The price difference between ether locked on Lido and spotether has reached record highs as large owners sell out their tokens, raising concerns about a potential ripple effect in cryptocurrencies in the lending markets.
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 major players from the beleagured lender Celsius to hedge fund Three Arrows Capital and industrial heavyweight Sam Bankman-Fried’s Alameda Research escape with their possessions.
The key measure is the discount between the price of ether (stETH) – a Lido Finance protocol token that is believed to trade at a price close to ether (ETH), the original cryptocurrency in the Ethereum blockchain – and the price of ether itself.
The discount hit a record high of 8% on Monday, according to data from Dune Analytics.
The speculation, according to analysts, is that cryptocurrency marketers and lenders may be forced to dump their holdings of stETH tokens to fund withdrawals and accommodate margin calls.
Staked ether was launched by the decentralized finance (DeFi) platform Lido Finance as a way to provide liquidity to traders who “play” 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 about a third of all ether deposits put on. In May, Goldman Sachs wrote that such a concentration of deposits “could theoretically increase systemic risk” due to Lido’s interconnections with cryptocurrency markets.
Discharge of large holders
Celsius, a cryptocurrency lender that has been under scrutiny since last weekend’s freezes, citing “extreme market conditions”, has 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 Huobi Research Institute, the research division of the crypto exchange Huobi, wrote in a note Tuesday that Celsius suffered a loss of nearly $ 71 million earlier while betting 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 sought liquidity.
“What Celsius can do is sell its stETH to buy ETH in the market to meet customer requirements,” 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 rebate was originally opened last month when the cryptocurrency markets were shaken by the collapse of the Terra blockchain network and its UST stablecoin. Since then, stETH has mostly traded at a 2-3% discount and peaked at 5% on May 12, when UST fell into a death spiral.
Staked Ether (stETH) began to fluctuate from the 1: 1 exchange ratio to ETH in early May, and the gap has widened ever since. (CoinMarketCap)
The market value of stETH has dropped to $ 4 billion from about $ 10 billion in early May, driven by holders fleeing betting platforms as the price of ether plummets.
Three Arrows Capital, a Singapore-based trading and investment firm that was one of the largest investors in the Terra blockchain, pulled stETH and ETH for nearly $ 400 million 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 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 Aave’s decentralized lending protocol on Tuesday and converted 38,900 stETH (approximately $ 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 company 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 the 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 ether stakes, Acheson said.
Investors are fleeing risky assets such as cryptocurrencies as financial markets around the world fall in response to central banks raising interest rates to fight inflation. This is pushing cryptocurrency platforms to respond to customer redemptions. At the same time, investors now prefer to have 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 billions, making the price of the less liquid asset more susceptible to selling pressure. When a major player has to sell their holdings, they can find fewer buyers, pushing the price of stETH down.
“In the short term, stETH will face enormous sales pressure,” the Huobi Research Institute report concluded. “Turbulence is expected in the near future.”