A bear market will magnify any possible bearishness, and this time it’s stETH’s turn. Since last Friday, the panic about the decoupling and liquidation of stETH has continued to spread in the market, a large part of which stems from the lack of understanding of stETH. In this article, I will break down 8 common senses about stETH to reduce the unnecessary impact of a large number of misunderstandings.
Firstly,stETH will not be the next UST
stETH is the ETH pledged on the Ethereum beacon chain, and is fully supported by ETH on the beacon chain 1:1, so, 1 stETH = 1 pledged ETH.
When the Ethereum merger is completed and the beacon chain opens the withdrawal function, users can exchange 1 stETH for 1 ETH, so any comparison between it and undercollateralized stablecoins such as UST is wrong.
stETH is not GBTC
stETH is the tokenised form of staked Ether native to Lido. Lido is a liquid staking solution for Ethereum backed by several industry-leading staking providers. It makes staked ETH liquid and allows participation with any amount of ETH. stETH is an ERC20 token.
stETH price is not necessarily pegged to ETH
stETH does not have a fixed peg to ETH, and it will continue to be staked regardless of the valuation of the secondary market. The ability to swap stETH for ETH on the secondary market now is just for convenience, but at the same time, you get the market’s valuation of it.
stETH has arbitrage opportunities
Generally speaking, stETH will not trade above 1ETH as long as there is no cap on deposits.
Because there is arbitrage in it:
If 1stETH=1.05ETH, then I can deposit 1ETH into Lido, get 1stETH, sell it at the price of 1.05ETH in the secondary market, and make a profit of 0.05ETH, which will also push down the price of stETH.
If stETH is trading at 0.95ETH, then I can buy 1stETH for 0.95ETH and then redeem it for 1ETH for a profit of 0.05ETH, which pushes the price of stETH higher.
It should be noted that after the merger of Ethereum, it is necessary to wait for the fork of the state transition, which may take 6–12 months. At this time, stETH still cannot redeem ETH from the beacon chain.
Four factors that affect the price of stETH
The risk of leveraged liquidation is currently the biggest cause of panic. 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, and deposit Lido to get stETH, and repeat the process.
Therefore, if people continue to sell stETH on the secondary market, these leveraged positions could be liquidated, 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 for borrowing stablecoins. If sold, this would certainly lead to a drop in the secondary market price of stETH.
The flip side of all of this is that no matter what the secondary market says about stETH, stETH is still backed 1:1 by ETH on the beacon chain.
Depending on your time preference and risk tolerance, starting stETH at a low price will increase a certain level of income.
For example, if 1stETH is trading at 0.70ETH (that’s a 30% discount), and the Ethereum staking yield remains at 4% APR. In the two years that Ethereum has successfully merged and opened the redemption function, you will receive 38% APR instead of the 8% rate of return for ordinary stakers (Ethereum staking does not automatically generate compound interest).
A negative premium of 3–5% is normal
So, is it worth risking Lido bugs and illiquidity for yield? Not everyone can accept it, but some arbitrageurs will. the secondary market price of stETH will not be 1:1 ETH for the time being, but this will not lead to a death spiral.
I think stETH may still trade below the value of the collateral after this wave of panic has passed, perhaps a negative 3–5% premium, depending a lot on market sentiment. But in any case, the beacon chain will continue, DeFi will continue, and Lido will continue.