This token can trigger the next Ethereum and Cryptocrash

  • The collapse of Terras LUNA made investors prefer liquid over illiquid assets, resulting in a 80% drop in liquid Ethereum in a pool on Curve Finance.
  • stETH, the tokenized form of betting Ethereum, experienced an explosive increase in sales pressure and suffered a break.
  • Institutions like Celsius and Three Arrows Capital were caught in the crossfire as the price of Ethereum continued to fall.

The Ethereum price continued its bloody decline this week. Experts say the withdrawal of Lido Finance’s stETH from Ethereum triggered a crisis, and institutions such as Celsius and 3AC witnessed mass liquidations.

Also read: Three Arrows Capital, allegedly facing insolvency, crypto bubble bursts

What is stETH?

Lido Finance, a DeFi platform that is one of the largest providers of betting services for Ethereum, offers a tokenized form of betting Ether, known as stETH. The decentralized staking service provider promises that stETH is backed by Ethereum 1: 1.

Once Ethereum has completed its transition from Proof-of-Work to Proof-of-Stake consensus mechanism, one stETH will be able to be replaced with 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, but it is likely that a delay could push the event to Q4 2022.

Therefore, stETH withdrawals are only possible after Capella hard fork, an event that is expected to occur six months after the merger, ie. Q2 2023 or later.

Why did Celsius and Three Arrows Capital swap stETH for ETH?

It is possible to trade stETH for Ethereum on the open market as the pair has historically traded at almost 1: 1, point. But with demand volatility, the price of stETH has fallen under Ethereum this week and a few times earlier.

Terra’s LUNA crash played a crucial role in stETH’s depeg and increased sales pressure on the token. When LUNA / UST imploded, investors rushed into liquid assets and dropped illiquid in the process. There was a withdrawal of 80% of liquid Ethereum from Curve Finance’s stETH: ETH pool. Institutions faced massive liquidation of their positions on stock exchanges and there was a large sale of stETH to cover margin requirements.

The price ratio stETH: ETH is falling

Celsius Network and Three Arrows Capital were among the projects that stepped up their sales of stETH and triggered a sharp drop in the price of the token. This is called a “depeg” when 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 the entire 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.

Your security also decreases with a drop in the Ethereum price. stETH is primarily used as a leverage tool so that an investor can get a loan where they put their ETH and hold stETH. But when the price of Ethereum drops, the value of their security drops, they panic and sell stETH on the open market, triggering a further drop.

Borrowers have a hard time repaying lenders when they hold illiquid assets like stETH if sales continue and buyers of the token disappear.

@hodlKRYPTONITE, a pseudonymous analyst shed light on how lenders like Celsius are collapsing due to counterparty risk.

The liquidity squeeze is a slippery slope

@hodlKRYPTONITE explains that lenders like Celsius, which is facing a collapse, are triggering infection in the ecosystem. The complex network of transactions in which Ethereum is committed to stETH and stETH is used as leverage is credit declining.

A fall in the price of the liquid asset can lead to a significant reduction in the capital invested, loans have to be repaid, and assets are sold for dollars or stack coins.

Analysts predict reversal of the Etheruem price trend

Netcost-Security analysts have assessed Ethereum’s price trend, claiming buyers are picking up the asset at discounted prices. If the purchase continues, the price of Ethereum could break through the barrier at $ 1,270 and rise to $ 1,730.

ETH-USD price chart

ETH-USD price chart

Bitcoin can bottom out at this level

Netcost-Security analysts have identified the level at which the price of Bitcoin may bottom out. As the asset recovers from the recent crisis, investors start buying again. For more information, watch this video:

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