How is the liquidity crunch related to the Ethereum Lido stack

It’s only been a month since Terra crashed and the havoc it wreaked in the cryptocurrency market, and now Lido Finance and Staked Ethereum (stETH) are at the center of another potential. Liquidity crisis.

Crypto lender Celsius is one of Lido’s main clients, and as such, is one of the largest owners of stETH. the problem? Staked ETH is always supposed to equal 1 ETH—It hasn’t been for some time now.

Stacked ETH Ethereum that has been locked to Ethereum 2.0 Signal Chain – a network that will soon be integrated with Ethereum mainnet In a highly anticipated upgrade, the blockchain has turned into proof of stake. Typically, users will need at least 32 ETH (worth around $40,000) to participate in the ETH 2.0 staking and earn rewards. But Lido Finance allows users to share any amount of ETH. Because it is a “liquid storage”, it gives users stETH tokens in return.

These stETH can then be loaned out, stored and traded against other tokens.

Celsius does just that with its clients’ money. But now, a day after Celsius has paused customer withdrawals, swaps, and transfers — “to put Celsius in a better position to meet, over time, its withdrawal obligations,” The company said—There is growing concern about the exposure of the lender to stETH.

The company has at least $475 million worth of stETH on file public walletAccording to blockchain research firm Nansen Research.

By depositing customer deposits, in this case Ethereum, Celsius works with decentralized finance (DeFi) protocols such as Lido. In return, Celsius gets stETH, which increases in value when deposits earn bonuses. Celsius makes money by paying its customers the promised rate of return, which was recently among the 6% to 8% on ETH . depositsand keeps the rest.

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The value proposition to depositors in percentage terms is that they promised a fixed rate of return on their ETH and it was up to the company to figure out how to reliably achieve that return.

But this strategy begins to unravel if stETH loses parity with ETH (it has) at the same time that there are a lot of cent depositors looking to withdraw ETH (they are) because the centipede does not seem to have enough liquid ETH to meet all of its commitments.

By noon on Monday, StETH did not even have to withdraw with Ethereum. At the time of writing, stETH is trading at 0.94 ETH. stETH has been trading at less than 1 ETH since last month, when stETH was affected by the crash of TerraUSD and Luna.

big crowd percentage wallet It shows the use of stETH’s $475 million as collateral for hundreds of millions of stable loans.

“They have also sent thousands of stETH to FTX in recent days, likely for sale,” said Andrew Thurman, Nansen’s content lead. Decrypt“Although we cannot verify this because it is off-chain. It is possible that they were particularly affected by the loss of stETH’s peg to ETH.”

But selling large amounts of stETH to get more liquidity from ETH could cause its price to drop even more, which will further exacerbate the liquidity crunch that the centipede is already facing.

There have been efforts to find other public portfolios and thus calculate the remaining $10 billion in client assets in percentage terms, but so far only about $1.5 billion appears to have been made. calculated forAnd the According to research from Bloc. This does not mean that Celsius does not have ETH, but it still causes panic.

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Jack Newold, founder of the crypto publication Crypto Pragmatist, wrote in Twitter theme. “So when all the cryptocurrency drops and all the users want their money back, all Celsius users get upset.”

Celsius did not respond immediately DecryptComment requests.

If all the hand-squeezing process on stETH sounds familiar, it’s because it also played a role in the collapse of Terra’s UST and LUNA tokens. At the time, the imbalance between StETH and ETH was the opposite of what it is today.

Last month, there was a run on stETH because users were quick to withdraw funds from the Anchor lending protocol on the Terra blockchain, which at the time offered users returns of up to 20% on their terrestrial treasury deposits. After Terraform Labs shut down the Terra network twice, users cashed in, driving up the price.

ETH can be exchanged for 1.0248 stETH through the Curve protocol, which means that it was traded at a discount of 3% in relation to Ethereum.

When that happened, it created an opportunity for arbitrage deals. Investors were able to sell stETH for more ETH than was deposited to create it, leading to a significant drop in Lido’s ETH pool.

Every time there is a major liquidity crunch, said Brian Norton, COO of My Ethereum Wallet DecryptIt makes DeFi a lot like traditional finance in that it leaves a central platform that controls people’s ability to access their money.

“Every time you see this, every time this just reinforces the point that if you rely exclusively on this kind of central platform,” he said, referring to Celsius, “even when the returns are great, I think You’re still giving up a great deal of control.”

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In the past week, the Celsius team has gone to great lengths to assure customers that it can deliver on its commitments.

“Celsius has reserves (and more than enough ETH) to meet commitments, as dictated by our comprehensive liquidity risk management framework,” the company wrote. In a blog postfollowing rumors that she was badly affected by the Tira crash.

The post ended with a rather chilling quote from US Navy Admiral David Farragut, who led an attack on New Orleans during the Civil War: “Damn the torpedoes, full speed ahead.”

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