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stETH decoupling phenomenon sorted out, Alameda also selling; Lido: opportunity to purchase stETH at a significant discount

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stETH decoupling phenomenon sorted out, Alameda also selling; Lido: opportunity to purchase stETH at a significant discount

Recently, the incident of Celsius concealing the loss of tens of thousands of ETH has attracted community attention, with concerns that the decoupling of stETH and ETH will become more serious. By observing on-chain data, it can be seen that some institutions are already selling their stETH holdings. However, based on the official statement from Lido regarding the current situation, it seems to be a good opportunity to buy at a discount.

Introduction to the Lido Protocol's stETH

stETH is an ETH2 staking certificate provided by the staking protocol Lido, allowing users to earn rewards through staking while maintaining liquidity. When the Ethereum merge is completed and the beacon chain opens for withdrawals, users holding stETH can exchange it back to ETH at a 1:1 ratio.

According to its mechanism, stETH serves as a liquidity incentive for stakers, and as the merge date approaches, the price of stETH should gradually equal that of ETH. However, recent observations have shown a worsening situation of price disconnect in the ETH-stETH liquidity pool on Curve, where 1 stETH can only be exchanged for approximately 0.954 ETH, and the pool ratio is imbalanced with stETH making up almost 80%.

What Causes the Price Disconnect?

According to previous reports, Paradigm researcher Hasu stated that the downward price movement of stETH mainly stems from liquidation risks. Users who previously used stETH as collateral on lending platforms like Aave may face liquidation in a market downturn, leading to a large sell-off of stETH and causing an imbalance in the Curve pool.

This situation worsened after the Celsius scandal. According to DeFi researcher Small Cap Scientist's post, Celsius holds around 450,000 stETH worth approximately $1.5 billion, which they collateralized on Aave for about $1.2 billion in assets lent out. Most of these loans are used to meet customer redemption requests, with approximately 50,000 ETH or around $85 million in redemption demands weekly.

Additionally, apart from the $70 million loss due to the Stakehound incident, Celsius also suffered a $50 million BTC loss in the BadgerDao hack last December and was revealed to have withdrawn $500 million UST in the Terra incident before its collapse. Considering these events, the company's financial situation and investment choices are indeed worrisome.

Small Cap Scientist highlighted that Alameda, one of the seven major stETH holders, withdrew approximately 50,000 stETH liquidity on Wednesday, disregarding slippage losses. This move, combined with Alameda's reputation for swift market reactions and significant stETH holdings, could potentially trigger further runs.

Insufficient Liquidity Leads to Losses

In the context of the Celsius scandal, where a substantial portion of Celsius's ETH holdings are in stETH, the current 5% slippage and issues with exchange depth may result in significant losses if stETH needs to be used to cover customer positions. The ability to control these losses largely depends on Celsius's short-term liquidity and the smooth progress of the Ethereum merge.

In response to this phenomenon, podcast host Brad Mills also mentioned on Twitter that many retail users were utilizing Lido and Aave with high leverage to profit. Their method involves:

  1. Staking ETH with Lido to obtain stETH
  2. Depositing stETH on Aave and borrowing ETH
  3. Repeating the first step

Under this operation, if the stETH price can remain pegged to ETH, retail users could earn more profits than simple staking. However, this strategy is irreversible because exchanging stETH back to ETH can only be done through decentralized exchanges. Retail users who find the stETH price dropping to an unbearable level may have to either add more collateral or face high slippage on exchanges or potential liquidation.

In essence, if the pressure of stETH redemptions does not decrease and ETH price continues to fall, Celsius and investors using high leverage may incur significant losses.

Lido's Explanation

Regarding the current price disconnect, Lido stated on Twitter that the exchange rate between stETH and ETH is not directly related to the underlying assets but reflects price fluctuations in the secondary market, providing others with an opportunity to purchase stETH at a significant discount.

"Over the past month, a series of events has disrupted the stETH:ETH exchange rate, including the Terra collapse, widespread deleveraging in the market, and many funds currently leaving platforms like Celsius. After the merge and opening of ETH withdrawals, redeeming stETH efficiently provides current stETH buyers with a discount exceeding 1 year of staking rewards." Lido explained.