After a lot of trading pairs professional fluctuations in exchange prices, just lately stETH (lido Finance’s liquid staking company) has also been a bit skewed when it comes to a slight depeg of ETH. So what occurred and does this pose a danger to the marketplace? Find out in the report under!
What occurred?
As of this creating (May 19), stETH has slipped in selling price with ETH similar big difference ~ two-three% in the final week. This usually means, one stETH I can only in exchange for .97 ETH on the Curve Finance exchange.
For these questioning about stETH, this is regarded as a certificate that the consumer has staking ETH in Lido Finance. Instead of owning to carry out technical operations, with a minimal stake of 32 ETH on Ethereum two. contracts, ordinary end users can bet by means of Lido Finance and nonetheless acquire the rewards of APR ~ three% curiosity.
>> See also: Using DeFi: Experience Lido Finance (LDO) – The greatest resolution to deliver Ethereum two. into perform
As a outcome, one ETH in staking will be exchanged for one stETH and on the expiry date, by withdrawing one stETH, you will acquire one preliminary ETH, along with one ETH of revenue from the staking prize.
However, the truth that one stETH <1 ETH makes the community quite concerned whether this is the next "super depeg" after UST recently flattened the cryptocurrency market.
The reason for this problem?
The main reason is why users implement leverage farming strategy. Specifically, the phases of this strategy are as follows:
- StETH mortgage on Aave, loan on ETH.
- Hold the borrowed amount of ETH, participate in Lido Finance, receive stETH.
- Take the amount of stETH received, mortgage it to Aave and repeat the ETH loan round.
This strategy helps users leverage Lido’s staking interests, helping to increase the return above the original staking by 1 amount of ETH. However, this also amounts to shorting ETH against the collateral of stETH.
Clearly the leverage is bigger in Aave. The chart below shows that ETH is the most borrowed asset from stETH in the amount of approximately $ 800 million as stETH / ETH recursive yield farming is the most popular strategy. pic.twitter.com/iWqa2ylx4L
– Primoz Kordez (@PrimozKordez) May 13, 2022
Evidence shows that most of the assets borrowed on stETH collateral are WETH (approximately 52.4%).
There is another argument, which is Big hands holding stETH want to temporarily exit their ETH positions. This step helps reduce liquidity risk, when holding ETH, it is easy to have future calculations. However, this argument doesn’t have too much data to support.
So what worries this phenomenon?
Of course, when using stETH as collateral for short ETH, it makes sense that if ETH appreciates over stETH, the risk of liquidating loans on Aave will gradually increase. On May 13, the Primoz account tweeted about the amount of stETH that could be liquidated if there was a 10% depeg.
If there is a 10% depeg on stETH / ETH, about $ 100 million or 50,000 stETH would be liquidated. This is much less than what you would expect from 800m ETH leverage on stETH. These are the risky farmers who maintain a high LTV, close to the 75% clearance threshold. pic.twitter.com/fn5eWTN5k9
– Primoz Kordez (@PrimozKordez) May 13, 2022
Note: This data is updated as of May 13, 2022.
Then there is the liquidity risk, as Curve’s liquidity pool is currently only around 1 million ETH (~ 2 million USD).
Also, as most of the ETH (~ 33%) bet on Ethereum 2.0 is done via Lido, a large depeg can lead to a feeling of panic in the market.
Views in the opposite direction
Currently, in the last week, stETH has always maintained a stable depeg of 2-3% compared to ETH. Since Lido has side activities when liquid staking, the risk is not too great.
The second reason users don’t have to worry too much is that The advantages of the arbitrage phase are not excessivecause many Market Makers are not interested with the anchoring of the rung to stETH.
Additionally, leveraged farmers can gradually reduce their leverage through Aave. And it appears these farmers have implemented this strategy, when according to Parsec data (as of May 19), the clearance price area is now moved to 0.8 ETH.
Finally, Lido moved to launch incentives to attract more liquidity into the stETH pools, helping to mitigate future liquidity risks.
We are implementing a further @CurveFinance pool to improve liquidity around the stETH: ETH rung.
This new pool will include an additional 1 million incentive LDO for next week and is currently nearly empty, suggesting high rewards for initial depositors.
– Lido (@LidoFinanza) May 12, 2022
Personal perspective
Given the current procrastination and trusted moves by Market Makers, I personally think stETH can be reduced to around 10%. This can help liquidate most of your leveraged agricultural positions via Aave (as mentioned above).
At the same time, the 10% level of arbitrage profit is quite an attractive number for market makers.
Talking about the risk of a big crash and dragging the entire market like UST did, I don’t think it can happen. Simply because stETH is seen as a certificate that has staking ETH at the Lido and this collateral is real, clearly verifiable on the blockchain. In short, stETH: ETH cannot be compared to LUNA: UST.
end
So we looked at some of the information related to ETH-derived stETH. Hope the above information will bring many new perspectives for you.
Note, the above article is for informational purposes only and should not be considered investment advice.
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