Depeg Returns | stETH has a Liquidity Crisis and Ethereum is Implicated

2022-06-13, 09:46

On June 7, according to media reports, the cryptocurrency lending platform Celsius Network lost at least 35,000 ETH in the event that the private key of Ethereum 2.0 staking solution Stakehound was lost. However, the company chose to conceal the information from users for more than one year.

This event became the fuse of stETH depeg: the Lido staking pool of Ethereum 2.0 staking agreement was seriously tilted, causing the market panic about the stETH liquidation, and once again reminding users of the UST depegging event. As of the time of writing, ETH had fallen for six consecutive days, with the lowest price reaching $1,304.36 and the largest decline of 9.81%.

Depeg Returns

Just as we were about to forget the painful blow of UST depegging and Luna plummeting, the depegging event occurred again in the market.

On June 9, Alameda, one of the seven holders of stETH, withdrew some liquidity from Lido. According to Small Cap Scientist, a Twitter crypto blogger, Alameda suffered a huge slide and sold approximately 50,000 stETH. Alameda's move directly led to a decrease of more than 20% in the total liquidity of Lido liquidity pool.

In the tweet, Small Cap Scientist called Alameda "the canary in the coal mine" and said that Alameda always "started big moves very early".

On June 10, a large number of 1k-2k independent addresses also began to sell stETH, forming a new wave of panic selling. These operations pushed the ratio of stETH to ETH in Curve to approximately 22%/78%. After that, a blue whale user took the lead in a wave of bottom buying, and stETH stopped falling for a short time, callback to 24.3%/75.7%.

On the same day, in response to the stETH depeg, Lido Finance replied on Twitter that stETH and ETH remained pegging at 1:1, and the exchange ratio did not reflect the underlying support of users staking ETH, but reflected the price fluctuations in the secondary market.

On June 11, stETH depeg continued, and there was no sign of the end of the liquidity crisis. The stETH and ETH deposits in the Curve liquidity pool are 22.95%/77.05%.

How did the event develop so far?

Lido's operating mechanism is to provide users with ETH liquidity staking service. Users can lock any number of ETH in Lido and charge stETH to earn total income in the DeFi. After the merger of Ethereum, theoretically, each stETH can be exchanged for 1 ETH, and each stETH is redeemed through the launched beacon chain. ETH in the ETH2.0 staking contract does not have liquidity.

A user on Twitter analyzed the incident and believed that the incident originated from the collapse of UST and LUNA. At that time, some institutions sold stETH to withdraw liquidity from the pool in order to cash in liquidity and mobilize funds to save UST. This has also affected some funds of stETH-ETH circular arbitrage by using AAVE, thus responding to the first wave of stETH decline.

Updates

On June 13, Celsius issued an official announcement to suspend withdrawal, trading and transfer.

"Due to today's extreme market conditions, we announced that Celsius suspended all withdrawals, transactions and transfers between accounts. We are taking this action today to enable Celsius to better meet its withdrawal obligations. In order to fulfill this commitment and adhere to our risk management framework, we have activated a clause in our terms of use, which will allow this process to occur. "

As of 16:20 on June 13, the ratio of stETH to ETH had dropped to 1:0.9458, and the proportion of liquidity pool was seriously inclined, reaching 19.96%/80.04%.

The current price of stETH is 1175.80, with a 24-hour decrease of 25.09%; LDO now offers $0.6518, with a 24-hour decrease of 28.03%.

We will continue to keep an eye on the follow-up updates. You are welcome to subscribe to Gate.io Blog (pull down the homepage of the Blog to the end, and enter the email address to subscribe) to get the latest status of the stETH depegging event.

Author: Gate.io Researcher Jill Ma Translator: Joy Z.
This article represents only the researcher's views and does not constitute any investment suggestions.
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