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Persistent StETH weakness could spell trouble for Instadapp Lite users

  • Lido Stacked Ether has caused a liquidity crisis in the crypto market
  • User funds remain safe unless stETH sells at a 15% discount, said Instadapp founder Samyak Jain

Instadapp, a smart wallet built on top of popular DeFi projects like Uniswap and Maker, is designed to help users with little financial or technical background manage assets. But on top of the smart contract risk, the ongoing instability in Lido Staked Ether (stETH) price has the potential to wreak havoc.

The company launched Instadapp Lite in March, a platform that allows its users to earn interest by depositing funds into strategy vaults, including exchanging Ether for stETH. The strategy is currently generating a projected annual return of 7.79% by applying leverage.

While stETH was expected to trade at the same price as Ether, it is not tied to it and has actually been trading at a discount recently. Normally that’s not a problem and funds in Instadapp’s vault remain safe unless stETH deviates in value by -15% relative to ETH, Instadapp founder Samyak Jain said during a Twitter Spaces interview with MakerDAO on Wednesday.

So far, stETH has remained no more than around -7% versus ETH, but the gap is large enough to raise fears of a liquidity crunch in the crypto market. As of Thursday at 11:00 a.m. ET, each stETH is trading at around 0.95 ETH.

After TerraUSD (UST) collapsed in May and triggered a broad market decline, demand for stETH dropped significantly as investors looking for liquid assets sold off quickly. This put significant pressure on the liquidity pools in which stETH is traded, particularly the Curve decentralized exchange.

The crux of the problem is that once stETH is minted, it will not be redeemed until after the merger — when the Ethereum blockchain migrates from proof-of-work to proof-of-stake — and another upgrade that allows for expected payouts may become the second quarter of 2023. While stETH itself is fully liquid, ETH support is not and the market is therefore applying a discount.

The Lido DAO, which manages stETH, has sought to mitigate risk by increasing short-term rewards in its LDO governance tokens.

“The most [Lido] What we can do is create awareness and provide rewards so that users are willing to buy more stETH in the current market situation,” Jain said. Until then, stETH price divergence remains a risk.

Despite his concerns, Jain remains optimistic that stETH’s price will rebound once the market stabilizes, explaining in a blog post that “almost all of my ETH holdings are in the form of Lido Staked ETH.”

A second vault in Instadapp Lite generates additional income by betting on the future price of stETH, but allows users to deposit and withdraw USD Coin (USDC), a stablecoin pegged to the US Dollar.

This approach uses the first stETH strategy by borrowing ETH and buying stETH using USDC as collateral in the Aave money market protocol. The stETH is then delivered to Aave and used to borrow an equal amount of ETH, which is sold back to USDC and also delivered to Aave. This limits directional price risk on ETH and uses ETH staking rewards converted back to USDC to generate interest.

“You can take advantage of current market inefficiency by first building a capital allocation, in this case with USDC. [You can utilize] that capital to borrow on ETH and buy stETH at a discounted rate that you can cash out immediately,” he said.

If stETH returns to ETH levels, you can close the position and reap the extra profits, Jain said.

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  • Bessie Liu



    Bessie is a New York-based crypto reporter who previously worked as a tech journalist for The Org. She received her Masters in Journalism from New York University after working as a management consultant for over two years. Bessie is originally from Melbourne, Australia. You can contact Bessie at [email protected]

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