Depegging of stETH: What is the impact and how to profit?

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Depegging of stETH: What is the impact and how to profit?

What is stETH? 

Liquid staked Ether- stETH on LidoFinance is a fully collateralized representation of Ethereum – ETH, staked on the Ethereum PoS beacon chain. Which means stETH is backed by staked ETH (1/1) and tradable in a future given time.

stETH is an ERC20 token that has utility within the DeFi ecosystem. It also have a native yield (4% APY) which you cannot get by having ETH alone.

When can you trade stETH?

The meaning of stETH is to give a hypotheticated token to all who deposited ETH on Lido for validating reasons in anticipation of the merge. When the merge finally happens it will be another 6-12 months when withdrawals are enabled and stETH will be redeemable for ETH. Note that there is already a queue on the beacon chain for withdrawals.

How much is stETH really worth?

Staked Ether – stETH doesn’t have a fixed peg, as it’s valued on what the secondary market values it. Generally stETH won’t trade at a value above 1 ETH because it will be redeemable for 1 ETH in the future.

Also, the exchange rate between stETH:ETH does not reflect the underlying backing of your staked ETH. Being able to exchange your stETH on a secondary market is simply for user convenience. 

Why is stETH losing its 1:1 peg with ETH? 

There’s various reasons stETH may temporarily trade below its collateral value. But the main reason is probably the forced sellers who used leverage for taking on Ethereum positions. 

Because stETH is an ERC20, that can be used as collateral, people took advantage and deposited stETH as collateral on different DeFi platforms, borrowed ETH, deposited into Lido for stETH, and repeated the process. Hereby creating synthetic leverage…

It is very possible some leveraged stETH holders will get liquidated at certain stETH prices if they do not have sufficient collateral to add. Causing a forced selling event for others leveraged holders and resulting in a liquidation cascade.

What can you do when stETH de-pegs?

Depending on your time preference and risk tolerance, buying stETH could be rewarding. This is because stETH will still be backed 1:1 by staked ETH.

If the secondary market values 1 stETH at for 0.80 ETH (20% discount) you can make a good profit if you have the time to wait for the merge and beyond.

There is no death spiral situation like Luna and UST for Ethereum – ETH. Because stETH liquidations don’t lead to a price crash of ETH, that is not directly related to the staked Ether.

How can you arbitrage stETH?

Now that there is a de-pegging event, traders can start to arbitrage. But how can this be done?

If stETH trades at 1.05 ETH (stETH > ETH)

Arbitrageurs can 

 Deposit 1 ETH at Lido

 Get 1 stETH

 Sell it on a secondary market for 1.05 ETH

 Profit 0.05 ETH

If stETH trades at 0.95 ETH (stETH < ETH)

Arbitrageurs can 

→ Buy 1 stETH for 0.95 ETH

→ Redeem it for 1 ETH (In future)

→ Profit of 0.05 ETH

Currently this arbitrage only works one direction, because stETH can not yet be redeemed.


Disclaimer: Trading and investing in cryptocurrencies (also called digital or virtual currencies, altcoins) involves a substantial risk of loss and is not suitable for every investor. You are solely responsible for the risk and financial resources you use to trade crypto. The content on this website is primarily for informational purposes and does not constitute financial advice.

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