July 4, 2022

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What is Staked ether (stETH) and why is it causing corruption in the cryptocurrency?

What is Staked ether (stETH) and why is it causing corruption in the cryptocurrency?

Ether is the second largest cryptocurrency in the world by market capitalization.

Yap Aryan | NurPhoto via Getty Images

Another controversial cryptocurrency is wreaking havoc on the digital asset market – and this time, it’s not a stablecoin.

Staked ether, or stETH, is a token that is supposed to be equal to the value of ether. But over the past few weeks, it has been trading at an increasing discount on the second largest cryptocurrency, fanning the flames of a liquidity crunch in the cryptocurrency market.

On Friday, stETH fell to 0.92 ETH, which means an 8% discount on the ether.

Here’s everything you need to know about stETH and why cryptocurrency investors are so worried.

What is STETH?

Each stETH token represents a unit of ether that has been ‘stored’ or deposited, in what is called a ‘beacon chain’.

Separation from the ether

When the Terra stablecoin project collapsed, stETH’s price started trading below the price of ether while investors raced to exit. A month later, crypto bank Celsius launched Stop withdrawals from the accountwhich saw an even greater decline in the value of stETH.

Celsius acts very much like a bank, taking users’ crypto and lending it to other institutions to generate a return on deposits. The company took users’ ether and pawned it over Lido to increase its profits.

Celsius has more than $400 million in stETH deposits, according to data from the DeFi Board Ape analytics site. The fear now is that Celsius will have to sell stETH, leading to massive losses and further downward pressure on the coin.

But this is easier said than done. StETh holders will not be able to redeem their tokens for ether until six to 12 months after an event known as “merging,” which will complete Ethereum’s transition from Proof of Work to Proof of Stake.

This comes at a price, as it means that investors are stuck in their power unless they choose to sell it on other platforms. One way to do this is to convert stETH into ether using Curve, a service that pools funds together to enable faster trading in and out of tokens.

Ryan Shea, an economist at crypto investment firm Trakx.io, said Curve’s liquidity pool for switching between stETH and ether “has become quite unbalanced.” Ether accounts for less than 20% of the reserves in the pool, which means that there will not be enough liquidity to meet every withdrawal.

“Staked ETH issued by Lido is backed by a 1:1 ratio with ETH stake deposits,” Lido said in a tweet last week, in an attempt to allay investor concerns about STETH’s increasing divergence from the value of ether.

“The stETH:ETH exchange rate does not reflect the underlying support for your ETH, but rather the volatile secondary market rate.”

cipher infection

Investors are concerned that the decline in the value of stETH will affect more crypto players.

“In cryptocurrency, there is no central bank,” Shea said. “Things should go well, and it will continue to affect the price of crypto assets, compounding the negative impact from the overall background.”

Bitcoin The coin’s price briefly fell below $18,000 on Saturday, pushing it deep to 18-month lows. It has since recovered back above $20,000. At one point, Ether fell below $900, before recovering $1,000 by Monday.


The stETH debacle has also led to new concerns about the security of Ethereum. About a third of the ether trapped in the Ethereum beacon chain is installed through Lido. Some investors are concerned that this could give a single player too much control over the upgraded Ethereum network.

Ethereum recently completed a file try clothes for its long-awaited integration. The success of the event bodes well for the Ethereum promotion, as investors expect it to take place as early as August. But there is no telling when it will actually happen – it has already been delayed several times.

“The latest updates to the Ethereum testnets have been positive, bringing more confidence to those waiting for consolidation,” said Mark Argonne, research associate at crypto asset management firm CoinShares.

“So when withdrawals are finally enabled, any discount will likely be settled in stETH but until this unknown date arrives, some form of discount will still be in place.”

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