The recent market turbulence has brought significant attention to stETH, a liquid staking derivative, after reports surfaced about Celsius and other major institutions facing solvency issues. These entities began offloading assets, including stETH, to raise capital, causing its price to decouple from ETH. On platforms like Curve, the exchange rate between stETH and ETH dropped to approximately 0.937. This deviation has sparked concerns about a potential death spiral, reminiscent of the UST collapse.
But what exactly is stETH? And is there a genuine risk of a death spiral? To answer these questions, it’s essential to understand how stETH is created and how it functions within the broader Ethereum ecosystem.
What Is stETH and How Does Lido Work?
stETH is a liquid staking token issued to users who stake their ETH through Lido, a decentralized, non-custodial staking protocol. This token represents the user’s stake in Ethereum’s proof-of-stake (PoS) network and accrues staking rewards over time.
Ethereum is transitioning from proof-of-work (PoW) to proof-of-stake, a process often referred to as "The Merge." To ensure network security before and after this upgrade, a certain amount of ETH must be staked. In return, stakers receive rewards. However, once the network merge is complete, these staked ETH can be withdrawn.
For everyday users, direct participation in PoS staking comes with several barriers:
- A minimum stake requirement of 32 ETH.
- Technical knowledge and hardware costs to run a validator node.
- Lack of liquidity since staked ETH is locked until after the merge.
Lido addresses these challenges by offering a liquid staking solution. Users can stake any amount of ETH and receive stETH tokens in return. These tokens accumulate staking rewards and can be used across various decentralized finance (DeFi) applications. After the Ethereum merge, stETH is designed to be redeemable for ETH at a 1:1 ratio.
The Role of Lido’s Ecosystem
Lido operates through two primary actors: depositors (users) and node operators (validators). Users delegate their ETH to node operators via Lido’s smart contracts. The node operators perform the actual staking on the blockchain, while the staking pool contract manages deposits, withdrawals, and the minting or burning of stETH.
Rewards generated from staking are distributed among node operators, the Lido DAO treasury, and stakers—all paid in stETH.
Why Is stETH Trading at a Discount?
Several factors contribute to stETH’s current discount relative to ETH:
- Limited Liquidity: stETH has significantly lower liquidity compared to ETH. This illiquidity premium results in a lower market price.
- Forced Selling by Large Holders: Institutions like Celsius are under pressure to liquidate stETH holdings to meet withdrawal demands or avoid margin calls. This selling pressure exacerbates the discount.
- Uncertainty Around Ethereum’s Merge: Any delay in Ethereum’s transition to PoS could prolong the lock-up period for staked ETH, negatively impacting stETH’s liquidity and price.
- Smart Contract Risks: Although audited, Lido’s smart contracts carry inherent risks that could affect the value of stETH.
Let’s explore each of these factors in more detail.
Liquidity Constraints in the stETH Market
Approximately 12.8 million ETH are currently staked on Ethereum. Of these, about 4.1 million (32%) are staked through Lido.
Until the Ethereum merge is complete, stakers cannot directly redeem their ETH. Instead, they must rely on secondary markets or DeFi protocols to exchange stETH for ETH. According to Messari data, as of May, two-thirds of all circulating stETH was held in Aave and Curve.
Curve’s stETH-ETH liquidity pool is the most liquid decentralized exchange for this trading pair. However, throughout June, as ETH prices fell sharply, liquidity in this pool dwindled from $1.7 billion to $670 million.
The pool also became highly imbalanced, with stETH making up 80% of the liquidity. As of recent data, the pool holds only around 120,000 ETH—enough to absorb just $133 million in stETH sell pressure. By comparison, Celsius alone holds over 450,000 stETH in Aave.
Centralized exchanges offer even less liquidity. FTX is currently the only major centralized platform supporting stETH trading, but over 98.5% of all stETH volume occurs on Curve.
With limited on-chain liquidity, large holders have turned to over-the-counter (OTC) deals or using stETH as collateral. On-chain data shows that Celsius and Amber Group have transferred large amounts of stETH to FTX addresses. At the same time, open interest on FTX has risen significantly, suggesting that these institutions may be hedging their stETH exposure through derivatives.
Short-Term Supply and Demand Imbalance
During bull markets, many institutions used stETH to leverage their positions. They would deposit stETH on lending platforms like Aave, borrow ETH against it, and then restake that ETH with Lido to earn more rewards. This循环质押 (re-staking) strategy worked well when prices were rising.
However, in a bear market, declining collateral values trigger margin calls. This forces institutions to sell assets—including stETH—to avoid liquidation. The resulting sell-off creates a negative feedback loop: more selling leads to lower prices, which triggers even more selling.
Several prominent crypto funds, including Three Arrows Capital, Alameda Research, Amber Group, and Celsius, have reportedly been selling stETH. On-chain data also shows that "smart money" addresses reduced their stETH holdings from 160,000 to 27,800 within a month.
With overwhelming sell-side pressure and insufficient buy-side demand, the market quickly became unbalanced, leading to steep discounts.
Ethereum Merge Delays
stETH is often compared to a futures contract on ETH because it represents a claim on ETH that will become available after the merge. If the merge is delayed, the timeline for unlocking staked ETH extends further. This uncertainty adds downward pressure on stETH’s price, as investors demand a higher discount for reduced liquidity.
Smart Contract Risk
Lido relies on several smart contracts for node operator registration, staking pool management, and oracle operations. While these contracts have been audited, any vulnerability could potentially put user funds at risk. This risk factor is also priced into stETH’s market valuation.
Could stETH Enter a Death Spiral?
Despite these pressures, a death spiral similar to UST/LUNA is unlikely. Here’s why:
UST was an algorithmic stablecoin backed primarily by LUNA tokens. When LUNA’s price fell, it triggered a vicious cycle of minting and burning that destroyed both currencies. Crucially, UST lacked sufficient collateral backing.
In contrast, stETH is fully backed by staked ETH. After the merge, each stETH can be redeemed for one ETH. This fundamental value anchor distinguishes it from under-collateralized stablecoins.
While short-term liquidity issues have caused a deviation from the peg, long-term ETH investors may see this as an opportunity. Buying stETH at a discount and holding until redemption becomes possible offers a potential arbitrage opportunity.
As the market stabilizes and leverage unwinds, stETH will likely return to its intrinsic value. Market participants can explore more strategies for managing liquid staking tokens in volatile conditions.
Frequently Asked Questions
What is stETH?
stETH is a liquid staking token issued by Lido. It represents ETH staked in Ethereum’s proof-of-stake network and accrues staking rewards over time.
Why is stETH trading below ETH?
The discount is due to a combination of low liquidity, forced selling by large institutions, uncertainty around Ethereum’s merge, and smart contract risk.
Can stETH be redeemed for ETH?
Yes, but only after Ethereum successfully transitions to proof-of-stake. Until then, stETH can only be traded on secondary markets.
Is stETH similar to UST?
No. stETH is backed by staked ETH, while UST was an algorithmic stablecoin without sufficient collateral. The risk profiles are fundamentally different.
What happens if Ethereum’s merge is delayed?
A delay would prolong the lock-up period for staked ETH, likely increasing the discount on stETH due to reduced liquidity and higher uncertainty.
How can I track stETH liquidity?
Curve Finance provides the deepest liquidity pool for stETH/ETH trades. Platforms like DeFiLlama and Dune Analytics also offer real-time metrics and dashboards. You can view real-time tools for monitoring these markets.