- The collapse of Terra’s LUNA caused investors to prefer liquid over illiquid assets, resulting in an 80% drop in liquid Ethereum in a pool on Curve Finance.
- stETH, the tokenized form of staked Ethereum, saw an explosive increase in selling pressure and suffered a breakaway.
- Institutions like Celsius and Three Arrows Capital were caught in the crossfire as the price of Ethereum continued to fall.
Ethereum price continued its bloody decline this week. Experts say the withdrawal of Lido Finance’s stETH from Ethereum sparked a crisis and institutions like Celsius and 3AC witnessed mass liquidations.
Also Read: Three Arrows Capital Reportedly Facing Insolvency, Crypto Bubble Bursts
What is stETH?
Lido Finance, a DeFi platform that is one of the largest staking service providers for Ethereum, offers a tokenized form of staked Ether, known as stETH. The decentralized staking service provider promises that stETH is backed by Ethereum 1:1.
Once Ethereum completes its transition from Proof-of-Work to Proof-of-Stake consensus mechanism, one stETH will be exchangeable for one Ether on the Beacon Chain. The merger was scheduled to take place as early as August 2022, according to Vitalik Buterin and Tim Beiko, however, it’s likely a delay could push the event to Q4 2022.
Therefore, stETH withdrawals are only possible after the Capella hard fork, an event that is expected to occur six months after the merger, i.e. Q2 2023 or later.
Why did Celsius and Three Arrows Capital trade stETH for ETH?
It is possible to trade stETH for Ethereum in the open market, as the pair has historically traded at nearly 1:1, the peg. However, with demand volatility, the price of stETH has fallen below Ethereum this week and a few times in the past.
Terra’s LUNA crash played a crucial role in stETH’s depeg and increased selling pressure on the token. When LUNA/UST imploded, investors rushed into liquid assets, dropping illiquid ones in the process. There was an 80% withdrawal of liquid Ethereum from Curve Finance’s stETH:ETH pool. Institutions faced massive liquidation of their positions on exchanges and there was a large-scale sell-off of stETH to cover margin requirements.
The price ratio stETH:ETH falls
Celsius Network and Three Arrows Capital were among the projects that stepped up their selling of stETH and triggered a sharp drop in the price of the token. This is called a “depeg” since stETH started trading at a discount to Ethereum on the open market.
How could stETH depeg push borrowers into insolvency?
stETH is an illiquid asset that retains value as long as there are buyers. Once all the Ethereum is drained and the buyers disappear, there is no one left to sell stETH to, making it a technically worthless token at the time.
Also, your collateral decreases with a drop in the Ethereum price. stETH is primarily used as a leverage tool, so an investor can get a loan where they stake their ETH and hold stETH. However, once the price of Ethereum drops, the value of their collateral decreases, they panic and sell stETH on the open market, triggering a further decline.
Borrowers find it difficult to repay lenders when holding illiquid assets like stETH, if the sell-off persists and buyers of the token disappear.
@hodlKRYPTONITE, a pseudonymous analyst shed light on how lenders like Celsius are collapsing due to counterparty risk.
12/x Ultimately, panic selling in stETH will lead to selling in ETH and pull the broader cryptocurrency complex down. We already have macro headwinds, these structural selling flows will exacerbate the crisis. In my opinion, we will see a repeat of March 2020.
— degentrading (@hodlKRYPTONITE) June 11, 2022
The liquidity crunch is a slippery slope
@hodlKRYPTONITE explains that lenders like Celsius, facing a collapse, trigger contagion in the ecosystem. The complex network of transactions, where Ethereum is staked for stETH and stETH is used as leverage, credit is shrinking.
A fall in the price of the liquid asset could lead to a significant reduction in capital deployed, loans need to be repaid, and assets are sold for dollars or stablecoins.
13/x – When lenders like Celsius collapse, they trigger contagion in the ecosystem because they have a complicated web of transactions with other players. The counterparty risk becomes real. Credit is shrinking – loans have to be repaid and assets have to be sold for dollars.
— degentrading (@hodlKRYPTONITE) June 11, 2022
Analysts Predict Etheruem Price Trend Reversal
Netcost-Security analysts have assessed Ethereum’s price trend and claim that buyers are picking up the asset at discounted prices. If the buying continues, Ethereum price could break through the hurdle at $1,270 and rebound to $1,730.
ETH-USD Price Chart
Bitcoin could bottom out at this level
Netcost-Security analysts have identified the level at which the price of Bitcoin could bottom. As the asset recovers from the recent crisis, investors are starting to buy again. For more information, watch this video:
We would like to say thanks to the writer of this write-up for this awesome material
This Token Could Trigger the Next Ethereum and Crypto Crash | Cryptocurrency
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