One token stood out to be the center of all the recent financial crashes in crypto. This token is the staked Ethereum (stETH). Over the past few weeks, giant protocols have sunk to their knees. Some, such as Terra Luna, completely fell dead. While everyone’s eyes remained on the ‘stablecoin’ pandemic, stETH was quietly part of most, if not each, of those cases.
This article looks at what stETH is and why it is at the center of the current crypto crash.
What is Staked Ethereum (stETH)
stETH is a token from Lido Finance that is given to Ethereum stakers on the Lido platform. For non-degens, Lido is a liquid staking platform for Ethereum, although later, it added support for Solana, Kusama, Polkadot, and Polygon networks. stETH is a combination of the value of your initial staking deposit plus the daily rewards accrued from staking.
Your stETH balance automatically updates daily at noon UTC, reflecting earned staking rewards. Owning stETH and ETH has no difference since the former has almost similar use cases to the latter can (except for paying gas fees).
Why Is stETH Important?
The value of 1 stETH should always be equivalent to 1 ETH. However, under certain circumstances, the 1:1 peg of these two assets can break. This is what happened in the case of the Celsius Liquidity attack by Alameda Research.
The aftermath of the coordinated attack among several large whales and influencers forced the stETH to depeg from Ethereum as low as 0.94. The attacker proceeded to buy stETH at these discounted prices, redeem it for Ethereum, and finally dump the Ethereum on the market.
For clarity, if you have 20 stETH, you should be able to redeem it for 20 ETH under normal circumstances. However, in a depeg scenario, such as the one mentioned above, 20 stETH would be redeemable for 21.27 ETH, hence an arbitrage opportunity.
Hence the liquidity crisis present today in the market is because of stETH. Additionally, the incident shows that investors value liquidity more than yield.
Final Thoughts
DeFi is a risky game, as is all of finance in whatever world. Companies such as Celsius need to balance their investors’ money exposure to assets such as stablecoins and derivatives of staked assets. The past few weeks have shown us how pegged assets are malleable given the right circumstances