Staked Ethereum (stETH) Could Cause Crypto Crash, Here’s How
Lido Staked Ethereum (stETH), a staked DeFi variant of Ethereum, has diverged sharply from the latter over the past 48 hours.
The token, which is believed to trade at a 1:1 rate against ETH, is currently trading at $1,513.14 and has fallen 10% in the past 24 hours. In comparison, ETH is trading at $1,582.
stETH has been unpecking since Thursday night, with the first wave of losses stemming from a huge Alameda Capital dumps $1.5 billion– one of the largest holders of stETH. Alameda has sold all of its holdings of the token.
stETH has no direct link to ETH prices. It can only be exchanged for ETH after the merger takes effect, the date of which is currently unknown.
But the token’s primary role as collateral on DeFi platforms such as AAVE and Lido could have dire implications for DeFi. Heavy losses in stETH also cause panic selling in Ethereum.
How will stETH affect ETH prices?
stETH, which represents ETH currently locked to the Ethereum 2.0 beacon chain, is typically used as collateral to borrow more ETH on DeFi platforms.
But if its price drops drastically, positions that borrowed ETH using the token are likely to be liquidated. Holders will be forced to sell stETH on the open market, driving an even bigger price drop for the token.
While this event has little direct impact on ETH prices, it appears to be causing a panic sell-off in the second-largest cryptocurrency.
ETH prices have fallen over 11% in the past 24 hours. The uncertainty surrounding the merger added to the selling pressure.
Celsius, the Lido could be caught in the crossfire
But even if stETH has minimal impact on ETH prices, its key role in mining ETH on DeFi could burn those with high exposure.
Currently, DeFi platform Celsius has many client funds locked in stETH, which are subject to redemptions. If customers were to be spooked by the current downturn in stETH, it could cause a bank run that would overload Celsius with redemptions, potentially causing a liquidity crunch.
DeFi majors AAVE and Lido, which hold large amounts of tokens, could also experience a liquidity crunch if stETH selling intensifies.
DeFi already seems to be feeling the heat. Data from DeFi Llama shows that the four largest platforms – MakerDAO, Curve, AAVE and Lido saw an average drop of 6% in total locked value over the past 24 hours.
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