The price gap between ether locked on Lido and spot ether has reached record highs as major holders sell their tokens, raising concerns about a possible ripple effect in cryptocurrencies in lending markets.
A token known as “staked ether” has suddenly become a prime target for crypto traders trying to track extreme tensions in the digital asset markets as major players from beleaguered lender Celsius to hedge fund Three Arrows Capital and industry heavyweight Sam Bankman-Fried’s Alameda Research got rid of their property.
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 Ethereum blockchain’s native cryptocurrency – and the price of ether itself.
The discount hit a record 8% on Monday, data from Dune Analytics shows.
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 the decentralized financial (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 moves 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 ecosystem, with about a third of all ether deposits. In May, Goldman Sachs wrote that such concentration of deposits “could theoretically increase systemic risk” because of Lido’s interconnections with cryptocurrency markets.
Disposal of large containers
Celsius, a cryptocurrency lender that has come under intense scrutiny since the withdrawals freeze last weekend, citing “extreme market conditions,” holds 409,260 stETH tokens, worth about $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 the Huobi Research Institute, the research arm of crypto exchange Huobi, wrote in a note Tuesday that Celsius had previously suffered a loss of nearly $71 million staking stETH on Stakehound because Stakehound held the keys had been lost.
Concerned Celsius users launched a rapid wave of redemptions at the rate of about 50,000 ETH per week, the report added, and the platform was looking for liquidity.
“What Celsius can do is sell its stETH to buy ETH in the marketplace to meet customer demands,” said Noelle Acheson, head of market intelligence at crypto market maker Genesis. , against CoinDesk. (Genesis and CoinDesk are both owned by Digital Currency Group.)
The stETH discount was initially opened last month when the 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 entered a deadly spiral.
Staked Ether (stETH) started swinging from the 1:1 trading ratio to ETH in early May and the gap has widened since then. (CoinMarketCap)
stETH’s market cap has fallen to $4 billion from about $10 billion in early May, driven by holders fleeing strike platforms as the price of ether crashes.
Three Arrows Capital, a Singapore-based trading and investment firm that has been one of the largest investors in the Terra blockchain, pulled nearly $400 million in stETH and ETH from the Curve protocol in May, Nansen analyst Andrew Thurman reported to 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 strong position,” Thurman said.
Data from Nansen shows that a wallet attributed to 3AC withdrew 80,000 stETH from Aave’s decentralized lending protocol on Tuesday, converting 38,900 stETH (about $45 million) into 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 associated with Sam Bankman-Fried, founder and CEO of crypto exchange FTX — sold 50,615 stETH, worth about $88 million at the time, according to a tweet from Hsaka, a popular crypto trader.
Another reason for the discount is the relative illiquidity of deployed ether, Acheson said.
Investors are fleeing risky assets like cryptocurrencies as financial markets around the world shrink in response to central banks raising interest rates to fight inflation. This puts pressure on 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 runs 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 has to sell their holdings, they can find fewer buyers, causing the price of stETH to fall.
“In the short term, stETH will face tremendous selling pressure,” the Huobi Research Institute report concluded. Turbulence is expected in the near future. †