stETH for circular ETH lending is not as extreme as imagined.

Let’s take a look at the situation of pledging stETH to circularly borrow ETH from the perspective of the lending structure (this is also a factor that the market is particularly worried about). Parsec data shows that the large liquidation point of this type of lending position is around 0.818 (stETH/ETH), which is still far from the current real-time exchange price of around 0.94.

Considering that the exchange price of 0.818 is approximately equal to an 18% discount, plus a 4% staking income, this means that purchasing stETH at this unknown level can obtain an ETH-based income of approximately 22% after on-chain redemption is enabled (expected to take about a year). This income has significantly exceeded the interest expense during the holding period (the institutional unsecured credit rate on Maple is approximately 10.5%). Therefore, under the balancing effect of arbitrage funds, the possibility of stETH reaching this point is not great.

stETH will not be the next UST

Based on the above analysis of the latest developments of Celsius, on-chain liquidation, etc., we still stick to the judgment we made in the previous article - stETH may continue to be discounted, but under the balancing effect of arbitrage funds, it is not expected to deviate too much, and it is basically impossible to collapse completely like UST.

In essence, stETH and UST have different asset attributes. The latter made an empty promise to anchor at $1 without sufficient collateral, while each stETH actually represents the future redemption right of 1+n ETH. Although the specific time of this redemption has not yet been determined and there are certain risks in whether it can be redeemed smoothly, combined with the development progress of ETH2.0 and Lido's past security performance, the market can have positive expectations for its future redemption.

Finally, I would like to add that the above conclusions are limited to evaluating the price relationship between stETH and ETH, rather than the U-based quotes of the two. In today's macro-clouds and depressed market sentiment, no one can accurately predict the market's future trends. All we can do is make relatively rational analysis and judgments on controversial events based on some objective dynamics and data.