Largest ‘stETH’ pool nearly empty, making it harder for potential sellers to exit | Cryptocurrency

A trading pool that big institutional investors like Alameda Research and Three Arrows Capital used to dump their “stETH” tokens is now nearly depleted and badly out of balance, potentially trapping retail investors as well as embattled crypto lender Celsius.

As cryptocurrency markets have sagged in recent weeks, major institutional crypto investors including Alameda and Three Arrows Capital have used the Curve blockchain protocol to dump their holdings of a token known as staked ether (stETH). The urgency came because the price of stETH tokens unexpectedly deviated from a supposed peg to the price of ether (ETH) – the largest and best-known native cryptocurrency on the Ethereum blockchain, which is the second largest after Bitcoin.

Now, however, Curve’s so-called liquidity pool that investors used to dump their stETH is rapidly drying up, a dynamic that could force future sellers into less transparent OTC markets where discounts could still be more important. .

The pool in question on Curve allows investors to trade stETH for ETH. Since early May, its total value locked (TVL) — a common way to measure the size of such protocols in decentralized finance — has fallen to $621 million from $4.6 billion, the data shows. It is also heavily imbalanced, holding almost five times more stETH than ether, making it expensive or impossible to trade large amounts of tokens.

“I feel bad for retailers because the Curve pool was their only way out,” Vance Spencer, co-founder of venture capital firm Frameworks, told CoinDesk in an interview. “Institutions can still get away with over-the-counter (OTC) offerings, albeit at a significant discount, much higher than in the Curve pool. »

‘stETH reduction’

The discount on stETH has been in the spotlight among analysts as a telltale sign of the recent liquidity crunch in cryptocurrency markets. An stETH represents an ETH token locked on Ethereum’s new blockchain, called Beacon Chain.

In times of high inflation and aggressive rate hikes, investors prefer to hold “liquid” assets that can be easily sold. The problem is that tokens locked on the Beacon Chain cannot be traded for the foreseeable future, until six to 12 months after Ethereum successfully completes a long-awaited upgrade to a “proof-of-stake” network. “, often called the Merge. And based on the latest estimate from senior Ethereum officials, the merger is not expected until August at the earliest.

Chase Devens, an analyst at blockchain data platform Messari, wrote in a note earlier this week that “stETH is in the early stages of its natural price discovery” and that the discount “will likely close when ETH staked will be unlocked on Ethereum’s Beacon Chain”.

The great carriers flee

Until the implosion of the Terra blockchain last month, stETH traded at a one-to-one ratio with ether. But then a 2-3% gap between prices opened up. The spread widened further to 5-6% in early June following financial troubles at crypto lender Celsius and hedge fund Three Arrows Capital – both top stETH holders.

“Celsius and Three Arrows Capital’s position transparency had put these companies at a disadvantage in that short sellers knew how hard to attack certain assets in an attempt to induce liquidations,” Lex Sokolin, Chief Economist and Global Co-Head of fintech. at Ethereum developer ConsenSys, CoinDesk said in an email.

Therefore, some large holders dropped their stETH to get ETH, mostly using the Curve pool. Data from Kaiko showed that the stETH-ETH curve pool was responsible for 98.5% of all decentralized exchange trading volumes in stETH in recent months, while trading on centralized exchanges was negligible. .

The stETH-ETH Curve pool was responsible for 98.5% of all staked ether trades. (Kaiko)

Amber, a cryptocurrency investment platform, withdrew $160 million within days in early June, according to the Kaiko report. Alameda Research, a digital asset trading firm, sold $88 million worth of stETH. Three Arrows Capital, the hedge fund facing potential insolvency, repurchased around $400,000 worth of ETH and stETH from the protocol in May.

“The reason the liquidity providers left is that once the ankle was broken, they got a terrible deal in that they were selling ETH too cheaply,” said Bob Baxley, chief technology officer of the automated market maker Maverick Protocol. “As the pool got out of balance, they didn’t want to get tricked into holding only illiquid stETH.

As a result, the Curve pool has lost 85% of its value and holds around 111,000 ETH and 492,000 stETH, indicating that many more investors want to sell stETH for ETH than the other way around.

Investors are trapped

Celsius, a major crypto lender currently under heavy scrutiny since halting withdrawals citing “extreme market conditions,” could be caught out with its stETH holdings.

Celsius still holds at least about 409,000 stETH, worth about $413 million at current prices, according to data provided by Ape Board, a portfolio tracker from blockchain analytics firm Nansen.

The stETH-ETH curve pool only has around 110,000 ether, which means there are simply not enough tokens to trade stETH.

“Celsius could not have sold all of its stETH on centralized or decentralized exchanges and therefore likely had to or will have to resort to an OTC-style transaction in order to remain solvent,” Kaiko’s Ryder wrote in the note.

Average investors looking to get rid of stETH may have even fewer options, as they typically cannot access the OTC markets to strike a deal.

Centralized exchanges do not have sufficient market depth for the stETH-ETH trading pair for those who want to sell, the Kaiko report showed.

1655439851 245 Largest stETH pool is nearly empty making it difficult to

The depth of the market for the stETH to ETH exchange has shrunk, trapping retail investors who might want to sell. (Kaiko)

The only way out for retail investors is the Curve pool, which has rapidly shrunk from 10,000 to 15,000 ETH per day this week.
Assuming this rate continues, the pool would be completely drained within two weeks.

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Largest ‘stETH’ pool nearly empty, making it harder for potential sellers to exit | Cryptocurrency


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