stETH depegging? Analysts say the price drop may be due to panic, leverage, and other reasons

The recent stETH depegging incident has intensified. Data shows that stETH depegging, the value once fell to 0.95 ETH. Many analysts believe that the price drop may be caused by panic, leverage and other reasons. However, the liquidity pledge agreement LidoFinance responded to the recent phenomenon of the stETH and ETH exchange ratio tilting on its social networking site, pointing out that stETH is still pegged to ETH 1:1. How is the situation going?

What is stETH and Lido Protocol

stETH is an ETH2 staking certificate provided by the staking protocol Lido, which allows users to obtain liquidity while staking rewards. When the Ethereum merger is completed and the beacon chain is open for claiming, users holding stETH can exchange stETH back to ETH at a 1:1 ratio.

Staked Ether, referred to as STETH, has a total supply of 189,540 STETH. The introduction states: Staked stETH represents your staked Ether in Lido, combining the value of the initial deposit and the staking reward. stETH tokens are minted at the time of deposit and burned at redemption. The stETH token balance is pegged 1:1 to the Ether staked by Lido, and the token balance is updated daily to reflect earnings and rewards. stETH tokens can be used like Ethereum, allowing you to earn ETH 2.0 shares and benefit from the returns of decentralized financial products.

However, according to the official mechanism, stETH is provided to pledgers as a liquidity compensation plan. As the merger date approaches, the price of stETH should be equal to ETH. However, it has recently been found that the price decoupling of the ETH-stETH liquidity pool on Curve has worsened. 1 stETH can only be exchanged for about 0.954 ETH, and the pool ratio has become unbalanced, with stETH accounting for nearly 80%.

Time Difference and Margin Liquidation

Why did stETH depeg? The first reason is leverage liquidation.

According to the official Lido statement, stETH will be able to be exchanged with ETH2.0 in a one-to-one ratio in the future. However, due to the time difference, this exchange cannot be realized now, and can only happen after the Ethereum mainnet is officially merged in a few months. Therefore, in these months, if people need ETH, they can only exchange ETH with stETH in the market. Once there is a transaction, there will be a price, and this price will fluctuate due to market sentiment. When people sell stETH in large quantities, the price of stETH will plummet.

According to Curve Whale Watching, a large account exchanged 18,398 stETH for 17,924 ETH (worth $42,705,398) on June 8. Curve official data shows that the current asset ratio of the stETH/ETH pool is tilted, with ETH accounting for 27.33% and stETH accounting for 72.67%.

Paradigm researcher Hasu said that the downward trend of stETH prices mainly comes from liquidation risk. Previously, users only needed to use stETH as collateral on lending platforms (such as Aave), and when the market fell, they might face liquidation, resulting in a large amount of stETH being sold, which in turn caused the Curve pool to become unbalanced.

Regarding this phenomenon, Brad Mills, the host of the podcast MIM, also said on Twitter that too many retail investors use excessive leverage to make profits using Lido and Aave. The following is their practice: 1. Pledge ETH in Lido in exchange for stETH; 2. Deposit stETH in Aave and borrow ETH; 3. Repeat the first step. Under this operation, if the price of stETH can be stably pegged to ETH, retail investors will be able to obtain more profits than simply staking. However, this practice is irreversible, because stETH can only be exchanged for ETH through decentralized exchanges, so when retail investors find that the price of stETH has fallen to an unbearable level, in addition to adding margin, they can only endure the high slippage of the exchange or watch their positions being liquidated. In other words, once the pressure of stETH redemption 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 agreement Lido Finance stated that both stETH and Curve pool are safe (stETH can be purchased at a 1.3% discount), but there are still 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 against the backdrop of widespread market turmoil, the stETH: ETH exchange ratio has deviated from its 1:1 peg. stETH is trading 4.2% lower than ETH on the main Curve pool. There is no risk to long-term holders and liquidity providers, but leveraged positions of stETH are at risk. If users have leveraged positions in Aave, etc., they may face the risk of being liquidated and should reduce the risk, such as increasing collateral.

Negative news about Celsius Network exacerbates panic

It can be said that there were early signs of stETH decoupling, and the reason that further exacerbated the decoupling of stETH was panic, which could easily lead to further liquidation.

Mainly from the recent negative news about Celsius Network, a crypto lending platform. According to Twitter user yieldchad's analysis on June 6, from a technical perspective, Celsius Network may be insolvent. The project has a total of 1 million ETH, but only 268,000 (nearly 27%) are fully liquid; 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 are directly pledged into the Ethereum 2.0 contract and cannot be taken out for a while (at least within 1 year). At the rate of 50,000 ETH per week, Celsius will run out of liquid ETH within five weeks. Although this conclusion is somewhat controversial, the problems exposed by Celsius are far more than that.

When Celsius was plagued by the news of "insolvency", Dirty Bubble Media broke the news that Celsius had lost 35,000 ETH from its customers but had been hiding the fact for a year. According to Dirty Bubble Media, Celsius Network, a crypto lending platform, lost at least 35,000 ETH in the private key loss incident of Stakehound, an Eth2.0 staking solution company.

CoinMarketCap data shows that Celsius (CEL) has fallen more than 90% from its all-time high ($8.02 on June 3, 2021).

In a series of negative reports about Celsius, it was mentioned that a large part of Celsius' ETH positions are stETH. Given the current 5% slippage and insufficient exchange depth, if stETH must be used to repay customer positions, it may cause huge losses. If losses are to be controlled, a large part depends on Celsius's short-term liquidity and whether the Ethereum merger can proceed smoothly as scheduled. However, judging from market performance, the depegging also reflects the market's lack of trust in Celsius, which further triggered panic selling.

Lido said on Twitter that the exchange rate between ETH has no direct correlation with the underlying assets, but only reflects the price fluctuations in the secondary market and creates opportunities for others to buy stETH at a significant discount. Does it sound like an opportunity? Is stETH decoupling just a price distortion 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 mainnet will be successfully merged and whether Lido will make rigid redemption of stETH.