Turmoil doesn’t seem to slow down when there’s a bear market ongoing. Even before the recent UST de-peg debacle settles, another asset – stETH – risks de-pegging against its intended peg, ETH. Today, we run through the cause of this de-peg and what it means for Celsius and the market.
Background
To understand stETH, you must firstly know what liquid staking is. The textbook definition is the delegation of your tokens to a third party, which does the staking for you. Said third party then issues you a separate token, for which is redeemable for the underlying asset. Some common examples are outlined below:
- Liquid Staked AVAX (sAVAX) – A derivative token of staked AVAX. Benqi Finance is the third party issuing sAVAX.
- Liquid Staked DOT (LDOT) – A derivative token of staked DOT. Acala is the third party issuing LDOT.
So, why do DeFi users use liquid staking? The reason is that it allows their tokens to remain liquid, while the underlying asset is staked for yield and securing the network. Using stETH as an example, staking your ETH through Lido Finance allows you to:
- Support the Ethereum 2.0 Beacon Chain.
- Earn an APR of 4% per year.
- Receive stETH, which then allows you to participate in trading, lending, liquidity pools, yield farming, etc.
The above sounds all rosy, right? But that only works when one stETH is always worth one ETH or slightly more.
stETH De-pegs From ETH
As of today, stETH currently sits at 0.94 ETH. There are a few reasons why this has happened:
- No arbitrage opportunity – Other liquid staked assets can easily recover peg as eager arbitrageurs will look to buy cheap liquid staked assets and swap them back to the underlying asset for a profit. However, stETH cannot be easily redeemed for ETH. Stakers can only redeem their ETH once ETH 2.0 launches.
- Delay in the ETH 2.0 launch – Multiple delays have caused investors to worry. This is further aggravated along with the current bearish sentiment.
Enter Celsius – The First Victim
When there’s money to be made in DeFi, you can be sure there are big companies eager to pounce. Enter Celsius – a crypto lending platform holding tons of stETH. In fact, Celsius is the largest holder of stETH on Aave. Refer to the below tweet for details.
The important part here is, Celsius is a HUGE holder of stETH.
In fact, they are the largest holder of interest bearing stETH (stETH on Aave) pic.twitter.com/qFFFGjxMFN
— CryptoJoe (@Crypto_Joe10) June 10, 2022
In the current fearful market sentiment, coupled with bad memories from the recent UST de-peg, holders of stETH rush to sell their holdings. This further exacerbates the de-pegging, thus destroying the value of Celsius’ stETH holdings. This led to fears of Celsius’ insolvency, which, in turn, triggered large withdrawals from their platform. In addition, Celsius does not have a good history of managing their users’ money well. You can read more about this in our recent research here.
Note: If Celsius is insolvent, investors with crypto on their platform may not get their deposit back.
As of today, Celsius has halted all withdrawals from their platform, further fueling the fears of its users. There is no doubt that Celsius is now plagued with liquidity issues. They’re facing tremendous pressure to return users their funds. Unsurprisingly, Celsius’ token (CEL) has taken a nosedive and dropped 95% from its all-time high.
The Effect of the stETH/ETH De-peg
While investors were barely recovering from the UST de-peg, stETH’s de-peg came along. Although it did not have the dramatic spikes of LUNA and UST, it did further destroy retail sentiment towards DeFi. Indeed, protocols for other liquid staked assets were quick to come out on Twitter to justify the strength of their asset’s peg.
The de-pegging of stETH also resulted in a huge dump in price of ETH, along with many other altcoins. ETH currently sits at more than 70% below its all-time high, and all Layer 1 altcoins face drawdowns of a similar amount or greater. Needless to say, DeFi-related altcoins like Aave and YFI were hit worse.
Insolvency of the Once-Great Crypto Giants
If I were asked, “What are the main differences between the bear market of 2018 versus today?” My answers would be: 1) interconnectedness between multiple protocols and 2) DeFi. When Terraform Labs and their once-thriving LUNA ecosystem crumbled, it raised the all-important question amongst retail crypto investors:
How badly were companies holding LUNA and UST affected?
In today’s crypto world, the damage of one major protocol’s downfall is never limited to just that party. Multiple companies are invested in each other’s products, just like how Celsius holds a ton of Lido Finance’s stETH. Think about the 2008 subprime mortgage crisis, whereby financial institutions fell one after another. For now, Celsius faces liquidity issues due to bad bets and the stETH de-peg. But come tomorrow, another once-great crypto “giant” may face the axe soon due to Celsius’ fall. In this case, the “interconnectedness” of crypto acts as a double-edged sword which worsens the bear market during such tough times. The tweet below summarizes it all.
13/x – When lenders like Celsius collapse – they trigger contagion in the ecosystem as they have a complicated web of transactions with other players. Counter party risk becomes real. Credit shrinks – loans have to be repaid and assets have to be sold for dollars.
— degentrading (@hodlKRYPTONITE) June 11, 2022
During the bear market in 2018, there were barely any signs of DeFi on-chain. Today, DeFi has progressed significantly. Crypto companies can easily use users’ crypto for risky plays, such as for collateral or over-leveraged trades. Greed was at its highest level during the 2021 bull market. Now, crypto companies face liquidations as prices tumble. This, in turn, creates a cascading effect of liquidations on DeFi, which wipes out more crypto investors.
Conclusion
So that summarizes the causes of stETH’s de-peg and its potential adverse effects on the crypto market. We hope Celsius is able to overcome its current issues and resume withdrawals for users soon. However, please note that this is not financial advice and that you should do your own research on how to deal with the current stETH/ETH de-pegging situation.
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