Institutional exodus from stETH trading pool may accelerate at any time?

Today’s research topic is stETH/ETH, where liquidity is being depleted.

As we all know, stETH is the pledged version of ETH on Lido, and its purpose is to protect the security of ETH after the merger.

Therefore, there should be a one-to-one correspondence between stETH and ETH, and there should be a liquidity pool on Curve.

However, the liquidity pool on Curve has now become extremely unbalanced, with stETH accounting for nearly 75%, an unprecedented tilt.

This has resulted in the exchange ratio of stETH to ETH becoming 1.03:1, and the tilt is still increasing.

Theoretically, the pace of depegging is determined by the tilt ratio of the liquidity pool and the A factor.

For questions about factor A, please refer to @Tetranode’s tweet. In short, the stETH pool is currently at a critical level and the depegging may accelerate at any time.

stETH is pegged one-to-one with ETH, and the merger will happen within a few months. Buying stETH now seems to be an arbitrage operation that can make money without doing anything. This is very different from UST, which has no asset support. So why are investors exiting?

I observed that Alameda Research was withdrawing their positions. In a few hours, almost 50,000 stETH was withdrawn regardless of slippage losses .

It is well known that Alameda has a keen sense of the market...

In fact, they are one of the seven largest holders of stETH on Lido, and their move is likely to trigger a run.

Let’s look at other big holders, starting with lending platform Celsius.

Celsius has nearly 450,000 stETH, worth about $1.5 billion. They deposited these stETH into Aave as collateral and borrowed about $1.2 billion in assets.

This may not be a big problem yet, but...

Celsius is rapidly draining its liquidity investors’ redemption positions.

They used these billions of dollars in illiquid assets to obtain large loans to repay customer redemptions.

Celsius is struggling, they lost a huge amount of money in hacks over the past year, and things are getting worse.

First they lost $70 million in the Stakehound incident. (BlockBeats

Note: On June 7, according to Dirty Bubble Media, Celsius Network, a crypto lending platform, lost at least 35,000 ETH in the Stakehound private key loss incident.)

Then another $50 million was lost in the BadgerDAO theft.

On top of that, $500 million of customer deposits were wiped out in the recent LUNA crash. Their reckless handling of customer funds is truly speechless.

These are just the losses of public information stolen, and other unknown thefts cannot be ruled out.

Investors are now redeeming their positions at a rate of 50,000 ETH per week, meaning Celsius has only two options:

1. Exchange their stETH for ETH, and then for Stablecoin to increase liquidity.

2. Mortgage stETH and use the loan to repay customers.

If they choose the first option, they will hold about 450,000 stETH, but there are only 242,000 ETH in Curve's pool. Every sell-off will increase the exchange ratio of the trading pair, which is a big loss for them.

There is also about $5 million of stETH liquidity on Uniswap, and the liquidity on CEX is unknown. However, the liquidity on CEX, Uniswap, and Curve should not be enough to support the sale of all their positions. If possible, they should go directly to CEX instead of selling on Curve.

The only trading pair for stETH is ETH (there is a USDC trading pair on FTX, but it accounts for a very small proportion), which means that after stETH is exchanged for ETH, ETH will also face selling pressure.

They have loaned out a lot of money with stETH, and these billions of dollars of selling pressure will make their collateralization ratio more dangerous.

Assume stETH decouples severely or market conditions get worse.

Celsius can be liquidated. Borrowing becomes more expensive, their collateral loses value due to market conditions, selling below the peg makes them lose more money, and liquidity dries up. Negative feedback loop.

Another thing worth noting is how Aave will liquidate illiquid assets such as stETH.

Are they responsible for these assets, or are they forced to be illiquid for a few months while risking a drop in the price of ETH? What should they do?

There is a high probability that Celsius will be frozen for redemption before liquidation.

Celsius only had a few weeks of funding left and was suffering heavy losses from the unpegging, borrowing fees, and the risk of a merger being delayed. It seemed only a matter of time before it was frozen.

Let’s not forget that they are not the only whales in this situation. When other whales smell blood, they will add fuel to the fire, shorting the futures market while liquidating other positions. Oops, this is probably why Alameda dumped 50k stETH and swapped for Stablecoin…

Asset management platforms like SwissBorg hold about 80,000 stETH of customer assets. Through their wallets, it can be found that they have placed $27 million of stETH in the Curve liquidity pool, and there are 51,000 stETH available. If they withdraw from the liquidity pool and sell stETH, Celsius will be in a dilemma.

After the feast, the giant whales are leaving. Who will be the first?

Looking at today’s trades, there have been some large exits, including this one for 2,400 stETH (~$4.2 million).

As the liquidity of stETH becomes lower and lower, I will continue to pay attention to other positions that Celsius needs to liquidate. About $7 million of LINK and more than $400 million of WBTC are on the way...

A large number of retail investors are using leverage to conduct arbitrage trading on Aave, and if the price of ETH collapses, the situation may become very ugly.

Everyone needs collateral to cover their leverage and sell their other positions.

If I were a VC or market maker, I would play it like this:

1. Liquidate them and short at the same time;

2. Break the stETH peg, causing a run and a collapse in ETH prices, and then buy stETH at a large discount before the merger.

This article only studies a few major stETH holders, and other whales may have other risks.

This seems inevitable. My goal is to get some outside opinions and see if I'm missing anything.