What is staked ether (stETH) and why is it causing havoc in crypto?


Ether is the second largest market value cryptocurrency in the world.

Jaap Arriens | NurPhoto via Getty Images

Another controversial cryptocurrency is wreaking havoc on the digital asset market, and this time it is not a stable currency.

The bet ether, or stETH, is a symbol that is supposed to be worth the same as the ether. But in recent weeks, it has traded at a growing discount to the second largest cryptocurrency, fueling the flames of a liquidity crisis in the cryptocurrency market.

On Friday, stETH fell as low as 0.92 ETH, implying an 8% discount on ether.

Here’s everything you need to know about stETH and why it worries crypto investors.

What is stETH?

Each stETH chip represents an ether unit that has been “bet” or deposited, in what is called a “beacon chain.”

Ethereum, the network that supports ether, is in the process of upgrading to a newer version that is intended to be faster and cheaper to use. The beacon chain is a test environment for this update.

Staking is a practice in which investors block their tokens for a period of time to contribute to the security of a cryptographic network. In return, they receive rewards in the form of interest-like returns. The mechanism behind this is known as “participation proof”. It is different from “work test” or mining, which requires a lot of computing power and energy.

To currently participate in Ethereum, users must agree to block a minimum of 32 ETHs until the network upgrades to a new standard, known as Ethereum 2.0.

However, a platform called Lido Finance allows users to bet any amount of ether and receive a derivative token called stETH, which can then be traded or lent on other platforms. It is an important part of decentralized finance, which aims to replicate financial services such as loans and insurance using blockchain technology.

StETH is not a stable currency like tether or terraUSD, the “algorithmic” stable currency that collapsed last month under the strain of a banking run. It’s more like an IOU: the idea is that stETH holders can exchange their tokens for an equivalent amount of ether once the upgrade is complete.

Decoupling of the ether

When the Terra stablecoin project imploded, the price of stETH began to negotiate below the ether as investors rushed for the exit. A month later, crypto lender Celsius began stopping withdrawals from the account, which saw the value of stETH fall further.

Celsius acts as a bank, taking user cryptography and lending it to other institutions to generate a return on deposits. The firm has taken the ether of users and opted for Lido to increase its profits.

Celsius has more than $ 400 million in stETH deposits, according to DeFi Ape Board analysis site data. The fear now is that Celsius will have to sell his stETH, which will cause big losses and put more downward pressure on the token.

But that’s easier said than done. StETh holders will not be able to exchange their tokens for ether until six to 12 months after an event known as a “merger”, which will complete Ethereum’s transition from work test to participation test.

This comes at a price, as it means investors are stuck with their stETH unless they choose to sell it on other platforms. One way to do this is to convert stETH to ether using Curve, a fundraising service to enable faster token exchange.

Curve’s liquidity group to switch between stETH and ether “has become quite unbalanced,” said Ryan Shea, an economist at cryptocurrency investment firm Trakx.io. Ether accounts for less than 20% of pool reserves, meaning there would not be enough liquidity to deal with every stETH withdrawal.

“The ETH bet issued by Lido is backed 1: 1 with ETH stake deposits,” Lido said in a tweet last week, trying to allay investors ’fears about stETH’s growing divergence with the value of the ether.

“The exchange rate between stETH: ETH does not reflect the underlying support of your bet ETH, but a fluctuating secondary market price.”

Cryptocontagion

Like many facets of cryptography, stETH has been caught in a whirlwind of negative news affecting the industry.

Higher Federal Reserve interest rates have led to a leak toward safer, more liquid assets, leading to liquidity problems in major space companies.

Another company with exposure to stETH is Three Arrows Capital, the cryptocurrency hedge fund that is rumored to be in financial trouble. Public blockchain records show that 3AC has been actively selling its stetH shares, and 3AC co-founder Zhu Su previously said his company is considering selling assets and rescuing another company to avoid collapse.

3AC was not available for comment when contacted by CNBC.

Investors worry that the fall in the value of stETH will affect even more crypto players.

“In crypto there is no central bank,” Shea said. “Things will just have to play out, and it will continue to weigh on the prices of cryptographic assets, aggravating the negative impact of the macro context.”

Bitcoin briefly sank below $ 18,000 a coin on Saturday, pushing further into the 18-month lows. He has since recovered above $ 20,000. Ether at some point dropped below $ 900, before recovering $ 1,000 on Monday.

The ‘fusion’

The stETH debacle has also sparked new concerns about Ethereum security. About a third of all ether enclosed in the Ethereum beacon chain is bet through Lido. Some investors fear that this could give a single player too much control over the upgraded Ethereum network.

Ethereum recently completed a general rehearsal for its long-awaited merger. The success of the event bodes well for the Ethereum upgrade, and investors expect it to take place as early as August. But it is unknown at this time what he will do after leaving the post.

“The latest updates on Ethereum’s test networks have been positive, giving more confidence to those waiting for the merger,” said Mark Arjoon, an associate researcher at cryptocurrency asset management company CoinShares.

“So when withdrawals are enabled, it’s likely that any stETH discount will be arbitrated, but until that unknown date arrives there will still be some sort of discount.”



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