Market Analysis

Lido-Staked ETH Prices Slip Due to Liquidity Issues

lido-staked-eth-prices-slip-due-to-liquidity-issues

Key Takeaways

  • The price of Lido-staked ETH has slipped by 5% on Curve due to a large imbalance in liquidity distribution within the pool.
  • Lido says that stETH is backed 1:1 with ETH. It argues the price difference is due to markets, not the state of Lido itself.
  • The disparity may be caused by withdrawals on other platforms, the activity of large investors, and various other factors.

The price of Lido-staked ETH (stETH) has fallen significantly against Ethereum prices, losing its intended parity with the latter asset.

Lido-Staked ETH Loses Target Price

stETH is losing parity with ETH.

As of 21:00 UTC on June 10, the price of stETH on Curve was 0.9474 ETH. That price represents slippage of about 5% despite the fact that stETH is backed nearly 1:1 with ETH deposits.

This Curve pool is becoming heavily imbalanced as market participants continue to sell their stETH for ETH. The pool is now made up of approximately 80% stETH and 20% ETH, which is causing the Curve algorithm to adjust the price.

With more than $1.2 billion in liquidity, the Curve pool is the deepest in the market. Therefore, it has a major impact on the overall market price of stETH. Various other DeFi exchanges—including Uniswap and Curve Finance—plus a number of centralized exchanges also handle stETH but are unlikely to have as large an impact as Curve does.

Lido’s governance token, LDO, is currently trading at $1.00 and has seemingly not been impacted by the ETH/stETH price slippage.

Lido Says Market Is Finding Fair Price

Lido is a DeFi protocol that offers liquid staking. When users stake their ETH with Lido they receive stETH, a token that represents their stake. They can then use stETH with other DeFi services while their staked ETH continues to generate rewards.

As such, stETH aims to match the price of ETH, but this is not guaranteed. Lido says that stETH is “backed 1:1 with ETH staking deposits,” but that the exchange rate represents “a fluctuating secondary market price” rather than the actual backing.

Lido assured users that the current events do not threaten the functioning of the protocol. It says that after Ethereum’s merge is complete, it will enable withdrawals and that those withdrawals will be provided at a 1:1 rate regardless of market prices.

In fact, Lido seems to imply the fluctuations are positive. It says that the market is trying to find a “fair price” and says that this provides an opportunity to buy stETH at a “significant discount.”

Causes of Slippage Are Unclear

Lido has cited several factors that led the two assets to lose parity, such as the collapse of TerraUSD, market-wide deleveraging, and withdrawals from other lending platforms.

Elsewhere, DeFi commentator Small Cap Scientist speculated that the current price changes may be due to specific large investors. He noted that Alameda Research moved $50,000 of stETH this week.

He also argued that Celsius Network is running out of liquid funds and therefore may have little choice but to redeem their stETH for ETH at a loss—though this has apparently not happened yet.

Given that Lido-staked ETH has only just begun to lose parity, it remains to be seen whether more factors will come into play.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.

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