Staked Ethereum tokens from the Lido network are being liquidated to markets as it has remained below its peg for the past few days.
Lido provides a liquid staking service whereby users can stake Ethereum and receive the equivalent value in a token called stETH. This can then be deposited in other decentralized finance (DeFi) protocols to generate additional yields on top of the staking reward or be used as collateral for loans.
It has several advantages over direct Ethereum staking as there is a flexible limit, and funds can be withdrawn or redeployed. To stake ETH on the Beacon Chain (Ethereum consensus layer) directly, there is a minimum of 32 ETH (worth approximately $38,400), and it remains locked there until after the Merge.
Lido Liquidation
Lido has been wildly popular for those that don’t have the minimum amount of ETH and want more flexibility with their investments. It has 4.2 million ETH staked, about a third of the total Ethereum staked overall (12.8 million ETH).
The problem arises when the stETH token falls below the price of Ethereum, which it is supposed to be pegged to at 1:1. Ethereum is currently trading at $1,217 while stETH is at $1,156, 5% lower, and only worth 0.927 of an ETH.
Adding fuel to the fire is the current liquidation of Lido’s staking token. According to a June 14 tweet by blockchain security firm PeckShield, venture capital firm Three Arrows Capital has been offloading stETH. At least 22,830 stETH tokens were converted back into ETH recently, according to the 3AC wallet address.
On June 15, 3AC co-founder Zhu Su attempted to alleviate the concern by tweeting: “We are in the process of communicating with relevant parties and fully committed to working this out.”
The Curve Finance DeFi platform has a liquidity pool for stETH and ETH that should be in balance. However, the de-pegging and stETH selloff has caused an imbalance in the pool. It is currently 78.4% heavy on stETH with just 21.6% in Ethereum.
Liquidity for staked Ether is shrinking, making it very difficult to conduct token swaps and collateralized loans using the Lido token.
The Celsius Concern
The Celsius fiasco has also been a cause for concern because the crypto lending platform holds a large amount of stETH. Earlier this week, Celsius sent millions of dollars worth of crypto to the FTX exchange in an attempt to shore up liquidity.
Celsius currently holds a whopping 409,260 stETH, equivalent to almost $500 million at the time of writing. If this is liquidated, the de-pegging situation will likely get far worse quickly.
On June 15, Bitcoin Magazine’s Dylan LeClair commented: “While everyone is focused on the Celsius collateralized loan, the biggest worry for the market may just be their massive stETH position. No resolution in sight.”
