The following big crypto crash might be nearby because of Lido Staked Ether (stETH), a liquid token in the Lido protocol that should be 100% pegged by Ethereum’s native token, Ether (ETH).
Particularly, the stETH peg could drop against ETH by 50% within the coming days, raising the chance of a “DeFi contagion” as Ethereum moves toward proof-of-stake (PoS), argues popular Bitcoin investor and independent analyst Kaira Mills.
Over 1M Ether liability risks default
At length, investors deposit ETH in Lido’s smart contracts to participate in The Merge, a network upgrade planning to make Ethereum an evidence-of-stake blockchain, also known as the Beacon Chain. Consequently, they receive stETH representing their staked ETH balance with Lido.
Users can redeem stETH for unstaked ETH when Beacon Chain goes live. Additionally, they are able to use stETH as collateral to gain access to or provide liquidity using various decentralized finance (DeFi) platforms to earn yield.
But, when the change to Eth2 gets delayed, this could result in a massive liquidity problem across DeFi platforms, Mills asserts, using Celsius Network, a crypto lending platform that provides as much as 17% annual percentage yields, for example.
“If customers start withdrawing from Celsius, they’re going to have to market their stETH,” Mills described. “Celsius has liabilities of just one million ETH. So, 288k are inaccessible until [the] Merge, ~30K are lost, ~445k are stETH, and 268k are liquid. Might cause a run.”
No matter unverified rumors that Celsius might be insolvent, the easiest method to secure your funds would be to take control of your own private keys. He adds:
“stETH may not ‘depeg,’ but the chance of DeFi contagion inside a crypto bear marketplace is high.”
Contagion risks?
Furthermore, even centralized yield platforms could face insolvency risks because of their ETH liabilities, argues market commentator Dirty Bubble Media (DBM), citing crypto asset management service Swissborg for example.
Swissborg offers daily yield on about $145 million price of Ether it holds, including 80% exposure in stETH.
The firm had staked around 11,300 ETH from its total Ether holdings in Curve’s stETH/ETH pool. Then the ETH peg grew to become imbalanced on May 12 within the wake of Terra’s collapse, with stETH/ETH shedding to .955 at the time.
“How is Swissborg having to pay daily yield on these assets, once the yield from staked Ether is locked combined with the principal,” asked DBM, adding that could possess the firm “exit all of their stETH position,” thus forcing its ETH peg even lower.
Meanwhile, the warnings coincided having a whale dumping its staked Ether positions for ETH on Wednesday.
Battening lower the hatches before ropsten. pic.twitter.com/MPQV5n0XMf
— Hsaka (@HsakaTrades) June 21, 2022
Mills responded, stating that stETH’s “dynamic is the same as GBTC in a perma-discount.” Quite simply, sell pressure could be “merciless” when the market flips bearish and yields vanish.
He described:
“When there’s deep liquidity & possibility to arbitrage, quants, Wall Street raccoons [and] flashbois will milk the yield. Once the strategy is the opposite of them, they’ll add cruel sell pressure.”
By Thursday, the stETH/ETH ratio had retrieved to .97, still 3% below its intended peg.
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