The price gap between ether locked on Lido and spot ether has reached record highs as large holders sell off their tokens, sparking concern of a potential ripple effect in loan markets cryptocurrencies.
A token known as “staked ether” has suddenly become a key target for crypto traders trying to monitor extreme tensions in digital asset markets, as big players from beleaguered lender Celsius to hedge fund Three Arrows Capital and industry heavyweight Sam Bankman-Fried’s Alameda Research are getting rid of their holdings.
The key metric is the discount between the price of staked ether (stETH) – a Lido Finance protocol token believed to trade at a price close to ether (ETH), the native cryptocurrency of the Ethereum blockchain – and the price of ether itself.
The discount hit a record 8% on Monday, according to data from Dune Analytics.
The speculation, according to analysts, is that cryptocurrency market makers and lenders may be forced to dump their holdings of stETH tokens to fund withdrawals and meet margin calls.
Staked ether was launched by decentralized finance (DeFi) platform Lido Finance as a way to provide liquidity to traders who “stake” their ether on Ethereum’s Beacon chain. This is all part of the process by which Ethereum transitions to a “proof-of-stake” blockchain. Without going into all the details, participants in the system must agree to lock their tokens for a certain period of time to facilitate the processing of transactions; in return, they receive cryptocurrency rewards. But in the meantime, they can take stETH tokens and continue trading.
Lido dominates the Ethereum staking ecosystem, with around a third of all ether deposits staked. In May, Goldman Sachs wrote that such a concentration of deposits “can theoretically increase systemic risk” due to Lido’s interconnections with cryptocurrency markets.
Discharge of large holders
Celsius, a crypto lender that has come under scrutiny since freezing withdrawals last weekend, citing “extreme market conditions,” holds 409,260 stETH tokens, worth around $470 million at current prices, according to data provided by Ape Board, a portfolio tracker from blockchain analytics firm Nansen.
Johnny Louey and Andy Hoo, analysts at Huobi Research Institute, the research arm of crypto exchange Huobi, wrote in a note on Tuesday that Celsius suffered a loss of nearly $71 million earlier while staking stETH on Stakehound. because Stakehound had misplaced the keys.
Concerned Celsius users launched a rapid wave of redemptions at a rate of around 50,000 ETH per week, the report added, and the platform was seeking liquidity.
“What Celsius can do is sell its stETH in order to buy ETH on the market to satisfy customer demands,” said Noelle Acheson, head of market intelligence at crypto market maker Genesis. , to CoinDesk. (Genesis and CoinDesk are both owned by Digital Currency Group.)
The stETH discount was initially opened last month, when cryptocurrency markets were rocked by the collapse of the Terra blockchain network and its UST stablecoin. Since then, stETH has mostly traded at a 2-3% discount, peaking at 5% on May 12 when UST fell into a death spiral.
Staked Ether (stETH) began to swing from the 1:1 exchange ratio to ETH in early May, and the gap has been widening ever since. (CoinMarketCap)
The market capitalization of stETH has fallen to $4 billion from around $10 billion in early May, driven by holders fleeing staking platforms as the price of ether crashes.
Three Arrows Capital, a Singapore-based trading and investment firm that was one of the biggest investors in the Terra blockchain, pulled nearly $400 million worth of stETH and ETH from the Curve protocol in May, reported Nansen analyst Andrew Thurman told CoinDesk.
Three Arrows Capital, often abbreviated as 3AC, “has come to the attention of the on-chain community in recent weeks for how they have managed their stETH position,” Thurman said.
Data from Nansen shows that a wallet attributed to 3AC withdrew 80,000 stETH from the Aave decentralized lending protocol on Tuesday and converted 38,900 stETH (about $45 million) in two transactions at a discount rate of 5.6. 5.9% for ether.
This came after rumors on crypto Twitter that the investment firm may be facing financial difficulties.
3AC representatives did not immediately respond to requests for comment.
Last week, another well-known trading company, Alameda – which is closely linked to Sam Bankman-Fried, founder and CEO of crypto exchange FTX – sold 50,615 stETH, worth around 88 million dollars at the time, according to a tweet from Hsaka, a popular crypto trader.
Another reason for the discount is the relative illiquidity of staked ether, Acheson said.
Investors are fleeing risky assets such as cryptocurrencies as financial markets around the world decline in response to central banks raising interest rates to fight inflation. This pressures cryptocurrency platforms to respond to customer redemptions. At the same time, investors now prefer to hold more liquid assets.
The daily trading volume of stETH is in the hundreds of thousands of dollars, compared to the daily volume of ETH in the billions, making the price of the less liquid asset more susceptible to selling pressure. When a big player needs to sell their holdings, they may find fewer buyers, driving down the price of stETH.
“In the short term, stETH will face tremendous selling pressure,” the Huobi Research Institute report concluded. “Turbulence is expected in the near future. »
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‘Staked Ether’ Becomes the Center of Crypto Stress, from Celsius to Three Arrows | Cryptocurrency
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