DeFi contagion? Analysts warn of ‘Staked Ether’ de-pegging from Ethereum by 50%

Lido Staked Ether, a Lido protocol liquid token that is 100% pegged to Ethereum’s native token Ether (ETH), could lead to the next crypto crash.

Brad Mills, an independent analyst and Bitcoin investor, believes that the stETH peg against Ethereum could fall by 50% over the next weeks. This raises the risk of a “DeFi contagion”, as Ethereum moves towards proof-of-stake.

Risks of default for more than 1M Ether

Specifically, investors deposit ETH into Lido’s smart contract to participate in “the Merge,” a network enhancement that aims to make Ethereum a proof of-stake blockchain. Also known as the “Beacon Chain,” it is a process where they deposit ETH to Lido’s smart contract to receive stETH. They receive stETH, which is their staked ETH balance with Lido.

When Beacon Chain launches, users will be able redeem stETH to get unstaked Ethereum. They can also use stETH to provide liquidity or collateral through various DeFi platforms in order to earn yield.

Mills claims that if the switch from ETH 2.0 is delayed, this could lead to a huge liquidity problem across DeFi platforms. She uses Celsius Network as an example, a crypto lending platform offering up to 17% annual percentage returns.

Mills stated that customers who withdraw from Celsius will need to sell their stETH. Mills explained that Celsius is responsible for 1 million ETH. So, 288k of these are not accessible until the Merge, 30K have been lost, 445k stETH and 268k are liquid. This could cause a run.

However, despite unverified rumors that Celsius may be insolvent the best way to protect your funds is to have your own private keys. He added:

Although stETH may not ‘depeg”, the risk of DeFi contagion is high in a crypto bearish market.

Contagion risks?

Market commentator Dirty Bubble Media (DBM) argues that even centralized yield platforms may face insolvency risk due to their ETH liabilities. He cites Swissborg, a crypto asset management service, as an example.

Swissborg offers a daily yield of approximately $145 million in Ether, which it also holds. This includes exposure to stETH at 80%.

Swissborg’s daily yield offers Source: Official Website

Curve’s stETH/ETH pool had approximately 11,300 Ether staked by the firm. In the wake of Terra’s collapse, the ETH peg was made unbalanced on May 12, with stETH/ETH falling to 0.955 that day.

In 2022, the exchange ratio of Staked Ether and Ethereum will be 1:1. Source: CoinMarketCap

“How can Swissborg pay daily yield on these assets when the yield from staked Ether has been locked along with principal?” DBM asked. He suggested that the firm could “exit their entire stETH positions” and force its ETH peg to even lower.

The warnings came as a result of a whale selling its Ether stakes to ETH on June 8th.

Before ropsten, we need to get down to business. pic.twitter.com/MPQV5n0XMf
— Hsaka (@HsakaTrades) June 8, 2022

Mills replied, saying that stETH is “no different from GBTC at a discount.” Mills responded by saying that sell-pressure is “merciless” when yields drop and the market flips bearish.

He explained:

“When there is deep liquidity and potential to arbitrage quants, Wall Street rats [and] flashbois can milk the yield. They will apply relentless sell pressure if the strategy is against them.

The stETH/ETH ratio was 0.97 as of June 9, but it was still 3% lower than its intended peg.

com. You should do your research before making any investment or trading decision.

Read more https://cointelegraph.com/news/defi-contagion-analysts-warn-of-staked-ether-de-pegging-from-ethereum-by-50