Ether is the second largest cryptocurrency in the world by market capitalization.
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Another controversial cryptocurrency is wreaking havoc on the digital asset market – and this time, it’s not a stablecoin.
Staked ether, or stETH, is a token that is supposed to be equal to the value of ether. But over the past few weeks, it has been trading at an increasing discount on the second largest cryptocurrency, fanning the flames of a liquidity crunch in the cryptocurrency market.
On Friday, stETH fell to 0.92 ETH, which means an 8% discount on the ether.
Here’s everything you need to know about stETH and why cryptocurrency investors are so worried.
What is STETH?
Each stETH token represents a unit of ether that has been ‘stored’ or deposited, in what is called a ‘beacon chain’.
Ethereum, the network on which ether is based, is in the process of being upgraded to a new version that is supposed to be faster and cheaper to use. The Beacon series is a test environment for this upgrade.
Staking is the practice of investors locking up their tokens for a period of time in order to contribute to the security of the crypto network. In return, they get rewards in the form of interest-like returns. The mechanism behind this is known as “Proof of Stake”. It differs from “proof of work” or mining, which requires a lot of computing power – and energy.
Currently, to participate in Ethereum, users have to agree to secure a minimum of 32 ETH even after upgrading the network to a new standard, known as Ethereum 2.0.
However, a platform called Lido Finance allows users to share any amount of Ether and get a derivative token called stETH, which can then be traded or loaned on other platforms. It is an important part of decentralized finance, which aims to replicate financial services such as lending and insurance using blockchain technology.
StETH is not a stablecoin like tether or terraUSD, which is an “algorithmic” stablecoin that collapsed last month Under current bank pressure. It’s more like an IOU – the idea is that stETH holders can redeem their tokens for an equivalent amount of Ether once the upgrade is complete.
Separation from the ether
When the Terra stablecoin project collapsed, stETH’s price started trading below the price of ether while investors raced to exit. A month later, crypto bank Celsius launched Stop withdrawals from the accountwhich saw an even greater decline in the value of stETH.
Celsius acts very much like a bank, taking users’ crypto and lending it to other institutions to generate a return on deposits. The company took users’ ether and pawned it over Lido to increase its profits.
Celsius has more than $400 million in stETH deposits, according to data from the DeFi Board Ape analytics site. The fear now is that Celsius will have to sell stETH, leading to massive losses and further downward pressure on the coin.
But this is easier said than done. StETh holders will not be able to redeem their tokens for ether until six to 12 months after an event known as “merging,” which will complete Ethereum’s transition from Proof of Work to Proof of Stake.
This comes at a price, as it means that investors are stuck in their power unless they choose to sell it on other platforms. One way to do this is to convert stETH into ether using Curve, a service that pools funds together to enable faster trading in and out of tokens.
Ryan Shea, an economist at crypto investment firm Trakx.io, said Curve’s liquidity pool for switching between stETH and ether “has become quite unbalanced.” Ether accounts for less than 20% of the reserves in the pool, which means that there will not be enough liquidity to meet every withdrawal.
“Staked ETH issued by Lido is backed by a 1:1 ratio with ETH stake deposits,” Lido said in a tweet last week, in an attempt to allay investor concerns about STETH’s increasing divergence from the value of ether.
“The stETH:ETH exchange rate does not reflect the underlying support for your ETH, but rather the volatile secondary market rate.”
cipher infection
Like many aspects of cryptocurrency, stETH has been caught up in a whirlwind of negative news affecting the sector.
High interest rates from the Federal Reserve led to flight to safer and more liquid assets, which in turn led to liquidity problems for the big companies in the space.
Another company exposed to stETH is Three Arrows Capital, a crypto hedge fund rumored to be in financial trouble. Public blockchain records show that 3AC was Actively sell its property in stETH3AC 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 are concerned that the decline in the value of stETH will affect more crypto players.
“In cryptocurrency, there is no central bank,” Shea said. “Things should go well, and it will continue to affect the price of crypto assets, compounding the negative impact from the overall background.”
Bitcoin The coin’s price briefly fell below $18,000 on Saturday, pushing it deep to 18-month lows. It has since recovered back above $20,000. At one point, Ether fell below $900, before recovering $1,000 by Monday.
“merging”
The stETH debacle has also led to new concerns about the security of Ethereum. About a third of the ether trapped in the Ethereum beacon chain is installed through Lido. Some investors are concerned that this could give a single player too much control over the upgraded Ethereum network.
Ethereum recently completed a file try clothes for its long-awaited integration. The success of the event bodes well for the Ethereum promotion, as investors expect it to take place as early as August. But there is no telling when it will actually happen – it has already been delayed several times.
“The latest updates to the Ethereum testnets have been positive, bringing more confidence to those waiting for consolidation,” said Mark Argonne, research associate at crypto asset management firm CoinShares.
“So when withdrawals are finally enabled, any discount will likely be settled in stETH but until this unknown date arrives, some form of discount will still be in place.”
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