What is Stacked Ethereum (stETH)?
Each stETH token represents a unit of Ether that has been "staked" or deposited in what is called the "beacon chain". Ethereum, the network underlying Ether, is currently transitioning to a new version, 2.0, which is supposed to be faster and cheaper to use. The beacon chain is a test environment for this upgrade.
Staking is a practice where investors lock up their tokens for a period of time to help keep a crypto network secure. In return, they receive rewards in the form of interest-like returns. The mechanism behind this is known as "proof of stake." This is different from "proof of work" or mining, which requires a lot of computing power and energy.
To bet on Ethereum currently, users must agree to lock in a minimum of 32 ETH until the network upgrades to a new standard, known as Ethereum 2.0. However, a platform called Lido Finance allows users to wager any amount of ether and receive a derivative token called stETH, which can then be traded or loaned on other platforms.
This is an important part of decentralized finance (DeFi), which aims to replicate financial services like loans and insurance using blockchain technology. stETH is not a stablecoin like tether or terraUSD, the "algorithmic" stablecoin that collapsed last month under the pressure of a banking panic.
How is stETH trading?
As we can see from the chart below, before the date of May 12, ETH and stETH were trading at almost the same price, as they should be. From May 12 onwards, we can clearly see a decoupling between ETH in orange and stETH which is here in blue. It seems that stETH is continuously trading at a 2% discount to ETH.
For now, as long as stETH is trading below ETH, there is no arbitrage opportunity but this will not be the case for long, stETH can be bought back for 1 ETH and sold for 1.X ETH.
Yet a stETH = an ETH, right?
Well, yeah and this is why!
When withdrawals will be allowed on the beacon chain, 1 stEth can be recovered for 1 Eth. We are talking about the chain which will be in fact Ethereum 2 (the Ropsten testnet has recently switched to PoS). This redemption will only be possible once Ethereum 2 is "activated".
So it is not at all the same as the UST stablecoin which was completely under-collateralized (i.e. secured by an extremely lower value). Here are some additional features of stETH:
stETH is an ERC20 token that has utility in a growing DeFi ecosystem. It also has a native yield attached that you can't get by having liquid ETH alone.
The stETH has no target value, it continues to be guaranteed regardless of its value in the secondary market.
The ability to exchange your stETH in the secondary market for ETH is a convenient facility if you need liquidity but you will get what the market values it at. In general, $stETH will not trade for more than 1 ETH until deposits are capped.
Why depeg then?
There are several reasons that can lead to the depeg of stETH, including liquidity premiums but also and especially potential liquidations due to leverage. We are not talking about direct leverage like on a futures platform, but rather purchase on a DeFi platform with the aim of using it on another platform and thus increasing its borrowing.
If such a position is liquidated, it can have quite a significant impact on the stability of the ETH/ETH.
Celsius in all this?
As you know, Celsius stopped withdrawals a few days ago, everyone knows that, but what is perhaps less known is that Celsius holds a significant amount of stETH.
If the withdrawals are unblocked and investors decide to withdraw and sell them, this should cause the parity to fall even further, at least temporarily.
A stETH will always be equal to an ETH, even if the value of the first one can vary from that of ETH, as it is the case for the moment with a discount of about 2% for stETH.
If Celsius were to liquidate a large part of its stETH, there is no doubt that the latter would see its value drop on the secondary market.
One cannot, for the moment, buy stETH to resell it in ETH, but this should be possible in the future, so there might be an incentive to buy stETH, even if one cannot sell it right away and take advantage of the arbitrage. This is obviously not advisable for the novice or risk-averse investors.