Decoupling of Lido’s Staked ETH Differs From Stablecoin Collapse, CoinShares Says

Staked ether (stETH) will trade at a discount until withdrawals are enabled, the report said.

AccessTimeIconJun 20, 2022 at 10:57 a.m. UTC
Updated Jun 21, 2022 at 4:46 p.m. UTC

Will Canny is CoinDesk's finance reporter.

The decoupling of ether (ETH) and Lido Finance’s staked ether (stETH) is not equivalent to the breaking of the link between terraUSD (UST) and the dollar, and isn’t an example of a stablecoin collapse, according to CoinShares.

Unlike a stablecoin, stETH does not have to trade 1:1 to function correctly, CoinShares wrote in a June 16 report. Moreover, because Ethereum has not enabled withdrawals from staking, there are “no arbitrage opportunities to keep the price in check.”

Staked ether is an Ethereum-based token representing ETH that’s been staked on Ethereum’s proof-of-stake Beacon Chain. StETH has tended to trade at a similar price to ETH because there’s a 1:1 claim relationship. However, after UST lost its peg last month, stETH began trading at a roughly 2% discount and at times as low as a 6% discount.

This is not the same as the UST crash because the underlying asset, ETH, is not directly affected by the market price of stETH, CoinShares said. The benefit of stETH is that it allows users to earn yield from staking ether, using a technique known as liquid staking. The ETH that’s been staked continues to secure the network as planned, while users have access to a liquid asset that can be invested. Lido’s product can be classified as “premature” because the inability to un-stake makes the stETH feature incomplete, according to the report.

The Ethereum community has become concerned over the amount of power that Lido has amassed because the liquid staking derivative has around one-third of all staked ether locked up in its contract, CoinShares said.

Because the underlying ETH is locked and there’s no planned date to introduce withdrawals, market makers like Celsius may be forced to sell their holdings to meet stETH redemptions, research analyst Marc Arjoon wrote. On-chain data appears to indicate that Celsius has enough assets to match the liabilities in the event that all stETH is redeemed “but given the opaqueness of centralized entities this is not certain,” according to the report.

Swissborg, BlockFi, Hodlnaut, Abra, Salt Lending and Nexo may also have to fulfill redemptions, the note said.

CoinShares says that longer-term investors whose profit and loss (P&L) is denominated in ETH could see this as a buying opportunity because stETH will become redeemable 1:1 when withdrawals are enabled. Conversely, investors with shorter-term horizons and U.S. dollar -denominated P&L will probably need to exit their positions, while arbitrageurs may also be buying stETH at a discount and shorting ETH, it added.

Recent updates on Ethereum’s testnets have been positive, which brings more confidence to those waiting on the Merge, and when withdrawals are finally enabled, any discount in stETH will likely be arbitraged away, but until then there will exist some form of discount, the report said.

This decoupling event will reinforce calls for regulation of lending platforms and the digital asset ecosystem in general, the report added.

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Will Canny is CoinDesk's finance reporter.

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Will Canny is CoinDesk's finance reporter.

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