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, a popular Bitcoin investor and independent analyst, argues that the stETH peg against Ethereum could fall by 50% in the next weeks. This raises the risk of a “DeFi contagion”, as Ethereum moves towards proof-of-stake (PoS) technology.

Risks of default for more than 1M Ether

Specifically, investors deposit ETH into Lido’s smart contract to participate in The Merge. This upgrade aims to make Ethereum a proof of-stake blockchain. Also known as the Beacon Chain. They receive stETH, which is their staked ETH balance from 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 Decentralized Finance (DeFi) platforms in order to generate yield.

Mills claims that if the switch from Eth2 is delayed, this could lead to a huge liquidity problem across DeFi platforms. She uses Celsius Network as an example, which offers crypto lending platforms with 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.

Unverified rumors suggesting that Celsius may be insolvent are not true. However, controlling your private keys is the best way to protect your funds. He added:

While “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 80% in stETH.

Swissborg’s daily yield offers Source: Official Website

Curve’s stETH/ETH pool had approximately 11,300 ETH staked by the firm. In the wake of Terra’s collapse on May 12, the ETH peg became unbalanced, and stETH/ETH dropped 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 whale dumped its Ether stakes for ETH Wednesday.

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

Mills replied, saying that stETH’s dynamic is “no different from GBTC at a discount.” This means that sell pressure can be “merciless,” once yields disappear 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 Thursday, still 3% lower than its intended peg.

com. You should do your research before making any investment or trading decision.
https://cointelegraph.com/news/defi-contagion-analysts-warn-of-staked-ether-de-pegging-from-ethereum-by-50

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