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How does the Ce It’s barely been a month since Terra’s demise and the ensuing pandemonium in the crypto market, and now Lido Finance and its Staked Ethereum (stETH) are at the centre of another possible liquidity crisis.
Celsius, a cryptocurrency loan firm, is one of Lido’s main clients and, as such, one of the major holders of stETH. What is the issue? Staked ETH is never meant to be worth 1 ETH, and it hasn’t been for quite some time. The lsius Liquidity Crisis Is Related to Lido’s Staked Ethereum
Staked ETH is Ethereum that has been locked up on the Ethereum 2.0 beacon chain, which will shortly be merged with the Ethereum mainnet in a much-anticipated update that will transform the blockchain to proof of stake. Users would normally require a minimum of 32 ETH (approximately $40,000) to engage in ETH 2.0 staking and collect rewards. However, Lido Finance allows customers to invest any amount of ETH. Because it is “liquid staking,” it rewards users with stETH tokens.
This stETH can then be lent, staked, and sold in exchange for other tokens.
Celsius accomplishes just that with its own cash. However, a day after Celsius suspended client withdrawals, swaps, and transfers—”to put Celsius in a better position to meet, over time, its withdrawal commitments,” the firm stated—there is rising anxiety over the loan company’s exposure to stETH.
According to blockchain research firm Nansen Research, the corporation holds at least $475 million in stETH in a public wallet.
Celsius generates revenue by staking client deposits, in this case Ethereum, in yield-generating decentralised finance (DeFi) protocols such as Lido. In exchange, Celsius receives stETH, which grows in value as deposits earn incentives. Celsius earns money by paying its clients the stated rate of return, which has lately ranged from 6% to 8% on ETH deposits, and keeping the remainder.
The value proposition for Celsius depositors is that they are offered a set rate of return on their ETH and must rely on the firm to figure out how to achieve that return on a consistent basis.
However, that plan begins to unravel if stETH loses parity with ETH (which it has) at the same time as many Celsius depositors are wanting to withdraw their ETH (which they are) since Celsius does not appear to have enough liquid ETH to satisfy all of its obligations.
stETH has failed to catch up to Ethereum by Monday afternoon. stETH was trading at 0.94 ETH at the time of writing. Since last month, when the TerraUSD and Luna collapsed, stETH has been trading below 1 ETH.
A big public Celsius wallet reveals $475 million in stETH as collateral for hundreds of millions of dollars in stablecoin loans.
“They’ve also transmitted thousands of stETH to FTX in recent days, presumably to sell,” Nansen content lead Andrew Thurman told Decrypt, “but we can’t verify that because it’s off-chain.” They have most likely been hurt the hardest by the loss of stETH’s peg to ETH.”
However, selling huge amounts of stETH to get more liquid ETH will lead its price to fall even worse, exacerbating the liquidity crisis that Celsius is currently experiencing.
There have been efforts to locate the other public wallets and so account for the remainder of Celsius’s $10 billion in client assets, but according to The Block analysis, just roughly $1.5 billion appear to have been accounted for. That isn’t to say Celsius doesn’t have that ETH, but it has made a stir.
“Celsius has most certainly failed to isolate risk: they may have acquired USDC and stored it in UST (Luna’s stablecoin), or taken ETH and held it in stETH,” stated Jack Niewold, creator of crypto weekly Crypto Pragmatist, in a Twitter thread. “As a result, when ALL crypto falls and ALL people demand their monies back, ALL Celsius users feel the pinch.”
Celsius did not react quickly to Decrypt’s attempts for comment.
If the uproar over stETH seems familiar, it’s because it also played a part in the demise of Terra’s UST and LUNA tokens. The stETH to ETH imbalance was the inverse of what it is currently at the time.
Last month, there was a run on stETH as users rushed to withdraw their assets from the Terra blockchain’s Anchor lending protocol, which at the time offered users up to 20% returns on their UST investments. Users cashed out their stETH when Terraform Labs shut down the Terra network twice, driving up the price.
Through the Curve protocol, one ETH could be traded for 1.0248 stETH, implying that it was trading at a 3% discount to Ethereum.
When this happened, it opened the door for arbitrage trading. Investors were able to sell stETH for more ETH than was invested to establish it, resulting in a significant depletion on Lido’s ETH pool.
To understand what and how the Lido staked ether (or stETH) works, you must first comprehend the Lido protocol and the underlying notion. However, the Lido Protocol, which runs on its own unique blockchain, is a decentralised network for holding liquidity across many blockchain networks.
The Lido protocol, in particular, combines staked assets from liquidity providers and locks them up for a certain period of time, after which users can withdraw their assets as well as their returns – commission-based revenues, for example.
There are now three primary networks in which consumers may engage in liquidity pooling. Ethereum, Terra, and Solana are among them.
The ability to utilise staked assets as collateral is one of the Lido protocol’s benefits.
The Lido protocol’s primary goal is to fix the scalability issue that plagued the Ethereum network prior to the latest upgrade to Ethereum 2.0.
Notably, Lido acts as a reserve for staked Ethereum assets, providing a staking solution for the improved Ethereum V2.0. In fact, Lido is extensively mentioned as the future of liquidity staking on Ethereum 2.0.
Users may mint the network’s native coin – stETH – and freely utilise it within the Lido ecosystem, which includes DeFi protocols, by offering a staking facility for Ethereum.
Lido Staked Ether (stETH) is a token that symbolises your staked Ether in Lido, combining the value of the initial deposit with staking incentives, according to our site description.
Notably, the balances of stETH tokens are tied 1:1 to the ethers staked by Lido, and the token balances are adjusted daily to reflect profits and prizes.
Furthermore, stETH tokens may be utilised in the same way that ether can be used, allowing you to receive ETH 2.0 staking incentives while benefiting from returns across decentralised financial products. stETH tokens, on the other hand, are minted upon deposit and destroyed when redeemed.
As previously stated, Lido provides liquidity staking as a service, which entails locking up an asset by staking it for a certain length of time. Ethereum’s Ether token (or ETH) is being held in the Lido liquidity pool in this context.
In exchange, Lido provides the liquidity provider with its freshly generated representative ERC-20 token, stETH, which, as previously stated, has a 1:1 value-to-ETH ratio.
But keep in mind that the Lido staking software, its decentralised autonomous organisation (DAO), and the native LDO token all work together to give a solution for staking ETH and collecting rewards.
The DAO is an essential component of Lido staking Ether since the whole project intends to provide completely decentralised ETH staking services. The DAO system, in particular, is necessary to assure the platform’s security.
Technically, the Lido platform’s pooled money from investors and validators constitute the network’s total stake in Ethereum, from which rewards are created and dispersed to stakeholders in percentages based on their stake.
Furthermore, Lido takes 10% of each investor’s returns, with 50% of the fees received going into establishing insurance and security for its customers, as well as platform enhancement.
Lido staked ether, also known as stETH, is one of three tokens distributed to Lido liquidity pool participants (Others include stSOL and stLUNA for Solana and Terra liquidity pool respectively).
Lido staked Ether is generated when a user deposits Ethereum tokens into the Lido Ethereum liquidity pool, implying evidence of investment for a liquidity provider. The ERC-20 token is also distributed as an incentive for taking part in the liquidity pooling.
On the other side, the Lido DAO token (or LDO) represents the Lido protocol’s original asset. While it primarily serves as the platform’s utility token, LDO may also be used to assist any of the following three activities: granting governance rights; managing
Disclaimer: The author’s thoughts and comments should not be construed as financial advice. We do not provide financial product advice.