The collapse of UST continues to resonate in crypto markets.
Curve’s largest pool has gone haywire – the stETH pool, which pairs ETH with stETH, a staking derivative of ETH, shows stETH trading at a 4.7% discount to ETH. Normally, the two assets are traded almost on a one to one basis.
Dash for cash
The imbalance could indicate that investors are dumping illiquid assets like an ETH derivative locked in Ethereum’s proof-of-stake chain and rushing to cash.
stETH is a token issued by Lido Finance. Users stake their ETH through Lido in exchange for stETH one-for-one. Later, when Lido unlocks ETH after withdrawals from Ethereum’s Beacon Chain are live, users should be able to redeem their stETH for their ETH plus the accrued staking rewards.
In the meantime, users have stETH, an asset they can potentially generate income from while also earning staking rewards via Lido. Like many moves in crypto, this one carries the risk of stETH retaining its bond — something it has done so far thanks to the stETH pool on Curve, which is heavily promoted by Lido.
After deploying another stETH pool on May 12, Lido has now tweeted about discounts on stETH on Curve. In the thread, the project emphasized that while long-term stETH holders are not at risk, those who borrowed against their staking derivative are at risk.
ETH currently makes up 21.6.7% of the liquidity pool, while stETH makes up the other 78.4%. The pool has $1.8 billion in TVL as of May 13. The imbalance in the pool creates the rebate as traders appear to be exchanging their stETH for ETH. As a general rule with liquidity pools, the scarcer asset tends to trade at a premium.
It’s not immediately clear why people are throwing away their stETH. “I’m not sure the reasons for this move,” DeFi influencer Degen Spartan tweeted about the pool imbalance.
But the move away from ETH-stETH parity is certainly a talking point – users are borrowing against stETH to increase leverage while benefiting from ETH staking rewards that will be unlocked after the Ethereum merger.
The story goes on
scope
So if the value of stETH collapses relative to ETH, users could be liquidated if the value of their loan increases relative to the collateralized staking derivative – this may already be happening. For example, a user who borrowed ETH against his stETH was liquidated on Aave.
According to a chart by data provider Parsec Finance, a fall in the price of stETH to just under 0.95 ETH will result in over $200 million in liquidations on Aave. This number will increase in a classic liquidation cascade scenario the further stETH falls.
0xngmi, the founder of DeFi Llama, confirmed the number on Twitter.
Additional LDO incentives
For now, it appears that Lido’s new curve pool hasn’t been enough to maintain parity between ETH and its staked derivative. “We are deploying an additional Curve Finance pool to improve liquidity around the stETH:ETH peg,” the project tweeted on May 12, amid concerns about divergent pricing. Lido is offering 1M LDO tokens worth $1.34M at current prices as an incentive for users to provide liquidity to the new pool.
While DeFi influencer 0xHamZ cited a mammoth trade of ETH for stETH for $33.6 million on Etherscan as evidence that concerns that stETH could lose its peg to ETH are over, the discrepancy between the both asset prices only increased.
Now Spencer Noon, co-founder of the crypto fund Variant, is warning of possible liquidations.
If anyone in DeFi feels like they’ve already had too much turmoil this week, they may need to brace for further depegging that threatens to trigger a cascade of liquidations.
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