It’s only been a month since the collapse of Terra and the chaos it created in the crypto market, and now Lido Finance and its Staked Ethereum (stETH) are at the center of another potential liquidity crisis.
Crypto lending firm Celsius is one of Lido’s top customers and as such one of the largest holders of stETH. The problem? Staked ETH is still assumed to be worth 1 ETH—and that hasn’t been the case for some time.
Staked ETH represents Ethereum who was locked up on the Ethereum 2.0 beacon chain – a network that will soon be merged with Ethereum main network in a highly anticipated update that moves the blockchain to proof of stake. Normally, users would need a minimum of 32 ETH (worth around $40,000) to participate in ETH 2.0 staking and earn rewards. But Lido Finance allows users to stake any amount of ETH. And because it is a “liquid game”, it gives users stETH tokens in return.
This stETH can then be loaned, staked, and traded for other tokens.
Celsius does precisely this with funds from its own clients. But now, a day after Celsius suspended customer withdrawals, exchanges and transfers – “to put Celsius in a better position to meet, over time, its withdrawal obligations”, the company said– the lending company’s exposure to stETH is a growing concern.
The company owns at least $475 million worth of stETH in a public portfolioaccording to blockchain research firm Nansen Research.
Celsius works by staking customer deposits, in this case Ethereum, into yield-generating decentralized finance (DeFi) protocols like Lido. In return, Celsius receives stETH, which increases in value as deposits yield rewards. Celsius makes money by paying customers the promised rate of return, recently between 6% to 8% on ETH depositsand keep the rest.
The value proposition for Celsius depositors is that they are promised a fixed rate of return on their ETH and leave it to the company to figure out how to reliably generate that return.
But this strategy starts to break down if stETH loses parity with ETH (it did) at the same time that there are a lot of Celsius depositors looking to withdraw their ETH (they are) because Celsius doesn’t seem not have enough liquid ETH to meet all of its obligations.
As of Monday afternoon, stETH had yet to take revenge on Ethereum. As of this writing, stETH is trading at 0.94 ETH. stETH has been trading below 1 ETH since last month, when stETH was impacted by the collapse of TerraUSD and Luna.
A large audience Celsius Wallet shows that $475 million of stETH is used as collateral for hundreds of millions of stablecoins.
“They also sent thousands of stETH to FTX in the past few days, presumably to sell,” said Andrew Thurman, chief content officer at Nansen. Decrypt” although we can’t verify that because it’s off-chain. They were probably particularly affected by the fact that stETH lost its peg to ETH.
But selling large amounts of stETH to obtain more liquid ETH would cause its price to fall even further, further worsening the liquidity crisis Celsius is already facing.
Efforts have been made to find the other public wallets, and thus represent the remainder of Celsius’ $10 billion in client assets, but so far only around $1.5 billion appears to have been taken into account, according to research by The block. This does not mean that Celsius does not have this ETH, but it still caused panic.
“Celsius probably failed to isolate the risk: they could have taken USDC and kept it in UST (Luna’s stablecoin), or taken ETH and kept it in stETH,” wrote Jack Niewold, founder of the Crypto Pragmatist newsletter, in a Twitter feed. “So when ALL crypto goes down and ALL users want their funds back, ALL Celsius users feel the pinch.”
Celsius did not immediately respond to Decrypt‘s requests for comments.
If the whole hand writhing on stETH sounds familiar, that’s because it also played a part in the collapse of Terra’s UST and LUNA tokens. Back then, the imbalance between stETH and ETH was the opposite of what it is today.
Last month, there was a run on stETH as users rushed to withdraw their funds from the Anchor lending protocol on the Terra blockchain, which then offered users up to 20% return on their UST deposits. After Terraform Labs shut down the Terra Network twice, users cashed in their stETH, driving the price up.
One ETH could be exchanged for 1.0248 stETH via the Curve protocol, meaning it was trading at a 3% discount to Ethereum.
When this happened, it created an opportunity for arbitrage trades. Investors were able to sell stETH for more ETH than was deposited to create it, which created a large drawdown on the Lido’s ETH pool.
Whenever there is a big shortage of liquidity, Brian Norton, COO of My Ethereum Wallet, said Decryptthis makes DeFi a lot like traditional finance because it lets a centralized platform control people’s ability to access their funds.
“Every time you see this, every time it only reinforces the point that if you rely exclusively on these kind of centralized platforms,” he said, referring to Celsius, “even when returns are excellent, I think you’re still giving up a lot of control.
Last week, the Celsius team went to great lengths to assure customers that they could meet their obligations.
“Celsius has the reserves (and more than enough ETH) to meet the obligations, as dictated by our comprehensive liquidity risk management framework,” the company wrote. in a blog postfollowing rumors that he was heavily impacted by the Terra crash.
The post ended with a somewhat chilling quote from US Navy Admiral David Farragut, who led an attack on New Orleans during the Civil War: “Damn the torpedoes, full speed ahead.”
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