What will stETH do next when stETH and ETH are unanchored？
In recent two days, stETH and ETH seriously unanchored became the hottest topic, and ETH price decreased by 11.9% in 24 hours. The panic in the markets continues. How stETH will develop next, whether into a death spiral, become the focus of attention.
With the coming of ETH2.0 merger, the form of ETH mining is gradually transiting to POS mortgage mining. Ethereum POS mortgage mining (also known as beacon chain mining) requires the number of ETH directly pledged to be at least 32ETH. However, it is extremely difficult for ordinary users to directly participate in beacon chain mining because of the defects of capital and technology. Hence the birth of a new track, liquidity pledge service.
The whole process is roughly like this: users provide their ETH to the third-party pledge platform, and the third-party pledge platform gathers ETH of multiple users and mortgages these ETH into the beacon chain for pledge mining.
At the same time, the third-party platform will send the user a token of ETH, which is equivalent to receiving the receipt of ETH. For example, if the user provides 5 ETH to the pledge platform for collateral, he will receive 5 ETH’s voucher tokens.
StETH is a Liquid Staking token issued by Lido. In the future, when the beacon chain is officially launched, users can find Lido with a stETH, exchange ETH on the beacon chain, and receive the corresponding pledge income.
The circulation of Liquid staked Ether 2.0 (stETH) is 4,217,82, with 78,544 stETH addresses held and 291,126 transactions so far.
2. StETH recent trading data
On June 10, The number of stETH deals jumped 68% to 3,573. Some whales and institutions began to flee the trading pool, selling stETH and converting into ETH.
At present, the top 3 addresses of stETH holding are: Aave interest bearing stETH (33.91%); 0xdc2… 022 (11.98%) and Wrapped Liquid staked Ether 2.0 (11.11%).
On June 8, 2022, the address marked as Alameda by Nansen (holding 110K stETH) began to transfer stETH to the new address through FTX, and a total of 75,000 stETH were sold, exacerbating the market panic.
3. Reasons for price deviation between stETH and ETH
Why can the price of stETH and ETH always keep 1:1? The reason is that stETH’s official Lido attracts users to pledge stETH through an annual APY of 4%. Meanwhile, Lido provides stETH with liquidity as much as possible through various Defi methods (including as collateral for MakerDAO, on-line Uniswap, on-line Curve pool and on-line AAVE), and the secondary market FTX and other exchanges, making it difficult for stETH to lose its anchor ETH. These measures have also encouraged money to pour into Lido.
However, if some stETH holders are not optimistic about stETH, they believe that the price of ETH will be lower after the launch of ETH2.0. In order to reduce the loss, we need to convert stETH into ETH and sell it now. Therefore, on Curve, the largest decentralized exchange, there is a trading pair between stETH and ETH. Under normal circumstances, the price of stETH and ETH is basically 1:1, that is, equivalent value. Users can realize the conversion between stETH and ETH through Curve.
Celsius pledged more than 40,000 ETH in 2021 to an ETH2.0 pledge service called Stakehound to participate in the mining of the Ethereum 2.0 beacon chain. Unfortunately, due to its own management error, part of the wallet private key of the pledged ETH was lost, and a considerable part of the pledged ETH could not be retrieved on the chain, and the users of the pledged ETH should also bear the loss. While Celsius, as an important stakeholder, loses a significant amount of ETH. Celsius did not reveal anything about the incident until recently…
As a result, Celsius is experiencing an unprecedented level of user trust. While planning how to take away their pledge ETH, Celsius users found themselves with a bigger problem.
Celsius does not retain a full 27% of the ETH it receives from its users. And 44% of the total amount was given to Lido to do beacon chain mining, stETH. So Celsius holds 44% of the total ETH in stETH tokens, while the remaining 29% mines the beacon chain themselves. However, the 29% ETH quota can not be converted into ETH until the beacon chain is online.
Therefore, if a user collectively takes out the ETH pledged in Celsius, only 27% of the TOTAL ETH can be redeemed immediately from Celsius. As for 44% of the amount of ETH and Celsius, you need to use stETH on Curve to exchange it.
As a result, it is considered Celsius that losing a user’s trust will expect a large number of withdrawals in the coming months.
As soon as the news came out, the panic in the market began to intensify. A large number of users sold their stETH on Curve, and the price of stETH fell sharply, leading to the disanchoring of stETH and ETH, and the price of the two no longer met the requirement of 1:1.
To make matters worse, the day before, another big holding of stETH started selling on Curve. This leads to further discount of stETH and further aggravation of deviation of stETH/ETH liquidity pool on Curve, resulting in more serious de-anchoring.
According to Tokenview data, the highest proportion of stETH holders is Aave loan pool, which currently has more than 1.4 million stETH.
When the anchor falls off to a certain extent, the collateral value of the revolving loan will be greater than the value of the loan. This leads to further liquidation, which, once started, leads to the liquidation of the collateral stETH. Lead to a further decline in stETH price, and then form a spiral.
What’s next? Let’s wait and see.