Compilation of the original text: Grain
Compilation of the original text: Grain
The bear market will magnify any possible negative, this time it is the turn of stETH.
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01
stETH will not be the next UST
stETH is ETH pledged on the Ethereum beacon chain, and is fully supported by ETH1:1 on the beacon chain, that is, 1 stETH=1 ETH in pledge.
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02
stETH is not GBTC
stETH is an ERC20 token with high utility in the growing DeFi ecosystem.
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The price of stETH is not necessarily linked to ETH
There is no fixed peg rate between stETH and ETH, and it will continue to be pledged regardless of the valuation of the secondary market.
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04
Arbitrage opportunities exist in stETH
Generally speaking, as long as there is no cap on deposits, stETH will not trade at a price higher than 1ETH.
Because there is arbitrage in it:
If 1stETH=1.05ETH, then I can deposit 1ETH into Lido, get 1stETH, sell it at 1.05ETH in the secondary market, and make a profit of 0.05ETH, which will also push down the price of stETH.
When the redemption of stETH is opened, the market has a working arbitrage method:
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05
Even with mergers, redemptions still have to wait 6-12 months
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Four factors affecting the price of stETH
There are a variety of reasons why stETH is temporarily above/below its collateral value, including but not limited to:
Liquidity Premium Risk
Lido Protocol Risks
Beacon Chain Delay Risks
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Causes of liquidation of stETH
The risk of leveraged liquidation is the biggest cause of panic right now.
As mentioned earlier, stETH is an ERC20 token that can be used as collateral in the DeFi ecosystem. People deposit stETH as collateral in Aave, borrow ETH, deposit Lido to get stETH, and repeat the process.
Therefore, if people continue to sell stETH in the secondary market, these leveraged positions may be liquidated, causing a larger liquidation cascade. Currently the larger market makers/manipulators have exited, but some are still here.
Celsius may or may not have liquidity issues, but they hold large amounts of stETH that are used as collateral to borrow stablecoins. If sold, this will certainly cause the secondary market price of stETH to drop.
The flip side of all of this is that no matter what the secondary market thinks about stETH, stETH is still backed 1:1 by ETH on the Beacon Chain.
According to your time preference and risk tolerance, buying stETH at a low price will increase a certain level of income.
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3-5% negative premium is normal
So, is it worth risking Lido bugs and illiquidity for yield?
Not everyone can take it, but some arbitrageurs certainly do. Although the liquidation cascade is miserable, and the secondary market price of stETH will not be 1:1 ETH for the time being, this will not lead to a death spiral.
I think that after this wave of panic passes, stETH may still trade at a discount to the value of the collateral, maybe a 3-5% negative premium, depending a lot on market sentiment. But regardless, the beacon chain will continue, DeFi will continue, and Lido will continue.
